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, 20182021
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 | |||
| 13-2626465 | ||
(State or other jurisdiction of | (I.R.S. Employer | ||
incorporation or organization) | Identification No.) |
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1400 DOUGLAS STREET, OMAHA, NEBRASKADouglas 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 | Trading Symbol | Name of each exchange on which registered |
Common Stock (Par Value $2.50 per share) | UNP | New York Stock Exchange |
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| ■ | 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 |
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| ■ | Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, |
Large Accelerated Filer | ☑ | Accelerated Filer | ☐ | Non-Accelerated Filer | ☐ | ||
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Reporting Company |
| Emerging Growth Company | ☐ |
■ | 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. |
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■ | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). |
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| ■ | As of June |
The number of shares outstanding of the registrant’s Common Stock as of February 1, 2019January 28, 2022, was 722,877,817.636,898,957.
Documents Incorporated by Reference – Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 2019,12, 2022, are incorporated by reference into Part III of this report. The registrant’s Proxy Statement will be filed with the Securities and Exchange Commission (SEC) within 120 days after the end of the fiscal year that this report relates pursuant to Regulation 14A.
UNIONUNION PACIFIC CORPORATION
TABLE OF CONTENTS
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Executive Officers of the Registrant and Principal Executive Officers of Subsidiaries |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Management’s Annual Report on Internal Control Over Financial Reporting |
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Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 63 |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. | Certain Relationships and Related Transactions and Director Independence |
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Certifications | 72 |
2
February 8, 2019
Fellow Shareholders:
I am pleased to report that Union Pacific produced record 2018 financial results and finished the year with significant improvementsdemonstrated again in service reliability and efficiency, after overcoming network congestion and excess operating costs. The year was also one of change,2021 that our team is “best in class” as we embarked on a fundamental shiftnavigated challenges from the pandemic and numerous operational disruptions. The pandemic continued to impact our daily lives and disrupt supply chains in our operating philosophy by adopting precision scheduled railroading (PSR) principles withsignificant ways. Despite these wide-ranging impacts, 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 achieved record financial results. In 2021, we are reporting earnings per share of $9.95, which is a 26% increase versus 2020. Total volumes increased 4% versus 2020, as our economy continued to recover from the pandemic impacts. Operating ratio was a record 57.2%, 270 basis points better than 2020’s 59.9% demonstrating continued focus on efficient operations. 2020 results were negatively impacted by a one-time $278 million non-cash impairment charge that reduced earnings per share by $0.31 and increased operating ratio by 140 basis points.
Safety is foundational to everything we do at Union Pacific. 2021 safety results did not satisfied with these resultsmeet our expectations. In 2022, we are continuing to engage external experts to help us get back on track to world class industrial safety performance. We are implementing more effective ways to coach, train, and will not be satisfied untilroot-cause analyze, all while building a stronger, deeper safety culture. Nothing is more important than making sure every employee returns home safely every daysafely.
During 2021, we rolled out a new strategic plan we call, “Serve, Grow, Win, Together.” The essence of our strategy is unchanged; however, as our culture evolves, it’s imperative that we have a strategic plan that clearly defines our path to long-term sustainable growth. Everything we do starts with Serve and the transportation products we provide our customers. Precision Scheduled Railroading (PSR) is the foundation for delivering customer-centered operational excellence and creating a more resilient and agile service product. In 2021, weather, wildfires, supply chain disruptions, and pandemic impacts to crew availability all impeded our ability to further improve our service product. Freight car velocity was down 8% versus 2020, lowering Trip Plan Compliance for both Intermodal and Manifest/Autos 8 points. Beyond reliable service, our customers want “greener” transportation options. Every carload of freight we take off the highway saves fuel, lowers emissions, and reduces highway congestion. We took steps toward our long-term emission reduction goals by achieving a best-ever fuel consumption rate, improving 1% versus 2020, helping our customers eliminate roughly 23 million metric tons of greenhouse gas emissions by choosing rail versus truck. To support our service product, we continue to make significant investments in our infrastructure. In 2021, we invested approximately $3.0 billion, completing 15 siding extensions, opening pop-up intermodal terminals in the Twin Cities, MN, and West Colton, CA, modernizing 100 locomotives, and hardening our infrastructure. We also invested in energy management systems to reduce fuel consumption and the resulting carbon emissions. |
These investments also underpin the next tenet of our strategy – Grow. We believe we have the best rail franchise in North America. By providing a quality service product, along with the lowest cost structure in the industry, we are well positioned to handle more business for new and existing customers. We see many opportunities to grow, whether by providing more services for our customers or by expanding our reach through new transload facilities or pop-up intermodal terminals. Improving the customer experience is critical and technology plays a key role. Our industry leading practices provide our customers with application programming interfaces (API), with over 50 services launched, we eliminate all derailments.are integrating deeper into our customers’ systems and supply chains. And our team is winning in the marketplace! We welcomed new customers in 2021, are committed to making progress toward these goalsonboarding more in 2019. 2022, and already setting the stage for a great 2023 with a significant domestic intermodal win.
