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(Mark One)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
[ ]
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission File Number 1-6075
UNION PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
UTAH
(State or other jurisdiction of
incorporation or organization)
13-2626465
(I.R.S. Employer
Identification No.)
1400 DOUGLAS STREET, OMAHA, NEBRASKA
(Address of principal executive offices)
68179
(Zip Code)
(402) 544-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Common Stock (Par Value $2.50 per share)
(cid:131)
Name of each exchange on which registered
New York Stock Exchange, Inc.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.
(cid:59) Yes (cid:31) No
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act.
(cid:31) Yes (cid:59) No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.
(cid:59) Yes (cid:31) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
(cid:59) Yes (cid:31) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this
chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
(cid:59)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:59) Accelerated filer (cid:31) Non-accelerated filer (cid:31) Smaller reporting company (cid:31)
(cid:131)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
(cid:31) Yes (cid:59) No
As of June 30, 2010, the aggregate market value of the registrant’s Common Stock held by non-affiliates (using the
New York Stock Exchange closing price) was $38.3 billion.
The number of shares outstanding of the registrant’s Common Stock as of January 28, 2011 was 491,001,416.
Documents Incorporated by Reference – Portions of the registrant’s definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 5, 2011, are incorporated by reference into Part III of
this report. The registrant’s Proxy Statement will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A.
UNION PACIFIC CORPORATION
TABLE OF CONTENTS
Chairman’s Letter .................................................................................................... 3
Directors and Senior Management ......................................................................... 4
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business ................................................................................................................. 5
Risk Factors ............................................................................................................ 10
Unresolved Staff Comments ................................................................................... 13
Properties ................................................................................................................ 13
Legal Proceedings .................................................................................................. 16
[Reserved] .............................................................................................................. 19
Executive Officers of the Registrant and Principal Executive
Officers of Subsidiaries ..................................................................................... 19
Item 5.
Market for the Registrant’s Common Equity, Related
PART II
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Stockholder Matters, and Issuer Purchases of Equity
Securities ......................................................................................................... 20
Selected Financial Data .......................................................................................... 22
Management’s Discussion and Analysis of Financial
Condition and Results of Operations ................................................................ 23
Critical Accounting Policies ..................................................................................... 42
Cautionary Information ............................................................................................ 47
Quantitative and Qualitative Disclosures About Market Risk .................................. 48
Financial Statements and Supplementary Data ...................................................... 49
Report of Independent Registered Public Accounting Firm .................................... 50
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................................................................ 83
Controls and Procedures ........................................................................................ 83
Management’s Annual Report on Internal Control Over
Financial Reporting ........................................................................................... 84
Report of Independent Registered Public Accounting Firm .................................... 85
Other Information .................................................................................................... 86
PART III
Directors, Executive Officers, and Corporate Governance ..................................... 86
Executive Compensation ........................................................................................ 86
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ............................................... 87
Certain Relationships and Related Transactions and
Director Independence ..................................................................................... 87
Principal Accountant Fees and Services ................................................................. 87
PART IV
Exhibits, Financial Statement Schedules ................................................................ 88
Signatures ............................................................................................................... 89
Certifications ........................................................................................................... 99
2
February 4, 2011
Fellow Shareholders:
As our country and our Company emerged from the shadow of the economic recession, the men and
women of Union Pacific demonstrated agility and resiliency to meet the evolving transportation needs of
our customers. The result was a break-out performance in 2010 that culminated in a record year.
The actions taken to support our core strategy of safety, service and customer value positioned us to
successfully handle growing volumes. With strengthening business demand, our service remained
excellent and we achieved many new safety records. Customers gave us their highest satisfaction marks
ever, and many rewarded us with new business. They recognize the value of our diverse service
offerings and the efficiency we add to their supply chains. In return, we’ve kept our commitment, making
strategic investments in infrastructure, facilities, equipment and technology.
These investments further support UP’s commitment to our shareholders to increase profitability and grow
financial returns. In 2010, we achieved new financial milestones, including a 70.6 percent operating ratio
and a 10.8 percent return on invested capital. We also returned more cash directly to shareholders,
increasing the dividend 41 percent and repurchasing nearly $1.25 billion of shares. UP’s stock price
reached new highs in 2010, increasing 45 percent and outpacing the S&P 500 by more than 30 points.
With the foundation of a record year as our springboard, we look forward to even greater opportunities to
grow our business, with the same commitment to safely serving our customers and increasing our
financial returns. One clear opportunity comes from an expanding global economy and greater
international demand for freight transportation, which already accounts for almost one third of UP’s
revenue base. The growing U.S. population alone is expected to increase freight demand 30 percent
over the next 20 years and further crowd our highways. The Department of Transportation recognized
that need when it set the goal of developing strategies to attract 50 percent of all shipments 500 miles or
greater to intermodal rail. They see what we see every day – America needs more rail.
Our strategic capital investments will help us tap into that future growth potential. This is illustrated by
projects such as double tracking our Sunset Corridor, where we are speeding global commerce between
Asia and our nation’s growing consumer base. This is a business model that works – invest, grow the
business, increase returns and invest again.
Great service, coupled with our logistics expertise and continued investment for the future, enables UP to
offer a strong door-to-door value proposition. Through efforts such as the “You’ll Find Us” advertising
campaign, customers who never before considered rail are turning to us to coordinate shipments across
town, across the country and around the world. Shippers also have a growing appreciation for UP’s
“green” profile and our ability to deliver safe, fuel-efficient service.
It’s clear that the opportunity to grow and prosper is well within our reach. This is the mission of the
43,000-plus Union Pacific employees who are “dedicated to serve.” Through innovation, teamwork and
some good old-fashioned hard work, we have set a course for growth designed to generate strong
financial returns in the years ahead.
Chairman, President and
Chief Executive Officer
3
BOARD OF DIRECTORS
Andrew H. Card, Jr.
Consultant and Professional
Speaker
Board Committees: Audit, Finance
Erroll B. Davis, Jr.
Chancellor
University System of Georgia
Board Committees: Compensation
and Benefits (Chair), Corporate
Governance and Nominating
Thomas J. Donohue
President and
Chief Executive Officer
U.S. Chamber of Commerce
Board Committees: Compensation
and Benefits, Corporate Governance
and Nominating
Archie W. Dunham
Retired Chairman
ConocoPhillips
Board Committees: Corporate
Governance and Nominating,
Finance
SENIOR MANAGEMENT
James R. Young
Chairman, President and
Chief Executive Officer
Union Pacific Corporation and
Union Pacific Railroad Company
Charles R. Eisele
Senior Vice President–Strategic
Planning
Union Pacific Corporation
Lance M. Fritz
Executive Vice President–
Operations
Union Pacific Railroad Company
J. Michael Hemmer
Senior Vice President–Law
and General Counsel
Union Pacific Corporation
Mary Sanders Jones
Vice President and Treasurer
Union Pacific Corporation
DIRECTORS AND SENIOR MANAGEMENT
Thomas F. McLarty III
President
McLarty Associates
Board Committees: Compensation
and Benefits, Corporate Governance
and Nominating
Steven R. Rogel
Retired Chairman
Weyerhaeuser Company
Board Committees: Compensation
and Benefits, Corporate Governance
and Nominating (Chair)
Jose H. Villarreal
Advisor
Akin, Gump, Strauss, Hauer &
Feld, LLP
Board Committees: Compensation
and Benefits, Corporate Governance
and Nominating
James R. Young
Chairman, President and
Chief Executive Officer
Union Pacific Corporation and
Union Pacific Railroad Company
Michael A. Rock
Vice President–External Relations
Union Pacific Corporation
Barbara W. Schaefer
Senior Vice President–Human
Resources and Secretary
Union Pacific Corporation
Lynden L. Tennison
Senior Vice President and
Chief Information Officer
Union Pacific Corporation
Jeffrey P. Totusek
Vice President and Controller
Union Pacific Corporation
Robert W. Turner
Senior Vice President–
Corporate Relations
Union Pacific Corporation
William R. Turner
Vice President–Labor Relations
Union Pacific Railroad Company
Judith Richards Hope
Distinguished Visitor from Practice
and Professor of Law
Georgetown University Law Center
Board Committees: Audit (Chair),
Finance
Charles C. Krulak
General, USMC, Ret.
Former Commandant of the
United States Marine Corps
Board Committees: Audit, Finance
Michael R. McCarthy
Chairman
McCarthy Group, LLC
Board Committees: Audit, Finance
Michael W. McConnell
General Partner
Brown Brothers Harriman & Co.
Board Committees: Audit,
Finance (Chair)
Robert M. Knight, Jr.
Executive Vice President–Finance
and Chief Financial Officer
Union Pacific Corporation
John J. Koraleski
Executive Vice President–
Marketing and Sales
Union Pacific Railroad Company
Richard R. McClish
Vice President–Continuous
Improvement
Union Pacific Railroad Company
Joseph E. O’Connor, Jr.
Vice President–Purchasing
Union Pacific Railroad Company
Patrick J. O’Malley
Vice President–Taxes and General
Tax Counsel
Union Pacific Corporation
4
Item 1. Business
GENERAL
PART I
Union Pacific Corporation owns one of America’s leading transportation companies. Its principal operating
company, Union Pacific Railroad Company, links 23 states in the western two-thirds of the country. Union
Pacific Railroad Company serves many of the fastest-growing U.S. population centers and provides
Americans with a fuel-efficient, environmentally responsible and safe mode of freight transportation.
Union Pacific Railroad Company’s diversified business mix includes Agricultural Products, Automotive,
Chemicals, Energy, Industrial Products and Intermodal. Union Pacific Railroad Company emphasizes
excellent customer service and offers competitive routes from all major West Coast and Gulf Coast ports
to eastern gateways. Union Pacific Railroad Company connects with Canada’s rail systems and is the
only railroad serving all six major gateways to Mexico, making it North America’s premier rail franchise.
Union Pacific Corporation was incorporated in Utah in 1969 and maintains its principal executive offices
at 1400 Douglas Street, Omaha, NE 68179. The telephone number at that address is (402) 544-5000.
The common stock of Union Pacific Corporation is listed on the New York Stock Exchange (NYSE) under
the symbol “UNP”.
For purposes of this report, unless the context otherwise requires, all references herein to “UPC”,
“Corporation”, “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”.
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 for our 2009 and 2010 Annual
Report on Form 10-K, our 2010 Quarterly Reports on Form 10-Q, and our 2009 Quarterly Reports on
Form 10-Q for the second and third quarters; 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 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. 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 NYSE 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.
We have included the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) certifications
regarding our public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits
31(a) and (b) to this report.
References to our website address in this report, including references in Management’s Discussion and
Analysis of Financial Condition and Results of Operations, Item 7, 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.
5
OPERATIONS
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment.
Although revenue is analyzed by commodity group, we analyze the net financial results of the Railroad as
one segment due to the integrated nature of our rail network. Additional information regarding our
business and operations, including revenue and financial information and data and other information
regarding environmental matters, is presented in Risk Factors, Item 1A; Legal Proceedings, Item 3;
Selected Financial Data, Item 6; Management’s Discussion and Analysis of Financial Condition and
Results of Operations, Item 7; and the Financial Statements and Supplementary Data, Item 8 (which
include information regarding revenues, statements of income, and total assets).
two-thirds of
2010 Freight Revenue
Operations – UPRR is a Class I railroad
operating in the U.S. We have 31,953 route
miles, linking Pacific Coast and Gulf Coast
ports with the Midwest and eastern U.S.
gateways and providing several corridors to
the
key Mexican gateways. We serve
western
the country and
maintain coordinated schedules with other
rail carriers to move freight to and from the
the
Atlantic Coast,
the Pacific Coast,
Southeast,
the Southwest, Canada, and
Mexico. Export and import traffic moves
through Gulf Coast and Pacific Coast ports
the Mexican and Canadian
and across
borders. Our freight traffic consists of bulk,
manifest, and premium business. Bulk traffic is primarily coal, grain, rock, or soda ash in unit trains –
trains transporting a single commodity from one source to one destination. Manifest traffic is individual
carload or less than train-load business, including commodities such as lumber, steel, paper, and food.
The transportation of finished vehicles and intermodal containers is part of our premium business. In
2010, we generated freight revenues totaling $16.1 billion from the following six commodity groups:
Agricultural – Transporting agricultural products generated 19% of our freight revenues in 2010. Included
in this commodity group are whole grains, products produced from grains, and food and beverage
products, in addition to corn for ethanol production and its by products. With access to most major grain
markets, we provide a critical link between the Midwest and western producing areas and export
terminals in the Pacific Northwest (the PNW) and Gulf ports, as well as Mexico. Unit trains of grain
efficiently shuttle between domestic markets or export terminals and producers. We also serve significant
domestic markets, including grain processors, animal feeders, and ethanol producers in the Midwest,
West, South, and Rocky Mountain region. Primary food commodities consist of a variety of fresh and
frozen fruits and vegetables, dairy products, and beverages, which are moved to major U.S. population
centers for distribution and consumption. Express Lane and Produce Unit Train are premium perishable
services that compete with the trucking industry by moving fruits and vegetables from the PNW and
California to destinations in the East. We transport frozen meat and poultry to the West Coast ports for
export, while beverages, primarily beer, enter the U.S. from Mexico.
Automotive – We are the largest automotive carrier west of the Mississippi River, serving vehicle
assembly plants and distributing imported vehicles from West Coast ports and Houston. We operate or
access 43 vehicle distribution centers covering most major western U.S. cities. In addition to transporting
finished vehicles, we provide expedited handling of automotive parts in both boxcars and intermodal
containers to several assembly plants. We carry automotive materials bound for assembly plants in
Mexico, the U.S., and Canada, and we also transport finished vehicles from manufacturing facilities in
Canada and Mexico. In 2010, transportation of finished vehicles and automotive materials accounted for
8% of our freight revenues.
Chemicals – Transporting chemicals provided 15% of our freight revenues in 2010. Our unique franchise
enables us to serve the chemical producing areas along the Gulf Coast, as well as the Rocky Mountain
region. Two-thirds of the chemicals business consists of industrial chemicals, plastics, and liquid
petroleum products. Plastics customers also use our storage-in-transit yards for intermediate storage of
plastic resins. Soda ash shipments originate in southwestern Wyoming and California, destined primarily
for glass producing markets in the East, the West, and abroad. Fertilizer movements originate primarily in
6
the Gulf Coast region, as well as the West and Canada, bound for major agricultural users in the Midwest
and the western U.S.
Energy – Coal transportation accounted for 22% of our 2010 freight revenues. Our transportation network
allows us to transport coal and coke to utilities, industrial facilities, interchange points, and water
terminals. Water terminals provide access to the West and Gulf Coasts for export, and rail/barge
interchange facilities on the Mississippi and Ohio Rivers and the Great Lakes. We serve mines located in
the Southern Powder River Basin (SPRB) of Wyoming, Colorado, Utah, southern Wyoming, and southern
Illinois. SPRB coal represents the largest segment of the market, as utilities continue to favor its lower
cost and low-sulfur content.
Industrial Products – Our extensive network enables us to move numerous commodities between
thousands of origin and destination points throughout North America. Lumber shipments originate
primarily in the PNW and Canada for destinations throughout the U.S. for new home construction and
repair and remodeling. Commercial and highway construction drives shipments of steel and construction
products, consisting of rock, cement, and roofing materials. Paper and consumer goods, as well as
furniture and appliances, are shipped to major metropolitan areas for consumers. Nonferrous metals and
industrial minerals are moved for industrial manufacturing. In addition, we provide efficient and safe
transportation for government entities and waste companies. In 2010, transporting industrial products
provided 16% of our freight revenues.
Intermodal – Our intermodal business, which represented 20% of our freight revenues in 2010, includes
international and domestic shipments. International business consists of imported or exported container
traffic that arrives at, or departs from, West Coast ports via ocean vessel. Domestic business includes
domestic container and trailer traffic for major retailers and other U.S. businesses that is usually sold
through intermodal marketing companies (primarily shipper agents and consolidators) and truckload
carriers.
Seasonality – Some of the commodities we carry have peak shipping seasons, reflecting either or both
the nature of the commodity, such as certain agricultural and food products that have specific growing
and harvesting seasons, and the demand cycle for the commodity, such as intermodal traffic, which
generally has a peak shipping season during the third quarter to meet holiday-related demand for
consumer goods during the fourth quarter. The peak shipping seasons for these commodities can vary
considerably from year to year depending upon various factors, including the strength of domestic and
international economies and currencies and the strength of harvests and market prices of agricultural
products. In response to an annual request delivered by the Surface Transportation Board (STB) of the
U.S. Department of Transportation (DOT) to all of the Class I railroads operating in the U.S., we issue a
publicly available letter during the third quarter detailing our plans for handling traffic during the third and
fourth quarters and providing other information requested by the STB.
Working Capital – At December 31, 2010 and 2009, we had a working capital surplus, which in 2010
continued to be the result of our decision in 2009 to maintain additional cash reserves to enhance liquidity
in response to uncertain economic conditions. Historically, we have had a working capital deficit, which is
common in our industry and does not indicate a lack of liquidity. We maintain adequate resources and,
when necessary, have access to capital to meet any daily and short-term cash requirements, and we
have sufficient financial capacity to satisfy our current liabilities.
Competition – We are subject to competition from other railroads, motor carriers, ship and barge
operators, and pipelines. Our main rail competitor is Burlington Northern Santa Fe Corporation. Its rail
subsidiary, BNSF Railway Company (BNSF), operates parallel routes in many of our main traffic
corridors. In addition, we operate in corridors served by other railroads and motor carriers. Motor carrier
competition exists for five of our six commodity groups (excluding energy). Because of the proximity of
our routes to major inland and Gulf Coast waterways, barges can be particularly competitive, especially
for grain and bulk commodities. In addition to price competition, we face competition with respect to
transit times and quality and reliability of service. While we must build or acquire and maintain our rail
system, trucks and barges are able to use public rights-of-way maintained by public entities. Any future
improvements or expenditures materially increasing the quality or reducing the costs of these alternative
modes of transportation, or legislation releasing motor carriers from their size or weight limitations, could
have a material adverse effect on our business.
7
Key Suppliers – We depend on two key domestic suppliers of high horsepower locomotives. Due to the
capital intensive nature of the locomotive manufacturing business and sophistication of this equipment,
potential new suppliers face high barriers to entry in this industry. Therefore, if one of these domestic
suppliers discontinues manufacturing locomotives for any reason, including insolvency or bankruptcy, we
could experience a significant cost increase and risk reduced availability of the locomotives that are
necessary to our operations. Additionally, for a high percentage of our rail purchases, we utilize two
suppliers (one domestic and one international) that meet our specifications. Rail is critical for both
maintenance of our network and replacement and improvement or expansion of our network and facilities.
Rail manufacturing also has high barriers to entry, and, if one of those suppliers discontinues operations
for any reason, including insolvency or bankruptcy, we could experience cost increases and difficulty
obtaining rail.
Employees – Approximately 86% of our 42,884 full-time-equivalent employees are represented by 14
major rail unions. Current labor agreements became subject to modification on January 1, 2010. In
January 2010, we began the current round of negotiations with the unions. Existing agreements remain in
effect and will continue to remain in effect until new agreements are reached or the Railway Labor Act’s
procedures (which include mediation, cooling-off periods, and the possibility of Presidential Emergency
Boards and Congressional intervention) are exhausted. Contract negotiations with the various unions
generally take place over an extended period of time, and we rarely experience work stoppages during
negotiations.
Railroad Security – Operating a safe and secure railroad is first among our critical priorities and is a
primary responsibility of all our employees. This emphasis helps us protect the public, our employees,
our customers, and operations across our rail network. Our security efforts rely upon a wide variety of
measures including employee training, cooperation with our customers, training of emergency
responders, and partnerships with numerous federal, state, and local government agencies. While
federal law requires us to protect the confidentiality of our security plans designed to safeguard against
terrorism and other security incidents, the following provides a general overview of our security initiatives.
UPRR Security Measures – We maintain a comprehensive security plan designed to both deter and to
respond to any potential or actual threats as they arise. The plan includes four levels of alert status, each
with its own set of countermeasures. We employ our own police force, consisting of more than 225
commissioned and highly-trained officers. Our employees also undergo recurrent security and
preparedness training, as well as federally-mandated hazardous materials and security training. We
regularly review the sufficiency of our employee training programs to identify ways to increase
preparedness and to improve security.
We have an emergency response management center, which operates 24 hours a day. The center
receives reports of emergencies, dangerous or potentially dangerous conditions, and other safety and
security issues from our employees, the public, and law enforcement and other government officials. In
cooperation with government officials, we monitor both threats and public events, and, as necessary, we
may alter rail traffic flow at times of concern to minimize risk to communities we serve and our operations.
We comply with the hazardous materials routing rules and other requirements imposed by federal law.
We also design our operating plan to expedite the movement of hazardous material shipments to
minimize the time rail cars remain idle at yards and terminals located in or near major population centers.
Additionally, in compliance with new Transportation Security Agency regulations that took effect on April
1, 2009, we deployed new information systems and instructed employees in tracking and documenting
the handoff of Rail Security Sensitive Material with customers and interchange partners.
We also have established a number of our own innovative safety and security-oriented initiatives ranging
from various investments in technology to The Officer on the Train program, which provides local law
enforcement officers with the opportunity to ride with train crews to enhance their understanding of
railroad operations and risks.
Cooperation with Federal, State, and Local Government Agencies – We work closely with government
agencies ranging from the DOT and the Department of Homeland Security (DHS) to local police
departments, fire departments, and other first responders. In conjunction with DOT, DHS, and other
railroads, we sponsor Operation Respond, which provides first responders with secure links to electronic
railroad resources, including mapping systems, shipment records, and other essential information
required by emergency personnel to respond to accidents and other situations. We also participate in the
8
National Joint Terrorism Task Force, a multi-agency effort established by the U.S. Department of Justice
and the Federal Bureau of Investigation to combat and prevent terrorism.
We work with the Coast Guard, U.S. Customs and Border Protection (CBP, formerly the U.S. Customs
Service), and the Military Transport Management Command to monitor shipments entering the UPRR rail
network at U.S. border crossings and ports. We were the first railroad in the U.S. to be named a partner
in CBP’s Customs-Trade Partnership Against Terrorism, a partnership designed to develop, enhance,
and maintain effective security processes throughout the global supply chain.
Cooperation with Customers and Trade Associations – Along with other railroads, we work with the
American Chemistry Council to train more than 200,000 emergency responders each year. We work
closely with our chemical shippers to establish plant security plans, and we continue to take steps to more
closely monitor and track hazardous materials shipments. In cooperation with the Federal Railroad
Administration (FRA) and other railroads, we are also working to develop additional improvements to tank
car design that will further limit the risk of releases of hazardous materials.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
Governmental Regulation – Our operations are subject to a variety of federal, state, and local
regulations, generally applicable to all businesses. (See also the discussion of certain regulatory
proceedings in Legal Proceedings, Item 3.)
The operations of the Railroad are also subject to the regulatory jurisdiction of the STB. The STB has
jurisdiction over rates charged on certain regulated rail traffic; common carrier service of regulated traffic;
freight car compensation; transfer, extension, or abandonment of rail lines; and acquisition of control of
rail common carriers. The STB has launched wide-ranging proceedings to explore whether to expand rail
regulation; we will actively participate in these proceedings. Additionally, several bills were introduced in
the U.S. Senate in early 2011 that would expand the regulatory authority of the STB and could include
new antitrust provisions. We are closely monitoring these proposed bills.
The operations of the Railroad also are subject to the regulations of the FRA and other federal and state
agencies. On January 12, 2010, the FRA issued final rules governing installation of Positive Train Control
(PTC) by the end of 2015. Although still under development, PTC is a collision avoidance technology
intended to override locomotive controls and stop a train before an accident. The FRA acknowledged
that projected costs will exceed projected benefits by a ratio of about 22 to one. We expect to invest
approximately $250 million in the development of PTC during 2011.
DOT, the Occupational Safety and Health Administration, and DHS, along with other federal agencies,
have jurisdiction over certain aspects of safety, movement of hazardous materials and hazardous waste,
emissions requirements, and equipment standards. On October 16, 2008, President Bush signed the Rail
Safety Improvement Act of 2008 into law, which, among other things, revised hours of service rules for
train and certain other railroad employees, mandated implementation of PTC, imposed passenger service
requirements, addressed safety at rail crossings, increased the number of safety related employees of the
FRA, and increased fines that may be levied against railroads for safety violations. Additionally, various
state and local agencies have jurisdiction over disposal of hazardous waste and seek to regulate
movement of hazardous materials in areas not preempted by federal law.
Environmental Regulation – We are subject to extensive federal and state environmental statutes and
regulations pertaining to public health and the environment. The statutes and regulations are
administered and monitored by the Environmental Protection Agency (EPA) and by various state
environmental agencies. The primary laws affecting our operations are the Resource Conservation and
Recovery Act, regulating the management and disposal of solid and hazardous wastes; the
Comprehensive Environmental Response, Compensation, and Liability Act, regulating the cleanup of
contaminated properties; the Clean Air Act, regulating air emissions; and the Clean Water Act, regulating
waste water discharges.
Information concerning environmental claims and contingencies and estimated remediation costs is set
forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Critical Accounting Policies – Environmental, Item 7 and Note 17 to the Consolidated Financial
Statements in Item 8, Financial Statements and Supplementary Data.
9
Item 1A. Risk Factors
The information set forth in this Item 1A should be read in conjunction with the rest of the information
included in this report, including Management’s Discussion and Analysis of Financial Condition and
Results of Operations, Item 7, and Financial Statements and Supplementary Data, Item 8.
We Must Manage Fluctuating Demand for Our Services and Network Capacity – If there is significant
demand for our services that exceeds the designed capacity of our network, we may experience network
difficulties, including congestion and reduced velocity, that could compromise the level of service we
provide to our customers. This level of demand may also compound the impact of weather and weather-
related events on our operations and velocity. Although we continue to improve our transportation plan,
add capacity, and improve operations at our yards and other facilities, we cannot be sure that these
measures will fully or adequately address any service shortcomings resulting from demand exceeding our
planned capacity. We may experience other operational or service difficulties related to network capacity,
dramatic and unplanned increases or decreases of demand for rail service with respect to one or more of
our commodity groups, or other events that could have a negative impact on our operational efficiency,
any of which could have a material adverse effect on our results of operations, financial condition, and
liquidity. In the event that we experience significant reductions of demand for rail services with respect to
one or more of our commodity groups, we may experience increased costs associated with resizing our
operations, including higher unit operating costs and costs for the storage of locomotives, rail cars, and
other equipment; work-force adjustments; and other related activities, which could have a material
adverse effect on our results of operations, financial condition, and liquidity.
We Are Subject to Significant Governmental Regulation – We are subject to governmental regulation by a
significant number of federal, state, and local authorities covering a variety of health, safety, labor,
environmental, economic (as discussed below), and other matters. Many laws and regulations require us
to obtain and maintain various licenses, permits, and other authorizations, and we cannot guarantee that
we will continue to be able to do so. Our failure to comply with applicable laws and regulations could have
a material adverse effect on us. Governments or regulators may change the legislative or regulatory
frameworks within which we operate without providing us any recourse to address any adverse effects on
our business, including, without limitation, regulatory determinations or rules regarding dispute resolution,
business relationships with other railroads, calculation of our cost of capital or other inputs relevant to
computing our revenue adequacy, the prices we charge, and costs and expenses. Significant legislative
activity in Congress or regulatory activity by the STB could expand regulation of railroad operations and
prices for rail services, which could reduce capital spending on our rail network, facilities and equipment
and have a material adverse effect on our results of operations, financial condition, and liquidity. As part
of the Rail Safety Improvement Act of 2008, railroad carriers must implement PTC by the end of 2015,
which could have a material adverse effect on our ability to make other capital investments. One or more
consolidations of Class I railroads could also lead to increased regulation of the rail industry.
We Are Required to Transport Hazardous Materials – Federal laws require railroads, including us, to
transport hazardous materials regardless of risk or potential exposure to loss. Any rail accident or other
incident or accident on our network, at our facilities, or at the facilities of our customers involving the
release of hazardous materials, including toxic inhalation hazard (or TIH) materials such as chlorine,
could involve significant costs and claims for personal injury, property damage, and environmental
penalties and remediation, which could have a material adverse effect on our results of operations,
financial condition, and liquidity.
We May Be Affected by General Economic Conditions – Prolonged severe adverse domestic and global
economic conditions or disruptions of financial and credit markets, including the availability of short- and
long-term debt financing, may affect the producers and consumers of the commodities we carry and may
have a material adverse effect on our access to liquidity and our results of operations and financial
condition.
We Face Competition from Other Railroads and Other Transportation Providers – We face competition
from other railroads, motor carriers, ships, barges, and pipelines. In addition to price competition, we face
competition with respect to transit times and quality and reliability of service. While we must build or
acquire and maintain our rail system, trucks and barges are able to use public rights-of-way maintained
by public entities. Any future improvements or expenditures materially increasing the quality or reducing
the cost of alternative modes of transportation, or legislation releasing motor carriers from their size or
weight limitations, could have a material adverse effect on our results of operations, financial condition,
10
and liquidity. Additionally, any future consolidation of the rail industry could materially affect the
competitive environment in which we operate.
Strikes or Work Stoppages Could Adversely Affect Our Operations as the Majority of Our Employees
Belong to Labor Unions and Labor Agreements – The U.S. Class I railroads are party to collective
bargaining agreements with various labor unions. Disputes with regard to the terms of these agreements
or our potential inability to negotiate acceptable contracts with these unions could result in, among other
things, strikes, work stoppages, slowdowns, or lockouts, which could cause a significant disruption of our
operations and have a material adverse effect on our results of operations, financial condition, and
liquidity. Additionally, future national labor agreements, or renegotiation of labor agreements or provisions
of labor agreements, could compromise our service reliability or significantly increase our costs for health
care, wages, and other benefits, which could have a material adverse impact on our results of operations,
financial condition, and liquidity.
Severe Weather Could Result in Significant Business Interruptions and Expenditures – As a railroad with
a vast network, we are exposed to severe weather conditions and other natural phenomena, including
earthquakes, hurricanes, fires, floods, mudslides or landslides, extreme temperatures, and significant
precipitation that may cause business interruptions, including line outages on our rail network, that can
adversely affect our entire rail network and result in increased costs, increased liabilities, and decreased
revenue, which could have a material adverse effect on our results of operations, financial condition, and
liquidity.
We Rely on Technology and Technology Improvements in Our Business Operations – We rely on
information technology in all aspects of our business. If we do not have sufficient capital to acquire new
technology or if we are unable to implement new technology, we may suffer a competitive disadvantage
within the rail industry and with companies providing other modes of transportation service, which could
have a material adverse effect on our results of operations, financial condition, and liquidity. Additionally,
if we experience significant disruption or failure of one or more of our information technology systems,
including computer hardware, software, and communications equipment, we could experience a service
interruption, safety failure, security breach, or other operational difficulties, which could have a material
adverse impact on our results of operations, financial condition, and liquidity.
