UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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)
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.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes 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.
Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to
be submitted 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 such files).
Yes 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.
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
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes No
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act.
As of June 29, 2018, the aggregate market value of the registrant’s Common Stock held by non-affiliates (using
the New York Stock Exchange closing price) was $104.6 billion.
The number of shares outstanding of the registrant’s Common Stock as of February 1, 2019 was 722,877,817.
Documents Incorporated by Reference – Portions of the registrant’s definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 16, 2019, 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
Directors and Senior Management
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Registrant and Principal Executive Officers of
Subsidiaries
PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities
Item 6.
Item 7.
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Operations
Critical Accounting Policies
Cautionary Information
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Management’s Annual Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Other Information
PART III
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits, Financial Statement Schedules
Signatures
Certifications
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4
5
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13
14
16
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19
20
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43
43
44
45
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February 8, 2019
Fellow Shareholders:
I am pleased to report that Union Pacific produced record 2018 financial results and finished the year with
significant improvements in service reliability and efficiency, after overcoming network congestion and excess
operating costs. The year was also one of change, as we embarked on a fundamental shift in our operating
philosophy by adopting precision scheduled railroading (PSR) principles with the launch of Unified Plan 2020.
An increase in customer shipments of 4 percent in 2018, coupled with core pricing and productivity gains,
generated earnings of $7.91 per share. This represents a 37 percent improvement compared to 2017 adjusted
results of $5.79 per share*. Our operating ratio was 62.7 percent, 0.1 point better than last year’s adjusted 62.8
percent*.
Premium carloadings were up 6 percent, driven primarily by increases in international and domestic intermodal
shipments. Our Industrial business unit also experienced a 6 percent increase in shipments across a number of
segments due to strong industrial production, while Agricultural Products carloadings were down 1 percent
reflecting lower export grain movements. Energy volume declined 2 percent due to lower coal and frac sand
carloadings, partially offset by an increase in petroleum products shipments.
As we entered 2018, the railroad was experiencing unusual network congestion on key routes and in terminals
that negatively impacted our operational performance. These inefficiencies also drove excess costs and
impacted our ability to reliably serve our customers. In response, we initiated Unified Plan 2020 and began
implementing PSR October 1. Fundamentally, PSR is an operating principle that emphasizes on-time service
performance for every rail car, execution accountability, and lean resource utilization, while at the same time
improving total safety performance.
Unified Plan 2020 implementation is progressing ahead of our original schedule, with the initial roll out expected
to be complete by mid-2019. Results are encouraging as railroad operations improved steadily throughout the
fourth quarter, driving out excess costs. We removed over 1,200 locomotives and approximately 30,000 freight
cars from our network since August 1, which increases operational fluidity and provides a source of future growth
capacity.
Despite our best efforts, we lost a little ground with our safety results in 2018. Our 0.82 reportable personal injury
rate increased 4 percent compared to 2017, although preliminary results show this was the best safety
performance for all Class 1 railroads for the fourth year in a row. Our reportable derailment incident rate and
crossing incidents rate increased 12 and 5 percent, respectively, compared to 2017. The entire Union Pacific
team is not satisfied with these results and will not be satisfied until every employee returns home safely every
day and we eliminate all derailments. We are committed to making progress toward these goals in 2019.
As part of our robust capital program, we invested about $3.2 billion in 2018 including $1.8 billion in replacement
capital to harden our infrastructure, replace older assets, and to improve the safety and resiliency of our network.
We also invested $520 million toward new rail capacity and commercial facilities projects to support future growth
and productivity initiatives.
Total shareholder return, including price appreciation and dividends, increased 5.3 percent in 2018, compared to
a negative 4.4 percent for the S&P 500. Our return on invested capital* of 15.1 percent increased 1.4 points over
2017’s adjusted 13.7 percent. We raised our quarterly dividend with two 10 percent increases, resulting in
dividends paid in 2018 totaling $2.3 billion. In addition, we repurchased 57.2 million Union Pacific shares,
decreasing our total share count by 6 percent. Combining dividends and share repurchases, Union Pacific
returned $10.5 billion to our shareholders in 2018.
Looking to 2019, we are optimistic that continued economic growth, our improving service performance,
increasingly-efficient use of our assets, and the strength of our diverse franchise will drive positive volume and
top-line revenue growth. We expect to generate significant productivity benefits and enhance customer
experience through our G55 + 0 initiatives and the continued roll out of Unified Plan 2020. Every Union Pacific
employee is committed to achieving industry-leading safety, service reliability, and financial performance in the
coming year.
Chairman, President and Chief Executive Officer
*See Item 7 of this report for reconciliations to U.S. GAAP.
3
BOARD OF DIRECTORS
Andrew H. Card, Jr.
Former White House
Chief of Staff
Board Committees: Audit,
Compensation and Benefits
Erroll B. Davis, Jr.
Former Chairman,
President & CEO
Alliant Energy Corporation
Board Committees: Compensation
and Benefits (Chair), Corporate
Governance and Nominating
William J. DeLaney
Former Chief Executive Officer,
Sysco Corporation
Board Committees: Audit,
Compensation and Benefits
David B. Dillon
Former Chairman
The Kroger Company
Board Committees: Audit (Chair),
Compensation and Benefits
DIRECTORS AND SENIOR MANAGEMENT
Lance M. Fritz
Chairman, President and
Chief Executive Officer
Union Pacific Corporation and
Union Pacific Railroad Company
Deborah C. Hopkins
Former Chief Executive Officer
Citi Ventures
Former Chief Innovation Officer
Citi
Board Committees: Corporate
Governance and Nominating, Finance
Thomas F. McLarty III
President
McLarty Associates
Board Committees: Finance (Chair),
Corporate Governance and
Nominating
Bhavesh V. Patel
Chief Executive Officer and
Chairman of the Management Board
LyondellBasell Industries N.V.
Board Committees: Finance,
Compensation and Benefits
Jane H. Lute
President and Chief Executive Officer
SICPA North America
Board Committees: Audit, Corporate
Governance and Nominating
Jose H. Villarreal
Advisor
Akin, Gump, Strauss, Hauer &
Feld, LLP
Board Committees: Audit,
Compensation and Benefits
Michael R. McCarthy
Chairman
McCarthy Group, LLC
Lead Independent Director
Board Committees: Corporate
Governance and Nominating (Chair),
Finance
SENIOR MANAGEMENT*
Lance M. Fritz
Chairman, President and
Chief Executive Officer
Prentiss W. Bolin, Jr.
Vice President-External Relations
Bryan L. Clark
Vice President-Tax
Rhonda S. Ferguson
Executive Vice President, Chief Legal
Officer and Corporate Secretary
Robert M. Knight, Jr.
Executive Vice President
and Chief Financial Officer
Thomas A. Lischer
Executive Vice President-Operations
Todd M. Rynaski
Vice President and Controller
Scott D. Moore
Senior Vice President-Corporate
Relations and
Chief Administrative Officer
Jon T. Panzer
Vice President and Treasurer
Clark J. Ponthier
Senior Vice President-Supply Chain
And Continuous Improvement
Kenny G. Rocker
Executive Vice President-Marketing
and Sales
Lynden L. Tennison
Executive Vice President and
Chief Strategy Officer
V. James Vena
Chief Operating Officer
Elizabeth F. Whited
Executive Vice President and
Chief Human Resource Officer
*Senior management are elected officers of both Union Pacific Corporation and Union Pacific Railroad Company,
except Messrs. Lischer, Ponthier and Rocker are elected officers for Union Pacific Railroad Company.
.
4
Item 1. Business
GENERAL
PART I
Union Pacific Railroad Company is the principal operating company of Union Pacific Corporation. One of
America's most recognized companies, Union Pacific Railroad Company links 23 states in the western two-
thirds of the country by rail, providing a critical link in the global supply chain. The Railroad’s diversified
business mix includes Agricultural Products, Energy, Industrial and Premium. Union Pacific serves many
of the fastest-growing U.S. population centers, operates from all major West Coast and Gulf Coast ports to
eastern gateways, connects with Canada's rail systems and is the only railroad serving all six major Mexico
gateways. Union Pacific provides value to its roughly 10,000 customers by delivering products in a safe,
reliable, fuel-efficient and environmentally responsible manner.
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”, “Company”, “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; our current reports on Form 8-
K; our proxy statements; Forms 3, 4, and 5, filed on behalf of our directors and certain executive officers;
and amendments to such reports filed or furnished pursuant to the Securities Exchange Act of 1934, as
amended (the Exchange Act). We provide these reports and statements 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.
OPERATIONS
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment.
Although we provide 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. 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).
5
two-thirds of
2018 Freight Revenue
Operations – UPRR is a Class I railroad
operating in the U.S. We have 32,236 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
the country and
maintain coordinated schedules with other
rail carriers to move freight to and from the
Atlantic Coast,
the
Southeast, the Southwest, Canada, and
Mexico. Export and import traffic moves
through Gulf Coast and Pacific Coast ports
and across the Mexican and Canadian
borders. Our freight traffic consists of bulk,
manifest, and premium business. Bulk traffic primarily consists of coal, grain, soda ash, ethanol, rock and
crude oil shipped in unit trains – trains transporting a single commodity from one origin to one destination.
Manifest traffic includes individual carload or less than train-load business involving commodities such as
lumber, steel, paper, food and chemicals. The transportation of finished vehicles, auto parts, intermodal
containers and truck trailers are included as part of our premium business. In 2018, we generated freight
revenues totaling $21.4 billion from the following four commodity groups:
the Pacific Coast,
Agricultural Products – Transportation of grains, commodities produced from these grains, fertilizer, and
food and beverage products generated 21% of the Railroad’s 2018 freight revenue. We access most major
grain markets, linking the Midwest and Western U.S. producing areas to export terminals in the Pacific
Northwest and Gulf Coast ports, as well as Mexico. We also serve significant domestic markets, including
grain processors, animal feeders and ethanol producers in the Midwest, West, South and Rocky Mountain
states. Fertilizer movements originate in the Gulf Coast region, the western U.S. and Canada (through
interline access) for delivery to major agricultural users in the Midwest, western U.S., as well as abroad.
Energy – The Company’s Energy shipments are grouped into the following three categories: (i) coal, (ii)
sand and (iii) petroleum, liquid petroleum gases (LPG) and renewables. In 2018, this group generated 21%
of our freight revenue. The Railroad’s network supports the transportation of coal shipments to independent
and regulated power companies and industrial facilities throughout the U.S. Through interchange gateways
and ports, UPRR’s reach extends to eastern U.S. utilities, as well as to Mexico and other international
destinations. Coal traffic originating in the Powder River Basin (PRB) area of Wyoming is the largest
segment of the Railroad’s coal business. Demand for hydraulic fracturing sand, or frac-sand, is generated
by oil and gas drilling, whereas, the Company’s petroleum and LPG shipments are primarily impacted by
refinery utilization rates, regional crude pricing differentials, pipeline capacity, and the use of asphalt for
road programs. Renewable shipments consist primarily of biomass exports and wind turbine components.
Industrial – Our extensive network facilitates the movement of numerous commodities between thousands
of origin and destination points throughout North America. The Industrial group consists of several
categories, including construction, industrial chemicals, plastics, forest products, specialized products
(primarily waste, lime, salt and government), metals and ores, and soda ash. Transportation of these
products accounted for 27% of our freight revenue in 2018. Commercial, residential and governmental
infrastructure investments drive shipments of steel, aggregates (cement components), cement and wood
products. Industrial and light manufacturing plants receive steel, nonferrous materials, minerals and other
raw materials.
The industrial chemicals market consists of a vast number of chemical compounds that support the
manufacturing of more complex chemicals. Plastics shipments support automotive, housing, and the
durable and disposable consumer goods markets. Paper and packaging commodities, as well as
appliances, move to major metropolitan areas for consumers. Forest product shipments originate primarily
in the Pacific Northwest or western Canada and move throughout the U.S. for use in new home construction
and repair and remodeling. Oil and gas drilling generates demand for raw steel, finished pipe, stone and
drilling fluid commodities. Soda ash originates in southwestern Wyoming and California, destined for
chemical and glass producing markets in North America and abroad.
Premium – In 2018, the Premium franchise generated 31% of Union Pacific’s total freight revenue. Our
Premium franchise includes three segments: international intermodal, domestic intermodal, and finished
vehicles. International business consists of import and export traffic moving in 20 or 40-foot shipping
6
containers, that mainly passes through West Coast ports served by UP’s extensive terminal network.
Domestic business includes container and trailer traffic picked up and delivered within North America for
intermodal marketing companies (primarily shipper agents and logistics companies), as well as truckload
carriers.
We are the largest automotive carrier west of the Mississippi River and operate or access 38 vehicle
distribution centers. The Railroad’s extensive franchise serves five vehicle assembly plants and connects
to West Coast ports, all six major Mexico gateways, and the Port of Houston to accommodate both import
and export shipments. In addition to transporting finished vehicles, UPRR provides expedited handling of
automotive parts in both boxcars and intermodal containers destined for Mexico, the U.S. and Canada.
Seasonality – Some of the commodities we carry have peak shipping seasons, reflecting either or both the
nature of the commodity and the demand cycle for the commodity (such as certain agricultural and food
products that have specific growing and harvesting seasons). The peak shipping seasons for these
commodities can vary considerably each year depending upon various factors, including the strength of
domestic and international economies and currencies and the strength of harvests and market prices for
agricultural products.
Working Capital – At December 31, 2018, we had a working capital deficit. At December 31, 2017, we had
a working capital surplus. The deficit at 2018 year-end was primarily due to an increase in upcoming debt
maturities. As past years indicate, it is not unusual for us to have a working capital deficit; however, we
believe it is not an indication of a lack of liquidity. We also maintain adequate resources, including our
credit facility, and when necessary, access to capital markets to meet any foreseeable cash requirements.
Competition – We are subject to competition from other railroads, motor carriers, ship and barge operators,
and pipelines. Our main railroad competitor is Burlington Northern Santa Fe LLC. Its primary 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 all
four of our commodity groups (excluding most coal shipments). 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 certain areas where we operate. In addition to price competition, we face competition
with respect to transit times, quality and reliability of service from motor carriers and other railroads. Motor
carriers in particular can have an advantage over railroads with respect to transit times and timeliness of
service. However, railroads are much more fuel-efficient than trucks, which reduces the impact of
transporting goods on the environment and public infrastructure, and we have been making efforts to
convert certain truck traffic to rail. Additionally, 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 of the following could
also affect the competitiveness of our transportation services for some or all of our commodities: (i)
improvements or expenditures materially increasing the quality or reducing the costs of these alternative
modes of transportation, (ii) legislation that eliminates or significantly increases the size or weight limitations
applied to motor carriers, or (iii) legislation or regulatory changes that impose operating restrictions on
railroads or that adversely affect the profitability of some or all railroad traffic. Finally, many movements
face product or geographic competition where our customers can use different products (e.g. natural gas
instead of coal, sorghum instead of corn) or commodities from different locations (e.g. grain from states or
countries that we do not serve, crude oil from different regions). Sourcing different commodities or different
locations allows shippers to substitute different carriers and such competition may reduce our volume or
constrain prices. For more information regarding risks we face from competition, see the Risk Factors in
Item 1A of this report.
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 of entry into this industry. Therefore, if one of these domestic
suppliers discontinues manufacturing locomotives, supplying parts or providing maintenance 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 steel producers (one domestic and one international) that
meet our specifications. Rail is critical for maintenance, replacement, improvement, and expansion of our
network and facilities. Rail manufacturing also has high barriers of 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.
7
Employees – Approximately 85% of our full-time employees are represented by 14 major rail unions.
Pursuant to the Railway Labor Act (RLA), our collective bargaining agreements are subject to modification
every five years. The most recent round of negotiations started on January 1, 2015, and throughout 2017
and 2018, we concluded new agreements with all 14 major rail unions. Existing agreements remain in effect
until new agreements are ratified or until the RLA procedures are exhausted. The RLA procedures include
mediation, potential arbitration, cooling-off periods, and the possibility of Presidential Emergency Boards
and Congressional intervention. The next round of negotiations begins with the service of RLA Section 6
notices on or about November 1, 2019 related to years 2019-2023. Contract negotiations historically
continue for an extended period of time, and work stoppages during negotiations are rare.
Railroad Security – Our security efforts consist of a wide variety of measures including employee training,
engagement 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
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 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. We maintain the capability to move critical operations to back-up facilities in
different locations.
We operate an emergency response management center 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, 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 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 Transportation
Security Agency regulations, we deployed information systems and instructed employees in tracking and
documenting the handoff of Rail Security Sensitive Materials 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 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. Our staff of information security professionals continually assesses cyber security
risks and implements mitigation programs that evolve with the changing technology threat environment. To
date, we have not experienced any material disruption of our operations due to a cyber threat or attack
directed at us.
Cooperation with Federal, State, and Local Government Agencies – We work closely on physical and cyber
security initiatives with government agencies, including the U.S. Department of Transportation (DOT) and
the Department of Homeland Security (DHS) as well as local police departments, fire departments, and
other first responders. In conjunction with the Association of American Railroads (AAR), we sponsor Ask
Rail, a mobile application which provides first responders with secure links to electronic information,
including commodity and emergency response information required by emergency personnel to respond to
accidents and other situations. We also participate in the 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), and the Military Transport
Management Command, which 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 – Through TransCAER (Transportation Community
Awareness and Emergency Response) we work with the AAR, the American Chemistry Council, the
American Petroleum Institute, and other chemical trade groups to provide communities with preparedness
8
tools, including the training of emergency responders. In cooperation with the Federal Railroad
Administration (FRA) and other interested groups, 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 Surface Transportation
Board (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 continues its efforts to explore expanding rail
regulation and is reviewing proposed rulemaking in various areas, including reciprocal switching,
commodity exemptions, and expanding and easing procedures for smaller rate complaints. The STB also
continues to develop a methodology for determining railroad revenue adequacy and the possible use of a
revenue adequacy constraint in regulating railroad rates. The STB posts quarterly reports on rate
reasonableness cases and maintains a database on service complaints, and has the authority to initiate
investigations, among other things.
The operations of the Railroad also are subject to the regulations of the FRA and other federal and state
agencies. In 2010, the FRA issued initial rules governing installation of Positive Train Control (PTC). PTC
is a collision avoidance technology intended to override engineer controlled locomotives and stop train-to-
train and overspeed accidents, misaligned switch derailments, and unauthorized entry to work zones. The
Surface Transportation Extension Act of 2015 amended the Rail Safety Improvement Act to require
implementation of PTC by the end of 2018, which deadline may be extended to December 31, 2020,
provided certain other criteria are satisfied. On December 10, 2018, we received FRA approval for an
alternative schedule to implement, test and refine our PTC during 2019-2020. Through 2018, we have
invested approximately $2.8 billion in the ongoing development of PTC. Final implementation of PTC will
require us to adapt and integrate our system with other railroads whose implementation plan may be
different than ours.
DOT, the Occupational Safety and Health Administration, the Pipeline and Hazardous Materials Safety
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. Additionally, various state and local agencies have jurisdiction over disposal of hazardous waste
and seek to regulate movement of hazardous materials in ways 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 18 to the Consolidated Financial Statements in Item
8, Financial Statements and Supplementary Data.
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 are significant
reductions in demand for rail services with respect to one or more commodities or changes in consumer
preferences that affect the businesses of our customers, we may experience increased costs associated
9
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. 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, improve operations at our yards and other facilities, and improve our ability to address surges in
demand for any reason with adequate resources, 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
fluctuations in our customers’ demand for rail service with respect to one or more commodities or operating
regions, or other events that could negatively impact our operational efficiency, any of which could have a
material adverse effect on our results of operations, financial condition, and liquidity.
We Transport Hazardous Materials – We transport certain hazardous materials and other materials,
including crude oil, ethanol, and toxic inhalation hazard (TIH) materials, such as chlorine, that pose certain
risks in the event of a release or combustion. Additionally, U.S. laws impose common carrier obligations on
railroads that require us to transport certain hazardous materials regardless of risk or potential exposure to
loss. A rail accident or other incident or accident on our network, at our facilities, or at the facilities of our
customers involving the release or combustion of hazardous materials could involve significant costs and
claims for personal injury, property damage, and environmental penalties and remediation in excess of our
insurance coverage for these risks, 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,
increasing the amount of our traffic subject to common carrier regulation, 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,
rail carriers were to implement PTC by the end of 2015 (the Rail Safety Improvement Act). The Surface
Transportation Extension Act of 2015 amended the Rail Safety Improvement Act to require implementation
of PTC by the end of 2018, which deadline may be extended to December 31, 2020, provided certain other
criteria are satisfied. On December 10, 2018, we received approval from the FRA for an alternative
schedule to implement, test and refine our PTC during 2019-2020. Final implementation of PTC will require
us to adapt and integrate our system with other railroads whose implementation plan may be different than
ours. This implementation could have a material adverse effect on our results of operations and financial
condition. Additionally, one or more consolidations of Class I railroads could also lead to increased
regulation of the rail industry.