As partSuccessful execution of our robust capital program,plans to “Serve” and “Grow” leads to Win. For our shareholders, winning means generating best-in-industry cash returns. In 2021, we invested about $3.2paid dividends of $2.8 billion, in 2018 including $1.8 billion in replacement capital to harden our infrastructure, replace older assets, and to improvewhich included two 10% dividend increases during 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.year. In addition, we repurchased 57.233 million Union Pacific shares, decreasing our totalfull-year average share count by 6 percent.3%. Combining dividends and share repurchases, Union Pacific returned $10.5$10.1 billion to our shareholders in 2018.2021.
LookingOur definition of “winning” extends to all UP’s stakeholders, which is the final piece of our strategy – Together. Our comprehensive approach to Environmental Social Governance (ESG) issues, “Building a Sustainable Future 2030”, is designed to address the evolving needs of our stakeholders. In 2021, we took major steps on our ESG journey, beginning with the July release of our 2018, 2019, and 2020 EEO-1 reports, providing increased transparency to our workforce demographics. And we continue to report quarterly progress towards our long-term diversity representation goals. Further, in December, we released our initial Climate Action Plan, laying out our plan to achieve our 2030 carbon emission reduction goals, approved in February by the Science Based Targets initiative (SBTi), and our commitment to Net Zero by 2050, the only U.S. rail to do so.
Every year can bring real challenges to our “outdoor factory”, although the last two years were unique. In response, the resiliency of the Union Pacific team has been on full display, and our employees have positioned our Company for even greater success in 2022. As we prepare to celebrate our 160th anniversary in 2022, we are optimistic that continued economic growth,focused on customer-centered operational excellence, growing with our improving service performance, increasingly-efficient use ofcustomers, and winning together with all 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. Everystakeholders. The future is very bright for Union Pacific employee is committed to achieving industry-leading safety, service reliability, and financial performance in the coming year.Pacific.
Chairman, President, and Chief Executive Officer
*See Item 7
DIRECTORSDIRECTORS AND SENIOR MANAGEMENT
BOARD OF DIRECTORS | ||||||||
Andrew H. Card, Jr. | Lance M. Fritz | Thomas F. McLarty III | ||||||
Former White House | Chairman, President, and |
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Chief of Staff | Chief Executive Officer | McLarty Associates | ||||||
Board Committees: and Benefits, Corporate Governance | Union Pacific Corporation and |
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| Union Pacific Railroad Company | Board Committees: Finance (Chair), Corporate Governance and | ||||||
and Nominating |
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William J. DeLaney |
| Jose H. Villarreal | ||||||
Former Chief Executive Officer | Citi Ventures and Former |
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Sysco Corporation | Chief Innovation Officer Citi |
| Akin, Gump, Strauss, Hauer, & | |||||
Board Committees: Audit, | Board Committees: Audit, Finance | Feld, LLP | ||||||
Compensation and Benefits (Chair) |
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Jane H. Lute |
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David B. Dillon |
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Former Chairman and CEO |
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The Kroger Company |
| Christopher J. Williams | ||||||
Board Committees: Audit (Chair), | Governance and Nominating |
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Compensation and Benefits |
| Siebert Williams Shank & Co. | ||||||
| Michael R. McCarthy | Board Committees: Audit, Finance | ||||||
Sheri H. Edison |
| Chairman – McCarthy Group, LLC |
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Former Executive Vice President and | Co-Chairman – Bridges Trust Company | |||||||
General Counsel Amcor plc | Lead Independent Director | |||||||
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Finance | ||||||||
SENIOR MANAGEMENT*
Lance M. Fritz | Rahul Jalali |
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Chairman, President, and | Senior Vice President – Information | Executive Vice | ||||
Chief Executive Officer | Technologies and Chief Information | Officer, and Corporate Secretary | ||||
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Prentiss W. Bolin, Jr. |
| Kenny G. Rocker | ||||
Vice President – External Relations | Michael V. Miller | Executive Vice President – Marketing | ||||
Vice President and Treasurer | and Sales | |||||
Bryan L. Clark | ||||||
Vice President – Tax | Scott D. Moore | Todd M. Rynaski | ||||
Senior Vice President – Corporate | Vice President and Controller | |||||
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*Senior management are elected officers of both Union Pacific Corporation and Union Pacific Railroad Company, except Messrs. |
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4
GENERAL
Union Pacific Railroad Company is the principal operating company of Union Pacific Corporation. One of America's most recognized companies, Union Pacific Railroad Company linksconnects 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,Bulk, 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”.