We May Be Subject to Various Claims and Lawsuits That Could Result in Significant Expenditures – As a
railroad with operations in densely populated urban areas and other cities and a vast rail network, we are
exposed to the potential for various claims and litigation related to labor and employment, personal injury,
property damage, environmental liability, and other matters. Any material changes to litigation trends or a
catastrophic rail accident or series of accidents involving any or all of property damage, personal injury,
and environmental liability could have a material adverse effect on our results of operations, financial
condition, and liquidity.
The Availability of Qualified Personnel Could Adversely Affect Our Operations – Changes in
demographics, training requirements, and the availability of qualified personnel could negatively affect our
ability to meet demand for rail service. Unpredictable increases in demand for rail services and a lack of
network fluidity may exacerbate such risks, which could have a negative impact on our operational
efficiency and otherwise have a material adverse effect on our results of operations, financial condition,
and liquidity.
We Are Subject to Significant Environmental Laws and Regulations – Due to the nature of the railroad
business, our operations are subject to extensive federal, state, and local environmental laws and
regulations concerning, among other things, emissions to the air; discharges to waters; handling, storage,
transportation, and disposal of waste and other materials; and hazardous material or petroleum releases.
We generate and transport hazardous and non-hazardous waste in our operations, and we did so in our
former operations. Environmental liability can extend to previously owned or operated properties, leased
properties, and properties owned by third parties, as well as to properties we currently own.
Environmental liabilities have arisen and may also arise from claims asserted by adjacent landowners or
other third parties in toxic tort litigation. We have been and may be subject to allegations or findings that
we have violated, or are strictly liable under, these laws or regulations. We could incur significant costs as
a result of any of the foregoing, and we may be required to incur significant expenses to investigate and
remediate known, unknown, or future environmental contamination, which could have a material adverse
effect on our results of operations, financial condition, and liquidity.
11
including chemical producers,
We May Be Affected by Climate Change and Market or Regulatory Responses to Climate Change –
Climate change, including the impact of global warming, could have a material adverse effect on our
results of operations, financial condition, and liquidity. Restrictions, caps, taxes, or other controls on
emissions of greenhouse gasses, including diesel exhaust, could significantly increase our operating
costs. Restrictions on emissions could also affect our customers that (a) use commodities that we carry
to produce energy, (b) use significant amounts of energy in producing or delivering the commodities we
carry, or (c) manufacture or produce goods that consume significant amounts of energy or burn fossil
food producers, and automakers and other
fuels,
manufacturers. Significant cost increases, government regulation, or changes of consumer preferences
for goods or services relating to alternative sources of energy or emissions reductions could materially
affect the markets for the commodities we carry, which in turn could have a material adverse effect on our
results of operations, financial condition, and liquidity. Government incentives encouraging the use of
alternative sources of energy could also affect certain of our customers and the markets for certain of the
commodities we carry in an unpredictable manner that could alter our traffic patterns, including, for
example, the impacts of ethanol incentives on farming and ethanol producers. Finally, we could face
increased costs related to defending and resolving legal claims and other litigation related to climate
change and the alleged impact of our operations on climate change. Any of these factors, individually or
in operation with one or more of the other factors, or other unforeseen impacts of climate change could
reduce the amount of traffic we handle and have a material adverse effect on our results of operations,
financial condition, and liquidity.
farmers and
Rising or Elevated Fuel Costs and Whether We Are Able to Mitigate These Costs with Fuel Surcharges
Could Materially and Adversely Affect Our Business – Fuel costs constitute a significant portion of our
transportation expenses. Diesel fuel prices are subject to dramatic fluctuations, and significant price
increases could have a material adverse effect on our operating results. Although we currently are able to
recover a significant amount of our increased fuel expenses through revenue from fuel surcharges, we
cannot be certain that we will always be able to mitigate rising or elevated fuel costs through surcharges.
Future market conditions or legislative or regulatory activities could adversely affect our ability to apply
fuel surcharges or adequately recover increased fuel costs through fuel surcharges. International,
political, and economic circumstances affect fuel prices and supplies. Weather can also affect fuel
supplies and limit domestic refining capacity. If a fuel supply shortage were to arise, higher fuel prices
could, despite our fuel surcharge programs, have a material adverse effect on our results of operations,
financial condition, and liquidity.
We Utilize Capital Markets – Due to the significant capital expenditures required to operate and maintain
a safe and efficient railroad, we rely on the capital markets to provide some of our capital requirements.
We utilize long-term debt instruments, bank financing and commercial paper from time-to-time, and we
pledge certain of our receivables. Significant instability or disruptions of the capital markets, including the
credit markets, or deterioration of our financial condition due to internal or external factors could restrict or
prohibit our access to, and significantly increase the cost of, commercial paper and other financing
sources, including bank credit facilities and the issuance of long-term debt, including corporate bonds. A
deterioration of our financial condition could result in a reduction of our credit rating to below investment
grade, which could prohibit or restrict us from utilizing our current receivables securitization facility or
accessing external sources of short- and long-term debt financing and significantly increase the costs
associated with utilizing the receivables securitization facility and issuing both commercial paper and
long-term debt.
We Are Subject to Legislative, Regulatory, and Legal Developments Involving Taxes – Taxes are a
significant part of our expenses. We are subject to U.S. federal, state, and foreign income, payroll,
property, sales and use, fuel, and other types of taxes. Changes in tax rates, enactment of new tax laws,
revisions of tax regulations, and claims or litigation with taxing authorities could result in substantially
higher taxes and, therefore, could have a material adverse effect on our results of operations, financial
condition, and liquidity.
We Are Dependent on Certain Key Suppliers of Locomotives and Rail – Due to the capital intensive
nature and sophistication of locomotive equipment, potential new suppliers face high barriers to entry.
Therefore, if one of the domestic suppliers of high horsepower locomotives discontinues manufacturing
locomotives for any reason, including bankruptcy or insolvency, we could experience significant cost
increases and reduced availability of the locomotives that are necessary to our operations. Additionally,
for a high percentage of our rail purchases, we utilize two suppliers (one domestic and one international)
that meet our specifications. Rail is critical to our operations for rail replacement programs, maintenance,
12
and for adding additional network capacity, new rail and storage yards, and expansions of existing
facilities. This industry similarly has high barriers to entry, and if one of these suppliers discontinues
operations for any reason, including bankruptcy or insolvency, we could experience both significant cost
increases for rail purchases and difficulty obtaining sufficient rail for maintenance and other projects.
We May Be Affected by Acts of Terrorism, War, or Risk of War – Our rail lines, facilities, and equipment,
including rail cars carrying hazardous materials, could be direct targets or indirect casualties of terrorist
attacks. Terrorist attacks, or other similar events, any government response thereto, and war or risk of
war may adversely affect our results of operations, financial condition, and liquidity. In addition, insurance
premiums for some or all of our current coverages could increase dramatically, or certain coverages may
not be available to us in the future.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We employ a variety of assets in the management and operation of our rail business. Our rail network
covers 23 states in the western two-thirds of the U.S.
13
TRACK
Our rail network includes 31,953 route miles. We own 26,083 miles and operate on the remainder
pursuant to trackage rights or leases. The following table describes track miles at December 31, 2010
and 2009.
Route
Other main line
Passing lines and turnouts
Switching and classification yard lines
Total miles
HARRIMAN DISPATCHING CENTER
2010
31,953
6,596
3,118
9,006
2009
32,094
6,584
3,040
9,167
50,673
50,885
The Harriman Dispatching Center (HDC), located in Omaha, Nebraska, is our primary dispatching facility.
It is linked to regional dispatching and locomotive management facilities at various locations along our
network. HDC employees coordinate moves of locomotives and trains, manage traffic and train crews on
our network, and coordinate interchanges with other railroads. Approximately 900 employees currently
work on-site in the facility.
RAIL FACILITIES
In addition to our track structure, we operate numerous facilities, including terminals for intermodal and
other freight; rail yards for train-building (classification yards), switching, storage-in-transit (the temporary
storage of customer goods in rail cars prior to shipment) and other activities; offices to administer and
manage our operations; dispatching centers to direct traffic on our rail network; crew quarters to house
train crews along our network; and shops and other facilities for fueling, maintenance, and repair of
locomotives and repair and maintenance of rail cars and other equipment. The following tables include
the major yards and terminals on our system:
Top 10 Classification Yards
North Platte, Nebraska
North Little Rock, Arkansas
Englewood (Houston), Texas
Proviso (Chicago), Illinois
Fort Worth, Texas
Livonia, Louisiana
Roseville, California
West Colton, California
Pine Bluff, Arkansas
Neff (Kansas City), Missouri
Avg. Daily
Car Volume
2009
2,100
1,300
1,300
1,200
1,100
1,100
1,100
1,000
1,000
900
2010
2,100
1,500
1,400
1,300
1,200
1,200
1,100
1,100
1,100
900
14
Top 10 Intermodal Terminals
ICTF (Los Angeles), California
East Los Angeles, California
Global II (Chicago), Illinois
Global I (Chicago), Illinois
Marion (Memphis), Tennessee
Dallas, Texas
Lathrop (Stockton), California
Yard Center (Chicago), Illinois
City of Industry (Los Angeles), California
LATC (Los Angeles), California
RAIL EQUIPMENT
2010
450,000
429,000
342,000
317,000
292,000
280,000
247,000
241,000
233,000
224,000
Annual Lifts
2009
453,000
372,000
284,000
306,000
265,000
233,000
250,000
199,000
254,000
134,000
Our equipment includes owned and leased locomotives and rail cars; heavy maintenance equipment and
machinery; other equipment and tools in our shops, offices, and facilities; and vehicles for maintenance,
transportation of crews, and other activities. As of December 31, 2010, we owned or leased the following
units of equipment:
Locomotives
Multiple purpose
Switching
Other
Total locomotives
Freight cars
Covered hoppers
Open hoppers
Gondolas
Boxcars
Refrigerated cars
Flat cars
Other
Total freight cars
Highway revenue equipment
Containers
Chassis
Owned Leased Total
7,563
457
154
2,628
26
59
4,935
431
95
Average
Age (yrs.)
15.9
31.5
25.0
5,461
2,713
8,174
N/A
Owned Leased Total
30,375
16,205
12,690
7,559
6,915
3,549
560
18,252
4,351
6,190
1,857
4,331
664
456
12,123
11,854
6,500
5,702
2,584
2,885
104
Average
Age (yrs.)
28.7
31.2
28.1
28.0
22.6
33.3
N/A
41,752
36,101
77,853
N/A
Owned Leased Total
48,635
25,879
39,234
23,210
9,401
2,669
Average
Age (yrs.)
5.2
7.3
Total highway revenue equipment
12,070
62,444
74,514
N/A
CAPITAL EXPENDITURES
Our rail network requires significant annual capital investments for replacement, improvement, and
expansion. These investments enhance safety, support the transportation needs of our customers, and
improve our operational efficiency. Additionally, we add new locomotives and freight cars to our fleet to
replace older, less efficient equipment, to support growth and customer demand, and to reduce our
impact on the environment through the acquisition of more fuel efficient and low-emission locomotives.
2010 Capital Expenditures – During 2010, we made capital investments totaling $2.5 billion, nearly all of
which was cash spending. (See the capital expenditures table in Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Liquidity and Capital Resources – Financial Condition,
Item 7.)
15
Infrastructure Expansion – With expected long-term growth in the intermodal market, we commenced
construction of a new intermodal terminal in Joliet, Illinois, in the spring of 2009 and completed the initial
phase in August 2010. This new facility supports customer growth by increasing the Railroad’s
international and domestic container capacity and improving rail traffic efficiencies in Chicago, the
nation’s largest rail center. Customers across our network benefit from the Joliet facility’s annual capacity
of 500,000 intermodal containers.
2011 Capital Expenditures – In 2011, we expect to make capital investments of approximately $3.2
billion, including expenditures for PTC of approximately $250 million. We may revise our 2011 capital
plan if business conditions warrant or if new laws or regulations affect our ability to generate sufficient
returns on these investments. (See discussion of our 2011 capital plan in Management’s Discussion and
Analysis of Financial Condition and Results of Operations – 2011 Outlook, Item 7.)
OTHER
Equipment Encumbrance – Equipment with a carrying value of approximately $3.2 billion and $3.4
billion at December 31, 2010 and 2009, respectively, served as collateral for capital leases and other
types of equipment obligations in accordance with the secured financing arrangements utilized to acquire
such railroad equipment.
As a result of the merger of Missouri Pacific Railroad Company (MPRR) with and into UPRR on January
1, 1997, and pursuant to the underlying indentures for the MPRR mortgage bonds, UPRR must maintain
the same value of assets after the merger in order to comply with the security requirements of the
mortgage bonds. As of the merger date, the value of the MPRR assets that secured the mortgage bonds
was approximately $6.0 billion. In accordance with the terms of the indentures, this collateral value must
be maintained during the entire term of the mortgage bonds irrespective of the outstanding balance of
such bonds.
Environmental Matters – Certain of our properties are subject to federal, state, and local laws and
regulations governing the protection of the environment. (See discussion of environmental issues in
Business – Governmental and Environmental Regulation, Item 1, and Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Environmental,
Item 7.)
Item 3. Legal Proceedings
From time to time, we are involved in legal proceedings, claims, and litigation that occur in connection
with our business. We routinely assess our liabilities and contingencies in connection with these matters
based upon the latest available information and, when necessary, we seek input from our third-party
advisors when making these assessments. Consistent with SEC rules and requirements, we describe
below material pending legal proceedings (other than ordinary routine litigation incidental to our
business), material proceedings known to be contemplated by governmental authorities, other
proceedings arising under federal, state, or local environmental laws and regulations (including
governmental proceedings involving potential fines, penalties, or other monetary sanctions in excess of
$100,000), and such other pending matters that we may determine to be appropriate.
ENVIRONMENTAL MATTERS
As we reported in our Annual Report on Form 10-K for 2005, the Environmental Protection Agency (EPA)
considers the Railroad a potentially responsible party for the Omaha Lead Site. The Omaha Lead Site
consists of approximately 25 square miles of residential property in the eastern part of Omaha, Nebraska,
allegedly impacted by air emissions from two former lead smelters/refineries. One refinery was operated
by ASARCO. The EPA identified the Railroad as a potentially responsible party because more than 60
years ago the Railroad owned land that was leased to ASARCO. The Railroad disputes both the legal
and technical basis of the EPA’s allegations. It has nonetheless engaged in extensive negotiations with
the EPA. The EPA issued a Unilateral Administrative Order with an effective date of December 16, 2005,
directing the Railroad to implement an interim remedy at the site at an estimated cost of $50 million.
Failure to comply with the order without just cause could subject the Railroad to penalties of up to
$37,500 per day and triple the EPA’s costs in performing the work. The Railroad believes it has just cause
not to comply with the order, but it offered to perform some of the work specified in the order as a
compromise. On August 5, 2009, the Railroad received a Special Notice Letter from EPA directing UPRR
16
to perform environmental remediation at approximately 9,000 residential yards in Omaha and to take
other remedial measures as part of a final remedy. The Railroad continues to contest its purported liability
for these costs but has submitted an offer to the EPA to attempt to negotiate a resolution of the matter.
On June 23, 2010, the Railroad filed suit in federal district court in Omaha, Nebraska against the EPA and
its Administrator under the Freedom of Information Act (FOIA), the Administrative Procedure Act and the
Federal Records Act asking the court to compel EPA to respond fully to outstanding FOIA requests and to
prevent EPA from destroying records. The court granted the Railroad a temporary restraining order
prohibiting further document destruction. On August 26, 2010, the Court entered an agreed Preliminary
Injunction preventing destruction of records by EPA. In November 2010, the Railroad reached a
tentative, confidential settlement agreement subject to further negotiation to resolve its liability at the
Omaha Lead Site. The FOIA litigation has been stayed pending possible resolution of the case.
As we reported in our Annual Report on Form 10-K for 2005, the Illinois Attorney General’s office filed a
complaint against the Railroad in the Circuit Court for the Twentieth Judicial Circuit (St. Clair County) for
injunctive and other relief on November 28, 2005, alleging a diesel fuel spill from an above-ground
storage tank in a rail yard in Dupo, St. Clair County, Illinois. The State of Illinois seeks to enjoin UPRR
from further violations and a monetary penalty. The amount of the proposed penalty, although uncertain,
could exceed $100,000.
As we reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, we received
notices from EPA Region 8 and U.S. Department of Justice (DOJ) alleging that we may be liable under
federal environmental laws for violating the Clean Water Act and the Oil Pollution Prevention Act relating
to derailments and spills and UPRR’s Spill Prevention Countermeasure and Control Plans and its
Stormwater Pollution Prevention Plans in Colorado, Utah, and Wyoming. We cannot predict the ultimate
impact of these proceedings because we are continuing to investigate and negotiate with the EPA Region
8 and DOJ. The amount of the proposed penalty, although uncertain, could exceed $100,000.
We received notices from the EPA and state environmental agencies alleging that we are or may be liable
under federal or state environmental laws for remediation costs at various sites throughout the U.S.,
including sites on the Superfund National Priorities List or state superfund lists. We cannot predict the
ultimate impact of these proceedings and suits because of the number of potentially responsible parties
involved, the degree of contamination by various wastes, the scarcity and quality of volumetric data
related to many of the sites, and the speculative nature of remediation costs.
Information concerning environmental claims and contingencies and estimated remediation costs is set
forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Critical Accounting Policies – Environmental, Item 7.
OTHER MATTERS
U.S. Customs and Border Protection (CBP) Dispute and Litigation – As we reported in our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2010, CBP directed its field offices to issue penalties
against the Railroad in December 2007 for discoveries of illegal drugs in railcars crossing the border from
Mexico. The cars are in trains delivered by Mexican railroads directly to CBP; the Railroad receives the
trains only after CBP inspects them. Additionally, CBP imposed or reinstated earlier penalties that had
been held in abeyance while the Railroad and CBP pursued a collective plan to address drug smuggling.
In some instances, CBP seized railcars in which drugs were found.
On July 31, 2008, the Railroad filed a complaint in the U.S. District Court for the District of Nebraska
asking the court to enter (1) a judgment declaring that CBP’s penalties and seizures are invalid and
unenforceable and (2) preliminary and permanent injunctions prohibiting CBP from enforcing penalties
and holding seized cars and directing CBP to refrain from issuing additional penalties and from future
equipment seizures. The total amount of penalties assessed against the Railroad at that time was
approximately $61.4 million. The parties discussed settlement, and the case in the District Court was
stayed. During this period, no new penalties were issued and no cars were seized.
Settlement discussions were unsuccessful. As a result, the Railroad reinstituted its lawsuit on February
18, 2009. U.S. Department of Justice (DOJ) then filed enforcement actions in the U.S. District Court for
the Southern District of Texas on March 17, 2009, and in the U.S. District Court for the Southern District
of California on March 18, 2009, and nine separate forfeiture complaints in the U.S. District Court for the
District of Arizona on March 19, 2009 (covering ten seized cars).
17
The Railroad is awaiting a decision on its motion for Summary Judgment from the Nebraska court. The
Railroad also filed motions in California, Texas, and Arizona to transfer (to Nebraska), dismiss or stay the
cases in those courts. The California and Texas courts granted UP’s motion to transfer venue to
Nebraska. The Arizona Court has not issued a ruling.
During the third quarter of 2010, CBP notified the Railroad of additional penalties for drug discoveries.
Since then, the Railroad received additional penalties for other drug discoveries. The total outstanding
penalty amount as of December 31, 2010, was approximately $376 million. Because the Railroad
believes that CBP lacks statutory authority to issue these fines, the Railroad will vigorously defend
against these penalties. The Railroad also is participating in high-level discussions with the
Commissioner of CBP to address the fines and seizures. Therefore, we currently believe that these
matters will not have a material adverse effect on any of our results of operations, financial condition, and
liquidity.
Antitrust Litigation – As we reported in our Quarterly Report on Form 10-Q for the quarter ended June
30, 2007, 20 small rail shippers (many of whom are represented by the same law firms) filed virtually
identical antitrust lawsuits in various federal district courts against us and four other Class I railroads in
the U.S. The original plaintiff filed the first of these claims in the U.S. District Court in New Jersey on May
14, 2007, and the additional plaintiffs filed claims in district courts in various states, including Florida,
Illinois, Alabama, Pennsylvania, and the District of Columbia. These suits allege that the named railroads
engaged in price-fixing by establishing common fuel surcharges for certain rail traffic.
We received additional complaints following the initial claim, increasing the total number of complaints to
30. In addition to suits filed by direct purchasers of rail transportation, a few of the suits involve plaintiffs
alleging that they are or were indirect purchasers of rail transportation and seek to represent a purported
class of indirect purchasers of rail transportation that paid fuel surcharges. These complaints added
allegations under state antitrust and consumer protection laws. On November 6, 2007, the Judicial Panel
on Multidistrict Litigation ordered that all of the rail fuel surcharge cases be transferred to Judge Paul
Friedman of the U.S. District Court in the District of Columbia for coordinated or consolidated pretrial
proceedings. Subsequently, the direct purchaser plaintiffs and the indirect purchaser plaintiffs filed
Consolidated Amended Class Action Complaints against UPRR and three other Class I railroads.
One additional shipper filed a separate antitrust suit during 2008. Subsequently, the shipper voluntarily
dismissed the action without prejudice.
On October 10, 2008, Judge Friedman heard oral arguments with respect to the defendant railroads’
motions to dismiss. In a ruling on November 7, 2008, Judge Friedman denied the motion with respect to
the direct purchasers’ complaint, and pretrial proceedings are underway in that case. On December 31,
2008, Judge Friedman ruled that the allegations of the indirect purchasers based upon state antitrust,
consumer protection, and unjust enrichment laws must be dismissed. He also ruled, however, that the
plaintiffs could proceed with their claim for injunctive relief under the federal antitrust laws, which is
identical to a claim by the direct purchaser plaintiffs.
The indirect purchasers appealed Judge Friedman's ruling to the U.S. Court of Appeals for the District of
Columbia. On April 16, 2010, the U.S. Court of Appeals for the District of Columbia affirmed Judge
Friedman’s ruling dismissing the indirect purchasers’ claims based on various state laws. On June 8,
2010, the court rejected the indirect purchasers’ requests for a rehearing of their appeal and a hearing en
banc by the entire court. On September 8, 2010, the indirect purchaser plaintiffs filed a Petition for
Certiorari with the U.S. Supreme Court. The railroad defendants filed their response on November 9,
2010, urging the Court not to review the lower courts' decisions. On December 13, 2010, the U.S.
Supreme Court denied the indirect purchaser plaintiffs’ Petition for Certiorari.
The direct purchaser plaintiffs filed their motion for class certification on March 18, 2010. The railroad
defendants filed their opposition to this motion on July 1, 2010. Judge Friedman conducted a hearing on
October 6 and 7, 2010, on the class certification issue and has yet to issue a decision.
We deny the allegations that our fuel surcharge programs violate the antitrust laws or any other laws. We
believe that these lawsuits are without merit, and we will vigorously defend our actions. Therefore, we
currently believe that these matters will not have a material adverse effect on any of our results of
operations, financial condition, and liquidity.
18
Item 4. [Reserved]
Executive Officers of the Registrant and Principal Executive Officers of Subsidiaries
The Board of Directors typically elects and designates our executive officers on an annual basis at the
board meeting held in conjunction with the Annual Meeting of Shareholders, and they hold office until
their successors are elected. Executive officers also may be elected and designated throughout the year,
as the Board of Directors considers appropriate. There are no family relationships among the officers, nor
any arrangement or understanding between any officer and any other person pursuant to which the
officer was selected. The following table sets forth certain information, as of February 1, 2011, relating to
the executive officers.
Name
James R. Young
Robert M. Knight, Jr.
J. Michael Hemmer
Barbara W. Schaefer
Jeffrey P. Totusek
Lance M. Fritz
John J. Koraleski
Position
Chairman, President and Chief Executive Officer
of UPC and the Railroad
Executive Vice President – Finance and Chief
Financial Officer of UPC and the Railroad
Senior Vice President – Law and General
Counsel of UPC and the Railroad
Senior Vice President – Human Resources and
Secretary of UPC and the Railroad
Vice President and Controller of UPC and Chief
Accounting Officer and Controller of the Railroad
Executive Vice President – Operations of the
Railroad
Executive Vice President – Marketing and Sales
of the Railroad
Business
Experience During
Age Past Five Years
58
[1]
53 Current Position
61 Current Position
57 Current Position
52
48
[2]
[3]
60 Current Position
[1] Mr. Young was elected Chief Executive Officer and President of UPC and the Railroad effective January 1, 2006. He was
elected to the additional position of Chairman effective February 1, 2007.
[2] Mr. Totusek was elected to his current position effective January 1, 2008. He previously was Assistant Vice President –
Financial Analysis of the Railroad.
[3] Mr. Fritz was elected to his current position effective September 1, 2010. He previously was Vice President – Operations of
the Railroad, effective January 1, 2010. Mr. Fritz previously served as Vice President – Labor Relations effective March 1,
2008, Regional Vice President – South, effective July 1, 2006, and Regional Vice President – North, effective April 1, 2005.
19
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol “UNP”. The
following table presents the dividends declared and the high and low closing prices of our common stock
for each of the indicated quarters.
2010 - Dollars Per Share
Dividends
Common stock price:
High
Low
2009 - Dollars Per Share
Dividends
Common stock price:
High
Low
Q1
0.27
$
Q2
0.33
$
Q3
0.33
$
Q4
0.38
$
74.35
60.41
78.61
65.99
83.08
66.84
95.78
79.32
Q1
0.27
$
Q2
0.27
$
Q3
0.27
$
Q4
0.27
$
54.66
33.28
55.45
39.82
64.75
47.47
66.73
54.20
At January 28, 2011, there were 491,001,416 shares of outstanding common stock and 33,537 common
shareholders of record. On that date, the closing price of the common stock on the NYSE was $93.54.
Through December 31, 2010, we have paid dividends to our common shareholders during each of the
past 111 years. We declared dividends totaling $653 million in 2010 and $544 million in 2009. On May 6,
2010, we increased the quarterly dividend to $0.33 per share, payable beginning on July 1, 2010, to
shareholders of record on May 28, 2010. On November 18, 2010, we increased the quarterly dividend for
a second time to $0.38 per share, payable beginning January 3, 2011 to shareholders of record on
November 30, 2010. We are subject to certain restrictions regarding retained earnings with respect to the
payment of cash dividends to our shareholders. The amount of retained earnings available for dividends
increased to $12.9 billion at December 31, 2010, from $11.6 billion at December 31, 2009. (See
discussion of this restriction in Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Liquidity and Capital Resources, Item 7.) We do not believe the restriction on retained
earnings will affect our ability to pay dividends, and we currently expect to pay dividends in 2011
comparable to 2010.
Comparison Over One- and Three-Year Periods – The following table presents the cumulative total
shareholder returns, assuming reinvested dividends, over one- and three-year periods for the
Corporation, a peer group index (comprised of CSX Corporation and Norfolk Southern Corporation), the
Dow Jones Transportation Index (Dow Jones), and the Standard & Poor’s 500 Stock Index (S&P 500).
47.6%
UPC Peer Group Dow Jones S&P 500
15.1%
(8.3)
44.2
18.1
29.0%
26.8%
55.7
Period
1 Year (2010)
3 Year (2008-2010)
20
Five-Year Performance Comparison – The following graph provides an indicator of cumulative total
shareholder returns for the Corporation as compared to the peer group index (described above), the Dow
Jones, and the S&P 500. The graph assumes that the value of the investment in the common stock of
Union Pacific Corporation and each index was $100 on December 31, 2005 and that all dividends were
reinvested.
Purchases of Equity Securities – During 2010, we repurchased 17,556,522 shares of our common
stock at an average price of $75.51. The following table presents common stock repurchases during each
month for the fourth quarter of 2010:
Period
Oct. 1 through Oct. 31
Nov. 1 through Nov. 30
Dec. 1 through Dec. 31
Total Number of
Shares
Purchased [a]
725,450
1,205,260
1,133,106
Average
Price Paid
Per Share
84.65
89.92
92.59
Total Number of Shares
Purchased as Part of a
Publicly Announced
Plan or Program [b]
519,554
1,106,042
875,000
Maximum Number of
Shares That May Yet Be
Purchased Under the Plan
or Program [b]
17,917,736
16,811,694
15,936,694
Total
3,063,816 $
89.66
2,500,596
N/A
[a]
Total number of shares purchased during the quarter includes approximately 563,220 shares delivered or attested to UPC by
employees to pay stock option exercise prices, satisfy excess tax withholding obligations for stock option exercises or vesting
of retention units, and pay withholding obligations for vesting of retention shares.
[b] On May 1, 2008, our Board of Directors authorized us to repurchase up to 40 million shares of our common stock through
March 31, 2011. We may make these repurchases on the open market or through other transactions. Our management has
sole discretion with respect to determining the timing and amount of these transactions.
On February 3, 2011, our Board of Directors authorized us to repurchase up to 40 million additional
shares of our common stock under a new program effective from April 1, 2011 through March 31, 2014.
21
Item 6. Selected Financial Data
The following table presents as of, and for the years ended, December 31, our selected financial data for
each of the last five years. The selected financial data should be read in conjunction with Management’s
Discussion and Analysis of Financial Condition and Results of Operations, Item 7, and with the Financial
Statements and Supplementary Data, Item 8. The information below is not necessarily indicative of future
financial condition or results of operations.