We May Be Affected by General Economic Conditions – Prolonged severe adverse domestic and global
economic conditions or disruptions of financial and credit markets 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. We must build or acquire and
maintain our rail system, while trucks, barges and maritime operators 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 that eliminates or significantly
increases the size or weight limitations currently applicable to motor carriers, could have a material adverse
10
effect on our results of operations, financial condition, and liquidity. Additionally, any future consolidation of
the rail industry could materially affect the competitive environment in which we operate.
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 develop or implement new technology such as PTC or the latest version
of our transportation control systems, 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 a cyber attack or other event
causes significant disruption or failure of one or more of our information technology systems, including
computer hardware, software, and communications equipment, we could suffer a significant 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 that exceed our insurance coverage for such risks could 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, 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 currently have certain obligations at existing sites for
investigation, remediation and monitoring, and we likely will have obligations at other sites in the future.
Liabilities for these obligations affect our estimate based on our experience and, as necessary, the advice
and assistance of our consultants. However, actual costs may vary from our estimates due to any or all of
several factors, including changes to environmental laws or interpretations of such laws, technological
changes affecting investigations and remediation, the participation and financial viability of other parties
responsible for any such liability and the corrective action or change to corrective actions required to
remediate any existing or future sites. 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.
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 fuels, including chemical
producers, farmers and food producers, and automakers and other 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, increasing royalties
charged to producers of PRB coal by the U.S. Department of Interior and 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
11
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.
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. Line outages and other interruptions caused by these conditions can adversely affect our
entire rail network and can adversely affect revenue, costs, and liabilities, which could have a material
adverse effect on our results of operations, financial condition, and liquidity.
Strikes or Work Stoppages Could Adversely Affect Our Operations – The U.S. Class I railroads are party
to collective bargaining agreements with various labor unions. The majority of our employees belong to
labor unions and are subject to these agreements. 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. Labor disputes, work stoppages, slowdowns or lockouts at
loading/unloading facilities, ports or other transport access points could compromise our service reliability
and have a material adverse impact on our results of operations, financial condition, and liquidity. Labor
disputes, work stoppages, slowdowns or lockouts by employees of our customers or our suppliers could
compromise our service reliability and have a material adverse impact 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 May Be Affected By Fluctuating Fuel Prices – Fuel costs constitute a significant portion of our
transportation expenses. Diesel fuel prices can be 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 fuel expenses from our customers through revenue from fuel
surcharges, we cannot be certain that we will always be able to mitigate rising or elevated fuel costs through
our fuel surcharges. Additionally, 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. As fuel prices fluctuate, our fuel surcharge programs trail such fluctuations in fuel price by
approximately two months, and may be a significant source of quarter-over-quarter and year-over-year
volatility, particularly in periods of rapidly changing prices. International, political, and economic factors,
events and conditions affect the volatility of fuel prices and supplies. Weather can also affect fuel supplies
and limit domestic refining capacity. A severe shortage of, or disruption to, domestic fuel supplies could
have a material adverse effect on our results of operations, financial condition, and liquidity. Alternatively,
lower fuel prices could have a positive impact on the economy by increasing consumer discretionary
spending that potentially could increase demand for various consumer products we transport. However,
lower fuel prices could have a negative impact on other commodities we transport, such as coal and
domestic drilling-related shipments, which could 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 significant
deterioration of our financial condition could result in a reduction of our credit rating to below investment
grade, which could restrict, or at certain credit levels below investment grade may prohibit us, from utilizing
our current receivables securitization facility. This may also limit our access to external sources of capital
and significantly increase the costs of short and long-term debt financing.
12
A Significant Portion of Our Revenue Involves Transportation of Commodities to and from International
Markets – Although revenues from our operations are attributable to transportation services provided in the
U.S., a significant portion of our revenues involves the transportation of commodities to and from
international markets, including Mexico and Southeast Asia, by various carriers and, at times, various
modes of transportation. Significant and sustained interruptions of trade with Mexico or countries in
Southeast Asia, including China, could adversely affect customers and other entities that, directly or
indirectly, purchase or rely on rail transportation services in the U.S. as part of their operations, and any
such interruptions could have a material adverse effect on our results of operations, financial condition and
liquidity. Any one or more of the following could cause a significant and sustained interruption of trade with
Mexico or countries in Southeast Asia: (a) a deterioration of security for international trade and businesses;
(b) the adverse impact of new laws, rules and regulations or the interpretation of laws, rules and regulations
by government entities, courts or regulatory bodies, including modifications to the North American Free
Trade Agreement (NAFTA) or its proposed successor called the U.S.-Mexico-Canada Agreement (USMCA)
and actions of taxing authorities that affect our customers doing business in foreign countries; (c) any
significant adverse economic developments, such as extended periods of high inflation, material disruptions
in the banking sector or in the capital markets of these foreign countries, and significant changes in the
valuation of the currencies of these foreign countries that could materially affect the cost or value of imports
or exports; (d) shifts in patterns of international trade that adversely affect import and export markets; and
(e) a material reduction in foreign direct investment in these countries.
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, such as those included in the U.S. Tax
Cuts and Jobs Act, enactment of new tax laws, revisions of tax regulations, and claims or litigation with
taxing authorities could result in a material effect to our results of operations, financial condition, and
liquidity. Higher tax rates 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, parts and maintenance, potential new suppliers face high
barriers to entry. Therefore, if one of the domestic suppliers of high horsepower locomotives discontinues
manufacturing locomotives, supplying parts or providing maintenance for any reason, including bankruptcy
or insolvency, we could experience significant cost increases and reduced availability of the locomotives
that are necessary for our operations. Additionally, for a high percentage of our rail purchases, we utilize
two steel producers (one domestic and one international) that meet our specifications. Rail is critical to our
operations for rail replacement programs, maintenance, 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.
13
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.
TRACK
Our rail network includes 32,236 route miles. We own 26,039 miles and operate on the remainder pursuant
to trackage rights or leases. The following table describes track miles at December 31, 2018, and 2017:
Route
Other main line
Passing lines and turnouts
Switching and classification yard lines
Total miles
HEADQUARTERS BUILDING
2018
32,236
7,074
3,274
8,970
51,554
2017
32,122
7,107
3,255
9,199
51,683
We own our headquarters building in Omaha, Nebraska. The facility has 1.2 million square feet of space
that can accommodate approximately 4,000 employees.
14
HARRIMAN DISPATCHING CENTER
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. In the event of a disruption of operations at HDC due to a cyber attack, flooding or
severe weather or other event, we maintain the capability to conduct critical operations at back-up facilities
in different locations.
RAIL FACILITIES
In addition to our track structure, we operate numerous facilities, including terminals for intermodal and
other freight; rail yards for building trains (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 table includes the major yards
and terminals on our system:
Major Classification Yards
North Platte, Nebraska
North Little Rock, Arkansas
Englewood (Houston), Texas
Proviso (Chicago), Illinois
Fort Worth, Texas
Livonia, Louisiana
Pine Bluff, Arkansas
West Colton, California
Roseville, California
Neff (Kansas City), Missouri
RAIL EQUIPMENT
Major Intermodal Terminals
Joliet (Global 4), Illinois
East Los Angeles, California
ICTF (Los Angeles), California
Global I (Chicago), Illinois
Marion (Memphis), Tennessee
DIT (Dallas), Texas
Mesquite, Texas
Lathrop, California
Global II (Chicago), Illinois
City of Industry, California
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, 2018, 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
Owned
6,387
201
35
6,623
Owned
14,001
6,485
6,105
2,776
2,372
2,404
8
34,151
Leased
1,582
12
57
1,651
Leased
11,784
2,389
2,133
7,045
3,269
1,057
332
28,009
Total
7,969
213
92
8,274
Total
25,785
8,874
8,238
9,821
5,641
3,461
340
62,160
Average
Age (yrs.)
20.5
38.3
39.6
N/A
Average
Age (yrs.)
19.7
30.6
27.6
37.1
25.4
33.6
30.8
N/A
15
Highway revenue equipment
Containers
Chassis
Total highway revenue equipment
CAPITAL EXPENDITURES
Owned
47,752
26,242
73,994
Leased
9,005
21,964
Total
56,757
48,206
Average
Age (yrs.)
8.2
10.2
30,969
104,963
N/A
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.
2018 Capital Program – During 2018, our capital program totaled approximately $3.2 billion. (See the cash
capital investments table in Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources, Item 7.)
2019 Capital Plan – In 2019, we expect our capital plan to be approximately $3.2 billion, flat compared to
2018. The plan includes expenditures to renew and improve our existing infrastructure as well as new
capacity investments designed to support future business growth and operational efficiency. In addition,
expenditures will be made for locomotive modernization and freight cars. The capital plan 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 of our 2019 capital plan in Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, Item 7.)
OTHER
Equipment Encumbrances – Equipment with a carrying value of approximately $1.8 billion and $2.0 billion
at December 31, 2018, and 2017, respectively served as collateral for capital leases and other types of
equipment obligations in accordance with the secured financing arrangements utilized to acquire or
refinance such railroad equipment.
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, Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Critical Accounting Policies – Environmental, Item 7,
and Note 18 of the Consolidated Financial Statements.)
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
District Attorneys from Placer, San Joaquin, San Bernardino and Nevada counties in California have
asserted claims against Union Pacific in connection with more than 150 alleged violations of environmental
laws that occurred in their counties, largely between 2011 and 2014. The alleged violations consist of
violation of (1) various hazardous waste requirements, (2) Hazardous Materials Business Plan
requirements, (3) above ground petroleum storage requirements, and (4) various spill requirements. The
Company has entered into a Stipulation for Entry of Final Judgment with the District Attorneys to resolve
their claims in connection with these matters for payment of a $2 million civil penalty, $313,000 in attorneys’
16
fees and investigative costs, and a 3 year environmental compliance monitoring and reporting program
performed under the supervision of an agreed upon outside consultant. The Stipulation, together with the
District Attorneys Complaint and a Final Judgment (reflecting the terms of the Stipulation) were lodged with
the Court in December 2018. The Judgment was signed on December 19, 2018.
The United States Department of Justice has asserted claims against Union Pacific in connection with a
September 12, 2014 release of diesel from a locomotive fuel tank arising out of a derailment that occurred
in Salem, OR. Some portion of that fuel entered Pringle Creek, which the United States asserts is a Water
of the United States. The Company has agreed to resolve those claims through a Stipulation of Settlement
and Judgment, pursuant to which the Company will pay $47,500 to the United States and $47,500 to the
State of Oregon.
We receive 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. See also Note 18 of the Consolidated Financial Statements.
OTHER MATTERS
Antitrust Litigation – As we reported in our Quarterly Report on Form 10-Q for the quarter ended June
30, 2007, 20 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.
Currently, UPRR and three other Class I railroads are the named defendants in the lawsuit. The original
plaintiff filed the first of these claims in the U.S. District Court in New Jersey on May 14, 2007. The number
of complaints reached a total of 30. These suits allege that the named railroads engaged in price-fixing by
establishing common fuel surcharges for certain rail traffic.
On June 21, 2012, Judge Friedman issued a decision that certified a class of plaintiffs with eight named
plaintiff representatives. The decision included in the class all shippers that paid a rate-based fuel surcharge
to any one of the defendant railroads for rate-unregulated rail transportation from July 1, 2003, through
December 31, 2008. On July 5, 2012, the defendant railroads filed a petition with the U.S. Court of Appeals
for the District of Columbia requesting that the court review the class certification ruling. On August 9, 2013,
the Circuit Court vacated the class certification decision and remanded the case to the district court to
reconsider the class certification decision in light of a recent Supreme Court case and incomplete
consideration of errors in the expert report of the plaintiffs. After reviewing an intervening case,
supplemental expert materials and related briefing from the parties, Judge Friedman scheduled and
completed a new class certification hearing during the week of September 26, 2016. On October 10, 2017,
the parties received a ruling from Judge Friedman denying class certification. Plaintiffs have sought
appellate review of that ruling and on December 20, 2017, were granted the right of an interlocutory appeal
by the U.S. Court of Appeals for the District of Columbia Circuit. A hearing of the appeal was conducted
on September 28, 2018. We are awaiting a decision on that hearing.
As we reported in our Current Report on Form 8-K, filed on June 10, 2011, the Railroad received a complaint
filed in the U.S. District Court for the District of Columbia on June 7, 2011, by Oxbow Carbon & Minerals
LLC and related entities (Oxbow). The parties are currently conducting discovery in this matter. For
additional information on Oxbow, please refer to Item 3. Legal Proceedings, under Other Matters, Antitrust
Litigation in our Annual Report on Form 10-K for the year ended December 31, 2016.
We continue to 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.
17
In 2016, a lawsuit was filed in U.S. District Court for the Western District of Washington alleging violations
of the Americans with Disabilities Act (ADA) and Genetic Information Nondiscrimination Act relating to
Fitness for Duty requirements for safety sensitive positions.
On August 8, 2016, the U.S. District Court for the Western District of Washington granted plaintiffs' motion
to transfer their claim to the U.S. District Court of Nebraska. On February 5, 2019, the U.S. District Court of
Nebraska granted plaintiffs’ motion to certify the ADA allegations as a class action. We intend to appeal
this class certification to the U.S. Court of Appeals for the 8th Circuit. We continue to deny these allegations,
believe this lawsuit is without merit and will defend our actions. We believe this lawsuit will not have a
material adverse effect on any of our results of operations, financial condition, and liquidity.
Item 4. Mine Safety Disclosures
Not applicable.
18
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 is there
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 current as of February 8, 2019, relating to
the executive officers.
Business
Experience During
Age Past Five Years
56
[1]
61 Current Position
Name
Lance M. Fritz
Robert M. Knight, Jr.
Rhonda S. Ferguson
Thomas A. Lischer
Position
Chairman, President and Chief Executive Officer of
UPC and the Railroad
Executive Vice President and Chief Financial Officer of
UPC and the Railroad
Executive Vice President and Chief Legal Officer and
Corporate Secretary of UPC and the Railroad
Executive Vice President - Operations of the Railroad
49
46
Kenny G. Rocker
Todd M. Rynaski
Executive Vice President - Marketing and Sales of the
Railroad
Vice President and Controller of UPC and the Railroad 48
47
Lynden L. Tennison
V. James Vena
Executive Vice President and Chief Strategy Officer of
UPC and the Railroad
Chief Operating Officer of UPC and the Railroad
Elizabeth F. Whited
Executive Vice President and Chief Human Resources
Officer of UPC and the Railroad
59
60
53
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[1] On July 30, 2015, Mr. Fritz was named Chairman of the Board of UPC and the Railroad effective October 1, 2015. Mr. Fritz was
elected President and Chief Executive Officer of UPC and the Railroad effective February 5, 2015. Previously, Mr. Fritz was
President and Chief Operating Officer of the Railroad effective February 6, 2014, Executive Vice President – Operations of the
Railroad effective September 1, 2010, and Vice President – Operations of the Railroad effective January 1, 2010.
[2] Ms. Ferguson was elected Corporate Secretary of UPC and the Railroad effective December 1, 2017, and Executive Vice
President and Chief Legal Officer of UPC and the Railroad effective July 11, 2016. She previously was Vice President, Corporate
Secretary and Chief Ethics Officer of FirstEnergy Corp. since 2007.
[3] Mr. Lischer was elected Executive Vice President – Operations of the Railroad effective August 15, 2018. Previously, Mr. Lischer
served as Vice President of the Harriman Dispatching Center and Network Operations for the Railroad. Prior to this election, Mr.
Lischer served as Assistant Vice President of Operations for the North Region (September 2016 – April 2017), Assistant Vice
President of Locomotive Distribution and Network Operations (April 2014 – September 2016), and General Superintendent of
Transportation Services (February 2011 – April 2014).
[4] Mr. Rocker was elected Executive Vice President – Marketing and Sales of the Railroad effective August 15, 2018. Mr. Rocker
previously served at the Railroad as Vice President – Marketing and Sales – Industrial team. Prior to this election, Mr. Rocker
served as Assistant Vice President – Chemicals (April 2014 – September 2016) and Assistant Vice President – Industrial
Products - Marketing (March 2012 – April 2014).
[5] Mr. Rynaski was elected Vice President and Controller of UPC and the Railroad effective September 1, 2015. He previously was
Assistant Vice President – Accounting of the Railroad effective January 1, 2014, and Assistant Vice President – Financial
Reporting and Analysis effective April 1, 2011.
[6] Mr. Tennison was elected Executive Vice President and Chief Strategy Officer of UPC and the Railroad effective August 1, 2018.
He previously was Senior Vice President and Chief Information Officer since February 2005. On January 29, 2019, Mr. Tennison
announced he will retire from the Company effective March 31, 2019.
[7] Mr. Vena was elected Chief Operating Officer of UPC and the Railroad effective January 14, 2019. Mr. Vena previously served
as Executive Vice President and Chief Operating Officer of Canadian National Railway Company (CN) from February 2013 until
his retirement in June 2016.
[8] Ms. Whited was elected Executive Vice President and Chief Human Resources Officer of UPC and the Railroad effective August
15, 2018. She previously served as Executive Vice President and Chief Marketing Officer (December 2016 – August 2018) and
Vice President and General Manager – Chemicals (October 2012 – December 2016).
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”.
At February 1, 2019, there were 722,877,817 shares of common stock outstanding and 30,902 common
shareholders of record. On that date, the closing price of the common stock on the NYSE was $159.67. We
paid dividends to our common shareholders during each of the past 119 years.
Comparison Over One- and Three-Year Periods – The following table presents the cumulative total
shareholder returns, assuming reinvestment of dividends, over one- and three-year periods for the
Corporation (UNP), a peer group index (comprised of CSX Corporation and Norfolk Southern Corporation),
the Dow Jones Transportation Index (DJ Trans), and the Standard & Poor’s 500 Stock Index (S&P 500).
Period
1 Year (2018)
3 Year (2016 - 2018)
UNP
5.3 %
89.3
Peer Group
DJ Trans
S&P 500
10.3 %
121.0
(12.3)%
27.6
(4.4)%
30.4
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 DJ
Trans, and the S&P 500. The graph assumes that $100 was invested in the common stock of Union Pacific
Corporation and each index on December 31, 2013 and that all dividends were reinvested. The information
below is historical in nature and is not necessarily indicative of future performance.
20
Purchases of Equity Securities – During 2018, we repurchased 57,669,746 shares of our common stock
at an average price of $143.70. The following table presents common stock repurchases during each month
for the fourth quarter of 2018:
Period
Oct. 1 through Oct. 31
Nov. 1 through Nov. 30
Dec. 1 through Dec. 31
Total Number
of Shares
Purchased [a]
6,091,605 $
3,408,467
3,007,951
Average
Price Paid
Per Share
158.20
147.91
148.40
Total Number of Shares
Purchased as Part of a
Publicly Announced
Plan or Program [b]
6,087,727
3,402,190
3,000,715
Maximum Number of
Shares Remaining Under
the Plan or Program [b]
32,831,024
29,428,834
26,428,119
Total
12,508,023 $
153.04
12,490,632
N/A
[a] Total number of shares purchased during the quarter includes approximately 17,391 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] Effective January 1, 2017, our Board of Directors authorized the repurchase of up to 120 million shares of our common stock by
December 31, 2020. These repurchases may be made on the open market or through other transactions. Our management has
sole discretion with respect to determining the timing and amount of these transactions.
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 historical in nature and 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 [b]
Operating income
Net income
Earnings per share - basic [c]
Earnings per share - diluted [c]
Dividends declared per share [c]
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 [d]
Debt due after one year
Common shareholders' equity
Additional Data
Freight revenues [b]
Revenue carloads (units) (000)
Operating ratio (%) [e]
Average employees (000)
Financial Ratios (%)
Return on average common
shareholders' equity [f]
2018
2017[a]
2016
2015
2014
$ 22,832 $ 21,240 $ 19,941
8,517
5,966
7.95
7.91
3.06
8,686
(3,411)
(5,222)
(8,225)
8,106
10,712
13.42
13.36
2.48
7,230
(3,086)
(4,146)
(4,013)
7,243
4,233
5.09
5.07
2.255
7,525
(3,393)
(4,246)
(3,105)
$ 21,813 $ 23,988
8,765
5,180
5.77
5.75
1.91
7,385
(4,249)
(2,982)
(3,225)
8,082
4,772
5.51
5.49
2.20
7,344
(4,476)
(3,063)
(3,465)
$ 59,147 $ 57,806 $ 55,718
34,098
20,925
20,423
29,011
16,144
24,856
32,146
14,249
19,932
$ 54,600 $ 52,372
27,419
10,952
21,189
30,692
13,607
20,702
$ 21,384 $ 19,837 $ 18,601
8,908
62.7
42.0
8,588
61.8
42.0
8,442
63.7
42.9
$ 20,397 $ 22,560
9,625
63.5
47.2
9,062
62.9
47.5
26.4
47.8
20.8
22.8
24.4
[a] 2017 includes a $5.9 billion non-cash reduction to income tax expense and $212 million non-cash reduction to operating
[b]
expenses related to the Tax Cuts and Jobs Act enacted on December 22, 2017.