STRATEGY
The Company’s growth strategy focuses on growing customer value through innovative supply chain solutions and aspiring to Serve, Grow, Win – Together.
Serve: Driving operational excellence to create a safer, more reliable and efficient service product. Precision scheduled railroading (PSR) is the foundation for delivering customer-centered operational excellence by:
1. | Shifting the focus of operations from moving trains to moving cars. |
2. | Minimizing car dwell, car classification events, and locomotive power requirements. |
3. | Utilizing general-purpose trains by blending existing train service. |
4. | Balancing train movements to improve the utilization of crews and rail assets. |
We aim to move cars faster and reduce the number of times each car is touched, resulting in terminal consolidation opportunities, improved asset utilization, and fewer car classifications, which in turn leads to products getting to the market quicker and more reliably. The result is a better customer experience, which enables us to grow our market share.
Grow: By harnessing the potential of the best rail franchise in the industry, we expect to generate growth in three ways – increasing profitable carloads that fit our network and transportation plan; providing more products and services to create value for our customers; and increasing the geographic reach of our franchise through innovative supply chain solutions.
Win: Driving strong financial performance resulting in significant shareholder returns. Execution of our plans to both serve and grow, leads to higher revenues with improved margins and greater cash generation, creating long term enterprise value.
Together: Engaging our four stakeholder groups – Communities, Customers, Employees, and Shareholders. Our comprehensive approach to Environmental Social Governance (ESG) issues, “Building a Sustainable Future 2030,” is designed to address the evolving needs of our stakeholders and is built on four areas of concentration – Investing in our Workforce, Driving Sustainable Solutions, Championing Environmental Stewardship, and Strengthening our Communities – to align with our stakeholder groups.
We believe that operational excellence and an engaged workforce with deep market knowledge and strong customer relationships will support best-in-class safety, a customer experience that drives growth, and shareholder returns.
As we work to transform our railroad into the safest, most reliable, and most efficient in North America, our values will continue guiding us. Our passion for performance will help us win; our high ethical standards will lead us to win in a way that supports all of our stakeholders; and our teamwork will make sure we win together.
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 revenues, financial information and data, and other information regarding environmental matters, is presented in Risk Factors, Item 1A; Legal Proceedings, Item 3; 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).
Operations –UPRR is a Class I railroad operating in the U.S. We have 32,452 route miles, connecting Pacific Coast and Gulf Coast ports with the Midwest and eastern U.S. gateways and providing several corridors to key Mexican gateways. We serve the Western two-thirds of the country and maintain coordinated schedules with other rail carriers to move freight to and from the Atlantic Coast, the Pacific 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. In 2021, we generated freight revenues totaling $20.2 billion from the following three commodity groups: | 2021 Freight Revenues |
Bulk – The Company's Bulk shipments consist of grain and grain products, fertilizer, food and refrigerated, and coal and renewables. In 2021, this group generated 33% of our freight revenues. We access most major grain markets, connecting 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 and West. Fertilizer movements originate in the Gulf Coast region, Midwest, western U.S., and Canada (through interline access) for delivery to major agricultural users in those areas as well as abroad. 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 portion of the Railroad’s coal business. Renewable shipments for customers committed to sustainability 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, salt, and roofing), metals and ores, petroleum, liquid petroleum gases (LPG), soda ash, and sand. Transportation of these products accounted for 36% of our freight revenues in 2021. Commercial, residential, and governmental infrastructure investments drive shipments of steel, aggregates, 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. Forest product shipments include lumber and paper commodities. Lumber shipments originate primarily in the Pacific Northwest or western Canada and move throughout the U.S. for use in new home construction and repairs and remodeling. Paper shipments primarily support packaging needs. Oil and gas drilling generates demand for raw steel, finished pipe, stone, and drilling fluid commodities. 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. Soda ash originates in southwestern Wyoming and California, destined for chemical and glass producing markets in North America and abroad.