Millions, Except per Share Amounts,
Carloads, Employee Statistics, and Ratios
For the Year Ended December 31
Operating revenues [a]
Operating income
Net income
Earnings per share - basic [b]
Earnings per share - diluted [b]
Dividends declared per share [b]
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Cash used for common share repurchases
At December 31
Total assets
Long-term obligations
Debt due after one year
Common shareholders' equity
Equity per common share [c]
Additional Data
Freight revenues [a]
Revenue carloads (units) (000)
Operating margin (%) [d]
Operating ratio (%) [d]
Average employees (000)
Operating revenues per employee (000)
Financial Ratios (%)
Debt to capital [e]
Return on average common
shareholders' equity [f]
2010
2009
2008
2007
2006
$ 16,965
$ 14,143
$ 17,970
$ 16,283
4,981
2,780
5.58
5.53
1.31
4,105
(2,488)
(2,381)
(1,249)
3,379
1,890
3.76
3.74
1.08
3,204
(2,145)
(458)
-
4,070
2,335
4.57
4.53
0.98
4,044
(2,738)
(935)
(1,609)
3,364
1,848
3.47
3.44
0.745
3,248
(2,397)
(800)
(1,375)
$ 43,088
$ 42,184
$ 39,509
$ 37,825
22,373
9,003
17,763
36.14
22,701
9,636
16,801
33.27
21,314
8,607
15,315
30.43
19,328
7,543
15,456
29.62
$ 16,069
$ 13,373
$ 17,118
$ 15,486
8,815
29.4
70.6
42.9
7,786
23.9
76.1
43.5
9,261
22.6
77.4
48.2
9,733
20.7
79.3
50.1
$
395.5
$
325.1
$
372.8
$
325.0
$ 15,578
2,871
1,598
2.97
2.94
0.60
2,853
(2,015)
(784)
-
$ 36,318
17,589
6,000
15,190
28.11
$ 14,791
9,852
18.4
81.6
50.7
$ 307.2
34.2
16.1
37.0
11.8
36.8
15.2
33.2
12.1
30.9
11.1
[a]
Includes fuel surcharge revenue of $1,237 million, $605 million, $2,323 million, $1,478 million, and $1,619 million for 2010,
2009, 2008, 2007, and 2006, respectively, which partially offsets increased operating expenses for fuel. Fuel surcharge
revenue is not comparable from year to year due to implementation of new mileage-based fuel surcharge programs in each
respective year. (See further discussion in Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Results of Operations – Operating Revenues, Item 7.)
[b] Earnings per share and dividends have been restated to reflect the May 28, 2008 stock split.
[c] Equity per common share is calculated as follows: common shareholders’ equity divided by common shares issued less
treasury shares outstanding. Shares have been adjusted to reflect the May 28, 2008 stock split.
[d] Operating margin is defined as operating income divided by operating revenues. Operating ratio is defined as operating
expenses divided by operating revenues.
[e] Debt to capital is determined as follows: total debt divided by total debt plus equity.
[f] Return on average common shareholders' equity is determined as follows: Net income divided by average common
shareholders' equity.
22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and
applicable notes to the Financial Statements and Supplementary Data, Item 8, and other information in
this report, including Risk Factors set forth in Item 1A and Critical Accounting Policies and Cautionary
Information at the end of this Item 7.
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment.
Although we analyze revenue by commodity group, we analyze the net financial results of the Railroad as
one segment due to the integrated nature of our rail network.
EXECUTIVE SUMMARY
2010 Results
• Safety – During 2010, we continued our positive, multi-year trend in safety performance by setting
records in many of our safety metrics. The employee injury incident rate per 200,000 man-hours
declined 4% from 2009 to its lowest level ever. Our continued focus on derailment prevention resulted
in another strong performance as our incident rate finished at 10.54 per million train miles, slightly
behind 2009 record results. However, the severity of those incidents was lower, resulting in a 12%
reduction in associated costs. With respect to public safety, we closed 286 grade crossings to reduce
our exposure to incidents. We also continued installing video cameras on our locomotives, which
assist us in reviewing grade crossing incidents, and we now have camera-equipped locomotives in
the lead position of over 97% of our through-freight trains. During 2010, the rate of grade crossing
incidents per million train miles increased 10% from record low levels of 2009, as both highway and
rail traffic increased in conjunction with economic improvement. Overall, our 2010 safety results
reflect our continued focus on the safety of our employees and the public.
• Financial Performance – In 2010, we generated record operating income of $5.0 billion, a 47%
increase over 2009, reflecting a 13% increase in volume, core pricing gains, and improved
productivity. Improved economic conditions increased demand for our services across almost all
market sectors compared to 2009, a year in which economic conditions substantially reduced
demand for rail service. We leveraged additional traffic volumes during 2010 by effectively utilizing
our assets and minimizing operational cost increases compared to 2009. These achievements
translated into an all-time record operating ratio of 70.6% for 2010, outpacing our previous record of
76.1% set in 2009. Net income of $2.8 billion also surpassed our previous milestone set in 2008,
translating into earnings of $5.53 per diluted share for 2010.
• Freight Revenues – Our freight revenues grew 20% year-over-year to $16.1 billion. Freight revenues
and volumes for all six commodity groups increased. Overall, volume increased 13% in 2010, with
particularly strong growth in automotive, intermodal, and industrial products shipments. Core pricing
gains and higher fuel surcharges (due to higher fuel prices, volume growth, and new fuel surcharge
provisions in contracts renegotiated in 2010) also drove the growth in freight revenue in 2010
compared to 2009. We continued to focus on improving the reinvestibility of our business, and we
have repriced approximately 88% of our business since 2004.
• Network Operations – In 2010, we continued operating an efficient and fluid network, effectively
handling the 13% increase in carloads compared to 2009. As reported to the Association of
American Railroads (AAR), average train speed decreased 4% in 2010 compared to a record-setting
2009. Maintenance activities and weather disruptions, combined with higher volume levels,
negatively impacted our average train speed. Average terminal dwell time increased 2% while
average rail car inventory decreased 3% in 2010 compared to 2009. We maintained more freight
cars off-line and retired a number of old freight cars, which drove a decrease in average rail car
inventory during the year. In 2010, customer satisfaction improved, surpassing a record established
in 2009, an indication that our ongoing efforts to improve operations again translated into better
customer service.
• Asset Utilization – In response to economic conditions and lower revenue in 2009, we implemented
productivity initiatives to improve efficiency and reduce costs, in addition to adjusting our resources to
reflect lower demand. By the end of 2009, we had removed from service approximately 26% of our
multiple purpose locomotives and 18% of our freight car inventory. As volume increased 13% from
23
2009 levels, we returned a portion of these assets to active service. At the end of 2010, we continued
to maintain in storage approximately 17% of our multiple purpose locomotives and 14% of our freight
car inventory, reflecting our ability to effectively leverage our assets as volumes return to our network.
• Fuel Prices – Fuel prices generally increased throughout 2010 as the economy improved. Our
average diesel fuel price per gallon increased nearly 20% from January to December of 2010, driven
by higher crude oil barrel prices and conversion spreads. Compared to 2009, our diesel fuel price per
gallon consumed increased 31%, driving operating expenses up by $566 million (excluding any
impact from year-over-year volume increases). To partially offset the effect of higher fuel prices, we
reduced our consumption rate by 3% during the year, saving approximately 27 million gallons of fuel.
The use of newer, more fuel efficient locomotives; increased use of distributed locomotive power (the
practice of distributing locomotives throughout a train rather than positioning them all in the lead
resulting in safer and more efficient train operations); fuel conservation programs; and efficient
network operations and asset utilization all contributed to this improvement.
• Free Cash Flow – Cash generated by operating activities (adjusted for the reclassification of our
receivables securitization facility) totaled $4.5 billion, yielding record free cash flow of $1.4 billion in
2010. Free cash flow is defined as cash provided by operating activities (adjusted for the
reclassification of our receivables securitization facility), less cash used in investing activities and
dividends paid.
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. We believe free cash
flow is important 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
Cash provided by operating activities
Receivables securitization facility [a]
Cash provided by operating activities
adjusted for the receivables securitization facility
Cash used in investing activities
Dividends paid
Free cash flow
2009
2010
2008
$ 4,105 $ 3,204 $ 4,044
16
400
184
4,505
3,388
4,060
(2,488)
(602)
(2,145)
(544)
(2,738)
(481)
$ 1,415 $
699 $
841
[a] Effective January 1, 2010, a new accounting standard required us to account for receivables transferred under our
receivables securitization facility as secured borrowings in our Consolidated Statements of Financial Position and as
financing activities in our Consolidated Statements of Cash Flows. The receivables securitization facility is included in our
free cash flow calculation to adjust cash provided by operating activities as though our receivables securitization facility
had been accounted for under the new accounting standard for all periods presented.
2011 Outlook
• Safety – Operating a safe railroad benefits our employees, our customers, our shareholders, and the
public. We will continue using a multi-faceted approach to safety, utilizing technology, risk
assessment, quality control, and training, and engaging our employees. We will continue
implementing Total Safety Culture (TSC) throughout our operations. TSC is designed to establish,
maintain, reinforce, and promote safe practices among co-workers. This process allows us to identify
and implement best practices for employee and operational safety. Reducing grade crossing
incidents is a critical aspect of our safety programs, and we will continue our efforts to maintain and
close crossings; install video cameras on locomotives; and educate the public and law enforcement
agencies about crossing safety through a combination of our own programs (including risk
assessment strategies), various industry programs, and engaging local communities.
• Transportation Plan – To build upon our success in recent years, we will continue evaluating traffic
flows and network logistic patterns, which can be quite dynamic, to identify additional opportunities to
simplify operations, remove network variability, and improve network efficiency and asset utilization.
We plan to adjust manpower and our locomotive and rail car fleets to meet customer needs and put
24
us in a position to handle demand changes. We will also continue utilizing industrial engineering
techniques to improve productivity.
• Fuel Prices – Uncertainty about the economy makes fuel price projections difficult, and we could see
volatile fuel prices during the year, as they are sensitive to global and U.S. domestic demand, refining
capacity, geopolitical events, weather conditions and other factors. To reduce the impact of fuel price
on earnings, we will continue to seek recovery from our customers through our fuel surcharge
programs and to expand our fuel conservation efforts.
• Capital Plan – In 2011, we plan to make total capital investments of approximately $3.2 billion,
including expenditures for Positive Train Control (PTC), which may be revised if business conditions
warrant or if new laws or regulations affect our ability to generate sufficient returns on these
investments. (See further discussion in this Item 7 under Liquidity and Capital Resources – Capital
Plan.)
• Positive Train Control – In response to a legislative mandate to implement PTC by the end of 2015,
we expect to spend approximately $250 million during 2011 on developing PTC. We currently
estimate that PTC will cost us approximately $1.4 billion to implement by the end of 2015, in
accordance with rules issued by the Federal Railroad Administration (FRA). 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 so all the parts of the system can communicate with
each other. During 2011, we plan to begin testing the technology to evaluate its effectiveness.
• Financial Expectations – We remain cautious about economic conditions, but anticipate volume to
increase from 2010 levels. In addition, we expect volume, price, and productivity gains to offset
expected higher costs for fuel, labor inflation, depreciation, casualty costs, and property taxes to drive
operating ratio improvement.
RESULTS OF OPERATIONS
Operating Revenues
Millions
Freight revenues
Other revenues
Total
2010
$ 16,069
2009
$ 13,373
896
770
2008
$ 17,118
852
% Change
2010 v 2009
20%
% Change
2009 v 2008
(22)%
16
(10)
$ 16,965
$ 14,143
$ 17,970
20%
(21)%
Freight revenues are revenues generated 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 a reduction to freight revenues based on the actual or projected
future shipments. We recognize freight revenues as freight moves 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 and volume levels for all six commodity groups increased during 2010 as a result of
economic improvement in many market sectors. We experienced particularly strong volume growth in
automotive, intermodal, and industrial products shipments. Core pricing gains and higher fuel surcharges
also increased freight revenues and drove a 6% improvement in ARC.
Freight revenues and volume levels for all six commodity groups decreased during 2009, reflecting
continued economic weakness. We experienced the largest volume declines in automotive and industrial
25
products shipments. Lower fuel surcharges due to lower fuel prices also reduced freight revenues in
2009 compared to 2008. ARC decreased 7% during the full year, driven by lower fuel cost recoveries,
partially offset by core pricing gains of approximately 5%. Fuel cost recoveries include fuel surcharge
revenue and the impact of resetting the base fuel price for certain traffic, which is described below in
more detail.
Our fuel surcharge programs (excluding index-based contract escalators that contain some provision for
fuel) generated freight revenues of $1.2 billion, $605 million, and $2.3 billion in 2010, 2009, and 2008,
respectively. Higher fuel prices, volume growth, and new fuel surcharge provisions in contracts
renegotiated during the year increased fuel surcharge amounts in 2010. Furthermore, for certain periods
during 2009, fuel prices dropped below the base at which our mileage-based fuel surcharge begins,
which resulted in no fuel surcharge recovery for associated shipments during those periods.
Fuel surcharge revenue is not entirely comparable to prior periods due to implementation of new mileage-
based fuel surcharge programs. In April 2007, we converted regulated traffic, which represents
approximately 20% of our current revenue base, to mileage-based fuel surcharge programs. In addition,
we have converted and continue to convert portions of our non-regulated traffic to mileage-based fuel
surcharge programs. At the time of conversion, we reset the base fuel price at which the new mileage-
based fuel surcharges take effect. Resetting the fuel price at which the fuel surcharge begins, in
conjunction with rebasing the affected transportation rates to include a portion of what had been in the
fuel surcharge, does not materially change our freight revenue as higher base rates offset lower fuel
surcharge revenue.
In 2010, other revenues increased from 2009 due primarily to higher revenues at our subsidiaries that
broker intermodal and automotive services. Assessorial revenues also increased in 2010 reflecting
higher volume levels during the year.
In 2009, other revenue decreased from 2008 due primarily to lower revenues at one of our subsidiaries
that brokers intermodal and automotive services. Assessorial revenues also decreased in 2009 reflecting
lower volume levels during the year.
The following tables summarize the year-over-year changes in freight revenues, revenue carloads (each
container or trailer is counted as one carload), and ARC by commodity type:
Freight Revenues
Millions
Agricultural
Automotive
Chemicals
Energy
Industrial Products
Intermodal
Total
Revenue Carloads
Thousands
Agricultural
Automotive
Chemicals
Energy
Industrial Products
Intermodal
Total
$
$
2010
3,018
1,271
2,425
3,489
2,639
3,227
$
2009
2,666
854
2,102
3,118
2,147
2,486
% Change
2010 v 2009
13%
% Change
2009 v 2008
(16)%
49
15
12
23
30
(36)
(16)
(18)
(34)
(18)
2008
3,174
1,344
2,494
3,810
3,273
3,023
$ 16,069
$ 13,373
$ 17,118
20%
(22)%
2010
918
611
844
2,056
1,073
3,313
8,815
2009
865
465
761
2,021
899
2,775
7,786
% Change
2010 v 2009
6%
% Change
2009 v 2008
(9)%
31
11
2
19
19
(30)
(14)
(14)
(28)
(12)
13%
(16)%
2008
947
667
885
2,348
1,249
3,165
9,261
26
Average Revenue per Car
Agricultural
Automotive
Chemicals
Energy
Industrial Products
Intermodal
$
2010
3,286
2,082
2,874
1,697
2,461
974
$
2009
3,080
1,838
2,761
1,543
2,388
896
$
2008
3,352
2,017
2,818
1,622
2,620
955
% Change
2010 v 2009
7%
% Change
2009 v 2008
(8)%
13
4
10
3
9
(9)
(2)
(5)
(9)
(6)
Average
$
1,823
$
1,718
$
1,848
6%
(7)%
in
improvements
2010 Agricultural Revenue
fuel
Agricultural Products – Higher volume,
surcharges, and price
increased
agricultural freight revenue in 2010 versus 2009.
Increased shipments from the Midwest to export
the Pacific Northwest combined with
ports
heightened demand in Mexico drove higher corn
and feed grain shipments in 2010. Increased corn
and feed grain shipments into ethanol plants in
California and Idaho and continued growth in
ethanol shipments also contributed to this increase.
In 2009, some ethanol plants temporarily ceased
operations due to lower ethanol margins, which
contributed
year-over-year
comparison. In addition, strong export demand for
U.S. wheat via the Gulf ports increased shipments
of wheat and food grains compared to 2009. Declines in domestic wheat and food shipments partially
offset the growth in export shipments. New business in feed and animal protein shipments also increased
agricultural shipments in 2010 compared to 2009.
favorable
the
to
Lower volume and fuel surcharges decreased agricultural freight revenue in 2009 versus 2008. Price
improvements partially offset these declines. Lower demand in both export and domestic markets led to
fewer shipments of corn and feed grains, down 11% in 2009 compared to 2008. Weaker worldwide
demand also reduced export shipments of wheat and food grains in 2009 versus 2008.
Automotive – 37% and 24% increases in shipments
of finished vehicles and automotive parts in 2010,
respectively, combined with core pricing gains and
fuel surcharges,
freight
revenue from relatively weak 2009 levels. Economic
conditions in 2009 led to poor auto sales and
reduced vehicle production, which in turn reduced
shipments of finished vehicles and parts during the
year.
improved automotive
2010 Automotive Revenue
in 2009 compared
Declines in shipments of finished vehicles and auto
parts and lower fuel surcharges reduced freight
revenue
to 2008. Vehicle
shipments were down 35% and parts were down
24%. Core pricing gains partially offset these
declines. These volume declines resulted from economic conditions that reduced sales and vehicle
production. In addition, two major domestic automotive manufacturers declared bankruptcy in the second
quarter of 2009, affecting production levels. Although the federal Car Allowance Rebate System (the
“cash for clunkers” program) helped stimulate vehicle sales and shipments in the third quarter of 2009,
production cuts and soft demand throughout the year more than offset the program’s benefits.
27
2010 Chemicals Revenue
Chemicals – Higher volume, price improvements,
and fuel surcharges increased freight revenue from
chemicals
Reduced
in 2010 versus 2009.
from 2009
inventories and purchases delayed
increased fertilizer shipments by 30% in 2010. A
modest rebound in market conditions and more
normalized inventory levels increased demand for
industrial chemicals during the year, driving volume
levels up 8% versus 2009. In addition, shipments of
soda ash increased 12% as continued strong export
demand outpaced weak 2009 export demand.
Reduced volume and fuel surcharges decreased
freight revenue from chemical shipments in 2009
versus 2008. Pricing improvements partially offset
these declines. Weak market conditions reduced
shipments of industrial chemicals in 2009 compared to 2008, driving volume levels down 16%. High
inventories, production curtailments, and delayed purchases combined to reduce fertilizer shipments by
29% in 2009. Additionally, business interruptions resulting from Hurricanes Gustav and Ike lowered
volume levels in the third quarter of 2008, contributing to a more favorable year-over-year comparison.
increased
2010 Energy Revenue
Energy – Core pricing gains, higher fuel surcharges
and modest volume growth
freight
revenue from energy shipments in 2010 compared
to 2009. Shipments from the Southern Powder
River Basin (SPRB) were up 4% driven by higher
demand resulting from improvement in economic
conditions, warmer summer weather, and more
efficient deliveries
tons per car and
(higher
increased train size). Higher inventory levels
carried over from 2009 partially offset this demand
increase. Shipments from Colorado and Utah
mines were down 8% in 2010 versus 2009 due to
increased
mine production
competition from other low cost fuel options (natural
gas and eastern coal), weaker demand from our industrial customers, and high inventories at some utility
customer locations.
interruptions and
Lower volume and fuel surcharges reduced freight revenue from energy shipments in 2009 versus 2008.
Price increases partially offset these declines. Shipments from the SPRB and the Colorado and Utah
mines decreased 14% and 25%, respectively, in 2009 compared to 2008. Continued economic weakness
and high coal inventories resulted in reduced demand at our utility customers, resulting in lower volumes.
Production problems at the Colorado and Utah mines and the loss of SPRB customer contracts also
contributed to the volume declines.
28
2010 Industrial Products Revenue
fuel
Industrial Products – Volume gains, core pricing
improvement, and higher
surcharges
increased freight revenue from industrial products
in 2010 versus 2009. A federal government
remediation program involving removal of uranium
mill tailings from a Moab, Utah, site drove an
increase in short-haul hazardous waste shipments
versus 2009. Shipments under this program
began modestly during the second quarter of
2009. Steel shipments also increased due to
improving economic conditions, while shipments
of non-metallic minerals (primarily frac sand) grew
in response to more drilling for natural gas.
Stone, sand and gravel shipments grew in 2010
compared to 2009 as increased oil drilling more
than offset the decline in commercial construction
activity.
Reduced volume and fuel surcharges resulted in lower freight revenue from industrial products shipments
in 2009 versus 2008. Price improvements partially offset these declines. Weak demand and inventory
reductions resulting from the economic downturn drove a 53% decline in steel shipments in 2009
compared to 2008. The continued weakness in the housing market reduced lumber shipments, while
surplus production and overall market uncertainty resulted in lower paper and newsprint shipments in
2009 versus 2008. In addition, cement and stone shipments declined during 2009 due to high inventories
and weak commercial and residential construction activity.
2010 Intermodal Revenue
the
from
increase
freight revenue
Increased volume, higher
Intermodal –
fuel
surcharges (including new recovery provisions in
contracts renegotiated in 2010), and pricing gains
from
in
drove
intermodal shipments in 2010 compared to 2009.
Volume from domestic and international traffic
increased
reflecting
2009
conditions.
improvements
International volumes grew
to
restocking and higher
continued
inventory
consumer demand.
shipments
Domestic
increased as a result of conversions from truck to
rail fueled by improved service operations. A new
contract with Hub Group, Inc., which included
additional shipments, was executed in the second
quarter of 2009 and contributed to the increase in domestic shipments.
economic
in
response
levels,
in
Decreased volumes and fuel surcharges reduced freight revenue from intermodal shipments in 2009
versus 2008. Volume from international traffic decreased 24% in 2009 compared to 2008, reflecting
economic conditions, continued weak imports from Asia, and diversions to non-UPRR served ports.
Additionally, continued weakness in the domestic housing and automotive sectors translated into weak
demand in large sectors of the international intermodal market, which also contributed to the volume
decline. Conversely, domestic traffic increased 8% in 2009 compared to 2008. A new contract with Hub
Group, Inc., which included additional shipments, was executed in the second quarter of 2009 and more
than offset the impact of weak market conditions in the second half of 2009.
Mexico Business – Each of our commodity groups include revenue from shipments to and from Mexico.
Revenue from Mexico business increased 30% in 2010 versus 2009 to $1.6 billion. Volume levels for all
six commodity groups increased, up 25% in aggregate versus 2009, with particularly strong growth in
automotive, industrial products, and intermodal shipments.
Revenue from Mexico business decreased 26% in 2009 versus 2008 to $1.2 billion. Volume declined in
five of our six commodity groups, down 19% in 2009, driven by 32% and 24% reductions in industrial
products and automotive shipments, respectively. Conversely, energy shipments increased 9% in 2009
versus 2008, partially offsetting these declines.
29
Operating Expenses
Millions
Compensation and benefits
Fuel
Purchased services and materials
Depreciation
Equipment and other rents
Other
$
2010
4,314
2,486
1,836
1,487
1,142
719
$
2009
4,063
1,763
1,644
1,427
1,180
687
$
% Change
2010 v 2009
2008
6%
4,457
41
3,983
12
1,928
1,366
4
1,326 (3)
5
840
% Change
2009 v 2008
(9)%
(56)
(15)
4
(11)
(18)
Total
$ 11,984
$ 10,764
$ 13,900
11%
(23)%
Operating expenses increased $1.2 billion in 2010
versus 2009. Our fuel price per gallon increased
31% during the year, accounting for $566 million
of the increase. Wage and benefit inflation,
depreciation, volume-related costs, and property
taxes also contributed to higher expenses during
2010 compared to 2009. Cost savings from
productivity improvements and better resource
utilization partially offset these increases.
2010 Operating Expenses
Operating expenses decreased $3.1 billion in
2009 versus 2008. Our fuel price per gallon
declined 44% during 2009, decreasing operating
expenses by $1.3 billion compared to 2008. Cost
savings
productivity
improvements, and better resource utilization also
decreased operating expenses
In
addition, lower casualty expense resulting primarily from improving trends in safety performance
decreased operating expenses in 2009. Conversely, wage and benefit inflation partially offset these
reductions.
in 2009.
volume,
lower
from
Compensation and Benefits – Compensation and benefits include wages, payroll taxes, health and
welfare costs, pension costs, other postretirement benefits, and incentive costs. General wage and
benefit inflation increased costs by approximately $190 million in 2010 compared to 2009. Volume-
related expenses and higher equity and incentive compensation also drove costs up during the year.
Workforce levels declined 1% in 2010 compared to 2009 as network efficiencies and ongoing productivity
initiatives enabled us to effectively handle the 13% increase in volume levels with fewer employees.
Lower volume and productivity initiatives led to a 10% decline in our workforce in 2009 compared to 2008,
saving $516 million during the year. Conversely, general wage and benefit inflation increased expenses,
partially offsetting these savings.
Fuel – Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy
equipment. Higher diesel fuel prices, which averaged $2.29 per gallon (including taxes and transportation
costs) in 2010 compared to $1.75 per gallon in 2009, increased expenses by $566 million. Volume, as
measured by gross ton-miles, increased 10% in 2010 versus 2009, driving fuel expense up by $166
million. Conversely, the use of newer, more fuel efficient locomotives, our fuel conservation programs
and efficient network operations drove a 3% improvement in our fuel consumption rate in 2010, resulting
in $40 million of cost savings versus 2009 at the 2009 average fuel price.
Lower diesel fuel prices, which averaged $1.75 per gallon (including taxes and transportation costs) in
2009 compared to $3.15 per gallon in 2008, reduced expenses by $1.3 billion in 2009. Volume, as
measured by gross ton-miles, decreased 17% in 2009, lowering expenses by $664 million compared to
2008. Our fuel consumption rate improved 4% in 2009, resulting in $147 million of cost savings versus
2008 at the 2008 average fuel price. The consumption rate savings versus 2008 using the lower 2009 fuel
price was $68 million. Newer, more fuel efficient locomotives, reflecting locomotive acquisitions in recent
years and the impact of a smaller fleet due to storage of some of our older locomotives; increased use of
30
distributed locomotive power; our fuel conservation programs; and improved network operations all drove
this improvement.
Purchased Services and Materials – Purchased services and materials expense includes the costs of
services purchased from outside contractors (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 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. A $148 million increase in
expenses for contract services drove the higher expenses in 2010 versus 2009. Volume-related trucking
and lift costs for intermodal containers and crew transportation and lodging costs also increased costs
from 2009. In addition, an increase in locomotive maintenance materials used to prepare a portion of our
locomotive fleet for return to active service increased expenses during the year compared to 2009.
Conversely, a decrease in freight car maintenance activity during 2010 drove lower freight car material
costs, partially offsetting the cost increases versus 2009.
Contract services expense (including equipment maintenance) decreased $134 million in 2009 versus
2008 due to lower volume levels and a favorable year-over-year comparison due to expenses incurred in
2008 resulting from Hurricanes Gustav and Ike. In addition, lower volume levels drove cost reductions of
$55 million in transportation and lodging costs and $27 million in expenses associated with operating
jointly owned facilities in 2009 versus 2008. We also performed fewer locomotive and freight car repairs
as a result of lower volumes and having portions of these fleets stored, which reduced related materials
expenses by $87 million in 2009 versus 2008. Clean-up and restoration expenses related to the Cascade
mudslide in January, flooding in the Midwest in June, and the two September hurricanes also increased
expenses in 2008, creating a favorable year-over-year comparison.
Depreciation – The majority of depreciation relates to road property, including rail, ties, ballast, and other
track material. A higher depreciable asset base, reflecting higher capital spending in recent years,
increased depreciation expense in 2010 compared to 2009. Costs also increased $25 million in 2010 due
to the restructuring of certain locomotive leases in the second quarter of 2009. Lower depreciation rates
for rail and other track material partially offset the increases. The lower rates, which became effective
January 1, 2010, resulted from reduced track usage (based on lower gross ton-miles in 2009).
A higher depreciable asset base, reflecting higher capital spending in recent years, increased
depreciation expense in 2009 versus 2008. Costs also increased $34 million in 2009 due to the
restructuring of certain locomotive leases. Lower depreciation rates for rail and other track material
partially offset the increases. The lower rates, which became effective January 1, 2009, resulted from
longer asset lives as determined by service life studies and reduced track usage (based on lower gross
ton-miles in 2008).
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; other specialty equipment leases; and office and other rentals. Short-term freight
car rental expense increased in 2010 compared to 2009, reflecting increased shipments of finished
vehicles and intermodal containers. Increased lease expenses for containers also drove the increase.
Conversely, lower lease expense for freight cars and locomotives decreased costs compared to 2009.
The restructuring of locomotive leases (completed in May 2009) also reduced lease expense by $36
million in 2010 compared to 2009. (See further discussion in this Item 7 under Liquidity and Capital
Resources – Financing Activities.)
Fewer shipments of industrial products and intermodal containers primarily contributed to the $85 million
reduction in our short-term freight car rental expense in 2009 versus 2008. In addition, the restructuring
of locomotive leases reduced lease expense by $52 million in 2009 compared to 2008. Lower lease
expense for freight cars, intermodal containers, and fleet vehicles also decreased costs in 2009 versus
2008.
Other – Other expenses include personal injury, freight and property damage, destruction of foreign
equipment, insurance, environmental, bad debt, state and local taxes, utilities, telephone and cellular,
employee travel, computer software, and other general expenses. Other costs were higher in 2010
compared to 2009, driven by higher property taxes and the $45 million one-time payment in the first
quarter of 2010 related to a transaction with CSXI. A $30 million payment in 2009 to Pacer International,
31
Inc. and lower expenses for freight and property damages partially offset these increases in comparing
2009 with 2010. In addition, personal injury expense was lower in 2010 compared to 2009, reflecting
continued improvement in our personal injury incident rate and lower settlement costs per claim. The
change in asbestos-related claim expenses in 2010 versus 2009 offset the lower personal injury costs.
As a result of our 2009 annual review of asbestos-related costs, we reduced expenses by $25 million,
thus driving the unfavorable variance in 2010.
Other costs were lower in 2009 compared to 2008, driven by a reduction in personal injury expense and
asbestos-related claims expense. We completed actuarial studies of personal injury expenses in both the
second and fourth quarters of 2009 and 2008 and annual reviews of asbestos-related claims in both
years, which resulted in a net reduction of $55 million in casualty expense in 2009 versus 2008. The
reduction reflects improvements in our safety experience and lower estimated costs to resolve claims. In
addition, the year-over-year comparison was favorably impacted by $28 million due to an adverse
development with respect to one personal injury claim in 2008 and favorable developments in three cases
in 2009. Other costs were also lower in 2009 compared to 2008, driven by a decrease in expenses for
freight and property damages, employee travel, and utilities. In addition, higher bad debt expense in 2008
due to the uncertain impact of the recessionary economy drove a favorable year-over-year comparison.
Conversely, an additional expense of $30 million related to a transaction with Pacer International, Inc. and
higher property taxes partially offset lower costs in 2009.
Non-Operating Items
Millions
Other income
Interest expense
Income taxes
$
2010
54
(602)
(1,653)
$
2009
195
(600)
(1,084)
$
2008
92
(511)
(1,316)
% Change
2010 v 2009
(72)%
% Change
2009 v 2008
112 %
-
17
52 %
(18)%
Other Income – Other income decreased in 2010 versus 2009 due to lower gains from real estate sales
(the second quarter of 2009 included a $116 million pre-tax gain from a land sale to the Regional
Transportation District in Colorado) and premiums paid for early debt redemption.