Includes fuel surcharge revenue of $1.7 billion, $966 million, $560 million, $1.3 billion, and $2.8 billion, for 2018, 2017, 2016,
2015, and 2014, respectively, which partially offsets increased operating expenses for fuel. (See further discussion in
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Item 7.)
[c] Earnings per share and dividends declared per share are retroactively adjusted to reflect the June 6, 2014 stock split.
[d] Long-term obligations is determined as follows: total liabilities less current liabilities.
[e] Operating ratio is defined as operating expenses divided by operating revenues.
[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 business segment. Although
revenue is analyzed by commodity, we analyze the net financial results of the Railroad as one segment
due to the integrated nature of the rail network.
EXECUTIVE SUMMARY
2018 Results
Safety – During 2018, we continued our focus on safety to reduce risk and eliminate incidents for our
employees, our customers and the public. Despite our efforts, our reportable personal injury incidents
per 200,000 employee-hours of 0.82 increased 4% from 2017, which was our second best year on
record. 2016 was our all-time annual record of 0.75 personal injury incidents per 200,000 employee-
hours. Our reportable derailment incident rate per million train miles of 3.28 and crossing incidents rate
of 2.69 increased 12% and 5%, respectively, compared to 2017. We remain intently focused on
improving employee and public safety with programs such as Courage to Care, Total Safety Culture,
and UP Way (our continuous improvement culture).
Network Operations: Unified Plan 2020 – We entered 2018 with network congestion on key routes
and terminals, compounded by high freight car inventory levels that negatively impacted operational
performance during the first half of the year. On October 1, 2018, we began implementation of the first
phase of our Unified Plan 2020, which included several initiatives focused on increasing reliability of
our service product, reducing variability in network operations, and improving resource utilization costs.
As a result, network operations improved significantly as we progressed throughout the fourth quarter.
We reduced our active locomotive fleet by 625 locomotives and reduced operating car inventory by
more than 10% compared to September 30, 2018, while handling relatively similar volume levels. As
reference, average terminal dwell, as reported to the AAR improved 14% to 26.7 hours in the fourth
quarter compared to the first half of 2018. On a full year basis, average terminal dwell improved 2%
while average train speed decreased 4% compared to 2017. Additional details on our Unified Plan
2020 goals and implementation schedule are included in the “2019 Outlook” section of Item 7.
Freight Revenues – Our freight revenues increased 8% year-over-year to $21.4 billion driven by
volume growth of 4%, higher fuel surcharge revenue, and core pricing gains, partially offset by negative
mix of traffic. Growth in international and domestic intermodal, petroleum products, metals, rock,
plastics, and industrial chemical shipments more than offset declines in coal, grain, and frac sand
shipments.
Financial Results – In 2018, we generated operating income of more than $8.5 billion, an 8% increase
compared to 2017 adjusted results (non-GAAP)[1]. Volume growth, combined with core pricing and
productivity gains, generated solid financial performance improvement and more than offset the impact
of excess network costs, higher fuel prices, and other cost hurdles, including state and local taxes,
depreciation, and inflation. Excess network costs include additional expenses associated with
operational efficiencies resulting in higher Train, Engine and Yard (TE&Y) labor expenses, fuel
consumption inefficiencies, maintenance costs on a larger, active locomotive fleet, and higher freight
car rent expense due to slower asset turns. Our 2018 operating ratio was an all-time record 62.7%,
improving 0.1 point from 2017 adjusted results (non-GAAP)[1]. Net income of nearly $6.0 billion
translated into earnings of $7.91 per diluted share.
[1] For comparability purposes, the following table reconciles our full year 2017 reported results under accounting principles
generally accepted in the U.S. (GAAP) to our 2017 adjusted results (non-GAAP) for tax related items recognized in 2017. We
believe the adjusted results provide relevant information to our investors as they more accurately reflect on-going financial
performance. In addition, these measures should be considered in addition to, and not a substitute for operating income, income
taxes, net income, diluted EPS, operating ratio, and effective tax rate.
23
Millions, Except Per Share Amounts and
Percentages
2017 Reported results* (GAAP)
Factors Affecting Comparability:
Adjustments for Tax Cuts and Jobs Act
Equity-method affiliates
Deferred taxes
2017 Adjusted results (non-GAAP)
Operating
Income
EPS
8,106 $ (3,080) $ 10,712 $ 13.36
Diluted Operating Effective
Ratio Tax Rate
61.8 % (40.4)%
Net
Income
Income
Taxes
$
(212)
-
(73)
5,935
(139)
(5,935)
$
7,894 $ 2,782 $ 4,638 $
(0.17)
(7.40)
5.79
1.0 pts
-
-
77.9
62.8 % 37.5 %
*Adjusted for the retrospective adoption of ASU 2017-07 which was effective January 1, 2018.
Fuel Prices – Our average price of diesel fuel in 2018 was $2.29 per gallon, an increase of 27% from
2017, as both crude oil and conversion spreads between crude oil and diesel increased in 2018. The
higher price resulted in increased operating expenses of $507 million (excluding any impact from year-
over-year volume growth). Gross-ton miles and our fuel consumption rate, computed as gallons of fuel
consumed divided by gross ton-miles, both increased 3%, which also drove higher fuel expense.
Free Cash Flow – Cash generated by operating activities totaled nearly $8.7 billion, yielding free cash
flow of $3.0 billion after reductions of $3.4 billion for cash used in investing activities and $2.3 billion in
dividends, which included a 20% increase in our quarterly dividend per share from $0.665 in the fourth
quarter of 2017 to $0.80 in the fourth quarter of 2018. Free cash flow is defined as cash provided by
operating activities less cash used in investing activities and dividends paid.
Free cash flow is not considered a financial measure under GAAP 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 free cash flow is important to management and investors 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
Cash used in investing activities
Dividends paid
Free cash flow
2019 Outlook
2018
8,686
(3,411)
(2,299)
2,976
$
$
2017
7,230 $
(3,086)
(1,982)
2,162 $
2016
7,525
(3,393)
(1,879)
2,253
$
$
Safety – Operating a safe railroad benefits all our constituents: our employees, customers,
shareholders and the communities we serve. We will continue using a multi-faceted approach to safety,
utilizing technology, risk assessment, training and employee engagement, quality control, and targeted
capital investments. We will continue using and expanding the deployment of Total Safety Culture and
Courage to Care throughout our operations, which allows us to identify and implement best practices
for employee and operational safety. We will continue our efforts to increase detection of rail defects;
improve or close crossings; and educate the public and law enforcement agencies about crossing
safety through a combination of our own programs (including risk assessment strategies), industry
programs and local community activities across our network.
Network Operations – In 2019, we will continue to implement our G55+0 and Unified Plan 2020
initiatives to further increase reliability of our service product, reduce variability in network operations,
and improve resource utilization. We began implementation of Phase 1 on October 1, 2018 which
included our north to south Mid-America corridor, and was substantially completed in late 2018. Phase
1 included approximately 160 changes to our transportation plan in that territory. In November of 2018,
we began the planning phase of implementation on the Sunset Route and on the two rail corridors
between Los Angeles and Chicago. Planning for the third phase, which includes the Pacific Northwest
and Northern California, began in late January of 2019. We expect full implementation of all phases of
the Unified Plan 2020 by mid-2019. Beyond the initial implementation of Unified Plan 2020, we will
continue to evaluate the entire network and make further changes as warranted.
24
In addition, we are working through a terminal rationalization process to more fully optimize our train
operations and crew resources. These potential changes, combined with other G55+0 initiatives, are
designed to better align our management structure and decision making processes in conjunction with
our Unified Plan 2020 operating model.
Fuel Prices – Fuel price projections for crude oil and natural gas continue to fluctuate in the current
environment. We again 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.
As prices fluctuate, there will be a timing impact on earnings, as our fuel surcharge programs trail
increases or decreases in fuel price by approximately two months.
Lower fuel prices could have a positive impact on the economy by increasing consumer discretionary
spending that potentially could increase demand for various consumer products that we transport.
Alternatively, lower fuel prices could likely have a negative impact on other commodities such as coal
and domestic drilling-related shipments.
Capital Plan – In 2019, we expect our capital plan to be approximately $3.2 billion, flat compared to
2018. The plan includes expenditures to renew and improve our existing infrastructure as well as new
capacity investments designed to support future business growth and operational efficiency. In addition,
expenditures will be made for locomotive modernization and freight cars. The capital plan 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).
Financial Expectations – Economic conditions in many of our market sectors continue to drive
uncertainty with respect to our volume levels. Although we expect volume to grow in the low single
digit range in 2019 compared to 2018, uncertainties in energy markets and prices, consumer
purchases, inflation, and both domestic and international economies will have an impact. In the current
environment, we expect continued margin improvement driven by continued pricing opportunities,
ongoing G55+0 productivity initiatives, and full implementation of our Unified Plan 2020 to better
leverage our resources and strengthen our franchise.
RESULTS OF OPERATIONS
Operating Revenues
Millions
Freight revenues
Other subsidiary revenues
Accessorial revenues
Other
$
2018
21,384
881
502
65
$
2017
19,837
885
458
60
$
% Change % Change
2016 2018 v 2017 2017 v 2016
7 %
8 %
-
9
1
10
(15)
8
18,601
814
455
71
Total
$
22,832
$
21,240
$
19,941
7 %
7 %
We generate freight revenues by transporting freight or other materials from our four commodity groups.
Freight revenues vary with volume (carloads) and average revenue per car (ARC). Changes in price, traffic
mix and fuel surcharges drive ARC. We provide some of our customers with contractual incentives for
meeting or exceeding specified cumulative volumes or shipping to and from specific locations, which we
record as reductions to freight revenues based on the actual or projected future shipments. We recognize
freight revenues as shipments move from origin to destination. We allocate freight revenues between
reporting periods based on the relative transit time in each reporting period and recognize expenses as we
incur them.
Other revenues include revenues earned by our subsidiaries, revenues from commuter rail operations that
we manage, 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, and miscellaneous contract
revenue. We recognize other revenues as we perform services or meet contractual obligations.
Freight revenues increased 8% year-over-year to $21.4 billion driven by 4% volume growth, higher fuel
surcharge revenue, and core pricing gains, partially offset by negative mix of traffic. Growth in international
25
and domestic intermodal, petroleum products, metals, rock, plastics, and industrial chemical shipments
more than offset declines in coal, grain, and frac sand shipments.
Freight revenues increased 7% in 2017 to $19.8 billion driven by volume growth of 2%, higher fuel
surcharge revenue, and core pricing gains. Growth in frac sand, coal, and intermodal shipments more than
offset declines in grain, crude oil, finished vehicles, and rock shipments.
Our fuel surcharge programs generated freight revenues of $1.7 billion, $966 million, and $560 million in
2018, 2017, and 2016, respectively. Fuel surcharge revenue in 2018 increased $769 million as a result of
a 27% increase in fuel price and 4% growth in carloadings. Fuel surcharge revenue in 2017 increased
$406 million as a result of a 22% increase in fuel price, a 2% growth in carloadings, and the lag impact on
fuel surcharge (it can generally take up to two months for changing fuel prices to affect fuel surcharge
recoveries).
In 2018, other revenues increased from 2017 driven by higher accessorial revenues associated with carload
and container volume growth.
In 2017, other revenues increased from 2016 due to higher revenues at our subsidiaries, primarily those
that broker intermodal, transload, and refrigerated warehousing logistics services.
The following tables summarize the year-over-year changes in freight revenues, revenue carloads, and
ARC by commodity type:
Freight Revenues
Millions
Agricultural Products
Energy
Industrial
Premium
Total
Revenue Carloads
Thousands
Agricultural Products
Energy
Industrial
Premium [a]
Total
$
2018
4,469 $
4,608
5,679
6,628
2017
4,303 $
4,498
5,204
5,832
% Change
% Change
2016 2018 v 2017 2017 v 2016
2 %
4 %
2
9
14
4,209
3,715
4,964
5,713
21
5
2
$
21,384 $
19,837 $
18,601
8 %
7 %
2018
1,124
1,650
1,752
4,382
2017
1,141
1,676
1,655
4,116
% Change
% Change
2016 2018 v 2017 2017 v 2016
(1)%
11
-
-
(1) %
(2)
6
6
1,151
1,510
1,656
4,125
8,908
8,588
8,442
4 %
2 %
Average Revenue per Car
Agricultural Products
Energy
Industrial
Premium
$
2018
3,973 $
2,793
3,241
1,513
2017
3,770 $
2,685
3,145
1,417
% Change
% Change
2016 2018 v 2017 2017 v 2016
3 %
5 %
9
4
5
3
2
7
3,657
2,461
2,996
1,385
Average
$
2,400 $
2,310 $
2,203
4 %
5 %
[a] For intermodal shipments, each container or trailer equals one carload.
26
2018 Agricultural Products Carloads
increased
largely due
Agricultural Products – Freight revenue from
agricultural products
in 2018
compared to 2017 driven by core pricing gains
and higher fuel surcharge revenue, partially
offset by a 1% decrease in volume. Grain
shipments decreased 8% in 2018 compared to
lower export wheat
2017
to
shipments
U.S.
competitiveness in the global market throughout
2018. Conversely, fertilizer shipments increased
7% and grain products shipments increased 4%
versus 2017 driven by continued strength in
potash exports and higher export ethanol
shipments.
reflecting
weaker
Freight revenue from agricultural products increased in 2017 compared to 2016 driven by core pricing gains
and higher fuel surcharge revenue, partially offset by a 1% decrease in volume. Grain and grain product
shipments decreased 3% in 2017 compared to 2016. Strong export demand for wheat drove volume growth
in the first half of the year, which was more than offset by declines of grain shipments in the second half of
the year due to an abundance of global supply reducing U.S. grain competitiveness. Conversely, fertilizer
shipments increased 7% as a result of continued strength in potash exports.
2018 Energy Carloads
revenue
Energy – Freight
from energy
shipments increased in 2018 compared to 2017
due to higher fuel surcharge revenue and mix of
traffic, which was partially offset by a 2% decline
in volume. Coal and coke shipments, which
represented 73% of energy shipments in 2017,
declined 5% due to a commercial contract loss
and certain UP-served facility retirements. Frac
sand shipments also declined largely due to
regional sand supplies in the Permian displacing
select shipments originating from the upper
Midwest.
Conversely, petroleum products
shipments increased due to continued strong
drilling activity.
Volume growth of 11% and higher fuel surcharge revenue drove an increase in freight revenue from energy
shipments in 2017 compared to 2016. Shipments out of the Powder River Basin (PRB) grew 5% driven by
strong growth in the first half of the year due to higher year-over-year natural gas prices and lower inventory
levels at utilities. Shipments out of Colorado and Utah increased 7% compared to 2016 due to the same
drivers, combined with stronger export demand. In addition, increased shale drilling activity and proppant
intensity per drilling well drove substantial volume growth in frac sand shipments versus 2016.
2018 Industrial Carloads
Industrial – Freight revenue from industrial
shipments increased in 2018 versus 2017 due
to volume growth, core pricing gains, and higher
fuel surcharge revenue, which was partially
offset by negative mix of traffic. Volume grew
6% compared to 2017 due to stronger industrial
production that drove growth in metals and ores,
construction products, plastics, and industrial
chemicals shipments.
lumber
shipments increased due to growth in end use
demand compared to 2017.
In addition,
Freight revenue
industrial shipments
increased in 2017 versus 2016 due to core
pricing gains and higher fuel surcharge revenue.
from
27
Volumes were flat as growth in shipments of metals, waste, and government shipments were offset by
declines in construction materials due to inclement weather in the West in the first half of the year, combined
with decreased construction activity in Texas and lower industrial chemical shipments.
2018 Premium Carloads
Premium – Freight revenue from premium
shipments increased in 2018 compared to 2017
driven by volume growth, higher fuel surcharge
revenue, and core pricing gains, partially offset
by negative mix of traffic. Volume grew 6%
driven by 9% growth in international intermodal,
including newly secured business in 2018 and a
fourth quarter surge in shipments. In addition,
including
intermodal shipments,
domestic
containerized automotive parts, increased as a
result of
increased
production at certain auto parts facilities, and
continued truck-to-rail conversions.
truck capacity,
tighter
Higher fuel surcharge revenue and core pricing gains drove an increase in freight revenue from premium
shipments in 2017 compared to 2016. Volumes were flat as a 1% growth in international shipments was
muted by flat domestic shipments (including containerized automotive parts) due to available truck capacity
during most of 2017, which offset a strong holiday shipping season in the fourth quarter. In addition,
shipments of finished vehicles fell 7% in 2017 resulting from lower domestic sales and reduced production
for certain manufactures.
Mexico Business – Each of our commodity groups includes revenue from shipments to and from Mexico.
Freight revenue from Mexico business was $2.5 billion in 2018, up 10% compared to 2017, driven by 1%
volume growth, fuel surcharge revenue, and core pricing gains. The increase in volume was driven by
higher shipments of corn and feed grains, coal, and finished vehicles, partially offset by declines in
automotive parts and intermodal shipments.
Freight revenue from Mexico business was $2.3 billion in 2017, up 2% compared to 2016. Core pricing
gains and higher fuel surcharge revenue more than offset the 1% volume decline. The decrease in volume
was driven by lower shipments of automotive parts, partially offset by growth in coal and refined petroleum
products shipments.
28
Operating Expenses
Millions
Compensation and benefits
Fuel
Purchased services and materials
Depreciation
Equipment and other rents
Other
$
2018
5,056 $
2,531
2,443
2,191
1,072
1,022
2017
4,939 $
1,891
2,363
2,105
888
948
% Change
% Change
2016 2018 v 2017 2017 v 2016
3 %
2 %
4,779
1,489
2,258
2,038
1,137
997
34
3
4
21
8
27
5
3
(22)
(5)
Total
$
14,315 $
13,134 $
12,698
9 %
3 %
2018 Operating Expenses
inflation.
Operating expenses increased $1,181 million in
2018 compared to 2017 driven by higher fuel
prices, excess network costs, volume-related
In
expenses, depreciation, and
addition, 2017 results included a $212 million
reduction to rent expense related to income tax
adjustments at certain equity-method affiliates.
Productivity savings, lower management and
administrative wage and benefit costs, lower
locomotive and freight car lease expenses, joint
facility, and personal injury costs partially offset
these increases.
Operating expenses increased $436 million in
2017 compared to 2016 driven by higher fuel
prices, inflation, $86 million of expenses related
to the third quarter workforce reduction plan, depreciation, contract services, and volume-related costs.
Partially offsetting these increases was a $212 million reduction to operating expense related to income tax
adjustments at certain equity-method affiliates, continued productivity gains, lower locomotive and freight
car lease expense, and lower environmental, personal injury, and joint facility costs.
Compensation and Benefits – Compensation and benefits include wages, payroll taxes, health and welfare
costs, pension costs, other postretirement benefits, and incentive costs. In 2018, expenses increased 2%
compared to 2017, due to volume-related costs, excess network costs, higher training expenses for
trainmen, and wage inflation. Lower management and administrative wage and benefit costs partially offset
these increases.
In 2017, expenses increased 3% compared to 2016, driven by general wage and benefit inflation, $86
million of expenses associated with the workforce reduction plan, volume-related costs, and higher training
expenses for trainmen, which were partially offset by resource productivity gains.
Fuel – Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy
equipment. Locomotive diesel fuel prices, which averaged $2.29 per gallon (including taxes and
transportation costs) in 2018, compared to $1.81 per gallon in 2017, increased expenses $507 million. In
addition, gross-ton miles and the fuel consumption rate (c-rate) both increased 3% in 2018, also driving
higher fuel expense compared to 2017. The c-rate is computed as gallons of fuel consumed divided by
gross ton-miles in thousands.
Locomotive diesel fuel prices, which averaged $1.81 per gallon (including taxes and transportation costs)
in 2017, compared to $1.48 per gallon in 2016, increased expenses $334 million. In addition, fuel costs
were higher as gross-ton miles increased 5% compared to 2016. The c-rate improved 2% compared to
2016.
Purchased Services and Materials – Expense for purchased services and materials includes the costs of
services purchased from outside contractors and other service providers (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
29
intermodal containers; leased automobile maintenance expenses; and tools and supplies. Purchased
services and materials increased 3% in 2018 compared to 2017 primarily due to volume-related costs,
inflationary cost pressures on transportation-related contract services incurred at our subsidiaries that
broker intermodal and transload services, and higher locomotive repair costs due to the larger active fleet
in service. Lower joint facility expenses partially offset these increases.
Purchased services and materials increased 5% in 2017 compared to 2016 primarily due to volume-related
costs (including higher subsidiary contract services) and Hurricane Harvey-related contract service costs,
which were partially offset by lower joint facility expenses.
Depreciation – The majority of depreciation relates to road property, including rail, ties, ballast, and other
track material. A higher depreciable asset base increased depreciation expense in 2018 compared to 2017.
A higher depreciable asset base increased depreciation expense in 2017 compared to 2016. This increase
was partially offset by our recent depreciation studies that resulted in lower depreciation rates for some
asset classes.