Premium – In 2021, Premium shipments generated 31% of Union Pacific’s total freight revenues. Premium includes finished automobiles, automotive parts, and merchandise in intermodal containers, both domestic and international. International business consists of import and export traffic moving in 20 or 40-foot shipping containers, that mainly pass through West Coast ports, destined for one of the Company's many inland intermodal terminals. 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, the Company 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 (such as certain agricultural and food products that have specific growing and harvesting seasons) and the demand cycle for the commodity (such as intermodal traffic that generally peaks during the third quarter to meet back-to-school and holiday-related demand for consumer goods during the fourth quarter). 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; consumer demand; the strength of harvests, which can be adversely affected by severe weather; and market prices for agricultural products.
Proud & Engaged Workforce – Safety is a top priority at Union Pacific. We continue to improve technology, enhance processes, and foster a culture focused on operating safely, remaining focused on identifying and managing risks, and training our employees. Our success is measured by our personal injury rate (the number of reportable injuries for every 200,000 employee-hours worked), and our equipment incident rate (the number of reportable equipment incidents per million train miles). We provide both measures to the Federal Railroad Administration (FRA). Personal injuries are defined as on duty incidents or occupational illnesses that require employees to lose time away from work, modify their normal duties, or receive certain types of medical treatment. Equipment incidents are defined as any occurrence that causes damage to assets above the monetary reporting threshold regardless of ownership ($11,200 for 2021 and $11,300 for 2022).
Our goal is to have every employee return home safely every day. Our 2021 personal injury rate of 0.98 and equipment incident rate of 3.80 did not meet expectations and illustrates that we have work to do to achieve an incident-free environment. Our 2021 personal injury rate increased 9% and our equipment incident rate increased 7% versus 2020. (See further discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 7, of this report.)
We recruit and develop talented individuals dedicated to our mission of service and who are passionate about performing to the best of their abilities while working as one team. We value people from all backgrounds and walks of life, and we empower employees to launch and grow their career within the Company. As of December 31, 2021, the Company employed 32,124employees.
We believe a diverse workforce provides access to the skills and character we need to foster innovative ideas and drive optimal business growth. Drawing on different experiences and expertise is critical for strategic decision-making, problem-solving, leadership development, and creativity.
Union Pacific’s commitment, today and for the future, is to further improve and strengthen performance through an inclusive workforce that reflects the diverse markets and communities we serve, where everyone is treated fairly, and differences are valued. To that end, Union Pacific established a goal to reach 40% people of color and 11% female representation in our workforce by 2030. As of December 31, 2021, workforce representation of people of color and females was approximately 31.3% and 5.3%, respectively.
Providing employees with meaningful work and fulfilling careers is important to us. We offer competitive compensation to our employees. We believe employees are more productive when their financial success is aligned with the Company's success. In May 2021, our shareholders approved our employee stock purchase plan (ESPP), allowing participants to receive a 40% Company match of up to 5% of their base compensation (limited to $15,000 annually) to purchase shares in the Company stock. Our Board of Directors evaluates our non-union compensation plans and reviews recommendations from the Compensation and Benefits Committee, while collective bargaining agreements govern compensation for our union employees. The median annual compensation for all employees employed as of December 31, 2021, was $81,179 (excluding the CEO).
Labor Agreements – Approximately 84% of our full-time employees are represented by 13 major rail unions. Pursuant to the Railway Labor Act (RLA), our collective bargaining agreements are subject to modification every five years. 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 current round of negotiations began on January 1, 2020, related to years 2020-2024, and all collective bargaining groups are currently in the mediation phase. Contract negotiations historically continue for an extended period of time, and work stoppages during negotiations are rare (see “Strikes or Work Stoppages Could Adversely Affect Our Operations” in the Risk Factors in Item 1A of this report).