Other income increased $103 million in 2009 compared to 2008 primarily due to higher gains from real
estate sales, which included the $116 million pre-tax gain from a land sale in Colorado, and lower interest
expense on our receivables securitization facility, resulting from lower interest rates and a lower
outstanding balance. Reduced rental and licensing income and lower returns on cash investments,
reflecting lower interest rates, partially offset these increases.
Interest Expense – Interest expense was flat in 2010 compared to 2009 due to a modestly higher
weighted-average debt level of $9.7 billion, compared to $9.6 billion in 2009, offset by a lower effective
interest rate of 6.2% in 2010, compared to 6.3% in 2009.
Interest expense increased in 2009 versus 2008 due primarily to higher weighted-average debt levels. In
2009, the weighted-average debt level was $9.6 billion (including the restructuring of locomotive leases in
May of 2009), compared to $8.3 billion in 2008. Our effective interest rate was 6.3% in 2009, compared
to 6.1% in 2008.
Income Taxes – Income taxes were higher in 2010 compared to 2009, primarily driven by higher pre-tax
income. Our effective tax rate for the year was 37.3% compared to 36.4% in 2009. Income taxes were
lower in 2009 compared to 2008, driven by lower pre-tax income. Our effective tax rate for 2009 was
36.4% compared to 36.0% in 2008.
OTHER OPERATING/PERFORMANCE AND FINANCIAL STATISTICS
We report key Railroad performance measures weekly to the Association of American Railroads (AAR),
including carloads, average daily inventory of rail cars on our system, average train speed, and average
terminal dwell time. We provide this data on our website at www.up.com/investors/reports/index.shtml.
32
Operating/Performance Statistics
Railroad performance measures reported to the AAR, as well as other performance measures, are
included in the table below:
Average train speed (miles per hour)
Average terminal dwell time (hours)
Average rail car inventory (thousands)
Gross ton-miles (billions)
Revenue ton-miles (billions)
Operating ratio
Employees (average)
Customer satisfaction index
2010
26.2
25.4
274.4
932.4
520.4
70.6
42,884
89
2009
27.3
24.8
283.1
846.5
479.2
76.1
43,531
88
2008
23.5
24.9
300.7
1,020.4
562.6
77.4
48,242
83
% Change
2010 v 2009
(4)%
2 %
(3)%
10 %
9 %
(5.5) pt
(1)%
1 pt
% Change
2009 v 2008
16 %
-
(6)%
(17)%
(15)%
(1.3) pt
(10)%
5 pt
Average Train Speed – Average train speed is calculated by dividing train miles by hours operated on our
main lines between terminals. Maintenance activities and weather disruptions, combined with higher
volume levels, led to a 4% decrease in average train speed in 2010 compared to a record set in 2009.
Overall, we continued operating a fluid and efficient network during the year. Lower volume levels,
ongoing network management initiatives, and productivity improvements contributed to a 16%
improvement in average train speed in 2009 compared to 2008.
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 2% in 2010 compared to 2009, driven in part by our network plan to increase the
length of numerous trains to improve overall efficiency, which resulted in higher terminal dwell time for
some cars. Average terminal dwell time improved slightly in 2009 compared to 2008 due to lower volume
levels combined with initiatives to expedite delivering rail cars to our interchange partners and customers.
Average Rail Car Inventory – Average rail car inventory is the daily average number of rail cars on our
lines, including rail cars in storage. Lower average rail car inventory reduces congestion in our yards and
sidings, which increases train speed, reduces average terminal dwell time, and improves rail car
utilization. Average rail car inventory decreased 3% in 2010 compared to 2009, while we handled 13%
increases in carloads during the period compared to 2009. We maintained more freight cars off-line and
retired a number of old freight cars, which drove the decreases. Average rail car inventory decreased 6%
in 2009 compared to 2008 driven by a 16% decrease in volume. In addition, as carloads decreased, we
stored more freight cars off-line.
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 and revenue-ton-miles increased 10% and 9% in
2010 compared to 2009 due to a 13% increase in carloads. Commodity mix changes (notably automotive
shipments) drove the variance in year-over-year growth between gross ton-miles, revenue ton-miles and
carloads. Gross and revenue ton-miles decreased 17% and 15% in 2009 compared to 2008 due to a
16% decrease in carloads. Commodity mix changes (notably automotive shipments, which were 30%
lower in 2009 versus 2008) drove the difference in declines between gross ton-miles and revenue ton-
miles.
Operating Ratio – Operating ratio is defined as our operating expenses as a percentage of operating
revenue. Our operating ratio improved 5.5 points to 70.6% in 2010 and 1.3 points to 76.1% in 2009.
Efficiently leveraging volume increases, core pricing gains, and productivity initiatives drove the
improvement in 2010 and more than offset the impact of higher fuel prices during the year. Core pricing
gains, lower fuel prices, network management initiatives, and improved productivity drove the
improvement in 2009 and more than offset the 16% volume decline.
Employees – Employee levels were down 1% in 2010 compared to 2009 despite a 13% increase in
volume levels. We leveraged the additional volumes through network efficiencies and other productivity
initiatives. In addition, we successfully managed the growth of our full-time-equivalent train and engine
force levels at a rate less than half of our carload growth in 2010. All other operating functions and
33
support organizations reduced
from continued
productivity initiatives. Productivity initiatives and lower volumes reduced employee levels 10%
throughout the Company in 2009 versus 2008.
full-time-equivalent
levels, benefiting
force
their
Customer Satisfaction Index – Our customer satisfaction survey asks customers to rate how satisfied they
are with our performance over the last 12 months on a variety of attributes. A higher score indicates
higher customer satisfaction. The improvement in survey results in 2010 and 2009 generally reflects
customer recognition of our service quality.
Return on Average Common Shareholders’ Equity
Millions, Except Percentages
Net income
Average equity
Return on average common shareholders' equity
Return on Invested Capital as Adjusted (ROIC)
Millions, Except Percentages
Net income
Add: Interest expense
Add: Interest on present value of operating leases
Add: Receivable securitization fees
Less: Taxes on interest and fees
Net operating profit after taxes as adjusted (a)
Average equity
Add: Average debt
Add: Average value of sold receivables
Add: Average present value of operating leases
$
$
$
$
$
2010
2,780
17,282
16.1%
2010
2,780
602
222
-
(307)
3,297
17,282
9,545
200
3,574
$
$
$
$
$
2009
1,890
16,058
11.8%
2009
1,890
600
232
9
(306)
2,425
16,058
9,388
492
3,681
$
$
$
$
$
2008
2,335
15,386
15.2%
2008
2,335
511
299
23
(300)
2,868
15,386
8,305
592
3,737
Average invested capital as adjusted (b)
$
30,601
$
29,619
$
28,020
Return on invested capital as adjusted (a/b)
10.8%
8.2%
10.2%
ROIC is considered a non-GAAP financial measure 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 this
measure is important in evaluating the efficiency and effectiveness of the Corporation’s long-term capital
investments. In addition, we currently use ROIC as a performance criteria in determining certain
elements of equity compensation for our executives. ROIC should be considered in addition to, rather
than as a substitute for, other information provided in accordance with GAAP. The most comparable
GAAP measure is Return on Average Common Shareholders’ Equity. The tables above provide
reconciliations from return on average common shareholders’ equity to ROIC. Our 2010 ROIC improved
2.6 points compared to 2009, primarily as a result of higher earnings.
34
Debt to Capital / Adjusted Debt to Capital
Millions, Except Percentages
Debt (a)
Equity
Capital (b)
Debt to capital (a/b)
Millions, Except Percentages
Debt
Value of sold receivables
Debt including value of sold receivables
Net present value of operating leases
Unfunded pension and OPEB
Adjusted debt (a)
Equity
Adjusted capital (b)
Adjusted debt to capital (a/b)
$
$
$
$
$
2010
9,242
17,763
27,005
34.2%
2010
9,242
-
9,242
3,476
421
13,139
17,763
30,902
42.5%
$
$
$
$
$
2009
9,848
16,801
26,649
37.0%
2009
9,848
400
10,248
3,672
456
14,376
16,801
31,177
46.1%
Adjusted debt to capital is a non-GAAP financial measure under SEC Regulation G and Item 10 of SEC
Regulation S-K. 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. Effective January 1, 2010, the value of the outstanding undivided interest held by investors
under our receivables securitization facility is included in our Consolidated Statement of Financial Position
as debt due after one year. At December 31, 2010, that amount was $100 million. Operating leases
were discounted using 6.2% at December 31, 2010 and 6.3% at December 31, 2009. The lower discount
rate reflects changes to interest rates and our current financing costs. 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. Our December 31, 2010 debt to capital
ratios decreased as a result of a $606 million net decrease in debt from December 31, 2009. Debt,
including the value of our receivables securitization facility, decreased $1.0 billion from December 31,
2009.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2010, our principal sources of liquidity included cash, cash equivalents, our
receivables securitization facility, and our revolving credit facility, as well as the availability of commercial
paper and other sources of financing through the capital markets (such as the remaining authority under
our shelf registration). We had $1.9 billion of committed credit available under our credit facility, with no
borrowings outstanding as of December 31, 2010. We did not make any borrowings under this facility
during 2010. The value of the outstanding undivided interest held by investors under the receivables
securitization facility was $100 million as of December 31, 2010, and is included in our Consolidated
Statements of Financial Position as debt due after one year. The receivables securitization facility is
subject to certain requirements, including maintenance of an investment grade bond rating. If our bond
rating were to deteriorate, it could have an adverse impact on our liquidity. Access to commercial paper
as well as other capital market financings is dependent on market conditions. Deterioration of our
operating results or financial condition due to internal or external factors could negatively impact our
ability to access capital markets as a source of liquidity. Access to liquidity through the capital markets is
also dependent on our financial stability. We expect that we will continue to have access to liquidity by
issuing bonds to public or private investors based on our assessment of the current condition of the credit
markets.
At December 31, 2010 and 2009, we had a working capital surplus, which in 2010 continues to be the
result of our decision in 2009 to maintain additional cash reserves to enhance liquidity in response to
35
uncertain economic conditions. Historically, we have had a working capital deficit, which is common in our
industry and does not indicate a lack of liquidity. We maintain adequate resources and, when necessary,
have access to capital to meet any daily and short-term cash requirements, and we have sufficient
financial capacity to satisfy our current liabilities.
Cash Flows
Millions
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Net change in cash and cash equivalents
Operating Activities
2010
4,105
(2,488)
(2,381)
(764)
$
$
2009
3,204
(2,145)
(458)
601
$
$
2008
4,044
(2,738)
(935)
371
$
$
Higher net income in 2010 increased cash provided by operating activities compared to 2009.
Conversely, the adoption of a new accounting standard for our receivables securitization facility from a
sale of undivided interests (recorded as an operating activity) to a secured borrowing (recorded as a
financing activity) decreased cash provided by operating activities by $400 million in 2010 versus $184
million in 2009. Lower net income in 2009, a reduction of $184 million in the outstanding balance of our
receivables securitization facility, higher pension contributions of $72 million, and changes to working
capital combined to decrease cash provided by operating activities compared to 2008.
Investing Activities
Higher capital investments and lower proceeds from asset sales in 2010 drove the increase in cash used
in investing activities compared to 2009. Lower capital investments and higher proceeds from asset sales
drove the decrease in cash used in investing activities in 2009 versus 2008.
The tables below detail cash capital investments and track statistics for the years ended December 31,
2010, 2009, and 2008:
Millions
Rail and other track material
Ties
Ballast
Other [a]
Total road infrastructure replacements
Line expansion and other capacity projects
Commercial facilities
Total capacity and commercial facilities
Locomotives and freight cars
Positive Train Control
Technology and other
Total cash capital investments
$
2010
626
444
190
365
1,625
122
227
349
330
84
94
$
2009
614
449
208
338
1,609
162
193
355
272
28
90
$
2008
620
425
243
386
1,674
488
254
742
164
-
174
$
2,482
$
2,354
$
2,754
[a] Other includes bridges and tunnels, signals, other road assets, and road work equipment.
Track miles of rail replaced
Track miles of rail capacity expansion
New ties installed (thousands)
Miles of track surfaced
2010
795
46
4,334
10,883
2009
841
62
4,814
15,128
2008
810
118
4,599
14,454
Capital Plan – In 2011, we expect our total capital investments to be approximately $3.2 billion, which
may be revised if business conditions warrant or if new laws or regulations affect our ability to generate
sufficient returns on these investments. We expect that approximately 65% of our 2011 capital
36
investments will replace and improve existing capital assets. Major investment categories include
replacing and improving track infrastructure; increasing network and terminal capacity; upgrading our
locomotive, freight car and container fleet, including acquiring 100 locomotives, 600 covered hoppers,
4,800 containers and 4,800 chassis; improving technology, including investing in PTC; and other capital
projects. We expect to fund our 2011 cash capital investments through cash generated from operations,
the sale or lease of various operating and non-operating properties, issuance of long-term debt, and cash
on hand at December 31, 2010. Our annual capital plan is a critical component of our long-term strategic
plan, which we expect will enhance the long-term value of the Corporation for our shareholders by
providing sufficient resources to (i) replace and improve our existing track infrastructure to provide safe
and fluid operations, (ii) increase network efficiency by adding or improving facilities and track, and (iii)
make investments that meet customer demand and take advantage of opportunities for long-term growth.
Financing Activities
Cash used in financing activities increased in 2010 versus 2009. During 2010, we repurchased $1.2
billion of shares under our common stock repurchase program, compared to no repurchases in 2009.
Additionally, our net debt reduction in 2010 was $518 million compared to $28 million in 2009, which also
contributed to the increase in cash used in financing activities in 2010. Cash used in financing activities
decreased in 2009 versus 2008 driven by share repurchases totaling $1.6 billion in 2008. Additionally,
debt repayments were $337 million lower in 2009, partially offset by lower new debt issuances of $1.4
billion and higher dividend payments (we increased our dividend from $0.22 per share to $0.27 per share,
effective in the third quarter of 2008). The restructuring of equipment leases in 2009 also generated $87
million in cash consideration, further contributing to the decrease.
Credit Facilities – On December 31, 2010, we had $1.9 billion of credit available under our revolving
credit facility (the facility). The facility is designated for general corporate purposes and supports the
issuance of commercial paper. We did not draw on the facility during 2010. Commitment fees and interest
rates payable under the facility are similar to fees and rates available to comparably rated, investment-
grade borrowers. The facility allows borrowings at floating rates based on London Interbank Offered
Rates, plus a spread, depending upon our senior unsecured debt ratings. The facility requires Union
Pacific Corporation to maintain a debt-to-net-worth coverage ratio as a condition to making a borrowing.
At December 31, 2010, and December 31, 2009 (and at all times during these periods), 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 December 31, 2010, the debt-to-net-worth coverage ratio
allowed us to carry up to $35.5 billion of debt (as defined in the facility), and we had $9.7 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
(including the Risk Factors in Item 1A of this report) 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. The facility will expire in
April 2012 in accordance with its terms, and we currently intend to replace the facility with a substantially
similar credit agreement on or before the expiration date, which is consistent with our past practices with
respect to our credit facilities.
During 2010, we did not issue or repay any commercial paper and, at December 31, 2010, we had no
commercial paper outstanding. Our commercial paper balance is supported by our revolving credit facility
but does not reduce the amount of borrowings available under the facility.
At December 31, 2010, we reclassified as long-term debt approximately $100 million of debt due within
one year that we intend to refinance. This reclassification reflected our ability and intent to refinance any
short-term borrowings and certain current maturities of long-term debt on a long-term basis. At December
31, 2009, we reclassified as long-term debt approximately $320 million of debt due within one year that
we intended to refinance at that time.
37
Ratio of Earnings to Fixed Charges
For each of the years ended December 31, 2010, 2009, and 2008, our ratio of earnings to fixed charges
was 6.9, 4.9, and 5.9, respectively. The ratio of earnings to fixed charges was computed on a
consolidated basis. Earnings represent income from continuing operations, less equity earnings net of
distributions, plus fixed charges and income taxes. Fixed charges represent interest charges,
amortization of debt discount, and the estimated amount representing the interest portion of rental
charges. (See Exhibit 12 to this report for the calculation of the ratio of earnings to fixed charges.)
Common Shareholders’ Equity
Dividend Restrictions – Our revolving credit facility includes a debt-to-net worth covenant (discussed in
the Credit Facilities section above) that, under certain circumstances, restricts the payment of cash
dividends to our shareholders. The amount of retained earnings available for dividends was $12.9 billion
and $11.6 billion at December 31, 2010 and 2009, respectively.
Share Repurchase Program – On May 1, 2008, our Board of Directors authorized the repurchase of 40
million common shares by March 31, 2011. Management’s assessments of market conditions and other
pertinent facts guide the timing and volume of all repurchases. Any share repurchases under this program
are expected to be funded 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.
First quarter
Second quarter
Third quarter
Fourth quarter
Total
Number of Shares Purchased
2009
-
-
-
-
2010
-
6,496,400
7,643,400
2,500,596
$
Average Price Paid
2009
-
-
-
-
2010
-
71.74
73.19
89.39
$
16,640,396
-
$
75.06
$
-
Remaining number of shares that may yet be repurchased
15,936,694
On February 3, 2011, our Board of Directors authorized us to repurchase up to 40 million additional
shares of our common stock under a new program effective from April 1, 2011 through March 31, 2014.
Shelf Registration Statement and Significant New Borrowings – We filed a shelf registration
statement, which became effective upon filing on February 10, 2010. Our Board of Directors authorized
the issuance of up to $3 billion of debt securities, replacing the $2.25 billion of authority remaining under
our shelf registration filed in March 2007. Under the 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.
During 2010, we issued the following unsecured, fixed-rate debt securities under our current shelf
registration:
Date
August 2, 2010
Description of Securities
$500 million of 4.00% Notes due February 1, 2021
The net proceeds from the offering were used for general corporate purposes, including the repurchase of
common stock pursuant to our share repurchase program. These debt securities include change-of-
control provisions.
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. At December 31, 2010, we had
remaining authority to issue up to $2.5 billion of debt securities under our shelf registration.
38
Debt Exchange – On July 14, 2010, we exchanged $376 million of 7.875% notes due in 2019 (Existing
Notes) for 5.78% notes (New Notes) due July 15, 2040, plus cash consideration of approximately $96
million and $15 million for accrued and unpaid interest on the Existing Notes. The cash consideration,
recorded as an adjustment to the carrying value of debt, and the balance of the unamortized discount and
issue costs from the Existing Notes are being amortized as an adjustment of interest expense over the
term of the New Notes. No gain or loss was recognized as a result of the exchange. Costs related to the
debt exchange that were payable to parties other than the debt holders totaled approximately $2 million
and were included in interest expense during the third quarter.
Debt Redemptions – On March 22, 2010, we redeemed $175 million of our 6.5% notes due April 15,
2012. The redemption resulted in an early extinguishment charge of $16 million in the first quarter of
2010. On November 1, 2010, we redeemed all $400 million of our outstanding 6.65% notes due January
15, 2011. The redemption resulted in a $5 million early extinguishment charge.
Receivables Securitization Facility – In June 2009, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update No. 2009-16, Accounting for Transfers of Financial Assets (ASU
2009-16). ASU 2009-16 limits the circumstances in which transferred financial assets can be
derecognized and requires enhanced disclosures regarding transfers of financial assets and a transferor’s
continuing involvement with transferred financial assets. We adopted the authoritative accounting
standard on January 1, 2010. As a result, we no longer account for the value of the outstanding undivided
interest held by investors under our receivables securitization facility as a sale. In addition, transfers of
receivables occurring on or after January 1, 2010, are reflected as debt issued in our Consolidated
Statements of Cash Flows, and the value of the outstanding undivided interest held by investors at
December 31, 2010, is accounted for as a secured borrowing and is included in our Consolidated
Statements of Financial Position as debt due after one year.
Under the receivables securitization facility, the Railroad sells most of its accounts receivable to Union
Pacific Receivables, Inc. (UPRI), a bankruptcy-remote subsidiary. UPRI may subsequently transfer,
without recourse on a 364-day revolving basis, an undivided interest in eligible accounts receivable to
investors. The total capacity to transfer undivided interests to investors under the facility was $600 million
at December 31, 2010 and 2009, respectively. The value of the outstanding undivided interest held by
investors under the facility was $100 million and $400 million at December 31, 2010 and 2009,
respectively. The value of the undivided interest held by investors was supported by $960 million and
$817 million of accounts receivable at December 31, 2010 and 2009, respectively. At December 31,
2010 and 2009, the value of the interest retained by UPRI was $960 million and $417 million,
respectively. This retained interest is included in accounts receivable, net in our Consolidated Statements
of Financial Position.
The value of the outstanding undivided interest held by investors could fluctuate based upon the
availability of eligible receivables and is directly affected by changing business volumes and credit risks,
including default and dilution. If default or dilution ratios increase one percent, the value of the
outstanding undivided interest held by investors would not change as of December 31, 2010. Should our
credit rating fall below investment grade, the value of the outstanding undivided interest held by investors
would be reduced, and, in certain cases, the investors would have the right to discontinue the facility.
The Railroad collected approximately $16.3 billion and $13.8 billion of receivables during the years ended
December 31, 2010 and 2009, respectively. UPRI used certain of these proceeds to purchase new
receivables under the facility.
The costs of the receivables securitization facility include interest, which will vary based on prevailing
commercial paper rates, program fees paid to banks, commercial paper issuing costs, and fees for
unused commitment availability. The costs of the receivables securitization facility are included in interest
expense and were $6 million during 2010. Prior to adoption of the new accounting standard, the costs of
the receivables securitization facility were included in other income and were $9 million and $23 million
for 2009 and 2008, respectively.
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.
In August 2010, the receivables securitization facility was renewed for an additional 364-day period at
comparable terms and conditions.
39
Contractual Obligations and Commercial Commitments
As described in the notes to the Consolidated Financial Statements and as referenced in the tables
below, we have contractual obligations and commercial commitments that may affect our financial
condition. 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, other than the risks that we and other similarly situated companies face with
respect to the condition of the capital markets (as described in Item 1A of Part II of this report), 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.
The following tables identify material obligations and commitments as of December 31, 2010:
Payments Due by December 31,
Contractual Obligations
Millions
Debt [a]
Operating leases
Capital lease obligations [b]
Purchase obligations [c]
Other post retirement benefits [d]
Income tax contingencies [e]
Total
$ 12,392 $
4,921
2,693
3,820
256
86
2011
594 $
613
311
1,395
27
68
2012
926 $
526
251
484
27
-
2013
998 $
461
253
375
27
-
2014
979 $
382
261
357
26
-
After
2015
2015
604 $ 8,291 $
340
262
223
26
-
2,599
1,355
954
123
-
Other
-
-
-
32
-
18
Total contractual obligations
$ 24,168 $ 3,008 $ 2,214 $ 2,114 $ 2,005 $ 1,455 $ 13,322 $
50
[a]
[b]
[c]
[d]
[e]
Excludes capital lease obligations of $1,909 million and unamortized discount of $198 million. Includes an interest
component of $4,861 million.
Represents total obligations, including interest component of $784 million.
Includes locomotive maintenance contracts; purchase commitments for locomotives, freight cars, containers, fuel, ties,
ballast, and rail; and agreements to purchase other goods and services. For amounts where we can not reasonably
estimate the year of settlement, the commitments are reflected in the Other column.
Includes estimated other post retirement, medical, and life insurance payments and payments made under the unfunded
pension plan for the next ten years. No amounts are included for funded pension as no contributions are currently required.
Income tax contingencies reflect the recorded liability for unrecognized tax benefits, including interest and penalties, as of
December 31, 2010. Where we can reasonably estimate the years in which these liabilities may be settled, this is shown in
the table. For amounts where we can not reasonably estimate the year of settlement, the obligations are reflected in the
Other column.
Amount of Commitment Expiration per Period
Other Commercial Commitments
Millions
Credit facilities [a]
Receivables securitization facility [b]
Guarantees [c]
Standby letters of credit [d]
Total
$ 1,900 $
600
382
23
2011
-
600
66
19
2012
$ 1,900
-
27
4
$
2013
-
-
10
-
$
2014
-
-
214
-
$
2015
-
-
12
-
$
After
2015
-
-
53
-
Total commercial commitments
$ 2,905 $ 685
$ 1,931
$
10
$ 214
$
12
$
53
[a] None of the credit facility was used as of December 31, 2010.
[b]
[c]
$100 million of the receivables securitization facility was utilized at December 31, 2010, which is accounted for as debt. The
full program matures in August 2011.
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 December 31, 2010.
Off-Balance Sheet Arrangements
Guarantees – At December 31, 2010, we were contingently liable for $382 million in guarantees. We
have recorded a liability of $3 million for the fair value of these obligations as of December 31, 2010 and
2009. We entered into these contingent guarantees in the normal course of business, and they include
guaranteed obligations related to our headquarters building, equipment financings, and affiliated
40
operations. The final guarantee expires in 2022. We are not aware of any existing event of default that
would require us to satisfy these guarantees. We do not expect that these guarantees will have a material
adverse effect on our consolidated financial condition, results of operations, or liquidity.
OTHER MATTERS
Inflation – Long periods of inflation significantly increase asset replacement costs for capital-intensive
companies. As a result, assuming that we replace all operating assets at current price levels, depreciation
charges (on an inflation-adjusted basis) would be substantially greater than historically reported amounts.
Derivative Financial Instruments – We may use derivative financial instruments in limited instances to
assist in managing our overall exposure to fluctuations in interest rates and fuel prices. We are not a party
to leveraged derivatives and, by policy, do not use derivative financial instruments for speculative
purposes. Derivative financial instruments qualifying for hedge accounting must maintain a specified level
of effectiveness between the hedging instrument and the item being hedged, both at inception and
throughout the hedged period. We formally document the nature and relationships between the hedging
instruments and hedged items at inception, as well as our risk-management objectives, strategies for
undertaking the various hedge transactions, and method of assessing hedge effectiveness. Changes in
the fair market value of derivative financial instruments that do not qualify for hedge accounting are
charged to earnings. We may use swaps, collars, futures, and/or forward contracts to mitigate the risk of
adverse movements in interest rates and fuel prices; however, the use of these derivative financial
instruments may limit future benefits from favorable price movements.
Market and Credit Risk – We address market risk related to derivative financial instruments by selecting
instruments with value fluctuations that highly correlate with the underlying hedged item. We manage
credit risk related to derivative financial instruments, which is minimal, by requiring high credit standards
for counterparties and periodic settlements. At December 31, 2010 and 2009, we were not required to
provide collateral, nor had we received collateral, relating to our hedging activities.
Determination of Fair Value – We determine the fair values of our derivative financial instrument
positions based upon current fair values as quoted by recognized dealers or the present value of
expected future cash flows.
Sensitivity Analyses – The sensitivity analyses that follow illustrate the economic effect that hypothetical
changes in interest rates could have on our results of operations and financial condition. These
hypothetical changes do not consider other factors that could impact actual results.
At December 31, 2010, we had variable-rate debt representing approximately 2.2% of our total debt. If
variable interest rates average one percentage point higher in 2011 than our December 31, 2010 variable
rate, which was approximately 0.9%, our interest expense would increase by approximately $2 million.
This amount was determined by considering the impact of the hypothetical interest rate on the balances
of our variable-rate debt at December 31, 2010.
Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a
hypothetical one percentage point decrease in interest rates as of December 31, 2010, and amounts to
an increase of approximately $824 million to the fair value of our debt at December 31, 2010. We
estimated the fair values of our fixed-rate debt by considering the impact of the hypothetical interest rates
on quoted market prices and current borrowing rates.
Interest Rate Fair Value Hedges – We manage our overall exposure to fluctuations in interest rates by
adjusting the proportion of fixed and floating rate debt instruments within our debt portfolio over a given
period. We generally manage the mix of fixed and floating rate debt through the issuance of targeted
amounts of each as debt matures or as we require incremental borrowings. We employ derivatives,
primarily swaps, as one of the tools to obtain the targeted mix. In addition, we also obtain flexibility in
managing interest costs and the interest rate mix within our debt portfolio by evaluating the issuance of
and managing outstanding callable fixed-rate debt securities.
Swaps allow us to convert debt from fixed rates to variable rates and thereby hedge the risk of changes in
the debt’s fair value attributable to the changes in interest rates. We account for swaps as fair value
hedges using the short-cut method as allowed by the Derivatives and Hedging Topic of the FASB
41
Accounting Standards Codification (ASC); therefore, we do not record any ineffectiveness within our
Consolidated Financial Statements.
Interest Rate Cash Flow Hedges – We report changes in the fair value of cash flow hedges in
accumulated other comprehensive loss until the hedged item affects earnings. At December 31, 2010 and
2009, we had reductions of $3 million recorded as an accumulated other comprehensive loss that is being
amortized on a straight-line basis through September 30, 2014. As of December 31, 2010 and 2009, we
had no interest rate cash flow hedges outstanding.
Recently Issued Accounting Pronouncements – In June 2009, the FASB issued Accounting Standards
Update No. 2009-16, Accounting for Transfers of Financial Assets (ASU 2009-16). ASU 2009-16 limits
the circumstances in which transferred financial assets can be derecognized and requires enhanced
disclosures regarding transfers of financial assets and a transferor’s continuing involvement with
transferred financial assets. We adopted the authoritative accounting standard on January 1, 2010. As a
result, we no longer account for the value of the outstanding undivided interest held by investors under
our receivables securitization facility as a sale. In addition, transfers of receivables occurring on or after
January 1, 2010, are reflected as debt issued in our Consolidated Statements of Cash Flows and
recognized as debt due after one year in our Consolidated Statements of Financial Position.
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
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.
Climate Change – Although climate change could have an adverse impact on our operations and
financial performance in the future (see Risk Factors under Item 1A of this report), we are currently
unable to predict the manner or severity of such impact. However, we continue to take steps and explore
opportunities to reduce the impact of our operations on the environment, including investments in new
technologies, using training programs to reduce fuel consumption, and changing our operations to
increase fuel efficiency.
CRITICAL ACCOUNTING POLICIES
Our Consolidated Financial Statements have been prepared in accordance with GAAP. 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 we believe are 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. The following critical accounting policies are a subset of our significant
accounting policies described in Note 2 to the Financial Statements and Supplementary Data, Item 8.
These critical accounting policies affect significant areas of our financial statements and involve judgment
and estimates. If these estimates differ significantly from actual results, the impact on our Consolidated
Financial Statements may be material.
Personal Injury – The cost of personal injuries to employees and others related to our activities is
charged to expense based on estimates of the ultimate cost and number of incidents each year. We use
an actuarial analysis to measure the expense and liability, including unasserted claims. The Federal
Employers’ Liability Act (FELA) governs compensation for work-related accidents. Under FELA, damages
42
are assessed based on a finding of fault through litigation or out-of-court settlements. We offer a
comprehensive variety of services and rehabilitation programs for employees who are injured at work.