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; and office and other rent expenses. Equity income from certain equity method
investments is also included. Equipment and other rents expense increased $184 million compared to
2017 largely driven by a $212 million reduction to 2017 rent expense related to income tax adjustments at
certain equity-method affiliates as a result of the lower federal tax rate implemented January 1, 2018.
Increased car rent expense due to volume growth and slower network velocity also contributed to the
increase. Lower locomotive and freight car lease expenses in 2018 partially offset these increases.
Equipment and other rents expense decreased $249 million compared to 2016. $212 million of the
reduction was due to income tax adjustments at certain equity-method affiliates. Lower locomotive and
freight car lease expense also contributed to the year-over-year decrease. Conversely, increased car rent
expense due to volume growth in certain markets partially offset these decreases.
Other – Other expenses include state and local taxes, freight, equipment and property damage, utilities,
insurance, personal injury, environmental, employee travel, telephone and cellular, computer software, bad
debt, and other general expenses. Other expenses increased 8% in 2018 compared to 2017 as a result of
higher state and local taxes and environmental expenses related to our operating properties. Lower
personal injury expense, an insurance reimbursement for lost revenue and expenses incurred during
Hurricane Harvey in 2017, and reduced costs for destroyed equipment owned by third parties and lower
freight damage expense partially offset these increases.
Other expenses decreased 5% in 2017 compared to 2016 as a result of lower environmental and personal
injury expenses, and higher bad debt expense in 2016 resulting from a customer bankruptcy. Conversely,
increased costs associated with destroyed equipment owned by third parties, and higher property and
damaged freight costs partially offset these decreases.
Non-Operating Items
Millions
Other income
Interest expense
Income tax benefit/(expense)
2018
$
94 $
(870)
(1,775)
2017
245 $
(719)
3,080
% Change
% Change
2016 2018 v 2017 2017 v 2016
11 %
221
3
(698)
F
(2,533)
(62) %
21
U
Other Income – Other income decreased in 2018 compared to 2017 largely as a result of a $65 million gain
on a litigation settlement for back rent and a $57 million real estate gain, both recognized in the third quarter
of 2017. In addition, an $85 million expense associated with early-extinguishment of outstanding
debentures and mortgage bonds recognized in the first quarter of 2018 also contributed to the decrease.
Higher interest income earned in 2018 partially offset these decreases.
Other income increased in 2017 compared to 2016 primarily as a result of a $65 million gain on a litigation
settlement for back rent and a $57 million real estate sale gain, both recognized in the third quarter of 2017.
Rental income also increased in 2017 compared to 2016.
30
Interest Expense – Interest expense increased in 2018 compared to 2017 due to an increased weighted-
average debt level of $20.1 billion in 2018 from $15.9 billion in 2017, partially offset by the impact of a lower
effective interest rate of 4.4% in 2018 compared to 4.6 % in 2017.
Interest expense increased in 2017 compared to 2016 due to an increased weighted-average debt level of
$15.9 billion in 2017 from $15.0 billion in 2016, partially offset by the impact of a lower effective interest rate
of 4.6% in 2017 compared to 4.7% in 2016.
Income Taxes – Income tax expense was $1.8 billion in 2018 compared to a benefit of $3.1 billion in 2017.
The Tax Cuts and Jobs Act was enacted on December 22, 2017 and reduced the federal income tax rate
from 35% to 21% effective January 1, 2018. Consequently, we remeasured our deferred tax assets and
liabilities, resulting in a $5.9 billion non-cash reduction in our income tax expense in 2017.
Our effective tax rate for 2018 was 22.9% compared to (40.4)% in 2017. The 2018 effective tax rate
declined due to decreases in the corporate state income tax rates in Iowa and Missouri. The 2017 rate was
substantially reduced by the impact of the Tax Act, which resulted in a $5.9 billion non-cash reduction in
our 2017 tax expense.
OTHER OPERATING/PERFORMANCE AND FINANCIAL STATISTICS
We report a number of key performance measures weekly to the AAR. We provide this data on our website
at www.up.com/investor/aar-stb_reports/index.htm.
Operating/Performance Statistics
Railroad performance measures are included in the table below:
Average train speed (miles per hour)
Average terminal dwell time (hours)
Gross ton-miles (billions)
Revenue ton-miles (billions)
Operating ratio
Employees (average)
2018
24.5
29.6
928.6
474.0
62.7
41,967
2017
25.4
30.3
898.7
466.7
61.8
41,992
2016
26.6
28.1
856.9
440.1
63.7
42,919
% Change
2018 v 2017
(4)%
(2)%
3 %
2 %
0.9 pts
-%
% Change
2017 v 2016
(5)%
8 %
5 %
6 %
(1.9)pts
(2)%
Average Train Speed – Average train speed is calculated by dividing train miles by hours operated on our
main lines between terminals. Average train speed, as reported to the AAR, declined 4% in 2018 compared
to 2017 largely driven by network congestion on key routes and terminals combined with high freight car
inventory levels during the first half of the year, somewhat offset by implementation of the first phase of our
Unified Plan 2020 in late third quarter 2018. Continued implementation and testing of PTC across a larger
portion of our network also negatively impacted overall average train speed throughout the year.
Average train speed declined 5% in 2017 compared to 2016 as disruptions across our network, including
the impact of Hurricane Harvey, negatively impacted network fluidity. Continued implementation and testing
of Positive Train Control across a growing number of routes in our network combined with operational
challenges also negatively impacted overall average train speed.
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 decreased 2% in 2018 compared to 2017 driven by an 18% improvement in the fourth quarter
compared to the same period in 2017. Implementation of the first phase of our Unified Plan 2020 in late-
third quarter 2018 drove the improvement, more than offsetting the impact of network congestion and high
inventory levels experienced in the first half of the year.
Average terminal dwell time increased 8% in 2017 compared to 2016 resulting from network disruptions
and operational challenges which negatively impacted network fluidity.
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 ton-miles and revenue ton-miles increased 3% and
31
2%, respectively in 2018 compared to 2017, resulting from a 4% increase in carloads. Changes in
commodity mix drove the variances in year-over-year increases between gross ton-miles, revenue ton-
miles, and carloads.
Gross ton-miles and revenue ton-miles increased 5% and 6%, respectively in 2017 compared to 2016,
resulting from a 2% increase in carloads. Changes in commodity mix drove the variances in year-over-year
increases between gross ton-miles, revenue ton-miles, and carloads.
Operating Ratio – Operating ratio is our operating expenses reflected as a percentage of operating revenue.
Our operating ratio increased 0.9 points to 62.7% in 2018 compared to 2017. Income tax adjustments
recognized in 2017 at our equity-method affiliates resulted in one point of the increase. Core pricing gains
and volume growth, mostly offset by excess network costs, higher fuel prices, and inflation, drove 0.1 point
of operating ratio improvement.
Our operating ratio improved 1.9 points to 61.8% in 2017 compared to 2016. Income tax adjustments
recognized in 2017 at our equity-method affiliates drove one point of the improvement. Core pricing gains,
volume growth, and productivity savings more than offset higher inflation, higher fuel prices, and other
expenses to drive 0.9 points of operating ratio improvement.
Employees – Employee levels were flat in 2018 compared to 2017 as a smaller capital workforce and fewer
management and administrative personnel offset the impact of 4% volume growth, which contributed to an
increase in TE&Y employees.
Employee levels decreased 2% in 2017 compared to 2016, driven by productivity gains, a smaller capital
workforce, and fewer management and administrative personnel, which more than offset the impact of 2%
volume growth.
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
Interest expense
Interest on average present value of operating leases
Taxes on interest
Net operating profit after taxes as adjusted (a)
Average equity
Average debt
Average present value of operating leases
$
$
$
$
$
2018
5,966 $
22,640 $
2017
10,712 $
22,394 $
26.4%
47.8%
2016
4,233
20,317
20.8%
2018
5,966 $
870
82
(218)
2017
10,712 $
719
105
(309)
2016
4,233
698
121
(306)
6,700 $
11,227 $
4,746
22,640 $
19,668
2,206
22,394 $
15,976
2,288
20,317
14,604
2,581
Average invested capital as adjusted (b)
$
44,514 $
40,658 $
37,502
Return on invested capital as adjusted (a/b)
15.1%
27.6%
12.7%
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 to management and investors in evaluating the efficiency and effectiveness of our
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. At December 31, 2018, in
transition to the adoption of the new lease accounting standard on January 1, 2019, the incremental
borrowing rate on operating leases was 3.7%. At December 31, 2017 and December 31, 2016, operating
32
leases were discounted using our effective interest rate on debt of 4.6% and 4.7%, respectively. Our 2018
ROIC of 15.1% decreased compared to 2017, largely as a result of the income tax benefit recognized in
2017 related to the $5.9 billion reduction in our deferred tax liability (See Note 8 of the Consolidated
Financial Statements for additional information).
Net Return on Invested Capital as Adjusted (Net ROIC)
The table below reconciles ROIC as previously calculated to Net ROIC for items affecting comparability.
Return on invested capital as adjusted
Factors Affecting Comparability:
Adjustments for Tax Cuts and Jobs Act [a]
Net Return on Invested Capital as Adjusted
2018
15.1%
N/A
15.1%
2017
27.6%
(13.9)
13.7%
2016
12.7%
N/A
12.7%
[a] Adjustments remove the impact of $5.9 billion and $139 million from both 12/31/17 Net Income and 12/31/17 Shareholders’
Equity.
Net 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 to management and investors in evaluating the efficiency and
effectiveness of our long-term capital investments. We use Net ROIC to demonstrate year over year
comparability for significant items. Net 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.
Adjusted Debt / Adjusted EBITDA
Millions, Except Ratios
for the Twelve Months Ended
Net income
Less:
Other income
Add:
Income tax expense/(benefit)
Depreciation
Interest expense
EBITDA
Interest on present value of operating leases
Adjusted EBITDA (a)
Debt
Net present value of operating leases
Unfunded pension and OPEB,
net of taxes of $135, $238, and $261
Adjusted debt (b)
Adjusted debt / Adjusted EBITDA (b/a)
Dec. 31,
2018
5,966
94
1,775
2,191
870
10,708
84
10,792
22,391
2,271
456
25,118
2.3
$
$
$
$
$
Dec. 31,
2017
10,712
245
(3,080)
2,105
719
10,211
98
10,309
16,944
2,140
396
19,480
1.9
$
$
$
$
$
Dec. 31,
2016
4,233
221
2,533
2,038
698
9,281
114
9,395
15,007
2,435
436
17,878
1.9
$
$
$
$
$
Adjusted debt to Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization and interest
on present value of operating leases) 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 to management and investors in evaluating the Company’s
ability to sustain given debt levels (including leases) with the cash generated from operations. In addition,
a comparable measure is used by rating agencies when reviewing the Company’s credit rating. Adjusted
debt to Adjusted EBITDA should be considered in addition to, rather than as a substitute for, net income.
The table above provides reconciliations from net income to adjusted debt to adjusted EBITDA. At
December 31, 2018, in transition to the adoption of the new lease accounting standard on January 1, 2019,
the incremental borrowing rate on operating leases was 3.7%. At December 31, 2017 and December 31,
2016, operating leases were discounted using our effective interest rate on debt of 4.6% and 4.7%,
respectively.
33
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2018, we had a working capital deficit. At December 31, 2017, we had a working capital
surplus. The deficit at 2018 year-end was primarily due to an increase in upcoming debt maturities. As past
years indicate, it is not unusual for us to have a working capital deficit; however, we believe it is not an
indication of a lack of liquidity. We also maintain adequate resources, including our credit facility, and when
necessary, access to capital markets to meet any foreseeable cash requirements.
As of December 31, 2018, 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. We had $2.0 billion of committed credit available
under our credit facility, with no borrowings outstanding as of December 31, 2018. We did not draw on our
current facility or previous facility at any time during 2018. The value of the outstanding undivided interest
held by investors under the $650 million capacity receivables securitization facility was $400 million as of
December 31, 2018. Our access to this receivables securitization facility may be reduced or restricted if our
bond ratings fall to certain levels below investment grade. 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 through any or all of the following sources or
activities: (i) increasing the size or utilization of our receivables securitization, (ii) issuing commercial paper,
(iii) entering into bank loans, outside of our revolving credit facility, or (iv) issuing bonds or other debt
securities to public or private investors based on our assessment of the current condition of the credit
markets. The Company’s $2.0 billion revolving credit facility is intended to support the issuance of
commercial paper by UPC and also serves as an additional source of liquidity to fund short term needs.
The Company currently does not intend to make any borrowings under this facility.
Cash Flows
Millions
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Net change in cash, cash equivalents and restricted cash
Operating Activities
2018
8,686 $
(3,411)
(5,222)
2017
7,230 $
(3,086)
(4,146)
2016
7,525
(3,393)
(4,246)
53 $
(2) $
(114)
$
$
Cash provided by operating activities increased in 2018 compared to 2017 due primarily to lower federal
income tax payments.
Cash provided by operating activities decreased in 2017 compared to 2016 due to the timing of tax
payments in 2016 related to bonus depreciation on capital spending. The decrease was mostly offset by
higher income in 2017 compared to 2016.
The Tax Act was enacted on December 22, 2017. The Tax Act extended 100% bonus depreciation effective
September 27, 2017 through 2022, and phases out bonus deprecation by 2027.
Investing Activities
Higher capital investments increased cash used in investing activities in 2018 compared to 2017.
Lower capital investments and short-term investment purchases decreased cash used in investing activities
in 2017 compared to 2016.
34
The following tables detail cash capital investments and track statistics for the years ended December 31,
2018, 2017, and 2016:
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 [b]
Positive train control
Technology and other
Total cash capital investments
$
2018
608 $
444
216
576
2017
619 $
480
231
503
2016
628
494
235
480
1,844
1,833
1,837
286
234
520
716
158
199
124
189
313
607
336
149
153
152
305
854
371
138
$
3,437 $
3,238 $
3,505
[a] Other includes bridges and tunnels, signals, other road assets, and road work equipment.
[b] Locomotives and freight cars include early lease buyouts of $290 million in 2018, $173 million in 2017, and $90 million in 2016.
Track miles of rail replaced
Track miles of rail capacity expansion
New ties installed (thousands)
Miles of track surfaced
2018
700
39
4,285
9,466
2017
731
11
4,026
11,071
2016
791
52
4,482
11,764
Capital Plan – In 2019, we expect our capital plan to be approximately $3.2 billion, which may be revised
if business conditions or the regulatory environment affect our ability to generate sufficient returns on these
investments. While asset replacements will fluctuate as part of our renewal strategy, we expect to use 75%
to 80% of our capital investments to renew and improve existing capital assets. We will continue to balance
investment in our network infrastructure and terminal capacity as appropriate, including new capacity
investments designed to support future business growth and operational efficiency. Significant investments
will be made for locomotive modernization and freight cars.
We expect to fund our 2019 cash capital plan by using some or all of the following: cash generated from
operations, proceeds from the sale or lease of various operating and non-operating properties, proceeds
from the issuance of long-term debt, and cash on hand. Our annual capital plan is a critical component of
our long-term strategic plan. We expect our plan will enhance the long-term value of the Company 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 2018 compared to 2017. Increases of $4,212 million in share
repurchase programs, $317 million in dividends paid and $896 million in debt repaid more than offset
increases of $4,157 million in debt issued and $194 million in net issuances of commercial paper.
Cash used in financing activities decreased in 2017 compared to 2016. An increase of $908 million in
common shares purchased and an increase of $103 million in dividends paid was more than offset by an
increase of $752 million in debt issued, a decrease of $173 million in debt repaid, and a decrease of $191
million in debt exchange costs.
See Note 15 of the Consolidated Financial Statements for a description of all our outstanding financing
arrangements and significant new borrowings.
35
Share Repurchase Programs
Effective January 1, 2017, our Board of Directors authorized the repurchase of up to 120 million shares of
our common stock by December 31, 2020, replacing our previous repurchase program. As of December
31, 2018, we repurchased a total of $31.4 billion of our common stock since the commencement of our
repurchase programs in 2007. The table below represents shares repurchased in 2018 under this
repurchase program.
First quarter
Second quarter [a]
Third quarter
Fourth quarter [b]
Total
Number of Shares Purchased
2017
2018
9,259,004
33,229,992
2,239,405
12,490,632
7,531,300 $
7,788,283
11,801,755
9,231,510
Average Price Paid
2017
2018
106.55
132.84 $
109.10
142.74
106.69
151.94
119.37
153.04
57,219,033
36,352,848 $
143.75 $
110.40
Remaining number of shares that may be repurchased under current authority
26,428,119
[a]
[b]
Includes initial delivery of 19,870,292 shares repurchased under accelerated share repurchase programs.
Includes 4,457,356 shares received upon settlement of accelerated share repurchase programs.
Management's assessments of market conditions and other pertinent facts guide the timing and volume of
all repurchases. We expect to fund any share repurchases under this program through cash generated
from operations, the sale or lease of various operating and non-operating properties, debt issuances, and
cash on hand. Open market repurchases are recorded in treasury stock at cost, which includes any
applicable commissions and fees.
From January 1, 2019, through February 7, 2019, we repurchased 3.4 million shares at an aggregate cost
of approximately $521 million.
On February 7, 2019, the Board of Directors approved a new share repurchase authorization, enabling the
Company to buy up to 150 million of its common shares by March 31, 2022. The new authorization is
effective April 1, 2019, and replaces the current authorization, which will now expire on March 31, 2019.
Accelerated Share Repurchase Programs – On June 14, 2018, the Company established accelerated
share repurchase programs (ASRs) with two financial institutions to repurchase shares of our common
stock. Under these ASRs, we paid a pre-specified amount of $3.6 billion and received an initial delivery of
19,870,292 shares on June 15, 2018. Upon settlement of the ASRs, we received 4,457,356 additional
shares in the fourth quarter of 2018. The final number of shares repurchased under the ASRs was based
on the volume weighted average stock price of the Company’s common stock during the ASR term, less a
negotiated discount.
ASRs are accounted for as equity transactions, and at the time of receipt, shares are included in treasury
stock at fair market value as of the corresponding initiation or settlement date. The Company reflects shares
received as a repurchase of common stock in the weighted average common shares outstanding
calculation for basic and diluted earnings per share.
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.
36
The following tables identify material obligations and commitments as of December 31, 2018:
Payments Due by December 31,
Contractual Obligations
Millions
Debt [a]
Operating leases [b]
Capital lease obligations [c]
Purchase obligations [d]
Other post retirement benefits [e]
Income tax contingencies [f]
2019
2022
2020
Total
2021
$ 38,253 $ 2,256 $ 1,679 $ 1,926 $ 1,556 $ 2,028 $ 28,808 $
303
159
265
49
-
2,646
898
3,311
477
174
1,040
200
49
233
-
419
148
1,915
50
99
378
155
967
49
-
272
142
49
48
-
234
94
30
48
-
2023
After
2023
Other
-
-
-
36
-
75
Total contractual obligations
$ 45,759 $ 4,887 $ 3,228 $ 2,702 $ 2,067 $ 2,434 $ 30,330 $
111
[a] Excludes capital lease obligations of $754 million, as well as unamortized discount and deferred issuance costs of $(817) million.
Includes an interest component of $15,799 million.
Includes leases for locomotives, freight cars, other equipment, and real estate.
[b]
[c] Represents total obligations, including interest component of $144 million.
[d] Purchase obligations include locomotive maintenance contracts; purchase commitments for fuel purchases, locomotives, ties,
ballast, and rail; and agreements to purchase other goods and services. For amounts where we cannot reasonably estimate the
year of settlement, they are reflected in the Other column.
Includes estimated other post retirement, medical, and life insurance payments, payments made under the unfunded pension
plan for the next ten years.
[e]
[f] Future cash flows for income tax contingencies reflect the recorded liabilities and assets for unrecognized tax benefits, including
interest and penalties, as of December 31, 2018. For amounts where the year of settlement is uncertain, they are reflected in
the Other column.
Other Commercial Commitments
Millions
Credit facilities [a]
Receivables securitization facility [b]
Guarantees [c]
Standby letters of credit [d]
Total
$ 2,000
650
22
18
$
- $
650
7
16
Amount of Commitment Expiration per Period
2019
2020
2021
2022
2023
- $
-
5
2
7 $
- $
-
5
-
5 $
- $ 2,000 $
-
5
-
-
-
-
After
2023
-
-
-
-
Total commercial commitments
$ 2,690
$
673 $
5 $ 2,000 $
-
[a] None of the credit facility was used as of December 31, 2018.
[b] $400 million of the receivables securitization facility was utilized as of December 31, 2018, which is accounted for as debt. The
full program matures in July 2019.
[c]
Includes guaranteed obligations related to our affiliated operations.
[d] None of the letters of credit were drawn upon as of December 31, 2018.