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. The police are certified state law enforcement officers with investigative and arrest powers. The Union Pacific Police Department has achieved accreditation under the Commission on Accreditation for Law Enforcement Agencies, Inc. (CALEA) for complying with the highest law enforcement standards. Our employees 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 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 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 assess cybersecurity risks and implement mitigation programs that evolve with the changing technology threat environment. For example, we released critical patches to address the vulnerability in Log4J, a component widely used in our applications and found in commercial software. 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 cybersecurity initiatives with government agencies, including the U.S. Department of Transportation (DOT); the Department of Homeland Security (DHS), along with its Cybersecurity & Infrastructure Security Agency (CISA) and Transportation Security Administration (TSA); as well as local police departments, fire departments, and other first responders. In connection with new guidance from the TSA, effective January 1, 2022, we are required to report cyber incidents to CISA, perform a cyber vulnerability self-assessment and submit results to the TSA (by March 31, 2022), assemble and adopt a cyber incident response plan (by June 29, 2022), and appoint cybersecurity coordinators. In conjunction with the Association of American Railroads (AAR), we sponsor Ask Rail, a mobile application that 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 tools, including the training of emergency responders. In cooperation with the 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.
Sustainable Future – Union Pacific believes it is important that we act as environmental stewards, reducing emissions and supporting the transition to a more sustainable future. While we work to further reduce our environmental footprint, it is important to note that railroads already are one of the most fuel-efficient means of transportation. According to the Association of American Railroads (AAR), moving freight by rail instead of truck reduces greenhouse gas (GHG) emissions by up to 75%. Building on rail’s relative emissions benefits over other modes of transportation, we are taking additional actions to reduce our emissions. These actions are described in our initial Climate Action Plan, which we released in December 2021.
Competition – see “We Face Competition from Other Railroads and Other Transportation Providers” in the Risk Factors in Item 1A of this report.
Key Suppliers – see “We Are Dependent on Certain Key Suppliers of Locomotives and Rail” in the Risk Factors in Item 1A of this report.
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).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).
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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:
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
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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.
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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
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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 regulations of the FRA and other federal and state agencies as well as 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 aexplore changes to the methodology for determining railroad revenue adequacy and the possible useuses 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 waterwastewater 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 –Estimates– Environmental, Item 7, and Note 1817 to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.Data, Item 8.
The following discussion addresses significant factors, events, and uncertainties that make an investment in our securities risky and provides important information for the understanding of our “forward-looking statements,” which are discussed immediately preceding Item 7A of this Form 10-K and elsewhere. The risk factors 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 urge you to consider carefully the factors described below and the risks that they present for our operations as well as the risks addressed in other reports and materials that we file with the SEC and the other information included or incorporated by reference in this Form 10-K. When the factors, events, and contingencies described below or elsewhere in this Form 10-K materialize, our business, reputation, financial condition, results of operations, cash flows, or prospects can be materially adversely affected. In such case, the trading price of our common stock could decline and you could lose part or all of your investment. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also materially adversely affect our business, reputation, financial condition, results of operations, cash flows, and prospects.
Strategic and Operational Risks
We Must Manage Fluctuating Demand for Our Services and Network Capacity – If there are significantSignificant 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 experiencecan lead to increased costs associated
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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 all 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 Rely on Technology and Technology Improvements in Our Business Operations – We rely on information technology in all aspects of our business, including technology systems operated by us or under control of third-parties. If we do not have sufficient capital or do not deploy sufficient capital in a timely manner to acquire, develop, or implement new technology or maintain or upgrade current systems, such as Positive Train Control (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.
We Are Subject to Cybersecurity Risks – We rely on information technology in all aspects of our business, including technology systems operated by us (whether created by us or purchased), under control of third-parties, or open-source software. Although we devote significant resources to protect our technology systems and proprietary data, we have experienced and will likely continue to experience varying degrees of cyber incidents in the normal course of business. There can be no assurance that the systems we have designed to prevent or limit the effects of cyber incidents or attacks will be sufficient to prevent or detect such incidents or attacks, or to avoid a material adverse impact on our systems after such incidents or attacks do occur. Furthermore, due to the rising numbers and increasing sophistication of cyber-attacks, an increasingly complex information technology supply chain, and the nature of zero-day exploits, we may be unable to anticipate or implement adequate preventative measures to prevent a security breach, including by ransomware, human error, or other cyber-attack methods, from materially disrupting our systems or the systems of third-parties. A successful cyber-attack may result in significant service interruption; safety failure; other operational difficulties; unauthorized access to (or the loss of access to) competitively sensitive, confidential, or other critical data or systems; loss of customers; financial losses; regulatory fines; and misuse or corruption of critical data and proprietary information, which could all have a material adverse impact on our results of operations, financial condition, and liquidity. We may experience security breaches that could remain undetected for an extended period and, therefore, have a greater impact on the services we offer. Additionally, we may be exposed to increased cybersecurity risk because we are a component of the critical U.S. infrastructure.