Our personal injury liability is discounted to present value using applicable U.S. Treasury rates.
Approximately 88% of the recorded liability related to asserted claims, and approximately 12% related to
unasserted claims at December 31, 2010. Because of the uncertainty surrounding the ultimate outcome
of personal injury claims, it is reasonably possible that future costs to settle these claims may range from
approximately $426 million to $464 million. We record an accrual at the low end of the range as no
amount of loss is more probable than any other. Our personal injury liability activity was as follows:
Millions
Beginning balance
Current year accruals
Changes in estimates for prior years
Payments
Ending balance at December 31
Current portion, ending balance at December 31
Our personal injury claims activity was as follows:
Open claims, beginning balance
New claims
Settled or dismissed claims
Open claims, ending balance at December 31
2010
545
155
(101)
(173)
426
140
$
$
$
2009
621
174
(95)
(155)
545
158
$
$
$
2008
593
226
(25)
(173)
621
186
$
$
$
2010
3,500
2,843
(3,192)
2009
4,079
3,012
(3,591)
2008
4,084
3,692
(3,697)
3,151
3,500
4,079
Asbestos – We are a defendant in a number of lawsuits in which current and former employees and
other parties allege exposure to asbestos. We assess our potential liability using a statistical analysis of
resolution costs for asbestos-related claims. This liability is updated annually and excludes future
defense and processing costs. The liability for resolving both asserted and unasserted claims was based
on the following assumptions:
• The ratio of future claims by alleged disease would be consistent with historical averages.
• The number of claims filed against us will decline each year.
• The average settlement values for asserted and unasserted claims will be equivalent to historical
averages.
• The percentage of claims dismissed in the future will be equivalent to historical averages.
Our liability for asbestos-related claims is not discounted to present value due to the uncertainty
surrounding the timing of future payments. Approximately 22% of the recorded liability related to asserted
claims and approximately 78% related to unasserted claims at December 31, 2010. Because of the
uncertainty surrounding the ultimate outcome of asbestos-related claims, it is reasonably possible that
future costs to settle these claims may range from approximately $162 million to $178 million. We record
an accrual at the low end of the range as no amount of loss is more probable than any other. In
conjunction with the liability update performed in 2010, we also reassessed estimated insurance
recoveries. We have recognized an asset for estimated insurance recoveries at December 31, 2010 and
2009. Our asbestos-related liability activity was as follows:
Millions
Beginning balance
Accruals/(credits)
Payments
Ending balance at December 31
Current portion, ending balance at December 31
2010
174
(1)
(11)
162
12
$
$
$
2009
213
(25)
(14)
174
13
$
$
$
2008
265
(42)
(10)
213
12
$
$
$
43
Our asbestos-related claims activity was as follows:
Open claims, beginning balance
New claims
Settled or dismissed claims
Open claims, ending balance at December 31
2010
1,670
216
(449)
1,437
2009
1,867
249
(446)
1,670
2008
2,086
256
(475)
1,867
We believe that our estimates of liability for asbestos-related claims and insurance recoveries are
reasonable and probable. The amounts recorded for asbestos-related liabilities and related insurance
recoveries were based on currently known facts. However, future events, such as the number of new
claims to be filed each year, average settlement costs, and insurance coverage issues, could cause the
actual costs and insurance recoveries to be higher or lower than the projected amounts. Estimates also
may vary in the future if strategies, activities, and outcomes of asbestos litigation materially change;
federal and state laws governing asbestos litigation increase or decrease the probability or amount of
compensation of claimants; and there are material changes with respect to payments made to claimants
by other defendants.
Environmental – We are subject to federal, state, and local environmental laws and regulations. We
identified 294 sites at which we are or may be liable for remediation costs associated with alleged
contamination or for violations of environmental requirements. This includes 31 sites that are the subject
of actions taken by the U.S. government, 17 of which are currently on the Superfund National Priorities
List. Certain federal legislation imposes joint and several liability for the remediation of identified sites;
consequently, our ultimate environmental liability may include costs relating to activities of other parties,
in addition to costs relating to our own activities at each site.
When we identify an environmental issue with respect to property owned, leased, or otherwise used in
our business, we and our consultants perform environmental assessments on the property. We expense
the cost of the assessments as incurred. We accrue the cost of remediation where our obligation is
probable and we can reasonably estimate such costs. We do not discount our environmental liabilities
when the timing of the anticipated cash payments is not fixed or readily determinable. At December 31,
2010, approximately 5% of our environmental liability was discounted at 2.8%, while approximately 12%
of our environmental liability was discounted at 3.4% at December 31, 2009. Our environmental liability
activity was as follows:
Millions
Beginning balance
Accruals
Payments
Ending balance at December 31
Current portion, ending balance at December 31
Our environmental site activity was as follows:
Open sites, beginning balance
New sites
Closed sites
Open sites, ending balance at December 31
2010
217
57
(61)
213
74
$
$
$
2009
209
49
(41)
217
82
$
$
$
2008
209
46
(46)
209
58
$
$
$
2010
307
44
(57)
294
2009
339
49
(81)
307
2008
339
82
(82)
339
The liability includes future costs for remediation and restoration of sites, as well as ongoing monitoring
costs, but excludes any anticipated recoveries from third parties. Cost estimates are based on information
available for each site, financial viability of other potentially responsible parties, and existing technology,
laws, and regulations. The ultimate liability for remediation is difficult to determine because of the number
of potentially responsible parties, site-specific cost sharing arrangements with other potentially
responsible parties, the degree of contamination by various wastes, the scarcity and quality of volumetric
data related to many of the sites, and the speculative nature of remediation costs. Estimates of liability
44
may vary over time due to changes in federal, state, and local laws governing environmental remediation.
Current obligations are not expected to have a material adverse effect on our consolidated results of
operations, financial condition, or liquidity.
Property and Depreciation – Our railroad operations are highly capital intensive, and our large base of
homogeneous, network-type assets turns over on a continuous basis. Each year we develop a capital
program for the replacement of assets and for the acquisition or construction of assets that enable us to
enhance our operations or provide new service offerings to customers. Assets purchased or constructed
throughout the year are capitalized if they meet applicable minimum units of property criteria. Properties
and equipment are carried at cost and are depreciated on a straight-line basis over their estimated
service lives, which are measured in years, except for rail in high-density traffic corridors (i.e., all rail lines
except for those subject to abandonment, yard and switching tracks, and electronic yards) for which lives
are measured in millions of gross tons per mile of track. We use the group method of depreciation in
which all items with similar characteristics, use, and expected lives are grouped together in asset classes,
and are depreciated using composite depreciation rates. The group method of depreciation treats each
asset class as a pool of resources, not as singular items. We currently have more than 60 depreciable
asset classes, and we may increase or decrease the number of asset classes due to changes in
technology, asset strategies, or other factors.
We determine the estimated service lives of depreciable railroad property by means of depreciation
studies. We perform depreciation studies at least every three years for equipment and every six years for
track assets (i.e., rail and other track material, ties, and ballast) and other road property. Our depreciation
studies take into account the following factors:
• Statistical analysis of historical patterns of use and retirements of each of our asset classes;
• Evaluation of any expected changes in current operations and the outlook for continued use of
the assets;
• Evaluation of technological advances and changes to maintenance practices; and
• Expected salvage to be received upon retirement.
For rail in high-density traffic corridors, we measure estimated service lives in millions of gross tons per
mile of track. It has been our experience that the lives of rail in high-density traffic corridors are closely
correlated to usage (i.e., the amount of weight carried over the rail). The service lives also vary based on
rail weight, rail condition (e.g., new or secondhand), and rail type (e.g., straight or curve). Our
depreciation studies for rail in high density traffic corridors consider each of these factors in determining
the estimated service lives. For rail in high-density traffic corridors, we calculate depreciation rates
annually by dividing the number of gross ton-miles carried over the rail (i.e., the weight of loaded and
empty freight cars, locomotives and maintenance of way equipment transported over the rail) by the
estimated service lives of the rail measured in millions of gross tons per mile. Rail in high-density traffic
corridors accounts for approximately 70 percent of the historical cost of rail and other track material.
Based on the number of gross ton-miles carried over our rail in high density traffic corridors during 2010,
the estimated service lives of the majority of this rail ranged from approximately 15 years to approximately
30 years. For all other depreciable assets, we compute depreciation based on the estimated service lives
of our assets as determined from the analysis of our depreciation studies. Changes in the estimated
service lives of our assets and their related depreciation rates are implemented prospectively.
Estimated service lives of depreciable railroad property may vary over time due to changes in physical
use, technology, asset strategies, and other factors that will have an impact on the retirement profiles of
our assets. We are not aware of any specific factors that are reasonably likely to significantly change the
estimated service lives of our assets. Actual use and retirement of our assets may vary from our current
estimates, which would impact the amount of depreciation expense recognized in future periods.
Changes in estimated useful lives of our assets due to the results of our depreciation studies could
significantly impact future periods’ depreciation expense and have a material impact on our Consolidated
Financial Statements. If the estimated useful lives of all depreciable assets were increased by one year,
annual depreciation expense would decrease by approximately $42 million. If the estimated useful lives
of all depreciable assets were decreased by one year, annual depreciation expense would increase by
approximately $45 million. Our recent depreciation studies have resulted in changes in depreciation rates
for some asset classes, but did not significantly affect our annual depreciation expense.
45
Under group depreciation, the historical cost (net of salvage) of depreciable property that is retired or
replaced in the ordinary course of business is charged to accumulated depreciation and no gain or loss is
recognized. The historical cost of certain track assets is estimated using (i) inflation indices published by
the Bureau of Labor Statistics and (ii) the estimated useful lives of the assets as determined by our
depreciation studies. The indices were selected because they closely correlate with the major costs of
the properties comprising the applicable track asset classes. Because of the number of estimates
inherent in the depreciation and retirement processes and because it is impossible to precisely estimate
each of these variables until a group of property is completely retired, we continually monitor the
estimated service lives of our assets and the accumulated depreciation associated with each asset class
to ensure our depreciation rates are appropriate. In addition, we determine if the recorded amount of
accumulated depreciation is deficient (or in excess) of the amount indicated by our depreciation studies.
Any deficiency (or excess) is amortized as a component of depreciation expense over the remaining
service lives of the applicable classes of assets.
For retirements of depreciable railroad properties that do not occur in the normal course of business, a
gain or loss may be recognized if the retirement meets each of the following three conditions: (i) is
unusual, (ii) is material in amount, and (iii) varies significantly from the retirement profile identified through
our depreciation studies. During the last three fiscal years, no gains or losses were recognized due to the
retirement of depreciable railroad properties. A gain or loss is recognized in other income when we sell
land or dispose of assets that are not part of our railroad operations.
Income Taxes – We account for income taxes by recording taxes payable or refundable for the current
year and deferred tax assets and liabilities for the expected future tax consequences of events that have
been recognized in our financial statements or tax returns. These expected future tax consequences are
measured based on current tax law; the effects of future changes in tax laws are not anticipated. Future
tax law changes, such as a change in the corporate tax rate, could have a material impact on our financial
condition, results of operations, or liquidity. For example, a 1% increase in future income tax rates would
increase our deferred tax liability by approximately $300 million.
When appropriate, we record a valuation allowance against deferred tax assets to reflect that these tax
assets may not be realized. In determining whether a valuation allowance is appropriate, we consider
whether it is more likely than not that all or some portion of our deferred tax assets will not be realized,
based on management’s judgments using available evidence about future events. In 2010, there is no
valuation allowance because the deferred tax assets associated with the 2009 valuation allowance
expired unrealized. Our total valuation allowance at December 31, 2009 was $8 million.
At times, we may claim tax benefits that may be challenged by a tax authority. We recognize tax benefits
only for tax positions that are more likely than not to be sustained upon examination by tax authorities.
The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely
to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits
claimed in our tax returns that do not meet these recognition and measurement standards.
Pension and Other Postretirement Benefits – We use an actuarial analysis to measure the liabilities
and expenses associated with providing pension and medical and life insurance benefits (OPEB) to
eligible employees. In order to use actuarial methods to value the liabilities and expenses, we must make
several assumptions. The critical assumptions used to measure pension obligations and expenses are
the discount rate and expected rate of return on pension assets. For OPEB, the critical assumptions are
the discount rate and health care cost trend rate.
We evaluate our critical assumptions at least annually, and selected assumptions are based on the
following factors:
• Discount rate is based on a Mercer yield curve of high quality corporate bonds (rated AA by a
recognized rating agency) for which the timing and amount of cash flows matches our plans’
expected benefit payments.
• Expected return on plan assets is based on our asset allocation mix and our historical return,
taking into consideration current and expected market conditions.
• Health care cost trend rate is based on our historical rates of inflation and expected market
conditions.
46
The following tables present the key assumptions used to measure net periodic pension and OPEB
cost/(benefit) for 2010 and the estimated impact on 2010 net periodic pension and OPEB cost/(benefit)
relative to a change in those assumptions:
Assumptions
Discount rate
Expected return on plan assets
Salary increase
Health care cost trend rate:
Pre-65 current
Pre-65 level in 2028
Sensitivities
Millions
0.25% decrease in discount rate
0.25% increase in salary scale
0.25% decrease in expected return on plan assets
1% increase in health care cost trend rate
Pension
5.90%
8.00%
3.46%
N/A
N/A
OPEB
5.55%
N/A
N/A
7.24%
4.50%
Increase in Expense
OPEB
Pension
$
$
$
7
3
6
N/A
$
$
-
N/A
N/A
2
The following table presents the net periodic pension and OPEB cost/(benefit) for the years ended
December 31:
Millions
Net periodic pension cost
Net periodic OPEB cost/(benefit)
Est.
2011
2010
2009
2008
$
79
(4)
$
51
(14)
$
54
(12)
$
35
5
Our net periodic pension cost is expected to increase to approximately $79 million in 2011 from $51
million in 2010. The increase is driven by a decrease in the discount rate to 5.35%, a decrease in our
expected rate of return on plan assets to 7.5%, and an increase in the amortization of actuarial losses
from accumulated other comprehensive income. We reduced our expected rate of return on plan assets
to 7.5% in 2011 from 8% in 2010 to reflect our expected future returns on plan assets based on our
current asset allocation strategy. Our net periodic OPEB benefit is expected to decrease to
approximately $(4) million in 2011 from $(14) million in 2010. The decrease in our net periodic OPEB
benefit is primarily driven by a decrease in the amortization of prior service credits from accumulated
other comprehensive income.
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, (A) statements in the Chairman’s letter preceding Part I regarding increasing profitability and
financial returns, expanding international and domestic market share, and future capital investments;
statements regarding planned capital expenditures under the caption “2011 Capital Expenditures” in Item
2 of Part I; statements regarding dividends in Item 5 and statements; and information set forth under the
captions “2011 Outlook” and “Liquidity and Capital Resources” in this Item 7, and (B) any other
statements or information in this report (including information incorporated herein by reference) regarding:
expectations as to financial performance, revenue growth and cost savings; 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; expectations as to operational or service performance or improvements; expectations as to
the effectiveness of steps taken or to be taken to improve operations and/or service, including capital
expenditures for infrastructure improvements and equipment acquisitions, any strategic business
acquisitions, and modifications to our transportation plans (including statements set forth in Item 2 as to
expectations related to our planned capital expenditures); expectations as to existing or proposed new
products and services; expectations as to the impact of any new regulatory activities or legislation on our
operations or financial results; estimates of costs relating to environmental remediation and restoration;
47
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 may be identified by their use of forward-looking
terminology, such as “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,”
“anticipates,” “projects” and similar words, phrases or expressions.
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 statements and information are subject to risks and uncertainties that could
cause actual performance or results to differ materially from those expressed in the statements and
information. 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 this report could affect our future results and could cause those results or other
outcomes to differ materially from those expressed or implied in any forward-looking statements or
information. To the extent circumstances require or we deem it otherwise necessary, we will update or
amend these risk factors in a Form 10-Q, Form 8-K or subsequent Form 10-K. All forward-looking
statements are qualified by, and should be read in conjunction with, these Risk Factors.
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information concerning market risk sensitive instruments is set forth under Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Other Matters, Item 7.
****************************************
48
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm .............................................................. 50
Consolidated Statements of Income
For the Years Ended December 31, 2010, 2009, and 2008 ........................................................ 51
Consolidated Statements of Financial Position
At December 31, 2010 and 2009 ................................................................................................. 52
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2010, 2009, and 2008 ........................................................ 53
Consolidated Statements of Changes in Common Shareholders’ Equity
For the Years Ended December 31, 2010, 2009, and 2008 ........................................................ 54
Notes to the Consolidated Financial Statements .............................................................................. 55
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Union Pacific Corporation, its Directors, and Shareholders:
We have audited the accompanying consolidated statements of financial position of Union Pacific
Corporation and Subsidiary Companies (the Corporation) as of December 31, 2010 and 2009, and the
related consolidated statements of income, changes in common shareholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2010. Our audits also included the financial
statement schedule listed in the Table of Contents at Part IV, Item 15. These financial statements and
financial statement schedule are the responsibility of the Corporation’s management. Our responsibility is
to express an opinion on the consolidated financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of Union Pacific Corporation and Subsidiary Companies as of December 31, 2010 and 2009, and
the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2010, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Corporation’s internal control over financial reporting as of December 31,
2010, based on the criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 4,
2011, expressed an unqualified opinion on the Corporation’s internal control over financial reporting.
Omaha, Nebraska
February 4, 2011
50
2010
2009
2008
16,069 $ 13,373 $ 17,118
852
770
896
16,965
14,143
17,970
4,314
2,486
1,836
1,487
1,142
719
4,063
1,763
1,644
1,427
1,180
687
4,457
3,983
1,928
1,366
1,326
840
11,984
10,764
13,900
4,981
54
(602)
4,433
(1,653)
3,379
195
(600)
2,974
(1,084)
4,070
92
(511)
3,651
(1,316)
2,780 $
1,890 $
2,335
5.58 $
5.53 $
3.76 $
3.74 $
498.2
502.9
503.0
505.8
4.57
4.53
510.6
515.0
1.31 $
1.08 $
0.98
CONSOLIDATED STATEMENTS OF INCOME
Union Pacific Corporation and Subsidiary Companies
Millions, Except Per Share Amounts,
for the Years Ended December 31,
Operating revenues:
Freight revenues
Other revenues
Total operating revenues
Operating expenses:
Compensation and benefits
Fuel
Purchased services and materials
Depreciation
Equipment and other rents
Other
Total operating expenses
Operating income
Other income (Note 6)
Interest expense
Income before income taxes
Income taxes (Note 7)
Net income
Share and Per Share (Note 8)
Earnings per share - basic
Earnings per share - diluted
Weighted average number of shares - basic
Weighted average number of shares - diluted
Dividends declared per share
$
$
$
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
51
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Union Pacific Corporation and Subsidiary Companies
Millions, as of December 31,
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net (Note 10)
Materials and supplies
Current deferred income taxes (Note 7)
Other current assets
Total current assets
Investments
Net properties (Note 11)
Other assets
Total assets
Liabilities and Common Shareholders' Equity
Current liabilities:
Accounts payable and other current liabilities (Note 12)
Debt due within one year (Note 14)
Total current liabilities
Debt due after one year (Note 14)
Deferred income taxes (Note 7)
Other long-term liabilities
Commitments and contingencies (Notes 16 and 17)
Total liabilities
Common shareholders' equity:
Common shares, $2.50 par value, 800,000,000 authorized;
553,931,181 and 553,497,981 issued; 491,565,880 and 505,039,952
outstanding, respectively
Paid-in-surplus
Retained earnings
Treasury stock
Accumulated other comprehensive loss (Note 9)
Total common shareholders' equity
2010
2009
$
1,086
1,184
534
261
367
3,432
1,137
38,253
266
$
1,850
666
475
339
350
3,680
1,036
37,202
266
$
43,088
$
42,184
$
2,713
239
2,952
9,003
11,557
1,813
$
2,470
212
2,682
9,636
11,044
2,021
25,325
25,383
1,385
3,985
17,154
(4,027)
(734)
17,763
1,384
3,968
15,027
(2,924)
(654)
16,801
Total liabilities and common shareholders' equity
$
43,088
$
42,184
The accompanying notes are an integral part of these Consolidated Financial Statements.
52
CONSOLIDATED STATEMENTS OF CASH FLOWS
Union Pacific Corporation and Subsidiary Companies
Millions, for the Years Ended December 31,
Operating Activities
Net income
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation
Deferred income taxes and unrecognized tax benefits
Net gain on non-operating asset disposition
Other operating activities, net
Changes in current assets and liabilities:
Accounts receivable, net
Materials and supplies
Other current assets
Accounts payable and other current liabilities
Cash provided by operating activities
Investing Activities
Capital investments
Proceeds from asset sales
Acquisition of equipment pending financing
Proceeds from sale of assets financed
Other investing activities, net
Cash used in investing activities
Financing Activities
Debt issued
Common share repurchases (Note 18)
Debt repaid
Dividends paid
Other financing activities, net
Cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental Cash Flow Information
Non-cash investing and financing activities:
Capital lease financings
Cash dividends declared but not yet paid
Capital investments accrued but not yet paid
Settlement of current liabilities for debt
Cash paid during the year for:
Interest, net of amounts capitalized
Income taxes, net of refunds
The accompanying notes are an integral part of these Consolidated Financial Statements.
2010
2009
2008
$ 2,780
$ 1,890
$ 2,335
1,487
672
(25)
(458)
(518)
(59)
(17)
243
4,105
(2,482)
67
-
-
(73)
(2,488)
1,427
718
(162)
(376)
(72)
(25)
(106)
(90)
3,204
(2,354)
187
(100)
100
22
(2,145)
1,366
545
(41)
89
38
3
51
(342)
4,044
(2,754)
93
(388)
388
(77)
(2,738)
894
(1,249)
(1,412)
(602)
(12)
(2,381)
(764)
1,850
$ 1,086
843
-
(871)
(544)
114
(458)
601
1,249
$ 1,850
2,257
(1,609)
(1,208)
(481)
106
(935)
371
878
$ 1,249
$
$
$
$
-
183
125
-
(614)
(936)
$
$
842
132
96
14
(578)
(452)
175
132
93
-
(500)
(699)
53
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Union Pacific Corporation and Subsidiary Companies
Millions
Balance at January 1, 2008
Comprehensive income:
Net income
Other comp. loss
Total comp. income/(loss)
(Note 9)
Conversion, stock option
exercises, forfeitures, and other
Share repurchases (Note 18)
Cash dividends declared
($0.98 per share)
Balance at December 31, 2008
Comprehensive income:
Net income
Other comp. income
Total comp. income (Note 9)
Conversion, stock option
exercises, forfeitures, and other
Share repurchases (Note 18)
Cash dividends declared
($1.08 per share)
Balance at December 31, 2009
Comprehensive income:
Net income
Other comp. loss
Total comp. income/(loss)
(Note 9)
Conversion, stock option
exercises, forfeitures, and other
Share repurchases (Note 18)
Cash dividends declared
($1.31 per share)
Common
Shares
552.3
Treasury
Shares
(30.6)
Common
Shares
$ 1,381
Treasury
Retained
Paid-in-
Surplus
Stock
Earnings
$ 3,926 $ 11,847 $ (1,624)
AOCI
[a]
Total
$ (74) $ 15,456
-
-
-
-
-
2,335
-
-
-
-
(630)
2,335
(630)
-
2,335
-
(630)
1,705
0.5
3.2
1
23
-
158
-
-
(22.2)
-
-
-
-
-
-
(1,527)
(501)
-
-
-
-
182
(1,527)
(501)
552.8
(49.6)
$ 1,382
$ 3,949 $ 13,681 $ (2,993) $ (704) $ 15,315
-
-
-
-
-
-
1,890
-
1,890
0.7
1.1
2
19
-
-
-
-
-
-
-
-
-
-
(544)
-
-
-
69
-
-
-
50
50
-
-
-
1,890
50
1,940
90
-
(544)
553.5
(48.5)
$ 1,384
$ 3,968 $ 15,027 $ (2,924) $ (654) $ 16,801
-
-
-
-
-
2,780
-
-
2,780
-
-
-
-
(80)
2,780
(80)
(80)
2,700
0.4
2.8
1
17
-
146
-
164
-
-
(16.6)
-
-
-
-
-
-
(1,249)
-
(1,249)
(653)
-
-
(653)
Balance at December 31, 2010
553.9
(62.3)
$ 1,385
$ 3,985 $ 17,154 $ (4,027) $ (734) $ 17,763
[a] AOCI = Accumulated Other Comprehensive Income/(Loss) (Note 9)
The accompanying notes are an integral part of these Consolidated Financial Statements.
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Union Pacific Corporation and Subsidiary Companies
For purposes of this report, unless the context otherwise requires, all references herein to the
“Corporation”, “UPC”, “we”, “us”, and “our” mean Union Pacific Corporation and its subsidiaries, including
Union Pacific Railroad Company, which will be separately referred to herein as “UPRR” or the “Railroad”.
1. Nature of Operations
Operations and Segmentation – We are a Class I railroad that operates in the U.S. We have 31,953
route miles, linking Pacific Coast and Gulf Coast ports with the Midwest and eastern U.S. gateways and
providing several corridors to key Mexican gateways. We serve the western two-thirds of the country and
maintain coordinated schedules with other rail carriers for the handling of freight to and from the Atlantic
Coast, the Pacific Coast, the Southeast, the Southwest, Canada, and Mexico. Export and import traffic is
moved through Gulf Coast and Pacific Coast ports and across the Mexican and Canadian borders.
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment.
Although revenues are analyzed by commodity group, we analyze the net financial results of the Railroad
as one segment due to the integrated nature of our rail network. The following table provides revenue by
commodity group:
Millions
Agricultural
Automotive
Chemicals
Energy
Industrial Products
Intermodal
Total freight revenues
Other revenues
Total operating revenues
2010
3,018 $
1,271
2,425
3,489
2,639
3,227
2009
2,666 $
854
2,102
3,118
2,147
2,486
16,069 $
896
13,373 $
770
2008
3,174
1,344
2,494
3,810
3,273
3,023
17,118
852
16,965 $
14,143 $
17,970
$
$
$
Although our revenues are principally derived from customers domiciled in the U.S., the ultimate points of
origination or destination for some products transported are outside the U.S.
Basis of Presentation – The Consolidated Financial Statements are presented in accordance with
accounting principles generally accepted in the U.S. (GAAP) as codified in the Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC).
2. Significant Accounting Policies
Principles of Consolidation – The Consolidated Financial Statements include the accounts of Union
Pacific Corporation and all of its subsidiaries. Investments in affiliated companies (20% to 50% owned)
are accounted for using the equity method of accounting. All intercompany transactions are eliminated.
We currently have no less than majority-owned investments that require consolidation under variable
interest entity requirements.
Cash and Cash Equivalents – Cash equivalents consist of investments with original maturities of three
months or less.
Accounts Receivable – Accounts receivable includes receivables reduced by an allowance for doubtful
accounts. The allowance is based upon historical losses, credit worthiness of customers, and current
economic conditions. Receivables not expected to be collected in one year and the associated
allowances are classified as other assets in our Consolidated Statements of Financial Position.
Investments – Investments represent our investments in affiliated companies (20% to 50% owned) that
are accounted for under the equity method of accounting and investments in companies (less than 20%
owned) accounted for under the cost method of accounting.
55
Materials and Supplies – Materials and supplies are carried at the lower of average cost or market.
Property and Depreciation – Properties and equipment are carried at cost and are depreciated on a
straight-line basis over their estimated service lives, which are measured in years, except for rail in high-
density traffic corridors (i.e., all rail lines except for those subject to abandonment, yard and switching
tracks, and electronic yards), for which lives are measured in millions of gross tons per mile of track. We
use the group method of depreciation in which all items with similar characteristics, use, and expected life
are grouped together in asset classes, and are depreciated using composite depreciation rates. The
group method of depreciation treats each asset class as a pool of resources, not as singular items. We
determine the estimated service lives of depreciable railroad assets by means of depreciation studies.
Under the group method of depreciation, no gain or loss is recognized when depreciable property is
retired or replaced in the ordinary course of business.
Impairment of Long-lived Assets – We review long-lived assets, including identifiable intangibles, for
impairment when events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows
are less than the carrying value of the long-lived assets, the carrying value is reduced to the estimated
fair value as measured by the discounted cash flows.
Revenue Recognition – We recognize freight revenues as freight moves from origin to destination. The
allocation of revenue between reporting periods is based on the relative transit time in each reporting
period with expenses recognized as incurred. Other revenues, which include revenues earned by our
subsidiaries, revenues from our commuter rail operations, and accessorial revenue, are recognized as
service is performed or contractual obligations are met. Customer incentives, which are primarily provided
for shipping a specified cumulative volume or shipping to/from specific locations, are recorded as a
reduction to operating revenues based on actual or projected future customer shipments.
Translation of Foreign Currency – Our portion of the assets and liabilities related to foreign investments
are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenue and
expenses are translated at the average rates of exchange prevailing during the year. Unrealized gains or
losses are reflected within common shareholders’ equity as accumulated other comprehensive income or
loss.
Fair Value Measurements – We use a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The level in the fair value hierarchy within
which the fair value measurement in its entirety falls is determined based on the lowest level input that is
significant to the fair value measurement in its entirety. These levels include:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
We have applied fair value measurements to our pension plan assets and to our interest rate fair value
hedges.
Stock-Based Compensation – We have several stock-based compensation plans under which
employees and non-employee directors receive stock options, nonvested retention shares, and
nonvested stock units. We refer to the nonvested shares and stock units collectively as “retention
awards”. We have elected to issue treasury shares to cover option exercises and stock unit vestings,
while new shares are issued when retention shares are granted.
We measure and recognize compensation expense for all stock-based awards made to employees and
directors, including stock options. Compensation expense is based on the calculated fair value of the
awards as measured at the grant date and is expensed ratably over the service period of the awards
(generally the vesting period). The fair value of retention awards is the closing stock price on the date of
grant, while the fair value of stock options is determined by using the Black-Scholes option pricing model.
Earnings Per Share – Basic earnings per share are calculated on the weighted-average number of
common shares outstanding during each period. Diluted earnings per share include shares issuable upon
exercise of outstanding stock options and stock-based awards where the conversion of such instruments
would be dilutive.
56
Use of Estimates – Our Consolidated Financial Statements include estimates and assumptions
regarding certain assets, liabilities, revenue, and expenses and the disclosure of certain contingent
assets and liabilities. Actual future results may differ from such estimates.