Off-Balance Sheet Arrangements
Guarantees – At December 31, 2018, and 2017, we were contingently liable for $22 million and $33 million
in guarantees. The fair value of these obligations as of both December 31, 2018, and 2017, was $0. We
entered into these contingent guarantees in the normal course of business, and they include guaranteed
obligations related to our 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.
OTHER MATTERS
Labor Agreements – Approximately 85% of our full-time employees are represented by 14 major rail
unions. Pursuant to the Railway Labor Act (RLA), our collective bargaining agreements are subject to
modification every five years. The most recent round of negotiations started on January 1, 2015, and
throughout 2017 and 2018, we concluded new agreements with all 14 major rail unions. Existing
agreements remain in effect until new agreements are ratified or until the RLA procedures are exhausted.
The RLA procedures include mediation, potential arbitration, cooling-off periods, and the possibility of
Presidential Emergency Boards and Congressional intervention. The next round of negotiations begins with
the service of RLA Section 6 notices on or about November 1, 2019 related to years 2019-2023. Contract
37
negotiations historically continue for an extended period of time, and work stoppages during negotiations
are rare.
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.
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, 2018, we had variable-rate debt representing approximately 3.8% of our total debt. If
variable interest rates average one percentage point higher in 2019 than our December 31, 2018 variable
rate, which was approximately 3.3%, our interest expense would increase by approximately $8.5 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, 2018.
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, 2018, and amounts to an increase of
approximately $2.4 billion to the fair value of our debt at December 31, 2018. 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.
Accounting Pronouncements – See Note 3 to the Consolidated Financial Statements.
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. To the extent possible, we have recorded
a liability where asserted and unasserted claims are considered probable and where such claims can be
reasonably estimated. 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.
Gain Contingency – UPRR filed multiple claims with the IRS for refunds of railroad retirement taxes
(Railroad Retirement Taxes) paid on (i) certain stock awards to its employees and (ii) certain bonus
payments it made to labor agreement employees during the years 1991 – 2017. In 2016, the U.S. District
Court for the District of Nebraska (the District Court) denied UPRR recovery of these Railroad Retirement
Taxes. UPRR appealed this denial to the U.S. Court of Appeals for the 8th Circuit (8th Circuit) and the 8th
Circuit ruled in favor of UPRR and remanded the case to the District Court. The IRS appealed the 8th Circuit
ruling to the U.S. Supreme Court. In June 2018, a similar case for another railroad was decided by the U.S.
Supreme Court against the IRS and in favor of that railroad (Wisconsin Central LTD., Et. Al. v. U.S.). As a
result, the U.S. Supreme Court denied the IRS request to appeal the 8th Circuit ruling. On November 28,
2018 the District Court issued an order granting summary judgment to UPRR pursuant to the mandate of
the 8th Circuit. UPRR, the Department of Justice (DOJ), and the IRS have since agreed upon the tax refund
amounts owed UPRR and its employees. UPRR’s employer refund of $78 million will be recognized as a
reduction of compensation and benefit expenses and approximately $30 million of interest will be
recognized in other income. UPRR expects to receive the refunds in 2019, but the refunds may be received
in multiple portions at different times. UPRR is in the process of seeking consent from approximately 75,000
current and former employees to obtain their employee share of the refunds. UPRR anticipates having this
consent process completed in the first half of 2019, but further actions by the IRS and Railroad Retirement
Board may delay completion until later in 2019.
These refund claims are considered gain contingencies and no refund amounts have been recorded in the
Consolidated Financial Statements as of December 31, 2018. The claims will be recorded when a final
judgment from the District Court has been issued and all IRS requirements for UPRR’s refunds have been
fulfilled.
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
38
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 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 not discounted to present value due to the uncertainty surrounding the timing
of future payments. Approximately 94% of the recorded liability is related to asserted claims and
approximately 6% is related to unasserted claims at December 31, 2018. 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 $271 million to $297 million. We record an accrual at the
low end of the range as no amount of loss within the range is more probable than any other. Estimates can
vary over time due to evolving trends in litigation.
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
39
2018
285 $
74
(16)
(72)
271 $
2017
290 $
77
(7)
(75)
285 $
72 $
66 $
2016
318
75
(29)
(74)
290
62
$
$
$
2018
2,090
3,188
(3,253)
2,025
2017
2,157
3,024
(3,091)
2,090
2016
2,404
2,453
(2,700)
2,157
We reassess our estimated insurance recoveries annually and have recognized an asset for estimated
insurance recoveries at December 31, 2018, and 2017. Any changes to recorded insurance recoveries are
included in the above table in the Changes in estimates for prior years category.
Environmental Costs – We are subject to federal, state, and local environmental laws and regulations.
We have identified 334 sites at which we are or may be liable for remediation costs associated with alleged
contamination or for violations of environmental requirements. This includes 33 sites that are the subject of
actions taken by the U.S. government, 21 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 perform, with assistance of our consultants, 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 such costs can be reasonably estimated. Our environmental liability is not discounted to
present value due to the uncertainty surrounding the timing of future payments.
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
2018
196 $
84
(57)
223 $
2017
212 $
45
(61)
196 $
59 $
57 $
$
$
$
2018
315
91
(72)
334
2017
292
77
(54)
315
2016
190
84
(62)
212
55
2016
290
85
(83)
292
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 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.
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, and yard and switching tracks) 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.
40
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 2018, the estimated service lives
of the majority of this rail ranged from approximately 19 years to approximately 41 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 $70 million. If the estimated useful lives of
all depreciable assets were decreased by one year, annual depreciation expense would increase by
approximately $75 million. Our 2018 depreciation studies have resulted in lower depreciation rates for
some asset classes. These lower rates will partially offset the impact of a projected higher depreciable
asset base, resulting in an increase in total depreciation expense by approximately 3% in 2019 versus
2018.
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 by multiplying the current replacement
cost of track assets by a historical index factor derived from (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) it is unusual,
(ii) it is material in amount, and (iii) it 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.
41
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 tax legislation are not anticipated. Future tax
legislation, 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 permanent 1% increase in future income tax
rates would increase our deferred tax liability by approximately $450 million. Similarly, a permanent 1%
decrease in future income tax rates would decrease our deferred tax liability by approximately $450 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 for purposes of estimating whether future
taxable income will be sufficient to realize a deferred tax asset. In 2018 and 2017, there were no valuation
allowances.
We recognize tax benefits 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
rates and expected rate of return on pension assets. For OPEB, the critical assumptions are the discount
rates and health care cost trend rate.
We evaluate our critical assumptions at least annually, and selected assumptions are based on the
following factors:
We measure the service cost and interest cost components of our net periodic benefit cost by using
individual spot rates matched with separate cash flows for each future year. Discount rates are based
on a Mercer yield curve of high quality corporate bonds (rated AA by a recognized rating agency).
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.
The following tables present the key assumptions used to measure net periodic pension and OPEB
cost/(benefit) for 2019 and the estimated impact on 2019 net periodic pension and OPEB cost/(benefit)
relative to a change in those assumptions:
Assumptions
Discount rate for benefit obligations
Discount rate for interest on benefit obligations
Discount rate for service cost
Discount rate for interest on service cost
Expected return on plan assets
Compensation increase
Health care cost trend rate:
Pre-65 current
Pre-65 level in 2038
Sensitivities
Millions
0.25% decrease in discount rates
0.25% increase in compensation scale
0.25% decrease in expected return on plan assets
1% increase in health care cost trend rate
$
$
$
42
Pension
4.23%
3.94%
4.33%
4.30%
7.00%
4.19%
N/A
N/A
OPEB
4.17%
3.84%
4.32%
4.27%
N/A
N/A
6.09%
4.50%
Pension
Increase in Expense
OPEB
-
N/A
N/A
3
13 $
10
10
N/A $
The following table presents the net periodic pension and OPEB cost for the years ended December 31:
Millions
Net periodic pension cost
Net periodic OPEB cost
CAUTIONARY INFORMATION
Est.
2019
39 $
19
$
2018
71 $
23
2017
115 $
22
2016
43
13
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; statements regarding planned capital expenditures
under the caption “2019 Capital Plan” in Item 2 of Part I; statements regarding dividends in Item 5 of Part
II; and statements and information set forth under the captions “2019 Outlook”; “Liquidity and Capital
Resources”; and “Pension and Other Postretirement Benefits” in this Item 7 of Part II, 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 implementation of PTC; 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; estimates and expectations regarding tax matters; 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.
****************************************
43
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income
For the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Financial Position
At December 31, 2018 and 2017
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Changes in Common Shareholders’ Equity
For the Years Ended December 31, 2018, 2017, and 2016
Notes to the Consolidated Financial Statements
45
46
46
47
48
49
50
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Union Pacific Corporation
Omaha, Nebraska
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Union Pacific
Corporation and Subsidiary Companies (the "Corporation") as of December 31, 2018 and 2017, the related
consolidated statements of income, comprehensive income, changes in common shareholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2018, and the related notes and
the schedule listed in the Table of Contents at Part IV, Item 15 (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Corporation as of December 31, 2018 and 2017, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the Corporation's internal control over financial reporting as of December
31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 8,
2019, expressed an unqualified opinion on the Corporation's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on the Corporation's financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the
Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Omaha, Nebraska
February 8, 2019
We have served as the Corporation’s auditor since 1967.
45
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 7)
Interest expense
Income before income taxes
Income tax benefit/(expense) (Note 8)
Net income
Share and Per Share (Note 9):
Earnings per share - basic
Earnings per share - diluted
Weighted average number of shares - basic
Weighted average number of shares - diluted
Dividends declared per share
2018
2017
2016
$
21,384 $
1,448
19,837 $
1,403
22,832
21,240
5,056
2,531
2,443
2,191
1,072
1,022
4,939
1,891
2,363
2,105
888
948
18,601
1,340
19,941
4,779
1,489
2,258
2,038
1,137
997
14,315
13,134
12,698
8,517
94
(870)
7,741
(1,775)
8,106
245
(719)
7,632
3,080
7,243
221
(698)
6,766
(2,533)
5,966 $
10,712 $
4,233
7.95 $
7.91 $
750.9
754.3
13.42 $
13.36 $
798.4
801.7
5.09
5.07
832.4
835.4
3.06 $
2.48 $
2.255
$
$
$
$
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Union Pacific Corporation and Subsidiary Companies
Millions,
for the Years Ended December 31,
Net income
Other comprehensive income/(loss):
Defined benefit plans
Foreign currency translation
Total other comprehensive income/(loss) [a]
2018
2017
2016
$
5,966
$
10,712 $
4,233
62
(36)
26
103
28
131
(29)
(48)
(77)
Comprehensive income
$
5,992
$
10,843 $
4,156
[a] Net of deferred taxes of $(22) million, $(61) million, $49 million, and during 2018, 2017, and 2016, respectively.
The accompanying notes are an integral part of these Consolidated Financial Statements.
46
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Union Pacific Corporation and Subsidiary Companies
Millions, Except Share and Per Share Amounts
as of December 31,
Assets
Current assets:
Cash and cash equivalents
Short-term investments (Note 14)
Accounts receivable, net (Note 11)
Materials and supplies
Other current assets
Total current assets
Investments
Net properties (Note 12)
Other assets
Total assets
Liabilities and Common Shareholders' Equity
Current liabilities:
Accounts payable and other current liabilities (Note 13)
Debt due within one year (Note 15)
Total current liabilities
Debt due after one year (Note 15)
Deferred income taxes (Note 8)
Other long-term liabilities
Commitments and contingencies (Notes 17 and 18)
Total liabilities
Common shareholders' equity:
Common shares, $2.50 par value, 1,400,000,000 authorized;
1,111,739,781 and 1,111,371,304 issued; 725,056,690 and 780,917,756
outstanding, respectively
Paid-in-surplus
Retained earnings
Treasury stock
Accumulated other comprehensive loss (Note 10)
Total common shareholders' equity
Total liabilities and common shareholders' equity
The accompanying notes are an integral part of these Consolidated Financial Statements.
2018
2017
$
1,273 $
60
1,755
742
333
4,163
1,912
52,679
393
1,275
90
1,493
749
399
4,006
1,809
51,605
386
$
59,147 $
57,806
$
3,160 $
1,466
4,626
20,925
11,302
1,871
3,139
800
3,939
16,144
10,936
1,931
38,724
32,950
2,779
4,449
45,284
(30,674)
(1,415)
2,778
4,476
41,317
(22,574)
(1,141)
20,423
24,856
$
59,147 $
57,806
47
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 and other income taxes
Net gain on non-operating asset dispositions
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
Income and other taxes
Cash provided by operating activities
Investing Activities
Capital investments
Purchases of short-term investments (Note 14)
Maturities of short-term investments (Note 14)
Proceeds from asset sales
Other investing activities, net
Cash used in investing activities
Financing Activities
Share repurchase programs (Note 19)
Debt issued (Note 15)
Dividends paid
Debt repaid
Net issuance of commercial paper
Debt exchange
Other financing activities, net
Cash used in financing activities
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents, and restricted cash at beginning of year
Cash, cash equivalents, and restricted cash at end of year
Supplemental Cash Flow Information
Non-cash investing and financing activities:
Term loan renewals
Capital investments accrued but not yet paid
Capital lease financings
Cash paid during the year for:
Income taxes, net of refunds
Interest, net of amounts capitalized
2018
2017
2016
$
5,966 $
10,712 $
4,233
2,191
338
(30)
347
(262)
7
(24)
(125)
278
8,686
(3,437)
(90)
90
63
(37)
(3,411)
2,105
(5,067)
(111)
(282)
(235)
(32)
9
182
(51)
7,230
(3,238)
(120)
90
168
14
(3,086)
(8,225)
6,892
(2,299)
(1,736)
194
-
(48)
(5,222)
53
1,275
1,328 $
(4,013)
2,735
(1,982)
(840)
-
-
(46)
(4,146)
(2)
1,277
1,275 $
2,038
831
(94)
(228)
98
19
22
232
374
7,525
(3,505)
(580)
520
129
43
(3,393)
(3,105)
1,983
(1,879)
(1,013)
-
(191)
(41)
(4,246)
(114)
1,391
1,277
250 $
205
12
- $
366
19
-
223
-
(1,205) $
(728)
(2,112) $
(666)
(1,347)
(652)
$
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
48
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Union Pacific Corporation and Subsidiary Companies
Millions
Balance at January 1, 2016
Net income
Other comprehensive loss
Conversion, stock option
exercises, forfeitures, and other
Share repurchase programs
(Note 19)
Cash dividends declared
($2.255 per share)
Balance at December 31, 2016
Net income
Other comprehensive income
Conversion, stock option
exercises, forfeitures, and other
Share repurchase programs
(Note 19)
Cash dividends declared
($2.48 per share)
Balance at December 31, 2017
Net income
Other comprehensive income
Conversion, stock option
exercises, forfeitures, and other
Share repurchase programs
(Note 19)
Cash dividends declared
($3.06 per share)
Reclassification due to ASU
2018-02 adoption (Note 3)
-
-
Common
Shares
Treasury
Shares
Common
Shares
Paid-in-
Surplus
Retained
Earnings
Total
1,110.4 (261.2)$ 2,776 $ 4,417 $ 30,233 $ (15,529) $ (1,195) $ 20,702
4,233
(77)
4,233
-
-
(77)
-
-
-
-
-
-
Treasury
Stock
AOCI
[a]
0.6
1.1
1
4
-
-
(35.1)
-
-
-
-
-
53
(3,105)
-
(1,879)
-
1,111.0 (295.2)$ 2,777 $ 4,421 $ 32,587 $ (18,581) $ (1,272) $ 19,932
10,712
131
10,712
-
-
131
-
-
-
-
-
-
0.4
1.1
1
55
-
-
(36.4)
-
-
-
-
-
20
(4,013)
-
(1,982)
-
1,111.4 (330.5)$ 2,778 $ 4,476 $ 41,317 $ (22,574) $ (1,141) $ 24,856
5,966
26
5,966
-
-
26
-
-
-
-
-
-
0.3
1.1
1
65
-
-
(57.2)
-
-
-
-
-
-
33
(8,133)
(92)
-
(2,299)
-
300
-
-
-
-
-
99
(8,225)
(2,299)
(300)
-
-
-
-
58
(3,105)
(1,879)
-
-
-
76
(4,013)
(1,982)
Balance at December 31, 2018
1,111.7 (386.6)$ 2,779 $ 4,449 $ 45,284 $ (30,674) $ (1,415) $ 20,423
[a] AOCI = Accumulated Other Comprehensive Income/(Loss) (Note 10)
The accompanying notes are an integral part of these Consolidated Financial Statements.
49
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”,
“Company”, “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 operating in the U.S. Our network includes
32,236 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 own 26,039 miles and operate on the
remainder pursuant to trackage rights or leases. 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 we provide and analyze revenue by commodity group, we treat the financial results of the Railroad
as one segment due to the integrated nature of our rail network. Our operating revenues are primarily
derived from contracts with customers for the transportation of freight from origin to destination. Effective
January 1, 2018, the Company reclassified its six commodity groups into four: Agricultural Products,
Energy, Industrial, and Premium. The following table represents a disaggregation of our freight and other
revenues:
Millions
Agricultural Products
Energy
Industrial
Premium
Total freight revenues
Other subsidiary revenues
Accessorial revenues
Other
Total operating revenues
$
$
2018
4,469 $
4,608
5,679
6,628
21,384 $
881
502
65
2017
4,303 $
4,498
5,204
5,832
19,837 $
885
458
60
2016
4,209
3,715
4,964
5,713
18,601
814
455
71
$
22,832 $
21,240 $
19,941
Although our revenues are principally derived from customers domiciled in the U.S., the ultimate points of
origination or destination for some products we transport are outside the U.S. Each of our commodity
groups includes revenue from shipments to and from Mexico. Included in the above table are freight
revenues from our Mexico business which amounted to $2.5 billion in 2018, $2.3 billion in 2017, and $2.2
billion in 2016.
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, Cash Equivalents and Restricted Cash – Cash equivalents consist of investments with original
maturities of three months or less. Amounts included in restricted cash represent those required to be set
aside by contractual agreement.
50
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within
the Consolidated Statements of Financial Position that sum to the total of the same such amounts shown
on the Consolidated Statements of Cash Flows:
Millions
Cash and cash equivalents
Restricted cash equivalents in other current assets
Restricted cash equivalents in other assets
Total cash, cash equivalents and restricted cash
equivalents shown on the Statement of Cash Flows:
$
$
2018
1,273 $
42
13
1,328 $
2017
1,275 $
-
-
1,275 $
2016
1,277
-
-
1,277
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. The results of operations for our equity method
investments that are integral to our operations are recorded in operating expenses.
Materials and Supplies – Materials and supplies are carried at the lower of average cost or net realizable
value.
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, and yard and switching
tracks), 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 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 – Freight revenues are derived from contracts with customers. We account for a
contract when it has approval and commitment from both parties, the rights of the parties are identified,
payment terms are identified, the contract has commercial substance, and collectability of consideration is
probable. Our contracts include private agreements, private rate/letter quotes, public circulars/tariffs, and
interline/foreign agreements. The performance obligation in our contracts is typically delivering a specific
commodity from a place of origin to a place of destination and our commitment begins with the tendering
and acceptance of a freight bill of lading and is satisfied upon delivery at destination. We consider each
freight shipment to be a distinct performance obligation.
We recognize freight revenues over time 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. Outstanding performance obligations related to freight moves in transit
totaled $123 million at December 31, 2018 and $154 million at December 31, 2017 and are expected to be
recognized in the next quarter as we satisfy our remaining performance obligations and deliver freight to
destination. The transaction price is generally specified in a contract and may be dependent on the
commodity, origin/destination, and route. 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.
51
Under typical payment terms, our customers pay us after each performance obligation is satisfied and there
are no material contract assets or liabilities associated with our freight revenues. Outstanding freight
receivables are presented in our Consolidated Statement of Financial Position as Accounts Receivables,
net.
Freight revenue related to interline transportation services that involve other railroads are reported on a net
basis. The portion of the gross amount billed to customers that is remitted by the Company to another party
is not reflected as freight revenue.
Other revenues consist primarily of revenues earned by our other subsidiaries (primarily logistics and
commuter rail operations) and accessorial revenues. Other subsidiary revenues are generally recognized
over time as shipments move 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.
Accessorial revenues are recognized at a point in time as performance obligations are satisfied.
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 short term investments, pension plan assets and short-
and long-term debt.
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.
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 tax legislation are not anticipated. Future tax
legislation, 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 for purposes of estimating whether future
taxable income will be sufficient to realize a deferred tax asset.
52
We recognize tax benefits 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, compensation 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 not discounted to present value. 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 perform, with the assistance
of our consultants, 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.
Use of Estimates – The preparation of our Consolidated Financial Statements in conformity with GAAP
requires management to make estimates and assumptions that affect certain reported assets and liabilities,
and the disclosure of certain contingent assets and liabilities as of the date of the consolidated financial
statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual
future results may differ from such estimates.
3. Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from
Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition guidance in
Topic 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize
revenue to depict the transfer of promised goods and services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in the exchange for those goods or services. This
may require the use of more judgment and estimates in order to correctly recognize the revenue expected
as an outcome of each specific performance obligation. Additionally, this guidance requires the disclosure
of the nature, amount, and timing of revenue arising from contracts so as to aid in the understanding of the
users of financial statements.
Effective January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective transition
method. The Company analyzed its freight and other revenues and recognizes freight revenues as freight
moves from origin to destination and recognizes other revenues as identified performance obligations are
satisfied. We also analyzed freight and other revenues in the context of the new guidance on principal
versus agent considerations and evaluated the required new disclosures. The ASU did not have an impact
on our consolidated financial position, results of operations, or cash flows.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01 (ASU 2016-01), Recognition
and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). ASU 2016-01 provides
guidance for the recognition, measurement, presentation, and disclosure of financial instruments. Effective
January 1, 2018, the Company adopted the ASU and it did not have an impact on our consolidated financial
position, results of operations, or cash flows.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07 (ASU 2017-07), Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). ASU
2017-07 requires the service cost component be reported separately from the other components of net
benefit costs in the income statement, provides explicit guidance on the presentation of the service cost
component and the other components of net benefit cost in the income statement, and allows only the
53
service cost component of net benefit cost to be eligible for capitalization. Effective January 1, 2018, we
adopted the standard on a retrospective basis. As a result of the adoption, only service costs are recorded
within compensation and benefits expense, and the other components of net benefit costs are now recorded
within other income.
The impact of ASU 2017-07 adoption is shown in the following table:
Millions
Increase/(decrease) in operating income
Increase/(decrease) in other income
$
2018
(13)
13
$
2017
45
(45)
$
2016
(29)
29
On February 14, 2018, the FASB issued Accounting Standards Update 2018-02, (ASU 2018-02),
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows
entities the option to reclassify from accumulated other comprehensive income (AOCI) to retained earnings
the income tax effects that remain stranded in AOCI resulting from the application of the Tax Act. ASU
2018-02 is effective for fiscal years beginning after December 15, 2018. Early adoption of the ASU is
permitted. We adopted ASU 2018-02 during the first quarter of 2018. As a result of this adoption, we elected
to reclassify $300 million from AOCI to retained earnings. We adopted the policy that future income tax
effects that are stranded in AOCI will be released only when the entire portfolio of the type of item is
liquidated.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases
(Subtopic 842). ASU 2016-02 will require companies to recognize lease assets and lease liabilities on the
balance sheet and disclose key information about leasing arrangements. For public companies, this
standard is effective for annual reporting periods beginning after December 15, 2018, and early adoption is
permitted. We have implemented an enterprise-wide lease management system to support the new
reporting requirements, and effective January 1, 2019, the Company adopted ASU 2016-02. We elected
an initial application date of January 1, 2019 and will not recast comparative periods in transition to the new
standard. In addition, we elected certain practical expedients which permit us not to reassess whether
existing contracts are or contain leases, to not reassess the lease classification of any existing leases, to
not reassess initial direct costs for any existing leases, and to not separate lease components for all classes
of underlying assets. We also made an accounting policy election to keep leases with an initial term of 12
months or less off of the balance sheet for all classes of underlying assets. Adoption of the new standard
resulted in an increase in the Company’s assets and liabilities of approximately $2 billion. The ASU did not
have an impact on our consolidated results of operations or cash flows.
4. Workforce Reduction Plans
On October 23, 2018, we announced the elimination of one operating region and five service units as part
of a broader effort to more closely align operating resources with the Company’s long term strategic
initiatives. This resulted in the reduction of approximately 330 management employees in the fourth quarter
of 2018. In addition, approximately 140 agreement positions were reduced as part of ongoing initiatives.
On August 16, 2017, the Company approved and commenced a management and administrative personnel
reorganization plan (the “Plan”) furthering its on-going efforts to increase efficiency and more effectively
align Company resources. The Plan implemented productivity initiatives identified during a Company-wide
organizational review that included the reduction of approximately 460 management positions and 250
agreement positions during the third and fourth quarters of 2017.
These workforce reductions resulted in pretax charges recognized within compensation and benefits
expense and other income in our Consolidated Statements of Income. The charges consisted of
management employee termination benefits, including pension expenses, severance costs, and
acceleration of equity compensation expense as shown in the following table:
54
Millions
for the Years Ended December 31,
Compensation and benefits expense
Severance
Equity compensation
Other income
Pension
Total expense
2018
2017
$
$
$
23
2
-
25
$
12
5
69
86
The 2017 workforce reduction plan included an enhanced pension benefit which resulted in a curtailment
loss of $20 million and a special termination benefit of $49 million as a result of a remeasurement as of
September 30, 2017. In accordance with ASU 2017-07, both of these charges were recorded within other
income.
The actions associated with the above workforce reductions are substantially complete, however we expect
future workforce reductions may result in additional charges (that we cannot currently, reasonably estimate)
as management continues to analyze the Company’s cost structure and evaluate other restructuring and
cost reduction opportunities that will further align with the Company’s long-term strategic priorities.
5. Stock Options and Other Stock Plans
In April 2000, the shareholders approved the Union Pacific Corporation 2000 Directors Plan (Directors Plan)
whereby 2,200,000 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, received a grant of 4,000 retention shares or retention stock units. In July 2018, the Board of
Directors eliminated the retention grant for directors newly elected in 2018 and all future years. As of
December 31, 2018, 36,000 restricted shares were outstanding under the Directors Plan.
The Union Pacific Corporation 2004 Stock Incentive Plan (2004 Plan) was approved by shareholders in
April 2004. The 2004 Plan reserved 84,000,000 shares of our common stock for issuance, plus any shares
subject to awards made under previous plans 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, 2018, 1,088,670 options and 0 retention shares and stock
units were outstanding under the 2004 Plan. We no longer grant any stock options or other stock or unit
awards under this plan.
The Union Pacific Corporation 2013 Stock Incentive Plan (2013 Plan) was approved by shareholders in
May 2013. The 2013 Plan reserved 78,000,000 shares of our common stock for issuance, plus any shares
subject to awards made under previous plans as of February 28, 2013, that are subsequently cancelled,
expired, forfeited or otherwise not issued under previous plans. Under the 2013 Plan, non-qualified options,
incentive stock options, 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 2013 Plan. As of December 31, 2018, 4,081,360 options and 3,163,005 retention shares and stock
units were outstanding under the 2013 Plan.
Pursuant to the above plans 70,730,692; 72,151,415; and 73,745,250; shares of our common stock were
authorized and available for grant at December 31, 2018, 2017, and 2016, 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.
55
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
Excess tax benefits from equity compensation plans
2018
2017
2016
$
$
$
17 $
79
96 $
28 $
19 $
84
103 $
44 $
16
66
82
28
Stock Options – We estimate the fair value of our stock option awards using the Black-Scholes option
pricing model. 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
2018
2.6%
2.3%
5.3
21.1%
2017
2.0%
2.3%
5.3
21.7%
2016
1.3%
2.9%
5.1
23.2%
Weighted-average grant-date fair value of options granted
$
21.70 $
18.19 $
11.36
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant; the expected
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 expected
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 2018 is presented below:
Outstanding at January 1, 2018
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2018
Vested or expected to vest
at December 31, 2018
Options exercisable at December 31, 2018
Options
(thous.)
5,630
800
(1,128)
(132)
5,170
5,118
3,429
Weighted-
Average
Exercise Price
83.37
124.86
70.88
101.01
$
Weighted-Average
Remaining
Contractual Term
5.8 yrs.
N/A
N/A
N/A
Aggregate
Intrinsic Value
(millions)
286
N/A
N/A
N/A
$
$
$
$
92.06
91.89
84.27
5.4 yrs.
5.4 yrs.
4.1 yrs.
$
$
$
239
237
185
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, 2018, are subject to performance or market-based vesting conditions.
At December 31, 2018, 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 following table:
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
$
2018
83 $
76
(20)
21
19
2017
88 $
59
(18)
34
20
2016
52
39
(15)
20
19
56
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 2018 were as follows:
Nonvested at January 1, 2018
Granted
Vested
Forfeited
Nonvested at December 31, 2018
Shares
(thous.)
2,313
542
(664)
(121)
2,070
$
Weighted-Average
Grant-Date Fair Value
95.04
125.51
88.79
103.07
$
104.55
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, 2018, there was $91 million of total unrecognized compensation
expense related to nonvested retention awards, which is expected to be recognized over a weighted-
average period of 1.6 years.
Performance Retention Awards – In February 2018, our Board of Directors approved performance stock
unit grants. The basic terms of these performance stock units are identical to those granted in February
2017, except for different annual return on invested capital (ROIC) performance targets. The plan also
includes relative operating income growth (OIG) as a modifier compared to the companies included in the
S&P 500 Industrials Index. 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. The modifier can be up to +/- 25% of the award earned
based on the ROIC achieved, but not to exceed the maximum number of shares 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, modified for the relative OIG. 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, and with respect to the third year of the plan, the relative OIG modifier. 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
2018 grant were as follows:
Dividend per share per quarter
Risk-free interest rate at date of grant
Changes in our performance retention awards during 2018 were as follows:
$
2018
0.73
2.3%
Nonvested at January 1, 2018
Granted
Vested
Unearned
Forfeited
Nonvested at December 31, 2018
Shares
(thous.)
1,138
348
(95)
(201)
(98)
1,092
$
Weighted-Average
Grant-Date Fair Value
92.92
117.80
111.96
114.97
93.06
$
95.12
At December 31, 2018, there was $42 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. This expense is subject to achievement of the performance measures established for
the performance stock unit grants.
57
6. 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. Non-union employees hired on or after January 1, 2018 are
no longer eligible for pension benefits, but are eligible for an enhanced 401(k) plan as described below in
other retirement programs.
Other Postretirement Benefits (OPEB) – We provide medical and life insurance benefits for eligible retirees
hired before January 1, 2004. These benefits are funded as medical claims and life insurance premiums
are paid.
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 projected
benefit obligation (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 compensation 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 compensation 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 curtailment cost
Special termination cost
Actuarial (gain)/loss
Gross benefits paid
Projected benefit obligation at end of year
Plan Assets
Fair value of plan assets at beginning of year
Actual (loss)/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
2018
2017
4,529 $
105
145
-
-
(371)
(227)
4,110 $
90
142
20
49
382
(264)
OPEB
2018
330 $
2
10
-
-
(20)
(24)
4,181 $
4,529 $
298 $
4,224 $
(139)
-
29
(227)
3,748 $
716
-
24
(264)
3,887 $
4,224 $
- $
-
-
24
(24)
- $
2017
334
2
10
(1)
-
7
(22)
330
-
-
-
22
(22)
-
(294) $
(305) $
(298) $
(330)
$
$
$
$
$
Amounts recognized in the statement of financial position as of December 31, 2018, and 2017 consist of:
Millions
Noncurrent assets
Current liabilities
Noncurrent liabilities
Net amounts recognized at end of year
Pension
2018
172 $
(28)
(438)
2017
196 $
(27)
(474)
OPEB
2018
- $
(22)
(276)
(294) $
(305) $
(298) $
2017
-
(23)
(307)
(330)
$
$
58
Pre-tax amounts recognized in accumulated other comprehensive income/(loss) as of December 31, 2018,
and 2017 consist of:
Millions
Prior service cost
Net actuarial loss
Total
2018
2017
Pension
OPEB
Total
Pension
OPEB
$
- $
- $
- $
- $
(1) $
(1,480)
(90)
(1,570)
(1,533)
(120)
Total
(1)
(1,653)
$ (1,480) $
(90) $ (1,570) $ (1,533) $
(121) $ (1,654)
Pre-tax changes recognized in other comprehensive income/(loss) during 2018, 2017, and 2016 were as
follows:
Millions
Net actuarial (loss)/gain
Amortization of:
Prior service cost/(credit)
Actuarial loss
Pension
OPEB
2018
(40) $
2017
67 $
2016
(112) $
2018
2017
20 $
(6) $
$
-
93
-
81
-
83
1
10
1
9
2016
(16)
(9)
10
Total
$
53 $
148 $
(29) $
31 $
4 $
(15)
Amounts included in accumulated other comprehensive income/(loss) expected to be amortized into net
periodic cost during 2019:
Millions
Prior service credit
Net actuarial loss
Total
Pension
OPEB
$
$
- $
(63)
(63) $
- $
(7)
(7) $
Total
-
(70)
(70)
Underfunded Accumulated Benefit Obligation – The accumulated benefit obligation (ABO) is the present
value of benefits earned to date, assuming no future compensation growth. The underfunded accumulated
benefit obligation represents the difference between the ABO and the fair value of plan assets. At December
31, 2018, and 2017, the non-qualified (supplemental) plan ABO was $446 million and $481 million,
respectively.
The following table discloses only the PBO, ABO, and fair value of plan assets for pension plans where the
accumulated benefit obligation is in excess of the fair value of the plan assets as of December 31:
Underfunded Accumulated Benefit Obligation
Millions
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Underfunded accumulated benefit obligation
2018
465 $
446 $
-
2017
501
481
-
(446) $
(481)
$
$
$
The ABO for all defined benefit pension plans was $3.9 billion and $4.2 billion at December 31, 2018, and
2017, respectively.
59
Assumptions – The weighted-average actuarial assumptions used to determine benefit obligations at
December 31:
Percentages
Discount rate
Compensation increase
Health care cost trend rate (employees under 65)
Ultimate health care cost trend rate
Year ultimate trend rate reached
Expense
Pension
2018
4.23%
4.19%
N/A
N/A
N/A
2017
3.62%
4.20%
N/A
N/A
N/A
OPEB
2018
4.17%
N/A
5.87%
4.50%
2038
2017
3.53%
N/A
6.09%
4.50%
2038
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 in accumulated other comprehensive income and, if necessary, amortized as
pension or OPEB expense.
The workforce reduction plan initiated in the third quarter of 2017 included a curtailment loss of $20 million
and a special termination benefit of $49 million as a result of a remeasurement as of September 30, 2017,
due to the eliminated future service for approximately 460 management employees.
The components of our net periodic pension and OPEB cost were as follows for the years ended December
31:
Millions
Net Periodic Benefit Cost:
Service cost
Interest cost
Expected return on plan assets
Plan curtailment cost
Special termination cost
Amortization of:
Prior service cost/(credit)
Actuarial loss
Pension
OPEB
2018
2017
2016
2018
2017
2016
$
105 $
145
(272)
-
-
-
93
90 $
84 $
2 $
2 $
142
(267)
20
49
-
81
143
(267)
-
-
-
83
10
-
-
-
1
10
10
-
-
-
1
9
1
11
-
-
-
(9)
10
13
Net periodic benefit cost
$
71 $
115 $
43 $
23 $
22 $
Assumptions – The weighted-average actuarial assumptions used to determine expense were as follows:
Percentages
Discount rate for benefit obligations
Discount rate for interest on benefit obligations
Discount rate for service cost
Discount rate for interest on service cost
Expected return on plan assets
Compensation increase
Health care cost trend rate (employees under 65)
Ultimate health care cost trend rate
Year ultimate trend reached
Pension
OPEB
2017
4.09%
3.47%
4.41%
4.27%
7.00%
4.13%
N/A
N/A
N/A
2016
4.37%
3.65%
4.69%
4.55%
7.50%
4.20%
N/A
N/A
N/A
2018
3.54%
3.14%
3.71%
3.64%
N/A
N/A
6.09%
4.50%
2038
2017
3.89%
3.25%
4.25%
4.11%
N/A
N/A
6.31%
4.50%
2038
2016
4.13%
3.34%
4.59%
4.44%
N/A
N/A
6.52%
4.50%
2038
2018
3.62%
3.27%
3.77%
3.72%
7.00%
4.19%
N/A
N/A
N/A
60
Beginning in 2016, we measure the service cost and interest cost components of our net periodic benefit
cost by using individual spot discount rates matched with separate cash flows for each future year. The
discount rates were based on a yield curve of high quality corporate bonds. 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
(2)% in 2018, 19% in 2017, and 8% in 2016.
Assumed health care cost trend rates have an 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 2019 assumed health care cost trend rate for employees under 65 is 5.87%. It is assumed the rate
will decrease gradually to an ultimate rate of 4.5% in 2038 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 $
21
One % pt.
Decrease
(1)
(17)
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
2018
2017
Pension
Qualified Non-qualified
$
- $
-
29 $
24
OPEB
24
22
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 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 2019 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 2019 through 2028:
Millions
2019
2020
2021
2022
2023
Years 2024 - 2028
$
Pension
223 $
220
218
217
217
1,113
OPEB
22
21
20
20
19
86
61
Asset Allocation Strategy
Our pension plan asset allocation at December 31, 2018, and 2017, and target allocation for 2019, are as
follows:
Equity securities
Debt securities
Real estate
Commodities
Total
Target
Allocation 2019
60% to 70%
25% to 35%
2% to 8%
N/A
Percentage of Plan Assets
December 31,
2017
69%
22
5
4
2018
56%
36
6
2
100%
100%
The investment strategy for pension plan assets is to maintain a broadly diversified portfolio designed to
achieve our target average long-term rate of return of 7.0%. While we believe we can achieve a long-term
average rate of return of 7.0%, 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
consulting firm. Actual asset allocations are monitored monthly, and rebalancing actions are executed at
least quarterly, as needed.
The pension plan investments are held in a Master Trust. 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 at both December 31, 2018 and 2017. 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 13 years at both December 31, 2018 and 2017.
The investment of pension plan assets in securities issued by UPC is explicitly 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 (the Trustee). 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 entities primarily engaged
in the business of investing in securities and are registered with the Securities and Exchange Commission.
The Plan’s holdings of Registered Investment Companies include both public and private fund vehicles.
The public vehicles are exchange-traded funds (stocks), which are classified as Level 1 investments. The
private vehicles (bonds) do not have published pricing and are valued using Net Asset Value (NAV).
Federal Government Securities – Federal 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. Federal Government Securities are classified as Level 2 investments.
Bonds and Debentures – Bonds and debentures consist of debt securities issued by U.S. and non-U.S.
corporations as well as state and local governments. These assets are valued using a bid evaluation
62
process with bid data provided by independent pricing sources. Corporate, state, and municipal bonds and
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. Most common shares are traded actively on exchanges and price quotes for these
shares are readily available. Common stock is classified as a Level 1 investment. Preferred shares included
in this category are valued using a bid evaluation process with bid data provided by independent pricing
sources. Preferred stock is classified as a Level 2 investment.
Venture Capital and Buyout Partnerships – This investment category is comprised of interests in limited
partnerships that invest primarily in privately-held companies. Due to the private nature of the partnership
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. The fair value recorded by the Plan is calculated using each
partnership’s NAV.
Real Estate Funds – Most of the Plan’s real estate investments are primarily interests in private real estate
investment trusts, partnerships, limited liability companies, and similar structures. Valuations for the
holdings in this category are not based on readily observable inputs and are primarily derived from property
appraisals. The fair value recorded by the Plan is calculated using the NAV for each investment.
Collective Trust and Other Funds – Collective trust and other funds are comprised of shares or units in
commingled funds and limited liability companies that are not publicly traded. The underlying assets in
these entities (U.S. stock funds, non-U.S. stock funds, commodity funds, hedge funds, and short term
investment funds) are publicly traded on exchanges and price quotes for the assets held by these funds
are readily available. The fair value recorded by the Plan is calculated using NAV for each investment.
As of December 31, 2018, the pension plan assets measured at fair value on a recurring basis were as
follows:
Millions
Plan assets at fair value:
Temporary cash investments
Registered investment companies [a]
Federal government securities
Bonds and debentures
Corporate stock
Quoted Prices
in Active
Markets for
Identical Inputs
(Level 1)
$
21
1
-
-
1,355
Significant
Other
Observable
Inputs
(Level 2)
$
-
-
191
538
12
Total plan assets at fair value
$ 1,377
$
741
Plan assets at NAV:
Registered investment companies [b]
Venture capital and buyout partnerships
Real estate funds
Collective trust and other funds
Total plan assets at NAV
Other assets/(liabilities) [c]
Total plan assets
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
-
-
-
-
-
-
$
21
1
191
538
1,367
$ 2,118
378
443
222
745
$ 1,788
(19)
$ 3,887
[a] Registered investment companies measured at fair value are stock investments.
[b] Registered investment companies measured at NAV include bond investments.
[c] Other assets include accrued receivables, net payables, and pending broker settlements.
63
As of December 31, 2017, the pension plan assets measured at fair value on a recurring basis were as
follows:
Millions
Plan assets at fair value:
Temporary cash investments
Registered investment companies [a]
Federal government securities
Bonds and debentures
Corporate stock
Quoted Prices
in Active
Markets for
Identical Inputs
(Level 1)
$
27
4
-
-
1,171
Significant
Other
Observable
Inputs
(Level 2)
$
-
-
182
389
8
Total plan assets at fair value
$ 1,202
$
579
Plan assets at NAV:
Registered investment companies [b]
Venture capital and buyout partnerships
Real estate funds
Collective trust and other funds
Total plan assets at NAV
Other assets/(liabilities) [c]
Total plan assets
Significant
Unobservable
Inputs
(Level 3)
$
$
-
-
-
-
-
-
Total
$
27
4
182
389
1,179
$ 1,781
329
358
226
1,552
$ 2,465
(22)
$ 4,224
[a] Registered investment companies measured at fair value are stock investments.