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, avalanches, and significant precipitation. Line outages and other interruptions caused by these conditions can adversely affect our entire rail network, potentially negatively affecting revenue, costs, and liabilities, despite efforts we undertake to plan for these events. Our revenues can also be adversely affected by severe weather that causes damage and disruptions to our customers. These impacts caused by severe weather could have a material adverse effect on our results of operations, financial condition, and liquidity.
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, Canada, and Southeast Asia, by various carriers and, at times, various modes of transportation. Significant and sustained interruptions of trade with Mexico, Canada, 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, Canada, 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 the United States-Mexico-Canada Agreement (USMCA) and a “Phase One” trade agreement with China; (c) actions of taxing authorities that affect our customers doing business in foreign countries; (d) 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; (e) shifts in patterns of international trade that adversely affect import and export markets; (f) a material reduction in foreign direct investment in these countries; and (g) public health crises, including the outbreak of pandemic or contagious disease, such as the coronavirus and its variant strains (COVID).
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 or the inability to manufacture locomotives that meet efficiency or regulatory emissions standards, we could experience significant cost increases and reduced availability of the locomotives that are necessary for our operations. Additionally, we utilize a limited number of steel producers 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. Changes to trade agreements or policies that result in increased tariffs on goods imported into the United States could also result in significant cost increases for rail purchases and difficulty obtaining sufficient rail.
Human Capital Risks
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 over 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 for us, our customers, and throughout the supply chain, including the effects on availability from pandemic illnesses or restrictions (including, for example, any potential effects from the coronavirus vaccine mandates), 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.
Legal and Regulatory Risks
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), tax, 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 whichthat we operate in 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, changes in tax rates, enactment of new tax laws, and costs and expenses.revision in tax regulations. Significant legislative activity in Congress or regulatory activity by the STB could expand regulation of railroad operations and pricespricing 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
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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, and disposal of waste and other materials; and hazardous material or petroleum releases. We generate and transport hazardous and non-hazardous waste in our operations, and we did so in our former operations. Environmental liability can extend to previously owned or operated properties, leased properties, and properties owned by third parties,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 partiesthird-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.
Macroeconomic and Industry Risks
We Face Competition from Other Railroads and Other Transportation Providers – We face competition from other railroads, motor carriers, ships, barges, 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 three 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 truck traffic to rail. Additionally, 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 of the following could also affect the competitiveness of our transportation services for some or all of our commodities, which could have a material adverse effect on our results of operations, financial condition, and liquidity: (i) improvements or expenditures materially increasing the quality or reducing the costs of these alternative modes of transportation, such as autonomous or more fuel efficient trucks, (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. 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. Additionally, any future consolidation of the rail industry could materially affect our competitive environment.
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,GHGs, 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, and GHG emissions could materially affect the markets for the commodities we carry and demand for our services, 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 also 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, weWe 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. Violent weather caused by climate change, including earthquakes, hurricanes, fires, floods, extreme temperatures, avalanches, and significant precipitation could cause line outages and other interruptions to our infrastructure. Any of these factors, individually or in operation with one or more of the other factors, or
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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. While we work to implement our Climate Action Plan, our efforts to achieve emission reduction targets could significantly increase our operational costs and capital expenditures.
Severe Weather Could Result
Our business, financial condition, and results of operations have been adversely affected, and in Significant Business Interruptionsthe future, could be materially adversely affected by pandemics or other public health crises – Our business, financial condition, and Expenditures – Asresults of operations have been adversely affected by COVID. COVID has caused, and is expected to continue to cause, a railroad withglobal slowdown of economic activity (including the decrease in demand for a vast network, we are exposed to severe weather conditions and other natural phenomena, including earthquakes, hurricanes, fires, floods, mudslides or landslides, extreme temperatures,broad variety of goods), disruptions in global supply chains, and significant precipitation. Line outagesvolatility and other interruptions caused bydisruption of financial markets, resulting further in adverse effects on workforces, customers, and regional and local economies. Other future pandemics or public health crises may cause these conditions can adversely affectsame or similar consequences. Because the severity, magnitude, and duration of the COVID pandemic and its economic consequences are rapidly changing, and difficult to predict, the impact on our entire rail networkbusiness and can adversely affect revenue, costs, and liabilities, which could have a material adverse effectfinancial condition remains uncertain. The ultimate impact of the COVID pandemic on our results of operations and financial condition remains uncertain and liquidity.