Income Taxes – We account for income taxes by recording taxes payable or refundable for the current
year and deferred tax assets and liabilities for the expected future tax consequences of events that have
been recognized in our financial statements or tax returns. These expected future tax consequences are
measured based on current tax law; the effects of future changes in tax laws are not anticipated. Future
tax law changes, such as a change in the corporate tax rate, could have a material impact on our financial
condition, results of operations, or liquidity.
When appropriate, we record a valuation allowance against deferred tax assets to reflect that these tax
assets may not be realized. In determining whether a valuation allowance is appropriate, we consider
whether it is more likely than not that all or some portion of our deferred tax assets will not be realized,
based on management’s judgments using available evidence about future events.
At times, we may claim tax benefits that may be challenged by a tax authority. We recognize tax benefits
only for tax positions that are more likely than not to be sustained upon examination by tax authorities.
The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely
to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits
claimed in our tax returns that do not meet these recognition and measurement standards.
Pension and Postretirement Benefits – We incur certain employment-related expenses associated with
pensions and postretirement health benefits. In order to measure the expense associated with these
benefits, we must make various assumptions including discount rates used to value certain liabilities,
expected return on plan assets used to fund these expenses, salary increases, employee turnover rates,
anticipated mortality rates, and expected future health care costs. The assumptions used by us are based
on our historical experience as well as current facts and circumstances. We use an actuarial analysis to
measure the expense and liability associated with these benefits.
Personal Injury – The cost of injuries to employees and others on our property is charged to expense
based on estimates of the ultimate cost and number of incidents each year. We use an actuarial analysis
to measure the expense and liability. Our personal injury liability is discounted to present value using
applicable U.S. Treasury rates. Legal fees and incidental costs are expensed as incurred.
Asbestos – We estimate a liability for asserted and unasserted asbestos-related claims based on an
assessment of the number and value of those claims. We use a statistical analysis to assist us in properly
measuring our potential liability. Our liability for asbestos-related claims is not discounted to present value
due to the uncertainty surrounding the timing of future payments. Legal fees and incidental costs are
expensed as incurred.
Environmental – When environmental issues have been identified with respect to property currently or
formerly owned, leased, or otherwise used in the conduct of our business, we and our consultants
perform environmental assessments on such property. We expense the cost of the assessments as
incurred. We accrue the cost of remediation where our obligation is probable and such costs can be
reasonably estimated. We do not discount our environmental liabilities when the timing of the anticipated
cash payments is not fixed or readily determinable. Legal fees and incidental costs are expensed as
incurred.
3. Recently Issued Accounting Pronouncements
In June 2009, the FASB issued Accounting Standards Update No. 2009-16, Accounting for Transfers of
Financial Assets (ASU 2009-16). ASU 2009-16 limits the circumstances in which transferred financial
assets can be derecognized and requires enhanced disclosures regarding transfers of financial assets
and a transferor’s continuing involvement with transferred financial assets. We adopted the authoritative
accounting standard on January 1, 2010. As a result, we no longer account for the value of the
outstanding undivided interest held by investors under our receivables securitization facility as a sale. In
addition, transfers of receivables occurring on or after January 1, 2010, are reflected as debt issued in our
Consolidated Statements of Cash Flows and recognized as debt due after one year in our Consolidated
Statements of Financial Position. (See the discussion of our receivables securitization facility in Note 10.)
57
4. Stock Options and Other Stock Plans
We have 12,542 options outstanding under the 1993 Stock Option and Retention Stock Plan of Union
Pacific Corporation (1993 Plan). There are 7,140 restricted shares outstanding under the 1992 Restricted
Stock Plan for Non-Employee Directors of Union Pacific Corporation. We no longer grant options or
awards of retention shares and units under these plans.
In April 2000, the shareholders approved the Union Pacific Corporation 2000 Directors Plan (Directors
Plan) whereby 1,100,000 shares of our common stock were reserved for issuance to our non-employee
directors. Under the Directors Plan, each non-employee director, upon his or her initial election to the
Board of Directors, receives a grant of 2,000 retention shares or retention stock units. Prior to December
31, 2007, each non-employee director received annually an option to purchase at fair value a number of
shares of our common stock, not to exceed 10,000 shares during any calendar year, determined by
dividing 60,000 by 1/3 of the fair market value of one share of our common stock on the date of such
Board of Directors meeting, with the resulting quotient rounded up or down to the nearest 50 shares. In
September 2007, the Board of Directors eliminated the annual payment of options for 2008 and future
years. As of December 31, 2010, 18,000 restricted shares and 264,000 options were outstanding under
the Directors Plan.
The Union Pacific Corporation 2001 Stock Incentive Plan (2001 Plan) was approved by the shareholders
in April 2001. The 2001 Plan reserved 24,000,000 shares of our common stock for issuance to eligible
employees of the Corporation and its subsidiaries in the form of non-qualified options, incentive stock
options, retention shares, stock units, and incentive bonus awards. Non-employee directors were not
eligible for awards under the 2001 Plan. As of December 31, 2010, 1,861,066 options were outstanding
under the 2001 Plan. We no longer grant any stock options or other stock or unit awards under this plan.
The Union Pacific Corporation 2004 Stock Incentive Plan (2004 Plan) was approved by shareholders in
April 2004. The 2004 Plan reserved 42,000,000 shares of our common stock for issuance, plus any
shares subject to awards made under the 2001 Plan and the 1993 Plan that were outstanding on April 16,
2004, and became available for regrant pursuant to the terms of the 2004 Plan. Under the 2004 Plan,
non-qualified options, stock appreciation rights, retention shares, stock units, and incentive bonus awards
may be granted to eligible employees of the Corporation and its subsidiaries. Non-employee directors are
not eligible for awards under the 2004 Plan. As of December 31, 2010, 7,677,841 options and 3,788,877
retention shares and stock units were outstanding under the 2004 Plan.
Pursuant to the above plans 32,904,291; 33,559,150; and 36,961,123 shares of our common stock were
authorized and available for grant at December 31, 2010, 2009, and 2008, respectively.
Stock-Based Compensation – We have several stock-based compensation plans under which
employees and non-employee directors receive stock options, nonvested retention shares, and
nonvested stock units. We refer to the nonvested shares and stock units collectively as “retention
awards”. We have elected to issue treasury shares to cover option exercises and stock unit vestings,
while new shares are issued when retention shares are granted. Information regarding stock-based
compensation appears in the table below:
Millions
Stock-based compensation, before tax:
Stock options
Retention awards
Total stock-based compensation, before tax
Total stock-based compensation, after tax
2010
2009
2008
$ 17
57
$ 74
$ 19
39
$ 58
$ 25
40
$ 65
$ 46
$ 36
$ 40
Excess tax benefits from equity compensation plans
$ 51
$ 10
$ 54
58
Stock Options – We estimate the fair value of our stock option awards using the Black-Scholes option
pricing model. Groups of employees and non-employee directors that have similar historical and expected
exercise behavior are considered separately for valuation purposes. The table below shows the annual
weighted-average assumptions used for valuation purposes:
Weighted-Average Assumptions
Risk-free interest rate
Dividend yield
Expected life (years)
Volatility
2010
2.4%
1.8%
2009
1.9%
2.3%
5.4
5.1
35.2%
31.3%
2008
2.8%
1.4%
5.3
22.2%
Weighted-average grant-date fair value of options granted
$ 18.26
$ 11.33
$ 13.35
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant; the dividend
yield is calculated as the ratio of dividends paid per share of common stock to the stock price on the date
of grant; the expected life is based on historical and expected exercise behavior; and volatility is based on
the historical volatility of our stock price over the expected life of the option.
A summary of stock option activity during 2010 is presented below:
Outstanding at January 1, 2010
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2010
Vested or expected to vest
at December 31, 2010
Shares
(thous.)
12,699
788
(3,520)
(152)
9,815
9,685
Options exercisable at December 31, 2010
7,457
$
Weighted-Average
Exercise Price
42.27
60.98
39.06
52.11
$
$
$
44.77
44.64
41.62
Weighted-Average
Remaining
Contractual Term
5.5 yrs.
Aggregate
Intrinsic Value
(millions)
275
$
N/A
N/A
5.2 yrs.
5.2 yrs.
4.2 yrs.
N/A
N/A
470
465
381
$
$
$
Stock options are granted at the closing price on the date of grant, have ten-year contractual terms, and
vest no later than three years from the date of grant. None of the stock options outstanding at December
31, 2010 are subject to performance or market-based vesting conditions.
At December 31, 2010, there was $17 million of unrecognized compensation expense related to
nonvested stock options, which is expected to be recognized over a weighted-average period of 0.9
years. Additional information regarding stock option exercises appears in the table below:
Millions
Intrinsic value of stock options exercised
Cash received from option exercises
Treasury shares repurchased for employee payroll taxes
Tax benefit realized from option exercises
Aggregate grant-date fair value of stock options vested
$
2010
150
114
(31)
57
19
$
2009
29
39
(8)
11
29
$
2008
169
83
(28)
63
21
59
Retention Awards – The fair value of retention awards is based on the closing price of the stock on the
grant date. Dividends and dividend equivalents are paid to participants during the vesting periods.
Changes in our retention awards during 2010 were as follows:
Nonvested at January 1, 2010
Granted
Vested
Forfeited
Nonvested at December 31, 2010
Shares
(thous.)
2,719
598
(620)
(59)
2,638
Weighted-Average
Grant-Date Fair Value
50.13
$
61.01
43.76
53.87
$
54.01
Retention awards are granted at no cost to the employee or non-employee director and vest over periods
lasting up to four years. At December 31, 2010, there was $62 million of total unrecognized compensation
expense related to nonvested retention awards, which is expected to be recognized over a weighted-
average period of 1.7 years.
Performance Retention Awards – In February 2010, our Board of Directors approved performance
stock unit grants. Other than different performance targets, the basic terms of these performance stock
units are identical to those granted in January 2008 and February 2009, including using annual return on
invested capital (ROIC) as the performance measure. We define ROIC as net operating profit adjusted
for interest expense (including interest on the present value of operating leases) and taxes on interest
divided by average invested capital adjusted for the present value of operating leases. In February 2009,
we changed an underlying assumption used in connection with calculating a component of ROIC. As a
result, for awards of performance stock units granted in 2009 and 2010, an assumed interest rate was
used in both the numerator and denominator when calculating the present value of our future operating
lease payments to reflect changes to interest rates and our financing costs. This rate is consistent with
the methodology used to calculate our adjusted debt-to-capital ratio. For performance stock units granted
in 2008, we calculated ROIC using the methodology and assumptions in effect when the performance
stock units were granted.
Stock units awarded to selected employees under these grants are subject to continued employment for
37 months and the attainment of certain levels of ROIC. We expense the fair value of the units that are
probable of being earned based on our forecasted ROIC over the 3-year performance period. We
measure the fair value of these performance stock units based upon the closing price of the underlying
common stock as of the date of grant, reduced by the present value of estimated future dividends.
Dividend equivalents are paid to participants only after the units are earned.
The assumptions used to calculate the present value of estimated future dividends related to the
February 2010 grant were as follows:
Dividend per share per quarter
Risk-free interest rate at date of grant
Changes in our performance retention awards during 2010 were as follows:
$
2010
0.27
1.3%
Nonvested at January 1, 2010
Granted
Vested
Forfeited
Nonvested at December 31, 2010
Shares
(thous.)
1,060
473
(225)
(157)
1,151
Weighted-Average
Grant-Date Fair Value
49.75
$
58.33
47.24
48.60
$
53.93
60
At December 31, 2010, there was $25 million of total unrecognized compensation expense related to
nonvested performance retention awards, which is expected to be recognized over a weighted-average
period of 1.2 years. A portion of this expense is subject to achievement of the ROIC levels established for
the performance stock unit grants.
5. Retirement Plans
Pension and Other Postretirement Benefits
Pension Plans – We provide defined benefit retirement income to eligible non-union employees through
qualified and non-qualified (supplemental) pension plans. Qualified and non-qualified pension benefits are
based on years of service and the highest compensation during the latest years of employment, with
specific reductions made for early retirements.
Other Postretirement Benefits (OPEB) – We provide medical and life insurance benefits for eligible
retirees. These benefits are funded as medical claims and life insurance premiums are paid.
Plan Amendment
Effective January 1, 2010, Medicare-eligible retirees who are enrolled in the Union Pacific Retiree Medical
Program received a contribution to a Health Reimbursement Account, which can be used to pay eligible
out-of-pocket medical expenses. The impact of the plan amendment was reflected in the projected
benefit obligation (PBO) at December 31, 2009.
Funded Status
We are required by GAAP to separately recognize the overfunded or underfunded status of our pension
and OPEB plans as an asset or liability. The funded status represents the difference between the PBO
and the fair value of the plan assets. Our non-qualified (supplemental) pension plan is unfunded by
design. The PBO of the pension plans is the present value of benefits earned to date by plan participants,
including the effect of assumed future salary increases. The PBO of the OPEB plan is equal to the
accumulated benefit obligation, as the present value of the OPEB liabilities is not affected by salary
increases. Plan assets are measured at fair value. We use a December 31 measurement date for plan
assets and obligations for all our retirement plans.
Changes in our PBO and plan assets were as follows for the years ended December 31:
Funded Status
Millions
Projected Benefit Obligation
Projected benefit obligation at beginning of year
Service cost
Interest cost
Plan amendments
Actuarial loss (gain)
Gross benefits paid
Projected benefit obligation at end of year
Plan Assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Voluntary funded pension plan contributions
Non-qualified plan benefit contributions
Gross benefits paid
Fair value of plan assets at end of year
Funded status at end of year
Pension
OPEB
2010
2009
2010
2009
$
$
$
$
$
2,448
34
143
-
281
(147)
2,759
2,044
294
200
13
(147)
2,404
(355)
$
$
$
$
$
2,272
38
140
-
140
(142)
2,448
1,543
350
280
13
(142)
2,044
(404)
$
$
$
$
$
$
314
2
16
(6)
16
(24)
318
$
418
2
18
(78)
(21)
(25)
314
-
-
-
24
(24)
$ -
-
-
25
(25)
-
$ -
(318)
$
(314)
61
Amounts recognized in the statement of financial position as of December 31, 2010 and 2009 consist of:
Millions
Noncurrent assets
Current liabilities
Noncurrent liabilities
Pension
OPEB
$
2010
1
(15)
(341)
$
2009
1
(13)
(392)
$
2010
-
(27)
(291)
$
2009
-
(28)
(286)
Net amounts recognized at end of year
$
(355)
$
(404)
$
(318)
$
(314)
Pre-tax amounts recognized in accumulated other comprehensive income/(loss) as of December 31,
2010 and 2009 consist of:
Millions
Prior service (cost)/credit
Net actuarial loss
Total
2010
Pension
(3)
$
(1,059)
$ (1,062)
OPEB
106
(142)
$
Total
103
(1,201)
(36)
$ (1,098)
$
$
$
Pension
(7)
(942)
$ (949)
$
$
2009
OPEB
146
(140)
$
Total
139
(1,082)
6
$ (943)
Other pre-tax changes recognized in other comprehensive income during 2010, 2009 and 2008 were as
follows:
Millions
Prior service credit
Net actuarial (gain)/loss
Amortization of:
Prior service cost/(credit)
Actuarial loss
$
2010
-
165
Pension
2009
$ -
(51)
2008
$ -
875
$
2010
(6)
16
OPEB
2009
(78)
(21)
$
$
(3)
(49)
(5)
(30)
(6)
(10)
45
(13)
44
(12)
2008
(9)
101
34
(13)
Total
$
113
$
(86)
$
859
$
42
$
(67)
$
113
Amounts included in accumulated other comprehensive income expected to be amortized into net
periodic cost (benefit) during 2011:
Millions
Prior service cost (credit)
Net actuarial loss
Total
Pension
2
$
70
$
72
OPEB
$ (35)
13
$ (22)
Total
$ (33)
83
$
50
Underfunded Accumulated Benefit Obligation – The accumulated benefit obligation (ABO) is the present
value of benefits earned to date, assuming no future salary growth. The underfunded accumulated benefit
obligation represents the difference between the ABO and the fair value of plan assets. At December 31,
2010 and 2009, the non-qualified (supplemental) plan ABO was $257 million and $229 million,
respectively. The PBO, ABO, and fair value of plan assets for pension plans with accumulated benefit
obligations in excess of the fair value of the plan assets were as follows for the years ended December
31:
Underfunded Accumulated Benefit Obligation
Millions
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Underfunded accumulated benefit obligation
2010
2,741
(2,663)
2,385
(278)
$
$
$
2009
(2,431)
(2,389)
2,026
(363)
$
$
$
62
The ABO for all defined benefit pension plans was $2.7 billion and $2.4 billion at December 31, 2010 and
2009, respectively.
Assumptions – The weighted-average actuarial assumptions used to determine benefit obligations at
December 31:
Percentages
Discount rate
Salary increase
Health care cost trend rate (employees under 65)
Health care cost trend rate (employees over 65)
Ultimate health care cost trend rate
Year ultimate trend rate reached
Expense
Pension
OPEB
2010
5.35%
3.36%
N/A
N/A
N/A
N/A
2009
5.90%
3.45%
N/A
N/A
N/A
N/A
2010
5.01%
N/A
7.24%
N/A
4.50%
2028
2009
5.55%
N/A
7.50%
9.10%
4.50%
2028
Both pension and OPEB expense are determined based upon the annual service cost of benefits (the
actuarial cost of benefits earned during a period) and the interest cost on those liabilities, less the
expected return on plan assets. The expected long-term rate of return on plan assets is applied to a
calculated value of plan assets that recognizes changes in fair value over a five-year period. This practice
is intended to reduce year-to-year volatility in pension expense, but it can have the effect of delaying the
recognition of differences between actual returns on assets and expected returns based on long-term rate
of return assumptions. Differences in actual experience in relation to assumptions are not recognized in
net income immediately, but are deferred and, if necessary, amortized as pension or OPEB expense.
The components of our net periodic pension and OPEB cost/(benefit) were as follows for the years ended
December 31:
Millions
Net Periodic Benefit Cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Prior service cost/(credit)
Actuarial loss
Pension
2010
2009
2008
2010
OPEB
2009
$
$
34
143
(178)
$
38
140
(159)
34
137
(152)
$
$
2
16
-
$
2
18
-
3
49
5
30
6
10
(45)
13
(44)
12
Net periodic benefit cost/(benefit)
$
51
$
54
$
35
$
(14)
$
(12)
$
2008
3
24
-
(35)
13
5
Assumptions – The weighted-average actuarial assumptions used to determine expense were as follows
for the years ended December 31:
Percentages
Discount rate
Expected return on plan assets
Salary increase
Health care cost trend rate (employees under 65)
Health care cost trend rate (employees over 65)
Ultimate health care cost trend rate
Year ultimate trend reached
OPEB
Pension
2009
2010
2009
2008
2008
2010
5.90% 6.25% 6.50% 5.55% 6.25% 6.50%
N/A
8.00% 8.00% 8.00%
3.45% 3.50% 3.50%
N/A
7.24% 7.50% 8.00%
N/A
N/A
N/A 9.10% 10.00%
4.50% 4.50% 5.00%
N/A
2013
2028
2028
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
The discount rate was based on a Mercer yield curve of high quality corporate bonds with cash flows
matching our plans’ expected benefit payments. The expected return on plan assets is based on our
asset allocation mix and our historical return, taking into account current and expected market conditions.
The actual return (loss) on pension plan assets, net of fees, was approximately 14% in 2010, 23% in
2009, and (30)% in 2008.
63
Assumed health care cost trend rates have a significant effect on the expense and liabilities reported for
health care plans. The assumed health care cost trend rate is based on historical rates and expected
market conditions. The 2011 assumed health care cost trend rate for employees under 65 is 7.07%. It is
assumed the rate will decrease gradually to an ultimate rate of 4.5% in 2028 and will remain at that level.
A one-percentage point change in the assumed health care cost trend rates would have the following
effects on OPEB:
Millions
Effect on total service and interest cost components
Effect on accumulated benefit obligation
Cash Contributions
One % pt.
Increase
1
$
11
One % pt.
Decrease
(1)
(9)
$
The following table details our cash contributions for the qualified pension plans and the benefit payments
for the non-qualified (supplemental) pension and OPEB plans:
Millions
2009
2010
Pension
$
Qualified
280
200
Non-qualified
13
13
OPEB
25
24
Our policy with respect to funding the qualified plans is to fund at least the minimum required by law and
not more than the maximum amount deductible for tax purposes. All contributions made to the qualified
pension plans in 2010 were voluntary and were made with cash generated from operations.
The non-qualified pension and OPEB plans are not funded and are not subject to any minimum regulatory
funding requirements. Benefit payments for each year represent supplemental pension payments and
claims paid for medical and life insurance. We anticipate our 2011 supplemental pension and OPEB
payments will be made from cash generated from operations.
Benefit Payments
The following table details expected benefit payments for the years 2011 through 2020:
Millions
2011
2012
2013
2014
2015
Years 2016 -2020
Asset Allocation Strategy
Pension
$ 150
$
153
158
163
170
927
OPEB
27
27
27
26
26
123
Our pension plan asset allocation at December 31, 2010 and 2009, and target allocation for 2011, are
as follows:
Equity securities
Debt securities
Real estate
Commodities
Total
Target
Allocation 2011
47% to 63%
30% to 40%
2% to 8%
4% to 6%
Percentage of Plan Assets
December 31,
2009
60% 61%
2010
31
4
5
31
4
4
100% 100%
64
The investment strategy for pension plan assets is to maintain a broadly diversified portfolio designed to
achieve our target of an average long-term rate of return of 7.5%. We reduced our expected rate of return
on plan assets to 7.5% in 2011 from 8% in 2010 to reflect our expected future returns on plan assets
based on our current asset allocation strategy. While we believe we can achieve a long-term average
rate of return of 7.5%, we cannot be certain that the portfolio will perform to our expectations. Assets are
strategically allocated among equity, debt, and other investments in order to achieve a diversification level
that reduces fluctuations in investment returns. Asset allocation target ranges for equity, debt, and other
portfolios are evaluated at least every three years with the assistance of an independent external
consulting firm. Actual asset allocations are monitored monthly, and rebalancing actions are executed at
least quarterly, if needed.
The pension plan investments are held in a Master Trust, with The Northern Trust Company. The majority
of pension plan assets are invested in equity securities because equity portfolios have historically
provided higher returns than debt and other asset classes over extended time horizons and are expected
to do so in the future. Correspondingly, equity investments also entail greater risks than other
investments. Equity risks are balanced by investing a significant portion of the plans’ assets in high
quality debt securities. The average credit rating of the debt portfolio exceeded A+ as of December 31,
2010 and 2009. The debt portfolio is also broadly diversified and invested primarily in U.S. Treasury,
mortgage, and corporate securities. The weighted-average maturity of the debt portfolio was 12 years at
both December 31, 2010 and 2009.
The investment of pension plan assets in securities issued by Union Pacific is specifically prohibited by
the plan for both the equity and debt portfolios, other than through index fund holdings.
Fair Value Measurements
The pension plan assets are valued at fair value. The following is a description of the valuation
methodologies used for the investments measured at fair value, including the general classification of
such instruments pursuant to the valuation hierarchy.
Temporary Cash Investments – These investments consist of U.S. dollars and foreign currencies held
in master trust accounts at The Northern Trust Company. Foreign currencies held are reported in terms
of U.S. dollars based on currency exchange rates readily available in active markets. These temporary
cash investments are classified as Level 1 investments.
Registered Investment Companies – Registered Investment Companies are mutual funds, unit trusts,
and other commingled funds registered with the Securities and Exchange Commission. Mutual fund and
unit trust shares are traded actively on public exchanges. The share prices for mutual funds and unit
trusts are published at the close of each business day. Holdings of mutual funds and unit trusts are
classified as Level 1 investments. Other registered commingled funds are not traded publicly, but the
underlying assets (stocks and bonds) held in these funds are traded on active markets and the prices for
these assets are readily observable. Holdings in other registered commingled funds are classified as
Level 2 investments.
U.S. Government Securities – U.S. Government Securities consist of bills, notes, bonds, and other fixed
income securities issued directly by the U.S. Treasury or by government-sponsored enterprises. These
assets are valued using a bid evaluation process with bid data provided by independent pricing sources.
U.S. Government Securities are classified as Level 2 investments.
Corporate Bonds & Debentures – Corporate bonds and debentures consist of fixed income securities
issued by U.S. and non-U.S. corporations. These assets are valued using a bid evaluation process with
bid data provided by independent pricing sources. Corporate bonds & debentures are classified as Level
2 investments.
Corporate Stock – This investment category consists of common and preferred stock issued by U.S. and
non-U.S. corporations. Common and preferred shares are traded actively on exchanges and price
quotes for these shares are readily available. Holdings of corporate stock are classified as Level 1
investments.
Venture Capital and Buyout Partnerships – This investment category is comprised of interests in
limited partnerships that invest in privately-held companies. Due to the private nature of the partnership
65
investments, pricing inputs are not readily observable. Asset valuations are developed by the general
partners that manage the partnerships. These valuations are based on the application of public market
multiples to private company cash flows, market transactions that provide valuation information for
comparable companies, and other methods. Holdings of limited partnership interests are classified as
Level 3 investments.
Real Estate Partnerships and Funds – Most of the real estate investments are partnership interests
similar to those described in the Venture Capital and Partnerships category. This category also includes
real estate investments held in less commonly used structures such as private real estate investment
trusts and pooled separate accounts. Valuations for the holdings in this category are not based on readily
observable inputs and are primarily derived from property appraisals. Interests in private real estate
partnerships, investment funds and pooled separate accounts are classified as Level 3 investments.
Common Trust and Other Funds – Common trust funds are comprised of shares or units in commingled
funds that are not publicly traded. The underlying assets in these funds (equity securities, fixed income
securities, and commodity-related securities) are publicly traded on exchanges and price quotes for the
assets held by these funds are readily available. Holdings of common trust funds are classified as Level 2
investments.
This category also includes an investment in a limited liability company that invests in publicly-traded
convertible securities. The limited liability company investment is a fund that invests in both long and
short positions in convertible securities, stocks, and fixed income securities. The underlying securities
held by the fund are traded actively on exchanges and price quotes for these investments are readily
available. Interest in the limited liability company is classified as a Level 2 investment.
Other Investments – This category includes several miscellaneous assets such as commodity hedge
fund investments. These investments have valuations that are based on observable inputs and are
classified as Level 2 investments.
As of December 31, 2010, the pension plan assets measured at fair value on a recurring basis were as
follows:
Millions
Plan assets:
Temporary cash investments
Registered investment companies
U.S. government securities
Corporate bonds & debentures
Corporate stock
Venture capital and buyout partnerships
Real estate partnerships and funds
Common trust and other funds
Other investments
Total plan assets at fair value
Other assets [a]
Total plan assets
Quoted Prices
in Active
Markets for
Identical Inputs
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
23
9
-
-
573
-
-
-
-
605
$
$
-
259
142
311
7
-
-
776
29
$ 1,524
$
-
-
-
-
-
169
99
-
-
268
$
Total
23
268
142
311
580
169
99
776
29
2,397
7
$ 2,404
[a] Other assets include accrued receivables and pending broker settlements.
66
As of December 31, 2009, the pension plan assets measured at fair value on a recurring basis were as
follows:
Millions
Plan assets:
Temporary cash investments
Registered investment companies
U.S. government securities
Corporate bonds & debentures
Corporate stock
Venture capital and buyout partnerships
Real estate partnerships and funds
Common trust and other funds
Other investments
Total plan assets at fair value
Other assets [a]
Total plan assets
Quoted Prices
in Active
Markets for
Identical Inputs
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
9
8
-
-
482
-
-
-
-
499
$
$
-
176
131
284
6
-
-
668
27
$ 1,292
$
-
-
-
-
-
142
78
-
-
220
$
Total
9
184
131
284
488
142
78
668
27
2,011
33
$ 2,044
[a] Other assets include accrued receivables and pending broker settlements.
The following table presents a reconciliation of the beginning and ending balances of the fair value
measurements using significant unobservable inputs (Level 3 investments) during 2010:
Millions
Beginning balance - January 1, 2010
Realized gain
Unrealized gain
Purchases, issuances, and settlements
Venture Capital
and Buyout
Partnerships
142
3
21
3
$
Real Estate
Partnerships
and Funds
78
$
1
10
10
Ending balance - December 31, 2010
$
169
$
99
Total
220
4
31
13
268
$
$
The following table presents a reconciliation of the beginning and ending balances of the fair value
measurements using significant unobservable inputs (Level 3 investments) during 2009:
Millions
Beginning balance - January 1, 2009
Realized gain
Unrealized loss
Purchases, issuances, and settlements
Venture Capital
and Buyout
Partnerships
147
3
(18)
10
$
Real Estate
Partnerships
and Funds
92
$
-
(29)
15
Ending balance - December 31, 2009
$
142
$
78
Total
239
3
(47)
25
220
$
$
Other Retirement Programs
401(k)/Thrift Plan – We provide a defined contribution plan (401(k)/thrift plan) to eligible non-union
employees for whom we make matching contributions. We match 50 cents for each dollar contributed by
employees up to the first six percent of compensation contributed. Our plan contributions were $13 million
in 2010, $14 million in 2009 and $14 million 2008.
67
Railroad Retirement System – All Railroad employees are covered by the Railroad Retirement System
(the System). Contributions made to the System are expensed as incurred and amounted to
approximately $566 million in 2010, $562 million in 2009, and $620 million in 2008.
Collective Bargaining Agreements – Under collective bargaining agreements, we participate in multi-
employer benefit plans that provide certain postretirement health care and life insurance benefits for
eligible union employees. Premiums paid under these plans are expensed as incurred and amounted to
$60 million in 2010, $48 million in 2009, and $49 million in 2008.
6. Other Income
Other income included the following for the years ended December 31:
Millions
Rental income
Net gain on non-operating asset dispositions
Interest income
Receivable securitization fees [a]
Early extinguishment of debt
Non-operating environmental costs and other
Total
$
2010
84
25
4
-
(21)
(38)
$
2009
73
162
5
(9)
-
(36)
$
2008
87
41
21
(23)
-
(34)
$
54
$ 195
$
92
[a] Receivable securitization fees totaling $6 million for the year ended December 31, 2010 are classified as interest expense.
(See Note 3 and Note 10 for further discussion.)
In June of 2009, we completed a $118 million sale of land to the Regional Transportation District (RTD) in
Colorado, resulting in a $116 million pre-tax gain. The agreement with the RTD involved a 33-mile
industrial lead track in Boulder, Colorado.