[b] Registered investment companies measured at NAV include bond investments.
[c] Other assets include accrued receivables, net payables, and pending broker settlements.
For the years ended December 31, 2018 and 2017, there were no significant transfers in or out of Levels
1, 2, or 3.
The Master Trust’s investments in limited partnerships and similar structures (used to invest in private equity
and real estate) are valued at fair value based on their proportionate share of the partnerships’ fair value
as recorded in the limited partnerships’ audited financial statements. The limited partnerships allocate
gains, losses and expenses to the partners based on the ownership percentage as described in the
partnership agreements. At December 31, 2018 and 2017, the Master Trust had future commitments for
additional contributions to private equity partnerships totaling $248 million and $359 million, respectively,
and to real estate partnerships and funds totaling $54 million and $67 million, respectively.
Other Retirement Programs
401(k)/Thrift Plan – For non-union employees hired prior to January 1, 2018, and eligible union employees
for whom we make matching contributions, we provide a defined contribution plan (401(k)/thrift plan). We
match 50 cents for each dollar contributed by employees up to the first 6% of compensation contributed.
Our plan contributions were $18 million in 2018, $19 million in 2017, and $19 million in 2016. For non-
union employees hired on or after January 1, 2018, we match dollar-for-dollar, up to the first 6% of
compensation contributed, in addition to contributing an annual amount of 3% of the employee’s annual
base salary.
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
$710 million in 2018, $672 million in 2017, and $671 million in 2016.
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 $50 million
in 2018, $60 million in 2017, and $50 million in 2016.
64
7. Other Income
Other income included the following for the years ended December 31:
Millions
Rental income [a]
Early extinguishment of debt [b]
Net gain on non-operating asset dispositions [c] [d]
Interest income
Net periodic pension and OPEB
Non-operating environmental costs and other
Total
$
$
2018
122
(85)
30
30
13
(16)
2017
178 $
-
111
16
(45)
(15)
$
94
$
245 $
2016
96
-
94
11
29
(9)
221
[a] 2017 includes $65 million related to a favorable litigation settlement in the third quarter.
[b] 2018 includes an $85 million debt extinguishment charge for the early redemption of certain bonds and debentures in the first
quarter (Note 15).
[c] 2017 includes $26 million and $57 million related to a real estate sale in the first quarter and in the third quarter, respectively.
[d] 2016 includes $17 million and $50 million related to a real estate sale in the first quarter and second quarter, respectively.
8. Income Taxes
Components of income tax expense were as follows for the years ended December 31:
Millions
Current tax expense:
Federal
State
Foreign
Total current tax expense
Deferred and other tax expense:
Federal
State
Foreign
Total deferred and other tax expense/(benefit) [a]
2018
2017
2016
$
1,144 $
287
5
1,750 $
235
2
1,436
1,987
344
5
(10)
339
(5,260)
183
10
(5,067)
1,518
176
8
1,702
692
139
-
831
Total income tax expense/(benefit)
$
1,775 $
(3,080) $
2,533
[a] 2017 includes a $(5,935) million adjustment to income tax expense resulting from the Tax Cuts and Jobs Act. Of this amount,
$(5,965) million is a federal income tax benefit and $30 million is a state income tax expense.
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
Adjustment for Tax Cuts and Jobs Act
Excess tax benefits from equity compensation plans
Other deferred tax adjustments
Tax credits
Other
Effective tax rate
2018
21.0 %
3.9
-
(0.4)
(0.6)
(0.1)
(0.9)
22.9 %
2017
35.0 %
3.1
(77.8)
(0.6)
0.4
0.1
(0.6)
(40.4) %
2016
35.0 %
3.1
-
(0.4)
-
(0.5)
0.2
37.4 %
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 assets relate to deductions that already have been claimed for financial reporting purposes but not for
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.
65
On December 22, 2017, The Tax Cuts and Jobs Act (the Tax Act) was enacted. The Tax Act made
significant changes to federal tax law, including a reduction in the federal income tax rate from 35% to 21%
effective January 1, 2018, 100% bonus depreciation for certain capital expenditures, stricter limits on
deductions for interest and certain executive compensation, and a one-time transition tax on previously
deferred earnings of certain foreign subsidiaries. As a result of our initial analysis of the Tax Act and existing
implementation guidance, we remeasured our deferred tax assets and liabilities and computed our
transition tax liability net of offsetting foreign tax credits. This resulted in a $5.9 billion reduction in our
income tax expense in the fourth quarter of 2017. We also recorded a $212 million reduction to our operating
expense related to income tax adjustments at equity-method affiliates in the fourth quarter of 2017.
The SEC provided guidance in SAB 118 on accounting for the tax effects of the Tax Act. In accordance
with that guidance, some of the income tax effects recorded in 2017 were provisional, including those
related to our analysis of 100% bonus depreciation for certain capital expenditures, stricter limits on
deductions for certain executive compensation, the one-time transition tax, and the reduction to our
operating expense related to income tax adjustments at equity-method affiliates. The accounting for the
income tax effects could have been adjusted during 2018 as a result of continuing analysis of the Tax Act;
additional implementation guidance from the Internal Revenue Service (IRS), state tax authorities, the SEC,
the FASB, or the Joint Committee on Taxation; and new information from domestic or foreign equity
affiliates. We had no material adjustments to our accounting for the Tax Act during 2018.
In the second quarter of 2018, Iowa and Missouri enacted legislation to reduce their corporate tax rates for
future years resulting in a $31 million reduction of our deferred tax expense.
In July of 2017, Illinois enacted legislation to increase its corporate income tax rate effective July 1, 2017.
In the third quarter of 2017, we increased our deferred tax expense by $33 million to reflect the increased
tax rate.
Deferred income tax (liabilities)/assets were comprised of the following at December 31:
Millions
Deferred income tax liabilities:
Property
Other
Total deferred income tax liabilities
Deferred income tax assets:
Accrued wages
Accrued casualty costs
Stock compensation
Retiree benefits
Credits
Other
Total deferred income tax assets
Net deferred income tax liability
2018
2017
$
(11,590) $
(213)
(11,262)
(197)
(11,803)
(11,459)
46
148
44
138
-
125
501 $
46
147
46
141
1
142
523
(11,302) $
(10,936)
$
$
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 for purposes of estimating whether future
taxable income will be sufficient to realize a deferred tax asset. In 2018 and 2017, there were no valuation
allowances.
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.
66
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
Refunds from/(payments to) and settlements with taxing authorities
Increases/(decreases) for interest and penalties
Lapse of statutes of limitations
2018
179 $
$
30
9
(30)
21
4
(39)
Unrecognized tax benefits at December 31
$
174 $
2017
125 $
38
51
(56)
64
-
(43)
179 $
2016
94
31
10
(20)
4
6
-
125
We recognize interest and penalties as part of income tax expense. Total accrued liabilities for interest and
penalties were $8 million at both December 31, 2018, and 2017. Total interest and penalties recognized as
part of income tax expense (benefit) were ($1) million for 2018, ($3) million for 2017, and $5 million for
2016.
The IRS is examining UPC’s 2016 tax return. The statute of limitations has run for all years prior to 2015.
In 2017, UPC amended its 2013 income tax return, primarily to claim deductions resulting from the
resolution of prior year IRS examinations. The IRS and Joint Committee on Taxation have completed their
review of the 2013 return, and in the second quarter of 2018 we received a refund of $19 million.
In 2016, UPC amended its 2011 and 2012 income tax returns to claim deductions resulting from the
resolution of IRS examinations for years prior to 2011. The IRS and Joint Committee on Taxation reviewed
these amended returns. In the third quarter of 2017, we received a refund of $62 million, consisting of $60
million of tax and $2 million of interest.
Several state tax authorities are examining our state income tax returns for years 2015 through 2016.
We do not expect our unrecognized tax benefits to change significantly in the next 12 months.
The portion of our unrecognized tax benefits that relates to permanent changes in tax and interest would
reduce our effective tax rate, if recognized. The remaining unrecognized tax benefits relate to tax positions
for which only the timing of the benefit is uncertain. Recognition of the tax benefits with uncertain timing
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
2018
63 $
111
174 $
2017
83 $
96
179 $
2016
31
94
125
$
$
67
9. 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
2018
2017
2016
$
5,966 $
10,712 $
4,233
750.9
1.9
1.5
754.3
798.4
1.8
1.5
801.7
$
$
7.95 $
7.91 $
13.42 $
13.36 $
832.4
1.5
1.5
835.4
5.09
5.07
Common stock options totaling 0.3 million, 1.6 million, and 2.0 million for 2018, 2017, and 2016,
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.
10. Accumulated Other Comprehensive Income/(Loss)
Reclassifications out of accumulated other comprehensive income/(loss) were as follows (net of tax):
Millions
Balance at January 1, 2018
Other comprehensive income/(loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income/(loss) [a]
Net year-to-date other comprehensive income/(loss),
net of taxes of $(22) million
Reclassification due to ASU 2018-02 adoption (Note 3)
Balance at December 31, 2018
Balance at January 1, 2017
Other comprehensive income/(loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income/(loss) [a]
Net year-to-date other comprehensive income/(loss),
net of taxes of $(61) million
Balance at December 31, 2017
$
$
$
$
$
$
Defined
benefit
plans
(1,029)
(1)
63
62
(225)
(1,192)
(1,132)
2
101
103
Foreign
currency
translation
(112)
Total
(1,141)
$
(36)
-
(36)
(75)
(223)
(140)
$
$
28
-
28
(37)
63
26
(300)
(1,415)
(1,272)
30
101
131
$
(1,029)
$
(112)
$
(1,141)
[a] The accumulated other comprehensive income/(loss) reclassification components are 1) prior service cost/(benefit) and 2) net
actuarial loss which are both included in the computation of net periodic pension cost. See Note 6 Retirement Plans for additional
details.
11. Accounts Receivable
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 both December 31, 2018, and 2017, our accounts receivable were reduced by $3 million.
Receivables not expected to be collected in one year and the associated allowances are classified as other
68
assets in our Consolidated Statements of Financial Position. At December 31, 2018, and 2017, receivables
classified as other assets were reduced by allowances of $27 million and $17 million, respectively.
Receivables Securitization Facility – The Railroad maintains a $650 million, 3-year receivables
securitization facility (the Receivables Facility), maturing in July 2019. Under the Receivables Facility, the
Railroad sells most of its eligible third-party receivables to Union Pacific Receivables, Inc. (UPRI), a
consolidated, wholly-owned, bankruptcy-remote subsidiary that may subsequently transfer, without
recourse, an undivided interest in accounts receivable to investors. 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.
The amount outstanding under the Receivables Facility was $400 million and $500 million at December 31,
2018, and December 31, 2017, respectively. The Receivables Facility was supported by $1.4 billion and
$1.1 billion of accounts receivable as collateral at December 31, 2018, and December 31, 2017,
respectively, which, as a retained interest, is included in accounts receivable, net in our Consolidated
Statements of Financial Position.
The outstanding amount the Railroad is allowed to maintain under the Receivables Facility, with a maximum
of $650 million, may fluctuate based on the availability of eligible receivables and is directly affected by
business volumes and credit risks, including receivables payment quality measures such as default and
dilution ratios. If default or dilution ratios increase one percent, the allowable outstanding amount under the
Receivables Facility would not materially change.
The costs of the Receivables Facility include interest, which will vary based on prevailing benchmark and
commercial paper rates, program fees paid to participating banks, commercial paper issuance costs, and
fees of participating banks for unused commitment availability. The costs of the Receivables Facility are
included in interest expense and were $15 million, $6 million, and $7 million for 2018, 2017, and 2016,
respectively.
12. Properties
The following tables list the major categories of property and equipment, as well as the weighted-average
estimated useful life for each category (in years):
Millions, Except Estimated Useful Life
As of December 31, 2018
Cost
Accumulated
Depreciation
Net Book
Value
Estimated
Useful Life
Land
$
5,264
$
N/A
$
5,264
Road:
Rail and other track material
Ties
Ballast
Other roadway [a]
Total road
Equipment:
Locomotives
Freight cars
Work equipment and other
Total equipment
Technology and other
Construction in progress
Total
16,785
10,409
5,561
19,584
52,339
9,792
2,229
1,040
13,061
1,117
1,024
6,156
3,025
1,595
3,766
14,542
3,861
929
301
5,091
493
-
10,629
7,384
3,966
15,818
37,797
5,931
1,300
739
7,970
624
1,024
$ 72,805
$
20,126
$ 52,679
[a] Other roadway includes grading, bridges and tunnels, signals, buildings, and other road assets.
N/A
43
34
34
48
N/A
19
24
19
N/A
12
N/A
N/A
69
Millions, Except Estimated Useful Life
As of December 31, 2017
Cost
Accumulated
Depreciation
Net Book
Value
Estimated
Useful Life
Land
$
5,258
$
N/A
$
5,258
Road:
Rail and other track material
Ties
Ballast
Other roadway [a]
Total road
Equipment:
Locomotives
Freight cars
Work equipment and other
Total equipment
Technology and other
Construction in progress
Total
16,327
10,132
5,406
18,972
50,837
9,686
2,255
936
12,877
1,105
736
5,929
2,881
1,509
3,482
13,801
3,697
983
267
4,947
460
-
10,398
7,251
3,897
15,490
37,036
5,989
1,272
669
7,930
645
736
$ 70,813
$
19,208
$ 51,605
N/A
43
33
34
47
N/A
19
24
19
N/A
11
N/A
N/A
[a] Other roadway 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, and yard and switching tracks) 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 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.
70
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 by multiplying the current replacement
cost of track assets by a historical index factor derived from (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.
Normal repairs and maintenance are 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. These
costs are allocated using appropriate statistical bases. Total expense for repairs and maintenance incurred
was $2.5 billion for 2018, $2.5 billion for 2017, and $2.3 billion for 2016.
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.
13. Accounts Payable and Other Current Liabilities
Millions
Accounts payable
Income and other taxes payable
Accrued wages and vacation
Interest payable
Accrued casualty costs
Equipment rents payable
Other
$
Dec. 31,
2018
872
694
384
317
211
107
575
$
Dec. 31,
2017
1,013
547
384
220
194
110
671
Total accounts payable and other current liabilities
$
3,160
$
3,139
14. Financial Instruments
Short-Term Investments – All of the Company’s short-term investments consist of time deposits and
government agency securities. These investments are considered level 2 investments and are valued at
amortized cost, which approximates fair value. On November 1, 2018, $30 million of the Company’s $90
million in short-term investments were placed into a trust for the purpose of providing collateral for payment
of certain other long-term liabilities, and as such were reclassified as other assets. All short-term
investments have a maturity of less than one year and are classified as held-to-maturity. There were no
transfers out of Level 2 during the year ended December 31, 2018.
71
Fair Value of Financial Instruments – The fair value of our short- and long-term debt was estimated using
a market value price model, which utilizes applicable U.S. Treasury rates along with current market quotes
on comparable debt securities. All of the inputs used to determine the fair market value of the Corporation’s
long-term debt are Level 2 inputs and obtained from an independent source. At December 31, 2018, the
fair value of total debt was $21.9 billion, approximately $0.5 billion less than the carrying value. At
December 31, 2017, the fair value of total debt was $18.2 billion, approximately $1.3 billion more than the
carrying value. The fair value of the Corporation’s debt is a measure of its current value under present
market conditions. It does not impact the financial statements under current accounting rules. At December
31, 2018, and 2017, approximately $0 and $155 million, respectively of debt securities contained call
provisions that allow us to retire the debt instruments prior to final maturity at par, without the payment of
fixed call premiums. The fair value of our cash equivalents approximates their carrying value due to the
short-term maturities of these instruments.
15. Debt
Total debt as of December 31, 2018, and 2017, is summarized below:
Millions
Notes and debentures, 1.8% to 7.9% due through 2067
Equipment obligations, 2.6% to 6.7% due through 2031
Capitalized leases, 3.1% to 8.0% due through 2028
Receivables Securitization (Note 11)
Term loans - floating rate, due in 2019
Commercial paper, 2.6% to 2.8% due in 2019
Medium-term notes, 9.3% to 10.0% due through 2020
Mortgage bonds, redeemed March 15, 2018
Unamortized discount and deferred issuance costs
Total debt
Less: current portion
Total long-term debt
$
2018
20,627 $
969
754
400
250
200
8
-
(817)
22,391
(1,466)
2017
15,096
1,018
892
500
250
-
18
57
(887)
16,944
(800)
$
20,925 $
16,144
Debt Maturities – The following table presents aggregate debt maturities as of December 31, 2018,
excluding market value adjustments:
Millions
2019
2020
2021
2022
2023
Thereafter
Total principal
Unamortized discount and deferred issuance costs
Total debt
$
1,467
981
1,267
913
1,396
17,184
23,208
(817)
$
22,391
Equipment Encumbrances – Equipment with a carrying value of approximately $1.8 billion and $2.0 billion
at December 31, 2018, and 2017, respectively, served as collateral for capital leases and other types of
equipment obligations in accordance with the secured financing arrangements utilized to acquire or
refinance such railroad equipment.
Debt Redemption – Effective as of March 15, 2018, we redeemed, in entirety, the Missouri Pacific 5%
Income Debentures due 2045, the Chicago and Eastern Illinois 5% Income Debentures due 2054, and the
Missouri Pacific 4.75% General Mortgage Income Bonds Series A due 2020 and Series B due 2030. The
debentures had principal outstanding of $96 million and $2 million, respectively, and the bonds had principal
outstanding of $30 million and $27 million, respectively. The bonds and debentures were assumed by the
Railroad in the 1982 acquisition of the Missouri Pacific Railroad Company, with a weighted average interest
rate of 4.9%. The carrying value of all four bonds and debentures at the time of redemption was $70 million,
72
due to fair value purchase accounting adjustments related to the acquisition. The redemption resulted in an
early extinguishment charge of $85 million in the first quarter of 2018.
Credit Facilities – During the second quarter of 2018, we replaced our $1.7 billion revolving credit facility,
which was scheduled to expire in May 2019, with a new $2.0 billion facility that expires in June 2023 (the
Facility). The Facility is based on substantially similar terms as those in the previous credit facility. At
December 31, 2018, we had $2.0 billion of credit available under our revolving credit facility, which is
designated for general corporate purposes and supports the issuance of commercial paper. We did not
draw on either facility at any time during 2018. 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 Rates, plus a spread, depending
upon credit ratings for our senior unsecured debt. The prior facility required UPC to maintain a debt-to-net-
worth coverage ratio. The new five-year facility requires UPC to maintain a debt-to-EBITDA (earnings
before interest, taxes, depreciation, and amortization) coverage ratio.
The definition of debt used for purposes of calculating the debt-to-EBITDA coverage ratio includes, among
other things, certain credit arrangements, capital leases, guarantees, unfunded and vested pension benefits
under Title IV of ERISA, and unamortized debt discount and deferred debt issuance costs. At December
31, 2018, the Company was in compliance with the debt-to-EBITDA coverage ratio, which allows us to carry
up to $37.9 billion of debt (as defined in the Facility), and we had $23.2 billion of debt (as defined in the
Facility) outstanding at that date. 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 $150 million cross-default provision and a change-of-control provision.
During 2018, we issued $8.5 billion and repaid $8.3 billion of commercial paper with maturities ranging from
1 to 34 days, and at December 31, 2018, and 2017, we had $200 million and $0 commercial paper
outstanding, respectively. Our revolving credit facility supports our outstanding commercial paper balances,
and, unless we change the terms of our commercial paper program, our aggregate issuance of commercial
paper will not exceed the amount of borrowings available under the Facility.
In May 2018, we entered into a short-term bilateral line of credit agreement with $1.0 billion of credit
available. During the three months ended June 30, 2018, we drew and repaid $750 million. The line of
credit matured in August 2018. We used the proceeds for general corporate purposes, including the
repurchase of common stock pursuant to our share repurchase programs.
Shelf Registration Statement and Significant New Borrowings – We filed an automatic shelf registration
statement with the SEC that became effective on February 12, 2018 (the Shelf). The Board of Directors
authorized the issuance of up to $6 billion of debt securities, replacing the prior Board authorization in July
2016, which had $1.55 billion of authority remaining. Under our 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 2018, we issued the following unsecured, fixed-rate debt securities under our current shelf
registration:
Date
June 8, 2018
Description of Securities
$600 million of 3.200% Notes due June 8, 2021
$650 million of 3.500% Notes due June 8, 2023
$500 million of 3.750% Notes due July 15, 2025
$1.5 billion of 3.950% Notes due September 10, 2028
$750 million of 4.375% Notes due September 10, 2038
$1.5 billion of 4.500% Notes due September 10, 2048
$500 million of 4.800% Notes due September 10, 2058
We used the net proceeds from the offerings for general corporate purposes, including the repurchase of
common stock pursuant to our share repurchase programs. These debt securities include change-of-control
provisions.