Strikes or Work Stoppages Could Adversely Affect Our Operations – The U.S. Class I railroads are partydepends on numerous evolving factors, which we may not be able to collective bargaining agreements with various labor unions. The majority of our employees belongeffectively respond to labor unions and are subjectnot entirely within our control. These factors also may be of importance for other pandemics or public health crises, including, but not limited to: governmental, business, and individuals’ actions that have been and continue to these agreements. Disputes with regardbe taken in response to a global pandemic or other public health crises (including restrictions on travel and transport, workforce pressures, social distancing, and shelter-in-place orders); the termseffect of these agreementsa pandemic or our potential inability to negotiate acceptable contracts with these unions could resultother public health crises on economic activity and actions taken in among other things, strikes, work stoppages, slowdowns, or lockouts, which could cause a significant disruption of our operations and have a material adverseresponse; the effect on our customers and their demand for our services; the effect of a pandemic or other public health crises on the credit-worthiness of our customers; national or global supply chain challenges or disruption; facility closures; commodity cost volatility; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery as the pandemic subsides as well as response to a potential reoccurrence. Further, a pandemic or other public health crises, and the volatile regional and global economic conditions stemming from such an event, could also precipitate and aggravate the other risk factors that we identify, which could materially adversely affect our business, financial condition, results of operations financial condition,(including revenues and liquidity.profitability), and/or stock price. 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, portspandemic or other transport access points could compromisepublic health crises also may affect our service reliabilityoperating and havefinancial results in a material adverse impact onmanner that is not presently known to us or that we currently do not consider to present significant risks to 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.operations.
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.Financial Risks
We May BeAre 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 UtilizeRely on 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 amount of our receivables.receivables as collateral for credit. 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.facility (Receivables Facility). This may also limit our access to external sources of capital and significantly increase the costs of short and long-term debt financing.
12General Risk Factors
A Significant PortionWe Are Affected by General Economic Conditions – Prolonged, severe adverse domestic and global economic conditions or disruptions of Our Revenue Involves Transportation of Commodities tofinancial 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 internationalcredit markets, including Mexicoinflation, may affect the producers and Southeast Asia, by various carriersconsumers of the commodities we carry 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 couldmay have a material adverse effect on our access to liquidity, results of operations, and 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.condition.
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.
ItemItem 1B. Unresolved Staff Comments
None.
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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 32,23632,452 route miles. We own 26,03926,124 miles and operate on the remainder pursuant to trackage rights or leases. The following table describes track miles at December 31, 2018,2021 and 2017:2020:
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Route | 32,236 | 32,122 | 32,452 | 32,313 | ||||||
Other main line | 7,074 | 7,107 | 7,093 | 7,097 | ||||||
Passing lines and turnouts | 3,274 | 3,255 | 3,412 | 3,382 | ||||||
Switching and classification yard lines | 8,970 | 9,199 | 8,887 | 9,001 | ||||||
Total miles | 51,554 | 51,683 | 51,844 | 51,793 |
HEADQUARTERS BUILDING
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.
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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 900More than 500 employees currently work on-site in the facility. In the event of a disruption of operations at HDC due to a cyber attack,cyber-attack, flooding or severe weather, pandemic outbreak, 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 houseon duty locations for 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 | Major Intermodal Terminals |
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North Platte, Nebraska | Joliet (Global 4), Illinois |
North Little Rock, Arkansas |
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| Global II (Chicago), Illinois |
| East Los Angeles, California |
Livonia, Louisiana | Lathrop, California |
West Colton, California | LATC (Los Angeles), California |
Fort Worth, Texas | Mesquite, Texas |
Houston, Texas | City of Industry, California |
Roseville, California | ICTF (Los Angeles), California |
RAIL EQUIPMENT