7. Income Taxes
Components of income tax expense/(benefit) were as follows for the years ended December 31:
Millions
Current:
Federal
State
Total current tax expense
Deferred:
Federal
State
Total deferred tax expense
Unrecognized tax benefits:
Federal
State
Total unrecognized tax benefits expense/(benefit)
2010
2009
2008
$
862
119
981
550
97
647
26
(1)
25
$
316
50
366
650
30
680
39
(1)
38
$
698
73
771
646
33
679
(121)
(13)
(134)
Total income tax expense
$ 1,653
$ 1,084
$ 1,316
68
For the years ended December 31, reconciliations between statutory and effective tax rates are as
follows:
Tax Rate Percentages
Federal statutory tax rate
State statutory rates, net of federal benefits
Deferred tax adjustments
Tax credits
Other
Effective tax rate
2010
35.0%
2009
35.0%
2008
35.0%
3.1
3.0
3.2
(0.3) (0.8) (0.7)
(0.7) (0.8) (0.9)
(0.2) (0.4)
0.2
37.3%
36.4%
36.0%
In February of 2009, California enacted legislation that changed how we determine the amount of income
subject to California tax. This change reduced our 2009 deferred tax expense by $14 million.
In January of 2008, Illinois enacted legislation that changed how we determine the amount of income
subject to Illinois tax. This change reduced our 2008 deferred tax expense by $16 million.
Deferred tax assets and liabilities are recorded for the expected future tax consequences of events that
are reported in different periods for financial reporting and income tax purposes. The majority of our
deferred tax liabilities relate to differences between the tax bases and financial reporting amounts of our
land and depreciable property, due to accelerated tax depreciation (including bonus depreciation),
revaluation of assets in purchase accounting transactions, and differences in capitalization methods.
Deferred income tax liabilities/(assets) were comprised of the following at December 31:
Millions
Net current deferred income tax asset
Property
State taxes, net of federal benefits
Other
Net long-term deferred income tax liabilities
Net deferred income tax liability
2010
2009
$
(261)
$
(339)
11,581
772
(796)
11,557
10,419
715
(90)
11,044
$ 11,296
$ 10,705
When appropriate, we record a valuation allowance against deferred tax assets to reflect that these tax
assets may not be realized. In determining whether a valuation allowance is appropriate, we consider
whether it is more likely than not that all or some portion of our deferred tax assets will not be realized,
based on management’s judgments using available evidence about future events. In 2010, there is no
valuation allowance because the deferred tax assets associated with the 2009 valuation allowance
expired unrealized. Our total valuation allowance at December 31, 2009 was $8 million.
Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon
examination by tax authorities. The amount recognized is measured as the largest amount of benefit that
is greater than 50 percent likely to be realized upon settlement. Unrecognized tax benefits are tax
benefits claimed in our tax returns that do not meet these recognition and measurement standards.
69
A reconciliation of changes in unrecognized tax benefits liabilities/(assets) from the beginning to the end
of the reporting period is as follows:
Millions
Unrecognized tax benefits at January 1
Increases for positions taken in current year
Increases for positions taken in prior years
Decreases for positions taken in prior years
Settlements with taxing authorities
Increases/(decreases) for interest and penalties
Lapse of statutes of limitations
$
2010
61
38
11
(22)
(4)
5
(3)
$
2009
26
18
50
(28)
(3)
3
(5)
Unrecognized tax benefits at December 31
$
86
$
61
2008
$ 161
10
1
(23)
(55)
(68)
-
$
26
A portion of our unrecognized tax benefits would, if recognized, reduce our effective tax rate. The
remaining unrecognized tax benefits relate to tax positions for which only the timing of the benefit is
uncertain. Recognition of these tax benefits would reduce our effective tax rate only through a reduction
of accrued interest and penalties. The unrecognized tax benefits that would reduce our effective tax rate
are as follows:
Millions
Unrecognized tax benefits that would reduce the effective tax rate
Unrecognized tax benefits that would not reduce the effective tax rate
Total unrecognized tax benefits
2010
90
(4)
86
$
$
2009
86
(25)
61
$
$
2008
79
(53)
26
$
$
We recognize interest and penalties as part of income tax expense. Total accrued liabilities for interest
and penalties were $19 million and $13 million at December 31, 2010 and 2009, respectively. Total
interest and penalties recognized as part of income tax expense (benefit) were $6 million for 2010, $(11)
million for 2009, and $(9) million for 2008.
Internal Revenue Service (IRS) examinations have been completed and settled for all years prior to 1999,
and the statute of limitations bars any additional tax assessments. Some interest calculations remain
open back to 1986. The IRS has completed its examinations and issued notices of deficiency for tax
years 1999 through 2006. We disagree with many of their proposed adjustments, and we are at IRS
Appeals for these years. We anticipate a partial settlement of the tax years 1999-2004 during 2011. The
IRS is examining the Corporation’s federal income tax returns for 2007 and 2008. Several state tax
authorities are examining our state income tax returns for tax years 2003 through 2006.
In 2008, we signed a closing agreement resolving all tax matters at IRS Appeals for tax years 1995
through 1998. In connection with the settlement, we paid the IRS $52 million of tax and $67 million of
interest in 2008. We filed interest refund claims in 2009 for years 1995-1998, and received refunds of
$17 million in October of 2009. The audit settlement and interest refund claims had only immaterial
effects on our income tax expense for 2008 and 2009.
We expect our unrecognized tax benefits to decrease significantly in the next 12 months. Of the $86
million balance at December 31, 2010, $68 million is classified as current in the Consolidated Statement
of Financial Position, in anticipation of a partial settlement of the 1999-2004 tax years, as well as a
reasonable possibility that some state tax disputes will be resolved in 2011.
70
8. Earnings Per Share
The following table provides a reconciliation between basic and diluted earnings per share for the years
ended December 31:
Millions, Except Per Share Amounts
Net income
Weighted-average number of shares outstanding:
Basic
Dilutive effect of stock options
Dilutive effect of retention shares and units
Diluted
Earnings per share – basic
Earnings per share – diluted
2010
2009
2008
$
2,780
$
1,890
$
2,335
498.2
3.3
1.4
502.9
5.58
5.53
$
$
503.0
1.5
1.3
505.8
$
$
3.76
3.74
$
$
510.6
3.4
1.0
515.0
4.57
4.53
Common stock options totaling 0.3 million, 4.6 million, and 1.0 million for 2010, 2009, and 2008,
respectively, were excluded from the computation of diluted earnings per share because the exercise
prices of these options exceeded the average market price of our common stock for the respective
periods, and the effect of their inclusion would be anti-dilutive.
9. Comprehensive Income/(Loss)
Comprehensive income/(loss) was as follows:
Millions
Net income
Other comprehensive income/(loss):
Defined benefit plans
Foreign currency translation
Derivatives
Total other comprehensive income/(loss) [a]
2010
2009
2008
$ 2,780 $ 1,890 $ 2,335
(88)
7
1
(80)
44
6
-
(604)
(26)
-
50
(630)
Total comprehensive income
$ 2,700 $ 1,940 $ 1,705
[a] Net of deferred taxes of $57 million, $(101) million, and $390 million during 2010, 2009, and 2008, respectively.
The after-tax components of accumulated other comprehensive loss were as follows:
Millions
Defined benefit plans
Foreign currency translation
Derivatives
Total
10. Accounts Receivable
Dec. 31,
2010
(703)
$
(28)
(3)
Dec. 31,
2009
$ (615)
(35)
(4)
$
(734)
$ (654)
Accounts receivable includes freight and other receivables reduced by an allowance for doubtful
accounts. The allowance is based upon historical losses, credit worthiness of customers, and current
economic conditions. At December 31, 2010 and 2009, our accounts receivable were reduced by $5
million and $3 million, respectively. Receivables not expected to be collected in one year and the
associated allowances are classified as other assets in our Consolidated Statements of Financial
Position. At December 31, 2010 and 2009, receivables classified as other assets were reduced by
allowances of $51 million and $67 million, respectively.
71
Receivables Securitization Facility – As discussed in Note 3, we adopted a new accounting standard
on January 1, 2010. As a result, we no longer account for the value of the outstanding undivided interest
held by investors under our receivables securitization facility as a sale. In addition, transfers of
receivables occurring on or after January 1, 2010, are reflected as debt issued in our Consolidated
Statements of Cash Flows, and the value of the outstanding undivided interest held by investors at
December 31, 2010, is accounted for as a secured borrowing and is included in our Consolidated
Statements of Financial Position as debt due after one year.
Under the receivables securitization facility, the Railroad sells most of its accounts receivable to Union
Pacific Receivables, Inc. (UPRI), a bankruptcy-remote subsidiary. UPRI may subsequently transfer,
without recourse on a 364-day revolving basis, an undivided interest in eligible accounts receivable to
investors. The total capacity to transfer undivided interests to investors under the facility was $600 million
at December 31, 2010 and 2009, respectively. The value of the outstanding undivided interest held by
investors under the facility was $100 million and $400 million at December 31, 2010 and 2009,
respectively. The value of the undivided interest held by investors was supported by $960 million and
$817 million of accounts receivable at December 31, 2010 and 2009, respectively. At December 31,
2010 and 2009, the value of the interest retained by UPRI was $960 million and $417 million,
respectively. This retained interest is included in accounts receivable, net in our Consolidated Statements
of Financial Position.
The value of the outstanding undivided interest held by investors could fluctuate based upon the
availability of eligible receivables and is directly affected by changing business volumes and credit risks,
including default and dilution. If default or dilution ratios increase one percent, the value of the
outstanding undivided interest held by investors would not change as of December 31, 2010. Should our
credit rating fall below investment grade, the value of the outstanding undivided interest held by investors
would be reduced, and, in certain cases, the investors would have the right to discontinue the facility.
The Railroad collected approximately $16.3 billion and $13.8 billion of receivables during the years ended
December 31, 2010 and 2009, respectively. UPRI used certain of these proceeds to purchase new
receivables under the facility.
The costs of the receivables securitization facility include interest, which will vary based on prevailing
commercial paper rates, program fees paid to banks, commercial paper issuing costs, and fees for
unused commitment availability. The costs of the receivables securitization facility are included in interest
expense and were $6 million during 2010. Prior to adoption of the new accounting standard, the costs of
the receivables securitization facility were included in other income and were $9 million and $23 million
for 2009 and 2008, respectively.
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.
In August 2010, the receivables securitization facility was renewed for an additional 364-day period at
comparable terms and conditions.
72
11. Properties
The following tables list the major categories of property and equipment, as well as the weighted-average
composite depreciation rate for each category:
Millions, Except Percentages
As of December 31, 2010
Land
Road:
Rail and other track material [a]
Ties
Ballast
Other [b]
Total road
Equipment:
Locomotives
Freight cars
Work equipment and other
Total equipment
Technology and other
Construction in progress
Total
Millions, Except Percentages
As of December 31, 2009
Land
Road:
Rail and other track material [a]
Ties
Ballast
Other [b]
Total road
Equipment:
Locomotives
Freight cars
Work equipment and other
Total equipment
Technology and other
Construction in progress
Total
Accumulated
Cost Depreciation
Net Book
Value
Depreciation
Rate for 2010
$ 4,984
$ N/A
$ 4,984
11,992
7,631
4,011
13,634
37,268
6,136
1,886
305
8,327
565
764
4,458
1,858
944
2,376
9,636
2,699
1,040
39
3,778
241
-
7,534
5,773
3,067
11,258
27,632
3,437
846
266
4,549
324
764
$ 51,908
$ 13,655
$ 38,253
N/A
3.1%
2.8%
3.0%
2.5%
2.8%
5.6%
3.6%
4.0%
5.1%
13.2%
N/A
N/A
Accumulated
Cost Depreciation
Net Book
Value
Depreciation
Rate for 2009
$ 4,891
$ N/A
$ 4,891
11,584
7,254
3,841
12,988
35,667
6,156
1,885
168
8,209
477
966
4,414
1,767
869
2,237
9,287
2,470
1,015
32
3,517
204
-
7,170
5,487
2,972
10,751
26,380
3,686
870
136
4,692
273
966
$ 50,210
$ 13,008
$ 37,202
N/A
3.6%
2.7%
2.9%
2.4%
2.9%
5.0%
4.2%
3.6%
4.8%
12.5%
N/A
N/A
[a]
Includes a weighted-average composite depreciation rate for rail in high-density traffic corridors as discussed below.
[b] Other includes grading, bridges and tunnels, signals, buildings, and other road assets.
Property and Depreciation – Our railroad operations are highly capital intensive, and our large base of
homogeneous, network-type assets turns over on a continuous basis. Each year we develop a capital
program for the replacement of assets and for the acquisition or construction of assets that enable us to
enhance our operations or provide new service offerings to customers. Assets purchased or constructed
throughout the year are capitalized if they meet applicable minimum units of property criteria. Properties
and equipment are carried at cost and are depreciated on a straight-line basis over their estimated
service lives, which are measured in years, except for rail in high-density traffic corridors (i.e., all rail lines
except for those subject to abandonment, yard and switching tracks, and electronic yards) for which lives
are measured in millions of gross tons per mile of track. We use the group method of depreciation in
which all items with similar characteristics, use, and expected lives are grouped together in asset classes,
73
and are depreciated using composite depreciation rates. The group method of depreciation treats each
asset class as a pool of resources, not as singular items. We currently have more than 60 depreciable
asset classes, and we may increase or decrease the number of asset classes due to changes in
technology, asset strategies, or other factors.
We determine the estimated service lives of depreciable railroad assets by means of depreciation studies.
We perform depreciation studies at least every three years for equipment and every six years for track
assets (i.e., rail and other track material, ties, and ballast) and other road property. Our depreciation
studies take into account the following factors:
• Statistical analysis of historical patterns of use and retirements of each of our asset classes;
• Evaluation of any expected changes in current operations and the outlook for continued use of
the assets;
• Evaluation of technological advances and changes to maintenance practices; and
• Expected salvage to be received upon retirement.
For rail in high-density traffic corridors, we measure estimated service lives in millions of gross tons per
mile of track. It has been our experience that the lives of rail in high-density traffic corridors are closely
correlated to usage (i.e., the amount of weight carried over the rail). The service lives also vary based on
rail weight, rail condition (e.g., new or secondhand), and rail type (e.g., straight or curve). Our
depreciation studies for rail in high density traffic corridors consider each of these factors in determining
the estimated service lives. For rail in high-density traffic corridors, we calculate depreciation rates
annually by dividing the number of gross ton-miles carried over the rail (i.e., the weight of loaded and
empty freight cars, locomotives and maintenance of way equipment transported over the rail) by the
estimated service lives of the rail measured in millions of gross tons per mile. For all other depreciable
assets, we compute depreciation based on the estimated service lives of our assets as determined from
the analysis of our depreciation studies. Changes in the estimated service lives of our assets and their
related depreciation rates are implemented prospectively.
Under group depreciation, the historical cost (net of salvage) of depreciable property that is retired or
replaced in the ordinary course of business is charged to accumulated depreciation and no gain or loss is
recognized. The historical cost of certain track assets is estimated using (i) inflation indices published by
the Bureau of Labor Statistics and (ii) the estimated useful lives of the assets as determined by our
depreciation studies. The indices were selected because they closely correlate with the major costs of
the properties comprising the applicable track asset classes. Because of the number of estimates
inherent in the depreciation and retirement processes and because it is impossible to precisely estimate
each of these variables until a group of property is completely retired, we continually monitor the
estimated service lives of our assets and the accumulated depreciation associated with each asset class
to ensure our depreciation rates are appropriate. In addition, we determine if the recorded amount of
accumulated depreciation is deficient (or in excess) of the amount indicated by our depreciation studies.
Any deficiency (or excess) is amortized as a component of depreciation expense over the remaining
service lives of the applicable classes of assets.
For retirements of depreciable railroad properties that do not occur in the normal course of business, a
gain or loss may be recognized if the retirement meets each of the following three conditions: (i) is
unusual, (ii) is material in amount, and (iii) varies significantly from the retirement profile identified through
our depreciation studies. A gain or loss is recognized in other income when we sell land or dispose of
assets that are not part of our railroad operations.
When we purchase an asset, we capitalize all costs necessary to make the asset ready for its intended
use. However, many of our assets are self-constructed. A large portion of our capital expenditures is for
replacement of existing track assets and other road properties, which is typically performed by our
employees, and for track line expansion and other capacity projects. Costs that are directly attributable to
capital projects (including overhead costs) are capitalized. Direct costs that are capitalized as part of self-
constructed assets include material, labor, and work equipment. Indirect costs are capitalized if they
clearly relate to the construction of the asset. These costs are allocated using appropriate statistical
bases.
General and administrative expenditures are expensed as incurred. Normal repairs and maintenance,
including rail grinding, are also expensed as incurred, while costs incurred that extend the useful life of an
asset, improve the safety of our operations or improve operating efficiency are capitalized.
74
Assets held under capital leases are recorded at the lower of the net present value of the minimum lease
payments or the fair value of the leased asset at the inception of the lease. Amortization expense is
computed using the straight-line method over the shorter of the estimated useful lives of the assets or the
period of the related lease.
12. Accounts Payable and Other Current Liabilities
Millions
Accounts payable
Dividends and interest
Accrued wages and vacation
Income and other taxes
Accrued casualty costs
Equipment rents payable
Other
$
Dec. 31,
2010
677
383
357
337
325
86
548
$
Dec. 31,
2009
612
347
339
224
379
89
480
Total accounts payable and other current liabilities
$
2,713
$ 2,470
13. Financial Instruments
Strategy and Risk – We may use derivative financial instruments in limited instances for other than
trading purposes to assist in managing our overall exposure to fluctuations in interest rates and fuel
prices. We are not a party to leveraged derivatives and, by policy, do not use derivative financial
instruments for speculative purposes. Derivative financial instruments qualifying for hedge accounting
must maintain a specified level of effectiveness between the hedging instrument and the item being
hedged, both at inception and throughout the hedged period. We formally document the nature and
relationships between the hedging instruments and hedged items at inception, as well as our risk-
management objectives, strategies for undertaking the various hedge transactions, and method of
assessing hedge effectiveness. Changes in the fair market value of derivative financial instruments that
do not qualify for hedge accounting are charged to earnings. We may use swaps, collars, futures, and/or
forward contracts to mitigate the risk of adverse movements in interest rates and fuel prices; however, the
use of these derivative financial instruments may limit future benefits from favorable interest rate and fuel
price movements.
Market and Credit Risk – We address market risk related to derivative financial instruments by selecting
instruments with value fluctuations that highly correlate with the underlying hedged item. We manage
credit risk related to derivative financial instruments, which is minimal, by requiring high credit standards
for counterparties and periodic settlements. At December 31, 2010 and 2009, we were not required to
provide collateral, nor had we received collateral, relating to our hedging activities.
Determination of Fair Value – We determine the fair values of our derivative financial instrument
positions based upon current fair values as quoted by recognized dealers or the present value of
expected future cash flows.
Interest Rate Fair Value Hedges – We manage our overall exposure to fluctuations in interest rates by
adjusting the proportion of fixed and floating rate debt instruments within our debt portfolio over a given
period. We generally manage the mix of fixed and floating rate debt through the issuance of targeted
amounts of each as debt matures or as we require incremental borrowings. We employ derivatives,
primarily swaps, as one of the tools to obtain the targeted mix. In addition, we also obtain flexibility in
managing interest costs and the interest rate mix within our debt portfolio by evaluating the issuance of
and managing outstanding callable fixed-rate debt securities.
Swaps allow us to convert debt from fixed rates to variable rates and thereby hedge the risk of changes in
the debt’s fair value attributable to the changes in interest rates. We account for swaps as fair value
hedges using the short-cut method; therefore, we do not record any ineffectiveness within our
Consolidated Financial Statements.
75
The following is a summary of our interest rate derivatives qualifying as fair value hedges:
Millions, Except Percentages
Amount of debt hedged
Percentage of total debt portfolio
Gross fair value asset position
2010
-
-
-
$
$
2009
250
3%
15
$
$
We recognized the fair value as a Level 2 valuation. A Level 2 valuation is defined as observable market-
based inputs or unobservable inputs that are corroborated by market data.
On February 25, 2010, we elected to terminate an interest rate swap agreement with a notional amount of
$250 million prior to the scheduled maturity and received cash of $20 million (which is comprised of $16
million for the fair value of the swap that was terminated and $4 million of accrued but unpaid interest
receivable). We designated the swap agreement as a fair value hedge, and as such the unamortized
adjustment to debt for the change in fair value of the swap remains classified as debt due after one year
in our Consolidated Statements of Financial Position and will be amortized as a reduction to interest
expense through April 15, 2012. As of December 31, 2010, we do not have any interest rate fair value
hedges outstanding.
Interest Rate Cash Flow Hedges – We report changes in the fair value of cash flow hedges in
accumulated other comprehensive loss until the hedged item affects earnings. At December 31, 2010 and
2009, we had reductions of $3 million recorded as an accumulated other comprehensive loss that is being
amortized on a straight-line basis through September 30, 2014. As of December 31, 2010 and 2009, we
had no interest rate cash flow hedges outstanding.
Earnings Impact – Our use of derivative financial instruments had the following impact on pre-tax income
for the years ended December 31:
Millions
Decrease in interest expense from interest rate hedging
Decrease in fuel expense from fuel derivatives
Increase in pre-tax income
2010
2
-
2
$
$
2009
8
$
-
$
8
2008
1
$
1
$
2
Fair Value of Debt Instruments – The fair value of our short- and long-term debt was estimated using
quoted market prices, where available, or current borrowing rates. At December 31, 2010, the fair value
of total debt was $10.4 billion, approximately $1.2 billion more than the carrying value. At December 31,
2009, the fair value of total debt was $10.8 billion, approximately $945 million more than the carrying
value. At December 31, 2010 and 2009, approximately $303 million and $320 million, respectively, of
fixed-rate debt securities contained call provisions that allowed us to retire the debt instruments prior to
final maturity, with the payment of fixed call premiums, or in certain cases, at par.
76
14. Debt
Total debt as of December 31, 2010 and 2009, net of interest rate swaps designated as fair value
hedges, is summarized below:
Millions
Notes and debentures, 3.0% to 7.9% due through 2054 [a]
Capitalized leases, 4.7% to 9.3% due through 2028
Equipment obligations, 6.2% to 8.1% due through 2031
Tax-exempt financings, 2.3% to 5.7% due through 2026
Floating rate term loan, due through 2013
Receivables securitization facility (Note 10)
Mortgage bonds, 4.8% due through 2030
Medium-term notes, 9.2% to 10.0% due through 2020
Unamortized discount
Total debt [a]
Less: current portion
Total long-term debt
$
$
2010
6,886
1,909
183
162
100
100
58
42
(198)
9,242
(239)
2009
7,277
2,061
219
182
100
-
58
61
(110)
9,848
(212)
$
9,003
$
9,636
[a]
2010 and 2009 included a write-up of $0 million and $15 million, respectively, due to market value adjustments for debt with
qualifying fair value hedges that are recorded on the Consolidated Statements of Financial Position.
Debt Maturities – The following table presents aggregate debt maturities as of December 31, 2010,
excluding market value adjustments.
Millions
2011
2012
2013
2014
2015
Thereafter
Total debt
$
339
646
774
794
456
6,233
$ 9,242
As of December 31, 2010, we have reclassified as long-term debt approximately $100 million of debt due
within one year that we intend to refinance. This reclassification reflects our ability and intent to refinance
any short-term borrowings and certain current maturities of long-term debt on a long-term basis. At
December 31, 2009, we reclassified as long-term debt approximately $320 million of debt due within one
year that we intended to refinance at that time.
Mortgaged Properties – Equipment with a carrying value of approximately $3.2 billion and $3.4 billion at
December 31, 2010 and 2009, respectively, served as collateral for capital leases and other types of
equipment obligations in accordance with the secured financing arrangements utilized to acquire such
railroad equipment.
As a result of the merger of Missouri Pacific Railroad Company (MPRR) with and into UPRR on January
1, 1997, and pursuant to the underlying indentures for the MPRR mortgage bonds, UPRR must maintain
the same value of assets after the merger in order to comply with the security requirements of the
mortgage bonds. As of the merger date, the value of the MPRR assets that secured the mortgage bonds
was approximately $6.0 billion. In accordance with the terms of the indentures, this collateral value must
be maintained during the entire term of the mortgage bonds irrespective of the outstanding balance of
such bonds.
Credit Facilities – On December 31, 2010, we had $1.9 billion of credit available under our revolving
credit facility (the facility). The facility is designated for general corporate purposes and supports the
issuance of commercial paper. We did not draw on the facility during 2010. Commitment fees and interest
rates payable under the facility are similar to fees and rates available to comparably rated, investment-
grade borrowers. The facility allows for borrowings at floating rates based on London Interbank Offered
77
Rates, plus a spread, depending upon our senior unsecured debt ratings. The facility requires us to
maintain a debt-to-net-worth coverage ratio as a condition to making a borrowing. At December 31, 2010,
and December 31, 2009 (and at all times during these periods), 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 December 31, 2010, the debt-to-net-worth coverage ratio
allowed us to carry up to $35.5 billion of debt (as defined in the facility), and we had $9.7 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. The facility will expire in April 2012 in accordance with its term, and we
currently intend to replace the facility with a substantially similar credit agreement on or before the
expiration date, which is consistent with our past practices with respect to our credit facilities.
During 2010, we did not issue or repay any commercial paper and, at December 31, 2010, we had no
commercial paper outstanding. Outstanding commercial paper balances are supported by our revolving
credit facility but do not reduce the amount of borrowings available under the facility.
Dividend Restrictions – Our revolving credit facility includes a debt-to-net worth covenant (discussed in
the Credit Facilities section above) that, under certain circumstances, restricts the payment of cash
dividends to our shareholders. The amount of retained earnings available for dividends was $12.9 billion
and $11.6 billion at December 31, 2010 and 2009, respectively.
Shelf Registration Statement and Significant New Borrowings – We filed a new shelf registration
statement, which became effective February 10, 2010. Our Board of Directors authorized the issuance of
up to $3 billion of debt securities, replacing the $2.25 billion of authority remaining under our shelf
registration filed in March 2007. Under the 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.
During 2010, we issued the following unsecured, fixed-rate debt securities under our current shelf
registration:
Date
August 2, 2010
Description of Securities
$500 million of 4.00% Notes due February 1, 2021
The net proceeds from the offering were used for general corporate purposes, including the repurchase of
common stock pursuant to our share repurchase program. These debt securities include change-of-
control provisions.
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. At December 31, 2010, we had
remaining authority to issue up to $2.5 billion of debt securities under our shelf registration.
Debt Exchange – On July 14, 2010, we exchanged $376 million of 7.875% notes due in 2019 (Existing
Notes) for 5.78% notes (New Notes) due July 15, 2040, plus cash consideration of approximately $96
million and $15 million for accrued and unpaid interest on the Existing Notes. The cash consideration,
recorded as an adjustment to the carrying value of debt, and the balance of the unamortized discount and
issue costs from the Existing Notes are being amortized as an adjustment of interest expense over the
term of the New Notes. No gain or loss was recognized as a result of the exchange. Costs related to the
debt exchange that were payable to parties other than the debt holders totaled approximately $2 million
and were included in interest expense during the third quarter.
Debt Redemptions – On March 22, 2010, we redeemed $175 million of our 6.5% notes due April 15,
2012. The redemption resulted in an early extinguishment charge of $16 million in the first quarter of
78
2010. On November 1, 2010, we redeemed all $400 million of our outstanding 6.65% notes due January
15, 2011. The redemption resulted in a $5 million early extinguishment charge.
Receivables Securitization Facility – At December 31, 2010, we have recorded $100 million as secured
debt under our receivables securitization facility. (See further discussion of our receivables securitization
facility in Note 10.)
15. Variable Interest Entities
We have entered into various lease transactions in which the structure of the leases contain variable
interest entities (VIEs). These VIEs were created solely for the purpose of doing lease transactions
(principally involving railroad equipment and facilities) and have no other activities, assets or liabilities
outside of the lease transactions. Within these lease arrangements, we have the right to purchase some
or all of the assets at fixed prices. Depending on market conditions, fixed-price purchase options available
in the leases could potentially provide benefits to us; however, these benefits are not expected to be
significant.
We maintain and operate the assets based on contractual obligations within the lease arrangements,
which set specific guidelines consistent within the railroad industry. As such, we have no control over
activities that could materially impact the fair value of the leased assets. We do not hold the power to
direct the activities of the VIEs and, therefore, do not control the ongoing activities that have a significant
impact on the economic performance of the VIEs. Additionally, we do not have the obligation to absorb
losses of the VIEs or the right to receive benefits of the VIEs that could potentially be significant to the
VIEs.
We are not considered to be the primary beneficiary and do not consolidate these VIEs because our
actions and decisions do not have the most significant effect on the VIE’s performance and our fixed-price
purchase price options are not considered to be potentially significant to the VIE’s. The future minimum
lease payments associated with the VIE leases totaled $4.2 billion as of December 31, 2010.
16. Leases
We lease certain locomotives, freight cars, and other property. The Consolidated Statement of Financial
Position as of December 31, 2010 and 2009 included $2,520 million, net of $901 million of accumulated
depreciation, and $2,754 million, net of $927 million of accumulated depreciation, respectively, for
properties held under capital leases. A charge to income resulting from the depreciation for assets held
under capital leases is included within depreciation expense in our Consolidated Statements of Income.
Future minimum lease payments for operating and capital leases with initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 2010, were as follows:
Millions
2011
2012
2013
2014
2015
Later years
Total minimum lease payments
Amount representing interest
Present value of minimum lease payments
$
Operating
Leases
613
526
461
382
340
2,599
$
Capital
Leases
311
251
253
261
262
1,355
$ 4,921
$ 2,693
N/A
(784)
N/A
$ 1,909
The majority of capital lease payments relate to locomotives. Rent expense for operating leases with
terms exceeding one month was $624 million in 2010, $686 million in 2009, and $747 million in 2008.
When cash rental payments are not made on a straight-line basis, we recognize variable rental expense
on a straight-line basis over the lease term. Contingent rentals and sub-rentals are not significant.
79
17. Commitments and Contingencies
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.
Personal Injury – The cost of personal injuries to employees and others related to our activities is
charged to expense based on estimates of the ultimate cost and number of incidents each year. We use
an actuarial analysis to measure the expense and liability, including unasserted claims. The Federal
Employers’ Liability Act (FELA) governs compensation for work-related accidents. Under FELA, damages
are assessed based on a finding of fault through litigation or out-of-court settlements. We offer a
comprehensive variety of services and rehabilitation programs for employees who are injured at work.
Our personal injury liability is discounted to present value using applicable U.S. Treasury rates.