On July 26, 2018, the Board of Directors renewed its authorization for the Company to issue up to $6.0
billion of debt securities under the Shelf. This authorization replaces the original Board authorization in
73
February 2018 which had no remaining authority. At December 31, 2018, we had remaining authority to
issue up to $6.0 billion of debt securities under our shelf registration.
Receivables Securitization Facility – As of December 31, 2018, and 2017, we recorded $400 million and
$500 million, respectively, of borrowings under our Receivables Facility, as secured debt. (See further
discussion of our receivables securitization facility in Note 11).
16. 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
options are not considered to be potentially significant to the VIEs. The future minimum lease payments
associated with the VIE leases totaled $1.7 billion as of December 31, 2018.
17. Leases
We lease certain locomotives, freight cars, and other property. The Consolidated Statements of Financial
Position as of December 31, 2018, and 2017 included $1,454 million, net of $912 million of accumulated
depreciation, and $1,635 million, net of $953 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, 2018, were as follows:
Millions
2019
2020
2021
2022
2023
Later years
Total minimum lease payments
Amount representing interest
Present value of minimum lease payments
$
Operating
Leases
419 $
378
303
272
234
1,040
$
2,646 $
N/A
N/A $
Capital
Leases
148
155
159
142
94
200
898
(144)
754
Approximately 97% of capital lease payments relate to locomotives. Rent expense for operating leases with
terms exceeding one month was $397 million in 2018, $480 million in 2017, and $535 million in 2016. 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.
18. 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. To the extent possible, we have recorded
74
a liability where asserted and unasserted claims are considered probable and where such claims can be
reasonably estimated. 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 not discounted to present value due to the uncertainty surrounding the timing
of future payments. Approximately 94% of the recorded liability is related to asserted claims and
approximately 6% is related to unasserted claims at December 31, 2018. 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 $271 million to $297 million. We record an accrual at the
low end of the range as no amount of loss within the range is more probable than any other. Estimates can
vary over time due to evolving trends in litigation.
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
2018
285 $
74
(16)
(72)
271 $
2017
290 $
77
(7)
(75)
285 $
72 $
66 $
2016
318
75
(29)
(74)
290
62
$
$
$
We reassess our estimated insurance recoveries annually and have recognized an asset for estimated
insurance recoveries at December 31, 2018, and 2017. Any changes to recorded insurance recoveries are
included in the above table in the Changes in estimates for prior years category.
Environmental Costs – We are subject to federal, state, and local environmental laws and regulations.
We have identified 334 sites at which we are or may be liable for remediation costs associated with alleged
contamination or for violations of environmental requirements. This includes 33 sites that are the subject of
actions taken by the U.S. government, 21 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 perform, with assistance of our consultants, 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 such costs can be reasonably estimated. Our environmental liability is not discounted to
present value due to the uncertainty surrounding the timing of future payments.
Our environmental liability activity was as follows:
Millions
Beginning balance
Accruals
Payments
Ending balance at December 31
Current portion, ending balance at December 31
75
2018
196 $
84
(57)
223 $
2017
212 $
45
(61)
196 $
59 $
57 $
2016
190
84
(62)
212
55
$
$
$
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 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.
Insurance – The Company has a consolidated, wholly-owned captive insurance subsidiary (the captive),
that provides insurance coverage for certain risks including FELA claims and property coverage which are
subject to reinsurance. The captive entered into annual reinsurance treaty agreements that insure workers
compensation, general liability, auto liability and FELA risk. The captive cedes a portion of its FELA
exposure through the treaty and assumes a proportionate share of the entire risk. The captive receives
direct premiums, which are netted against the Company’s premium costs in other expenses in the
Consolidated Statements of Income. The treaty agreements provide for certain protections against the risk
of treaty participants’ non-performance, and we do not believe our exposure to treaty participants’ non-
performance is material at this time. We record both liabilities and reinsurance receivables using an
actuarial analysis based on historical experience in our Consolidated Statements of Financial Position.
Effective January 2019, the captive insurance subsidiary will no longer participate in the reinsurance treaty
agreement. The Company established a trust in the fourth quarter of 2018 for the purpose of providing
collateral as required under the reinsurance treaty agreement for prior years’ participation.
Guarantees – At December 31, 2018, and 2017, we were contingently liable for $22 million and $33 million,
respectively, in guarantees. The fair value of these obligations as of both December 31, 2018, and 2017
was $0. We entered into these contingent guarantees in the normal course of business, and they include
guaranteed obligations related to our 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 – We are contingently obligated under a variety of indemnification arrangements, although in
some cases the extent of our potential liability is limited, 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.
Gain Contingency – UPRR filed multiple claims with the IRS for refunds of railroad retirement taxes
(Railroad Retirement Taxes) paid on (i) certain stock awards to its employees and (ii) certain bonus
payments it made to labor agreement employees during the years 1991 – 2017. In 2016, the U.S. District
Court for the District of Nebraska (the District Court) denied UPRR recovery of these Railroad Retirement
Taxes. UPRR appealed this denial to the U.S. Court of Appeals for the 8th Circuit (8th Circuit) and the 8th
Circuit ruled in favor of UPRR and remanded the case to the District Court. The IRS appealed the 8th Circuit
ruling to the U.S. Supreme Court. In June 2018, a similar case for another railroad was decided by the U.S.
Supreme Court against the IRS and in favor of that railroad (Wisconsin Central LTD., Et. Al. v. U.S.). As a
result, the U.S. Supreme Court denied the IRS request to appeal the 8th Circuit ruling. On November 28,
2018 the District Court issued an order granting summary judgment to UPRR pursuant to the mandate of
the 8th Circuit. UPRR, the Department of Justice (DOJ), and the IRS have since agreed upon the tax refund
amounts owed UPRR and its employees. UPRR’s employer refund of $78 million will be recognized as a
reduction of compensation and benefit expenses and approximately $30 million of interest will be
recognized in other income. UPRR expects to receive the refunds in 2019, but the refunds may be received
in multiple portions at different times. UPRR is in the process of seeking consent from approximately 75,000
current and former employees to obtain their employee share of the refunds. UPRR anticipates having this
consent process completed in the first half of 2019, but further actions by the IRS and Railroad Retirement
Board may delay completion until later in 2019.
These refund claims are considered gain contingencies and no refund amounts have been recorded in the
Consolidated Financial Statements as of December 31, 2018. The claims will be recorded when a final
76
judgment from the District Court has been issued and all IRS requirements for UPRR’s refunds have been
fulfilled.
19. Share Repurchase Programs
Effective January 1, 2017, our Board of Directors authorized the repurchase of up to 120 million shares of
our common stock by December 31, 2020, replacing our previous repurchase program. As of December
31, 2018, we repurchased a total of $31.4 billion of our common stock since the commencement of our
repurchase programs in 2007. The table below represents shares repurchased under this repurchase
program.
First quarter
Second quarter [a]
Third quarter
Fourth quarter [b]
Total
Number of Shares Purchased
2017
2018
9,259,004
33,229,992
2,239,405
12,490,632
7,531,300 $
7,788,283
11,801,755
9,231,510
Average Price Paid
2017
2018
106.55
132.84 $
109.10
142.74
106.69
151.94
119.37
153.04
57,219,033
36,352,848 $
143.75 $
110.40
Remaining number of shares that may be repurchased under current authority
26,428,119
[a]
[b]
Includes initial delivery of 19,870,292 shares repurchased under accelerated share repurchase programs.
Includes 4,457,356 shares received upon settlement of accelerated share repurchase programs.
Management's assessments of market conditions and other pertinent factors guide the timing and volume
of all repurchases. We expect to fund any share repurchases under this program through cash generated
from operations, the sale or lease of various operating and non-operating properties, debt issuances, and
cash on hand. Open market repurchases are recorded in treasury stock at cost, which includes any
applicable commissions and fees.
From January 1, 2019, through February 7, 2019, we repurchased 3.4 million shares at an aggregate cost
of approximately $521 million.
On February 7, 2019, the Board of Directors approved a new share repurchase authorization, enabling the
Company to buy up to 150 million of its common shares by March 31, 2022. The new authorization is
effective April 1, 2019, and replaces the current authorization, which will now expire on March 31, 2019.
Accelerated Share Repurchase Programs – On June 14, 2018, the Company established accelerated
share repurchase programs (ASRs) with two financial institutions to repurchase shares of our common
stock. Under these ASRs, we paid a pre-specified amount of $3.6 billion and received an initial delivery of
19,870,292 shares on June 15, 2018. Upon settlement of the ASRs, we received 4,457,356 additional
shares in the fourth quarter of 2018. The final number of shares repurchased under the ASRs was based
on the volume weighted average stock price of the Company’s common stock during the ASR term, less a
negotiated discount.
ASRs are accounted for as equity transactions, and at the time of receipt, shares are included in treasury
stock at fair market value as of the corresponding initiation or settlement date. The Company reflects shares
received as a repurchase of common stock in the weighted average common shares outstanding
calculation for basic and diluted earnings per share.
20. Related Parties
UPRR and other North American railroad companies jointly own TTX Company (TTX). UPRR has a 36.79%
economic and voting interest in TTX while the other North American railroads own the remaining interest.
In accordance with ASC 323 Investments - Equity Method and Joint Venture, UPRR applies the equity
method of accounting to our investment in TTX.
TTX is a railcar pooling company that owns railcars and intermodal wells to serve North America’s railroads.
TTX assists railroads in meeting the needs of their customers by providing railcars in an efficient, pooled
environment. All railroads have the ability to utilize TTX railcars through car hire by renting railcars at stated
rates.
77
UPRR had $1.3 billion and $1.2 billion recognized as investments related to TTX in our Consolidated
Statements of Financial Position as of December 31, 2018, and 2017, respectively. TTX car hire expenses
of $429 million in 2018, $388 million in 2017, and $368 million in 2016 are included in equipment and other
rents in our Consolidated Statements of Income. In addition, UPRR had accounts payable to TTX of $66
million and $69 million at December 31, 2018, and 2017, respectively.
21. Selected Quarterly Data (Unaudited)
Millions, Except Per Share Amounts
2018
Operating revenues
Operating income
Net income
Net income per share:
Basic
Diluted
Millions, Except Per Share Amounts
2017
Operating revenues
Operating income
Net income
Net income per share:
Basic
Diluted
$
$
Mar. 31
5,475 $
1,939
1,310
Jun. 30
5,672 $
2,099
1,509
Sep. 30
5,928 $
2,269
1,593
1.69
1.68
1.98
1.98
2.16
2.15
Mar. 31
5,132 $
1,788
1,072
Jun. 30
5,250 $
1,998
1,168
Sep. 30
5,408 $
2,073
1,194
1.32
1.32
1.45
1.45
1.50
1.50
Dec. 31
5,757
2,210
1,554
2.13
2.12
Dec. 31
5,450
2,247
7,278
9.29
9.25
Per share net income for the four quarters combined may not equal the per share net income for the year
due to rounding.
78
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 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 were 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 materially affected, or are reasonably likely to materially affect, the Corporation’s internal control
over financial reporting.
79
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, 2018. 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 (2013). Based on our assessment, management believes that, as of December 31,
2018, 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 7, 2019
80
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Union Pacific Corporation
Omaha, Nebraska
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Union Pacific Corporation and Subsidiary
Companies (the "Corporation") as of December 31, 2018, based on criteria established in Internal Control
— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, the Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2018, based on criteria established in Internal Control
— Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the consolidated statements of financial position of the Corporation as of
December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income,
changes in common shareholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2018, and the related notes and the schedule listed in the Table of Contents at Part IV, Item
15 (collectively referred to as the “financial statements”) and our report dated February 8, 2019 expressed
an unqualified opinion on those financial statements.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Omaha, Nebraska
February 8, 2019
81
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/investor/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 2018, Outstanding Equity Awards at 2018 Fiscal Year-End, Option Exercises
and Stock Vested in Fiscal Year 2018, Pension Benefits at 2018 Fiscal Year-End, Nonqualified Deferred
Compensation at 2018 Fiscal Year-End, Potential Payments Upon Termination or Change in Control and
Director Compensation in Fiscal Year 2018 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 and Benefits 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.
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.
82
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.
83
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 44.
(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 87. 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.
84
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 8th day of February, 2019.
UNION PACIFIC CORPORATION
By
/s/ Lance M. Fritz
Lance M. Fritz,
Chairman, President and
Chief Executive Officer
Union Pacific Corporation
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below,
on this 8th day of February, 2019, by the following persons on behalf of the registrant and in the capacities
indicated.
PRINCIPAL EXECUTIVE OFFICER
AND DIRECTOR:
By
/s/ Lance M. Fritz
Lance M. Fritz,
Chairman, President and
Chief Executive Officer
Union Pacific Corporation
By
/s/ Robert M. Knight, Jr.
Robert M. Knight, Jr.,
Executive Vice President and
Chief Financial Officer
By
/s/ Todd M. Rynaski
Todd M. Rynaski,
Vice President and Controller
Jane H. Lute*
Michael R. McCarthy*
Thomas F. McLarty III*
Bhavesh V. Patel*
Jose H. Villarreal*
PRINCIPAL FINANCIAL OFFICER:
PRINCIPAL ACCOUNTING OFFICER:
DIRECTORS:
Andrew H. Card, Jr.*
Erroll B. Davis, Jr.*
William J. DeLaney*
David B. Dillon*
Deborah C. Hopkins*
* By Rhonda S. Ferguson
Rhonda S. Ferguson, Attorney-in-fact
85
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Union Pacific Corporation and Subsidiary Companies
Millions, for the Years Ended December 31,
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
2018
2017
2016
$
684
202
(177)
716 $
167
(199)
709
$
684 $
211
498
709
$
$
194 $
490
684 $
736
202
(222)
716
185
531
716
$
$
$
$
86
UNION PACIFIC CORPORATION
Exhibit Index
Exhibit No.
Description
Filed with this Statement
10(a)
10(b)
10(c)
21
23
24
31(a)
31(b)
32
101
Form of Performance Stock Unit Agreement dated February 7, 2019.
Form of Stock Unit Agreement for Executives dated February 7, 2019.
Form of Non-Qualified Stock Option Agreement for Executives dated February 7,
2019.
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 - Lance M. Fritz.
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 - Lance M. Fritz and Robert M. Knight, Jr.
eXtensible Business Reporting Language
(XBRL) documents submitted
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
Taxonomy Definition Linkbase Document) and 101.PRE (XBRL 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, 2018 (filed with the SEC on February 8, 2019), is formatted in XBRL
and submitted electronically herewith: (i) Consolidated Statements of Income for
the years ended December 31, 2018, 2017 and 2016, (ii) Consolidated Statements
of Comprehensive Income for the years ended December 31, 2018, 2017, and
2016, (iii) Consolidated Statements of Financial Position at December 31, 2018
and December 31, 2017, (iv) Consolidated Statements of Cash Flows for the years
ended December 31, 2018, 2017 and 2016, (v) Consolidated Statements of
Changes in Common Shareholders’ Equity for the years ended December 31,
2018, 2017 and 2016, and (vi) the Notes to the Consolidated Financial Statements.
Incorporated by Reference
3(a)
3(b)
4(a)
Restated Articles of Incorporation of UPC, as amended and restated through June
27, 2011, and as further amended May 15, 2014, are incorporated herein by
reference to Exhibit 3(a) to the Corporation’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2014.
By-Laws of UPC, as amended, effective November 19, 2015, are incorporated
herein by reference to Exhibit 3.2 to the Corporation’s Current Report on Form 8-
K dated November 19, 2015.
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).
87
4(b)
4(c)
4(d)
4(e)
4(f)
4(g)
4(h)
4(i)
10(d)
10(e)
10(f)
10(g)
10(h)
10(i)
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 3.200% Note due 2021 is incorporated herein by reference to Exhibit 4.1
to the Corporation’s Current Report on Form 8-K dated June 8, 2018.
Form of 3.500% Note due 2023 is incorporated herein by reference to Exhibit 4.2
to the Corporation’s Current Report on Form 8-K dated June 8, 2018.
Form of 3.750% Note due 2025 is incorporated herein by reference to Exhibit 4.3
to the Corporation’s Current Report on Form 8-K dated June 8, 2018.
Form of 3.950% Note due 2028 is incorporated herein by reference to Exhibit 4.4
to the Corporation’s Current Report on Form 8-K dated June 8, 2018.
Form of 4.375% Note due 2038 is incorporated herein by reference to Exhibit 4.5
to the Corporation’s Current Report on Form 8-K dated June 8, 2018.
Form of 4.500% Note due 2048 is incorporated herein by reference to Exhibit 4.6
to the Corporation’s Current Report on Form 8-K dated June 8, 2018.
Form of 4.800% Note due 2058 is incorporated herein by reference to Exhibit 4.7
to the Corporation’s Current Report on Form 8-K dated June 8, 2018.
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 Grandfathered Component) of Union Pacific
Corporation, as amended March 1, 2013, is incorporated herein by reference to
Exhibit 10(d) to the Corporation’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2013.
Supplemental Pension Plan for Officers and Managers (409A Grandfathered
Component) of Union Pacific Corporation and Affiliates, as amended February 1,
2013, and March 1, 2013 is incorporated herein by reference to Exhibit 10(f) to
the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2013.
Union Pacific Corporation Key Employee Continuity Plan, as amended February
6, 2014, 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, 2013.
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.
Deferred Compensation Plan (409A Grandfathered Component) of Union Pacific
Corporation, as amended March 1, 2013, is incorporated herein by reference to
Exhibit 10(b) to the Corporation’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2013.
Deferred Compensation Plan (409A Non-Grandfathered Component) of Union
Pacific Corporation, as amended December 17, 2013, 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, 2013.
88
10(j)
10(k)
10(l)
10(m)
10(n)
10(o)
10(p)
10(q)
10(r)
10(s)
10(t)
10(u)
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.
Union Pacific Corporation 2013 Stock Incentive Plan, effective May 16, 2013, is
incorporated herein by reference to Exhibit 4.3 to the Corporation’s Form S-8
dated May 17, 2013.
UPC 2004 Stock Incentive Plan amended March 1, 2013, is incorporated herein
by reference to Exhibit 10(g) to the Corporation’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2013.
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).
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, 2012.
Form of Stock Unit Agreement for Executives is incorporated herein by reference
to Exhibit 10(b) to the Corporation’s Annual Report on Form 10-K for the year
ended December 31, 2012.
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, 2013.
Form of Stock Unit Agreement for Executives is incorporated herein by reference
to Exhibit 10(b) to the Corporation’s Annual Report on Form 10-K for the year
ended December 31, 2013.
89
10(v)
10(w)
10(x)
10(y)
Form of 2016 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, 2015.
Form of 2017 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, 2016.
Form of 2018 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, 2017.
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.
90
SIGNIFICANT SUBSIDIARIES OF UNION PACIFIC CORPORATION
Name of Corporation
Union Pacific Railroad Company
Exhibit 21
State of
Incorporation
Delaware
91
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. 333-10797, Registration Statement No. 333-88709,
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, Registration Statement No. 333-170208, and
Registration No. 333-188671 on Form S-8, Registration Statement No. 333-214407 on Form S-4, and
Registration Statement No. 333-201958 and Registration No. 333-222979 on Form S-3 of our reports dated
February 8, 2019, 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 for the year ended December 31, 2018.
Omaha, Nebraska
February 8, 2019
92
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 Lance M. Fritz and Rhonda S. Ferguson 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, 2018, 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 7, 2019.
/s/ Andrew H. Card, Jr.
Andrew H. Card, Jr.
/s/ Erroll B. Davis, Jr.
Erroll B. Davis, Jr.
/s/ William J. DeLaney
William J. DeLaney
/s/ David B. Dillon
David B. Dillon
/s/ Deborah C. Hopkins
Deborah C. Hopkins
/s/ Jane H. Lute
Jane H. Lute
/s/ Michael R. McCarthy
Michael R. McCarthy
/s/ Thomas F. McLarty III
Thomas F. McLarty III
/s/ Bhavesh V. Patel
Bhavesh V. Patel
/s/ Jose H. Villarreal
Jose H. Villarreal
93
Exhibit 31(a)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Lance M. Fritz, 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 8, 2019
/s/ Lance M. Fritz
Lance M. Fritz
Chairman, President and
Chief Executive Officer
94
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 8, 2019
/s/ Robert M. Knight, Jr.
Robert M. Knight, Jr.
Executive Vice President and
Chief Financial Officer
95
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, 2018, as filed with the Securities and Exchange Commission on
the date hereof (the Report), I, Lance M. Fritz, 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/ Lance M. Fritz
Lance M. Fritz
Chairman, President and
Chief Executive Officer
Union Pacific Corporation
February 8, 2019
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, 2018, as filed with the Securities and Exchange Commission on
the date hereof (the Report), I, Robert M. Knight, Jr., Executive Vice President 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 and
Chief Financial Officer
Union Pacific Corporation
February 8, 2019
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.
96