Approximately 88% of the recorded liability related to asserted claims, and approximately 12% related to
unasserted claims at December 31, 2010. Because of the uncertainty surrounding the ultimate outcome
of personal injury claims, it is reasonably possible that future costs to settle these claims may range from
approximately $426 million to $464 million. We record an accrual at the low end of the range as no
amount of loss is more probable than any other. Our personal injury liability activity was as follows:
Millions
Beginning balance
Current year accruals
Changes in estimates for prior years
Payments
Ending balance at December 31
Current portion, ending balance at December 31
2010
545
155
(101)
(173)
426
140
$
$
$
2009
621
174
(95)
(155)
545
158
$
$
$
2008
593
226
(25)
(173)
621
186
$
$
$
Asbestos – We are a defendant in a number of lawsuits in which current and former employees and
other parties allege exposure to asbestos. We assess our potential liability using a statistical analysis of
resolution costs for asbestos-related claims. This liability is updated annually and excludes future
defense and processing costs. The liability for resolving both asserted and unasserted claims was based
on the following assumptions:
• The ratio of future claims by alleged disease would be consistent with historical averages.
• The number of claims filed against us will decline each year.
• The average settlement values for asserted and unasserted claims will be equivalent to historical
averages.
• The percentage of claims dismissed in the future will be equivalent to historical averages.
80
Our liability for asbestos-related claims is not discounted to present value due to the uncertainty
surrounding the timing of future payments. Approximately 22% of the recorded liability related to asserted
claims and approximately 78% related to unasserted claims at December 31, 2010. Because of the
uncertainty surrounding the ultimate outcome of asbestos-related claims, it is reasonably possible that
future costs to settle these claims may range from approximately $162 million to $178 million. We record
an accrual at the low end of the range as no amount of loss is more probable than any other. In
conjunction with the liability update performed in 2010, we also reassessed estimated insurance
recoveries. We have recognized an asset for estimated insurance recoveries at December 31, 2010 and
2009. Our asbestos-related liability activity was as follows:
Millions
Beginning balance
Accruals/(credits)
Payments
Ending balance at December 31
Current portion, ending balance at December 31
2010
174
(1)
(11)
162
12
$
$
$
2009
213
(25)
(14)
174
13
$
$
$
2008
265
(42)
(10)
213
12
$
$
$
We believe that our estimates of liability for asbestos-related claims and insurance recoveries are
reasonable and probable. The amounts recorded for asbestos-related liabilities and related insurance
recoveries were based on currently known facts. However, future events, such as the number of new
claims to be filed each year, average settlement costs, and insurance coverage issues, could cause the
actual costs and insurance recoveries to be higher or lower than the projected amounts. Estimates also
may vary in the future if strategies, activities, and outcomes of asbestos litigation materially change;
federal and state laws governing asbestos litigation increase or decrease the probability or amount of
compensation of claimants; and there are material changes with respect to payments made to claimants
by other defendants.
Environmental – We are subject to federal, state, and local environmental laws and regulations. We
identified 294 sites at which we are or may be liable for remediation costs associated with alleged
contamination or for violations of environmental requirements. This includes 31 sites that are the subject
of actions taken by the U.S. government, 17 of which are currently on the Superfund National Priorities
List. Certain federal legislation imposes joint and several liability for the remediation of identified sites;
consequently, our ultimate environmental liability may include costs relating to activities of other parties,
in addition to costs relating to our own activities at each site.
When we identify an environmental issue with respect to property owned, leased, or otherwise used in
our business, we and our consultants perform environmental assessments on the property. We expense
the cost of the assessments as incurred. We accrue the cost of remediation where our obligation is
probable and we can reasonably estimate such costs. We do not discount our environmental liabilities
when the timing of the anticipated cash payments is not fixed or readily determinable. At December 31,
2010, approximately 5% of our environmental liability was discounted at 2.8%, while approximately 12%
of our environmental liability was discounted at 3.4% at December 31, 2009. Our environmental liability
activity was as follows:
Millions
Beginning balance
Accruals
Payments
Ending balance at December 31
Current portion, ending balance at December 31
2010
217
57
(61)
213
74
$
$
$
2009
209
49
(41)
217
82
$
$
$
2008
209
46
(46)
209
58
$
$
$
The environmental liability includes future costs for remediation and restoration of sites, as well as
ongoing monitoring costs, but excludes any anticipated recoveries from third parties. Cost estimates are
based on information available for each site, financial viability of other potentially responsible parties, and
existing technology, laws, and regulations. The ultimate liability for remediation is difficult to determine
because of the number of potentially responsible parties, site-specific cost sharing arrangements with
other potentially responsible parties, the degree of contamination by various wastes, the scarcity and
81
quality of volumetric data related to many of the sites, and the speculative nature of remediation costs.
Estimates of liability may vary over time due to changes in federal, state, and local laws governing
environmental remediation. Current obligations are not expected to have a material adverse effect on our
consolidated results of operations, financial condition, or liquidity.
Guarantees – At December 31, 2010, we were contingently liable for $382 million in guarantees. We
have recorded a liability of $3 million for the fair value of these obligations as of December 31, 2010 and
2009. We entered into these contingent guarantees in the normal course of business, and they include
guaranteed obligations related to our headquarters building, equipment financings, and affiliated
operations. The final guarantee expires in 2022. We are not aware of any existing event of default that
would require us to satisfy these guarantees. We do not expect that these guarantees will have a material
adverse effect on our consolidated financial condition, results of operations, or liquidity.
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
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.
18. Share Repurchase Program
On May 1, 2008, our Board of Directors authorized the repurchase of 40 million common shares by March
31, 2011. Management’s assessments of market conditions and other pertinent facts guide the timing and
volume of all repurchases. Any share repurchases under this program are expected to be funded 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.
First quarter
Second quarter
Third quarter
Fourth quarter
Total
Number of Shares Purchased
2009
-
-
-
-
2010
-
6,496,400
7,643,400
2,500,596
$
Average Price Paid
2009
-
-
-
-
2010
-
71.74
73.19
89.39
$
16,640,396
-
$
75.06
$
-
Remaining number of shares that may yet be repurchased
15,936,694
Subsequent Event – On February 3, 2011, our Board of Directors authorized us to repurchase up to 40
million additional shares of our common stock under a new program effective from April 1, 2011 through
March 31, 2014.
82
19. Selected Quarterly Data (Unaudited)
Millions, Except Per Share Amounts
2010
Operating revenues
Operating income
Net income
Net income per share:
Basic
Diluted
Millions, Except Per Share Amounts
2009
Operating revenues
Operating income
Net income
Net income per share:
Basic
Diluted
Mar. 31
Jun. 30
Sep. 30
Dec. 31
$ 3,965
988
516
$ 4,182
1,279
711
$
4,408
1,401
778
$ 4,410
1,313
775
1.02
1.01
1.42
1.40
1.58
1.56
1.58
1.56
Mar. 31
Jun. 30
Sep. 30
Dec. 31
$ 3,415
671
362
$ 3,303
748
465
$
3,671
961
514
$ 3,754
999
549
0.72
0.72
0.92
0.92
1.02
1.01
1.09
1.08
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, the Corporation carried out an evaluation, under the
supervision and with the participation of the Corporation’s management, including the Corporation’s Chief
Executive Officer (CEO) and Executive Vice President – Finance and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of the Corporation’s disclosure controls and procedures
pursuant to Exchange Act Rules 13a-15 and 15d-15. In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives. Based
upon that evaluation, the CEO and the CFO concluded that, as of the end of the period covered by this
report, the Corporation’s disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified by the SEC, and that such information is
accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosure.
Additionally, the CEO and CFO determined that there have been no changes to the Corporation’s internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last
fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s
internal control over financial reporting.
83
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Union Pacific Corporation and Subsidiary Companies (the Corporation) is
responsible for establishing and maintaining adequate internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)). The Corporation’s internal control system was designed
to provide reasonable assurance to the Corporation’s management and Board of Directors regarding the
preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
The Corporation’s management assessed the effectiveness of the Corporation’s internal control over
financial reporting as of December 31, 2010. In making this assessment, it used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control –
Integrated Framework. Based on our assessment, management believes that, as of December 31, 2010,
the Corporation’s internal control over financial reporting is effective based on those criteria.
The Corporation’s independent registered public accounting firm has issued an attestation report on the
effectiveness of the Corporation’s internal control over financial reporting. This report appears on the next
page.
February 3, 2011
84
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Union Pacific Corporation, its Directors, and Shareholders:
We have audited the internal control over financial reporting of Union Pacific Corporation and Subsidiary
Companies (the Corporation) as of December 31, 2010, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Corporation's management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Corporation's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision
of, the company's principal executive and principal financial officers, or persons performing similar
functions, and effected by the company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may
not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of
the internal control over financial reporting to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2010, based on the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedule as of and
for the year ended December 31, 2010 of the Corporation and our report dated February 4, 2011
expressed an unqualified opinion on those financial statements and financial statement schedule.
Omaha, Nebraska
February 4, 2011
85
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers, and Corporate Governance
(a) Directors of Registrant.
PART III
Information as to the names, ages, positions and offices with UPC, terms of office, periods of
service, business experience during the past five years and certain other directorships held by each
director or person nominated to become a director of UPC is set forth in the Election of Directors
segment of the Proxy Statement and is incorporated herein by reference.
Information concerning our Audit Committee and the independence of its members, along with
information about the audit committee financial expert(s) serving on the Audit Committee, is set forth
in the Audit Committee segment of the Proxy Statement and is incorporated herein by reference.
(b) Executive Officers of Registrant.
Information concerning the executive officers of UPC and its subsidiaries is presented in Part I of
this report under Executive Officers of the Registrant and Principal Executive Officers of
Subsidiaries.
(c) Section 16(a) Compliance.
Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is set
forth in the Section 16(a) Beneficial Ownership Reporting Compliance segment of the Proxy
Statement and is incorporated herein by reference.
(d) Code of Ethics for Chief Executive Officer and Senior Financial Officers of Registrant.
The Board of Directors of UPC has adopted the UPC Code of Ethics for the Chief Executive Officer
and Senior Financial Officers (the Code). A copy of the Code may be found on the Internet at our
website www.up.com/investors/governance. We intend to disclose any amendments to the Code or
any waiver from a provision of the Code on our website.
Item 11. Executive Compensation
Information concerning compensation received by our directors and our named executive officers is
presented in the Compensation Discussion and Analysis, Summary Compensation Table, Grants of Plan-
Based Awards in Fiscal Year 2010, Outstanding Equity Awards at 2010 Fiscal Year-End, Option
Exercises and Stock Vested in Fiscal Year 2010, Pension Benefits at 2010 Fiscal Year-End, Nonqualified
Deferred Compensation at 2010 Fiscal Year-End, Potential Payments Upon Termination or Change in
Control and Director Compensation in Fiscal Year 2010 segments of the Proxy Statement and is
incorporated herein by reference. Additional information regarding compensation of directors, including
Board committee members, is set forth in the By-Laws of UPC and the Stock Unit Grant and Deferred
Compensation Plan for the Board of Directors, both of which are included as exhibits to this report.
Information regarding the Compensation Committee is set forth in the Compensation Committee
Interlocks and Insider Participation and Compensation Committee Report segments of the Proxy
Statement and is incorporated herein by reference.
86
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information as to the number of shares of our equity securities beneficially owned by each of our directors
and nominees for director, our named executive officers, our directors and executive officers as a group,
and certain beneficial owners is set forth in the Security Ownership of Certain Beneficial Owners and
Management segment of the Proxy Statement and is incorporated herein by reference.
The following table summarizes the equity compensation plans under which Union Pacific Corporation
common stock may be issued as of December 31, 2010:
Column (a)
Column (b)
Column (c)
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
11,585,181
[1]
11,585,181
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
$
$
43.85
[2]
32,904,291
43.85
32,904,291
Plan Category
Equity compensation plans approved
by security holders
Total
[1]
Includes 1,769,732 retention units that do not have an exercise price. Does not include 2,044,285 retention shares that have
been issued and are outstanding.
[2] Does not include the retention units or retention shares described above in footnote 1.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information on related transactions is set forth in the Certain Relationships and Related Transactions and
Compensation Committee Interlocks and Insider Participation segments of the Proxy Statement and is
incorporated herein by reference. We do not have any relationship with any outside third party that would
enable such a party to negotiate terms of a material transaction that may not be available to, or available
from, other parties on an arm’s-length basis.
Information regarding the independence of our directors is set forth in the Director Independence
segment of the Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information concerning the fees billed by our independent registered public accounting firm and the
nature of services comprising the fees for each of the two most recent fiscal years in each of the following
categories: (i) audit fees, (ii) audit-related fees, (iii) tax fees, and (iv) all other fees, is set forth in the
Independent Registered Public Accounting Firm’s Fees and Services segment of the Proxy Statement
and is incorporated herein by reference.
Information concerning our Audit Committee’s policies and procedures pertaining to pre-approval of audit
and non-audit services rendered by our independent registered public accounting firm is set forth in the
Audit Committee segment of the Proxy Statement and is incorporated herein by reference.
87
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements, Financial Statement Schedules, and Exhibits:
(1) Financial Statements
The financial statements filed as part of this filing are listed on the index to the Financial
Statements and Supplementary Data, Item 8, on page 49.
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not applicable or not required
or the information required to be set forth therein is included in the Financial Statements and
Supplementary Data, Item 8, or notes thereto.
(3) Exhibits
Exhibits are listed in the exhibit index beginning on page 91. The exhibits include management
contracts, compensatory plans and arrangements required to be filed as exhibits to the Form
10-K by Item 601 (10) (iii) of Regulation S-K.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on
this 4th day of February, 2011.
UNION PACIFIC CORPORATION
By /s/ James R. Young
James R. Young,
Chairman, President, Chief
Executive Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below,
on this 4th day of February, 2011, by the following persons on behalf of the registrant and in the capacities
indicated.
PRINCIPAL EXECUTIVE OFFICER
AND DIRECTOR:
PRINCIPAL FINANCIAL OFFICER:
PRINCIPAL ACCOUNTING OFFICER:
DIRECTORS:
Andrew H. Card, Jr.*
Erroll B. Davis, Jr.*
Thomas J. Donohue*
Archie W. Dunham*
Judith Richards Hope*
Charles C. Krulak*
* By /s/ James J. Theisen, Jr.
James J. Theisen, Jr., Attorney-in-fact
/s/ James R. Young
James R. Young,
Chairman, President, Chief
Executive Officer, and Director
/s/ Robert M. Knight, Jr.
Robert M. Knight, Jr.,
Executive Vice President - Finance
and Chief Financial Officer
/s/ Jeffrey P. Totusek
Jeffrey P. Totusek,
Vice President and Controller
Michael R. McCarthy*
Michael W. McConnell*
Thomas F. McLarty III*
Steven R. Rogel*
Jose H. Villarreal*
89
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Union Pacific Corporation and Subsidiary Companies
Millions, for the Years Ended December 31,
Allowance for doubtful accounts:
Balance, beginning of period
Charges/(reduction) to expense
Net recoveries/(write-offs)
Balance, end of period
Allowance for doubtful accounts are presented in the
Consolidated Statements of Financial Position as follows:
Current
Long-term
Balance, end of period
Accrued casualty costs:
Balance, beginning of period
Charges to expense
Cash payments and other reductions
Balance, end of period
Accrued casualty costs are presented in the
Consolidated Statements of Financial Position as follows:
Current
Long-term
Balance, end of period
2010
2009
2008
$
$
$
$
$
70
(6)
(8)
56
5
51
56
1,086
186
(367)
$
105
2
(37)
75
23
7
70
$
105
$
$
$
3
67
70
1,206
199
(319)
10
95
105
1,170
322
(286)
905
$
1,086
$
1,206
325
580
905
$
$
379
707
1,086
$
$
390
816
1,206
$
$
$
$
$
$
$
$
90
UNION PACIFIC CORPORATION
Exhibit Index
Exhibit No.
Description
Filed with this Statement
10(a)
10(b)
10(c)
10(d)
10(e)
12
21
23
24
31(a)
31(b)
32
101
Form of 2011 Long Term Plan Stock Unit Agreement dated February 3, 2011.
Form of Stock Unit Agreement for Executives dated February 3, 2011.
Form of Non-Qualified Stock Option Agreement for Executives dated February 3,
2011.
Deferred Compensation Plan (409A Non-Grandfathered Component) of Union
Pacific Corporation, effective as January 1, 2009 as amended December 30,
2010.
Union Pacific Corporation Key Employee Continuity Plan, dated as of November
16, 2000, as amended and restated effective as of January 1, 2009, as amended
February 3, 2011.
Ratio of Earnings to Fixed Charges.
List of the Corporation’s significant subsidiaries and their respective states of
incorporation.
Independent Registered Public Accounting Firm’s Consent.
Powers of attorney executed by the directors of UPC.
Certifications Pursuant to Rule 13a-14(a), of the Exchange Act, as Adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - James R. Young.
Certifications Pursuant to Rule 13a-14(a), of the Exchange Act, as Adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Robert M. Knight,
Jr.
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 - James R. Young and Robert M.
Knight, Jr.
(XBRL) documents submitted
eXtensible Business Reporting Language
electronically: 101.INS (XBRL Instance Document), 101.SCH (XBRL Taxonomy
Extension Schema Document), 101.CAL
(XBRL Calculation Linkbase
Document), 101.LAB (XBRL Taxonomy Label Linkbase Document), 101.DEF
(XBRL
(XBRL Taxonomy Definition Linkbase Document) and 101.PRE
Taxonomy Presentation Linkbase Document). The following financial and related
information from Union Pacific Corporation’s Annual Report on Form 10-K for the
year ended December 31, 2010 (filed with the SEC on February 4, 2011), is
formatted in XBRL and submitted electronically herewith: (i) Consolidated
Statements of Income for the years ended December 31, 2010, 2009 and 2008,
(ii) Consolidated Statements of Financial Position at December 31, 2010 and
December 31, 2009, (iii) Consolidated Statements of Cash Flows for the years
ended December 31, 2010, 2009 and 2008, (iv) Consolidated Statements of
Changes in Common Shareholders’ Equity for the years ended December 31,
2010, 2009 and 2008, and (v) the Notes to the Consolidated Financial
Statements.
91
Incorporated by Reference
3(a)
3(b)
4(a)
4(b)
4(c)
10(f)
10(g)
10(h)
10(i)
10(j)
By-Laws of UPC, as amended, effective May 14, 2009, are incorporated herein
by reference to Exhibit 3.2 to the Corporation’s Current Report on Form 8-K
dated May 15, 2009.
Revised Articles of Incorporation of UPC, as amended through May 1, 2008, are
incorporated herein by reference to Exhibit 3(a) to the Corporation’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2008.
Indenture, dated as of December 20, 1996, between UPC and Wells Fargo Bank,
National Association, as successor to Citibank, N.A., as Trustee, is incorporated
herein by reference to Exhibit 4.1 to UPC’s Registration Statement on Form S-3
(No. 333-18345).
Indenture, dated as of April 1, 1999, between UPC and The Bank of New York,
as successor to JP Morgan Chase Bank, formerly The Chase Manhattan Bank,
as Trustee, is incorporated herein by reference to Exhibit 4.2 to UPC’s
Registration Statement on Form S-3 (No. 333-75989).
Form of Debt Security (Note) is incorporated herein by reference to Exhibit 4.1 to
the Corporation’s Current Report on Form 8-K, dated August 2, 2010.
Certain instruments evidencing long-term indebtedness of UPC are not filed as
exhibits because the total amount of securities authorized under any single such
instrument does not exceed 10% of the Corporation’s total consolidated assets.
UPC agrees to furnish the Commission with a copy of any such instrument upon
request by the Commission.
Supplemental Thrift Plan (409A Non-Grandfathered Component) of Union Pacific
Corporation, effective as of January 1, 2009 is incorporated herein by reference
to Exhibit 10(c) to the Corporation’s Annual Report on Form 10-K for the year
ended December 31, 2008.
Supplemental Thrift Plan (409A Grandfathered Component) of Union Pacific
Corporation, as amended and restated in its entirety, effective as of January 1,
2009 is incorporated herein by reference to Exhibit 10(d) to the Corporation’s
Annual Report on Form 10-K for the year ended December 31, 2008.
Supplemental Pension Plan for Officers and Managers (409A Non-Grandfathered
Component) of Union Pacific Corporation and Affiliates, as amended and
restated in its entirety effective as of January 1, 1989, including all amendments
adopted through January 1, 2009 is incorporated herein by reference to Exhibit
10(e) to the Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2008.
Supplemental Pension Plan for Officers and Managers (409A Grandfathered
Component) of Union Pacific Corporation and Affiliates, as amended and
restated in its entirety effective as of January 1, 1989, including all amendments
adopted through January 1, 2009 is incorporated herein by reference to Exhibit
10(f) to the Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2008.
Union Pacific Corporation Executive Incentive Plan, effective May 5, 2005,
amended and restated effective January 1, 2009 is incorporated herein by
reference to Exhibit 10(g) to the Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2008.
92
10(k)
10(l)
10(m)
10(n)
10(o)
10(p)
10(q)
10(r)
10(s)
10(t)
10(u)
Deferred Compensation Plan (409A Grandfathered Component) of Union Pacific
Corporation, as amended and restated in its entirety, effective as January 1,
2009 is incorporated herein by reference to Exhibit 10(i) to the Corporation’s
Annual Report on Form 10-K for the year ended December 31, 2008.
Union Pacific Corporation 2000 Directors Plan, effective as of April 21, 2000, as
amended November 16, 2006, January 30, 2007 and January 1, 2009 is
incorporated herein by reference to Exhibit 10(j) to the Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2008.
Union Pacific Corporation Stock Unit Grant and Deferred Compensation Plan for
the Board of Directors (409A Non-Grandfathered Component), effective as of
January 1, 2009 is incorporated herein by reference to Exhibit 10(k) to the
Corporation’s Annual Report on Form 10-K for the year ended December 31,
2008.
Union Pacific Corporation Stock Unit Grant and Deferred Compensation Plan for
the Board of Directors (409A Grandfathered Component), as amended and
restated in its entirety, effective as of January 1, 2009 is incorporated herein by
reference to Exhibit 10(l) to the Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2008.
2008 Long Term Plan Amended and Restated Stock Unit Agreement is
incorporated herein by reference to Exhibit 10(q) to the Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2008.
The 1993 Stock Option and Retention Stock Plan of UPC, as amended
November 16, 2006, is incorporated herein by reference to Exhibit 10 to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2007.
UPC 2001 Stock
is
incorporated herein by reference to Exhibit 10(e) to the Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2006.
Incentive Plan, as amended November 16, 2006,
Amended and Restated Registration Rights Agreement, dated as of July 12,
1996, among UPC, UP Holding Company, Inc., Union Pacific Merger Co. and
Southern Pacific Rail Corporation (SP) is incorporated herein by reference to
Annex J to the Joint Proxy Statement/Prospectus included in Post-Effective
Amendment No. 2 to UPC’s Registration Statement on Form S-4 (No. 33-64707).
Agreement, dated September 25, 1995, among UPC, UPRR, Missouri Pacific
Railroad Company (MPRR), SP, Southern Pacific Transportation Company
(SPT), The Denver & Rio Grande Western Railroad Company (D&RGW), St.
Louis Southwestern Railway Company (SLSRC) and SPCSL Corp. (SPCSL), on
the one hand, and Burlington Northern Railroad Company (BN) and The
Atchison, Topeka and Santa Fe Railway Company (Santa Fe), on the other
hand, is incorporated by reference to Exhibit 10.11 to UPC’s Registration
Statement on Form S-4 (No. 33-64707).
Supplemental Agreement, dated November 18, 1995, between UPC, UPRR,
MPRR, SP, SPT, D&RGW, SLSRC and SPCSL, on the one hand, and BN and
Santa Fe, on the other hand, is incorporated herein by reference to Exhibit 10.12
to UPC’s Registration Statement on Form S-4 (No. 33-64707).
The Pension Plan for Non-Employee Directors of UPC, as amended January 25,
1996, is incorporated herein by reference to Exhibit 10(w) to the Corporation’s
Annual Report on Form 10-K for the year ended December 31, 1995.
93
10(v)
10(w)
10(x)
10(y)
10(z)
10(aa)
10(bb)
10(cc)
99
The Executive Life Insurance Plan of UPC, as amended October 1997, is
incorporated herein by reference to Exhibit 10(t) to the Corporation’s Annual
Report on Form 10-K for the year ended December 31, 1997.
Charitable Contribution Plan for Non-Employee Directors of Union Pacific
Corporation is incorporated herein by reference to Exhibit 10(z) to the
Corporation’s Annual Report on Form 10-K for the year ended December 31,
1995.
Form of Non-Qualified Stock Option Agreement for Executives is incorporated
herein by reference to Exhibit 10(a) to the Corporation’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004.
Form of 2009 Long Term Plan Stock Unit Agreement is incorporated herein by
reference to Exhibit 10(a) to the Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2008.
Form of 2010 Long Term Plan Stock Unit Agreement is incorporated herein by
reference to Exhibit 10(a) to the Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2009.
Form of Non-Qualified Stock Option Agreement for Directors is incorporated
herein by reference to Exhibit 10(d) to the Corporation’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004.
Form of Non-Qualified Stock Option Agreement for Executives is incorporated
herein by reference to Exhibit 10(c) to the Corporation’s Annual Report on Form
10-K for the year ended December 31, 2005.
Executive Incentive Plan (2005) – Deferred Compensation Program, dated
December 21, 2005 is incorporated herein by reference to Exhibit 10(g) to the
Corporation’s Annual Report on Form 10-K for the year ended December 31,
2005.
U.S. $1,900,000,000 5-year revolving credit agreement, dated as of April 20,
2007, is incorporated herein by reference to Exhibit 99 to the Corporation’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
94
Exhibit 12
RATIO OF EARNINGS TO FIXED CHARGES
Union Pacific Corporation and Subsidiary Companies
Millions, Except for Ratios
Fixed charges:
Interest expense including
amortization of debt discount
Portion of rentals representing an interest factor
Total fixed charges
Earnings available for fixed charges:
Net income
Equity earnings net of distributions
Income taxes
Fixed charges
2010
2009
2008
2007
2006
$
$
602
136
738
$
$
600
155
755
$
$
511
226
737
$
$
482
237
719
$
$
477
243
720
$ 2,780
$ 1,890
$ 2,335
$ 1,848
(44)
1,653
738
(42)
1,084
755
(53)
1,316
737
(69)
1,150
719
$ 1,598
(59)
914
720
Earnings available for fixed charges
$ 5,127
$ 3,687
$ 4,335
$ 3,648
$ 3,173
Ratio of earnings to fixed charges
6.9
4.9
5.9
5.1
4.4
95
SIGNIFICANT SUBSIDIARIES OF UNION PACIFIC CORPORATION
Name of Corporation
State of
Incorporation
Union Pacific Railroad Company ......................................................................
Southern Pacific Rail Corporation .....................................................................
Delaware
Utah
Exhibit 21
96
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Post-Effective Amendment No. 1 to Registration
Statement No. 33-12513, Registration Statement No. 33-53968, Registration Statement No. 33-49785,
Registration Statement No. 33-49849, Registration Statement No. 33-51071, Registration Statement No.
333-10797, Registration Statement No. 333-13115, Registration Statement No. 333-16563, Registration
Statement No. 333-88225, Registration Statement No. 333-88709, Registration Statement No. 333-
61856, Registration Statement No. 333-42768, Registration Statement No. 333-106707, Registration
Statement No. 333-106708, Registration Statement No. 333-105714, Registration Statement No. 333-
105715, Registration Statement No. 333-116003, Registration Statement No. 333-132324, Registration
Statement No. 333-155708, Registration Statement No. 333-170209, and Registration Statement No.
333-170208 on Forms S-8 and Registration Statement No. 333-88666, Amendment No. 1 to Registration
Statement No. 333-88666, Registration Statement No. 333-111185, Registration Statement No. 333-
141084, and Registration Statement No. 333-164842 on Forms S-3 of our reports dated February 4,
2011, relating to the consolidated financial statements and financial statement schedule of Union Pacific
Corporation and Subsidiary Companies (the Corporation) and the effectiveness of the Corporation’s
internal control over financial reporting, appearing in this Annual Report on Form 10-K of Union Pacific
Corporation and Subsidiary Companies for the year ended December 31, 2010.
Omaha, Nebraska
February 4, 2011
97
Exhibit 24
UNION PACIFIC CORPORATION
Powers of Attorney
Each of the undersigned directors of Union Pacific Corporation, a Utah corporation (the Company), do
hereby appoint each of James R. Young, Barbara W. Schaefer, and James J. Theisen, Jr. his or her true
and lawful attorney-in-fact and agent, to sign on his or her behalf the Company’s Annual Report on Form
10-K, for the year ended December 31, 2010, and any and all amendments thereto, and to file the same,
with all exhibits thereto, with the Securities and Exchange Commission.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney as of February 3, 2011.
/s/ Andrew H. Card, Jr.
Andrew H. Card, Jr.
/s/ Erroll B. Davis, Jr.
Erroll B. Davis, Jr.
/s/ Thomas J. Donohue
Thomas J. Donohue
/s/ Archie W. Dunham
Archie W. Dunham
/s/ Judith Richards Hope
Judith Richards Hope
/s/ Charles C. Krulak
Charles C. Krulak
/s/ Michael R. McCarthy
Michael R. McCarthy
/s/ Michael W. McConnell
Michael W. McConnell
/s/ Thomas F. McLarty III
Thomas F. McLarty III
/s/ Steven R. Rogel
Steven R. Rogel
/s/ Jose H. Villarreal
Jose H. Villarreal
98
Exhibit 31(a)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, James R. Young, certify that:
1. I have reviewed this annual report on Form 10-K of Union Pacific Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting.
Date: February 4, 2011
/s/ James R. Young
James R. Young
Chairman, President and
Chief Executive Officer
99
Exhibit 31(b)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Robert M. Knight, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Union Pacific Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting.
Date: February 4, 2011
/s/ Robert M. Knight, Jr.
Robert M. Knight, Jr.
Executive Vice President – Finance and
Chief Financial Officer
100
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the accompanying Annual Report of Union Pacific Corporation (the Corporation) on
Form 10-K for the period ending December 31, 2010, as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, James R. Young, Chairman, President and Chief
Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Corporation.
By: /s/ James R. Young
James R. Young
Chairman, President and
Chief Executive Officer
Union Pacific Corporation
February 4, 2011
A signed original of this written statement required by Section 906 has been provided to the Corporation
and will be retained by the Corporation and furnished to the Securities and Exchange Commission or its
staff upon request.
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report of Union Pacific Corporation (the Corporation) on
Form 10-K for the period ending December 31, 2010, as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, Robert M. Knight, Jr., Executive Vice President - Finance
and Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Corporation.
By: /s/ Robert M. Knight, Jr.
Robert M. Knight, Jr.
Executive Vice President - Finance and
Chief Financial Officer
Union Pacific Corporation
February 4, 2011
A signed original of this written statement required by Section 906 has been provided to the Corporation
and will be retained by the Corporation and furnished to the Securities and Exchange Commission or its
staff upon request.
101