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, 2018,2021, we owned or leased the following units of equipment:
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Locomotives | Owned | Leased | Total | Age (yrs.) | ||||||||||||
Multiple purpose | 6,204 | 1,038 | 7,242 | 22.5 | ||||||||||||
Switching | 158 | - | 158 | 41.4 | ||||||||||||
Other | 15 | 61 | 76 | 41.3 | ||||||||||||
Total locomotives | 6,377 | 1,099 | 7,476 | N/A |
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Locomotives | Owned | Leased | Total | Age (yrs.) |
Multiple purpose | 6,387 | 1,582 | 7,969 | 20.5 |
Switching | 201 | 12 | 213 | 38.3 |
Other | 35 | 57 | 92 | 39.6 |
Total locomotives | 6,623 | 1,651 | 8,274 | N/A |
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Freight cars | Owned | Leased | Total | Age (yrs.) | ||||||||||||
Covered hoppers | 12,992 | 7,996 | 20,988 | 22.4 | ||||||||||||
Open hoppers | 5,108 | 817 | 5,925 | 34.8 | ||||||||||||
Gondolas | 5,468 | 2,671 | 8,139 | 28.8 | ||||||||||||
Boxcars | 2,210 | 6,604 | 8,814 | 40.6 | ||||||||||||
Refrigerated cars | 1,974 | 2,081 | 4,055 | 22.6 | ||||||||||||
Flat cars | 2,260 | 1,139 | 3,399 | 32.3 | ||||||||||||
Other | - | 263 | 263 | 33.2 | ||||||||||||
Total freight cars | 30,012 | 21,571 | 51,583 | N/A |
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Highway revenue equipment | Owned | Leased | Total | Age (yrs.) | ||||||||||||
Containers | 48,962 | 1,856 | 50,818 | 10.5 | ||||||||||||
Chassis | 29,875 | 14,148 | 44,023 | 12.6 | ||||||||||||
Total highway revenue equipment | 78,837 | 16,004 | 94,841 | N/A |
We continuously assess our need for equipment to run an efficient and reliable network. Many factors cause us to adjust the size of our active fleets, including changes in carload volume, weather events, seasonality, customer preferences, and operational efficiency initiatives. As some of these factors are difficult to assess or can change rapidly, we maintain a surge fleet to remain agile. Without the surge fleet, our ability to react quickly is hindered as equipment suppliers are limited and lead times to acquire equipment are long and may be in excess of a year. We believe our locomotive and freight car fleets are appropriately sized to meet our current and future business requirements. These fleets serve as the most reliable and efficient equipment to facilitate growth without additional acquisitions. Locomotive and freight car in service utilization percentages for the year ended December 31, 2021, were 62% and 80%, respectively.
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Freight cars | Owned | Leased | Total | Age (yrs.) |
Covered hoppers | 14,001 | 11,784 | 25,785 | 19.7 |
Open hoppers | 6,485 | 2,389 | 8,874 | 30.6 |
Gondolas | 6,105 | 2,133 | 8,238 | 27.6 |
Boxcars | 2,776 | 7,045 | 9,821 | 37.1 |
Refrigerated cars | 2,372 | 3,269 | 5,641 | 25.4 |
Flat cars | 2,404 | 1,057 | 3,461 | 33.6 |
Other | 8 | 332 | 340 | 30.8 |
Total freight cars | 34,151 | 28,009 | 62,160 | N/A |
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Highway revenue equipment | Owned | Leased | Total | Age (yrs.) |
Containers | 47,752 | 9,005 | 56,757 | 8.2 |
Chassis | 26,242 | 21,964 | 48,206 | 10.2 |
Total highway revenue equipment | 73,994 | 30,969 | 104,963 | N/A |
CAPITAL EXPENDITURES
Our rail network requires significant annual capital investments for replacement, improvement, and expansion. These investments enhance safety, support the transportation needs of our customers, and improve our operational efficiency.efficiency, and support emission reduction initiatives outlined in our Climate Action Plan. Additionally, we add new locomotives and freight carsequipment to our fleet to replace older less efficient equipment and 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.demand.
20182021 Capital Program – During 2018,2021, our capital program totaled approximately $3.2$3.0 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 7.7, of this report.)
20192022 Capital Plan – In 2019,2022, we expect our capital plan to be approximately $3.2$3.3 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.up 10% from 2021. (See further discussion of our 20192022 capital plan in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, Item 7,. of this report.)
OTHER
Equipment Encumbrances – Equipment with a carrying value of approximately $1.8$1.2 billion and $2.0$1.3 billion at December 31, 2018,2021 and 2017,2020, respectively, served as collateral for capitalfinance 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 within this report of environmental issues in Business – Governmental and Environmental Regulation, Item 1,1; Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting PoliciesEstimates – Environmental, Item 7,7; and Note 18 of17 to the Consolidated Financial Statements.Statements and Supplementary Data, Item 8.)
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)$1,000,000), 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’
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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 this report in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting PoliciesEstimates – Environmental, Item 7. See also7, and Note 1817 to the Financial Statements and Supplementary Data, Item 8.
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 arewere 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.lawsuits. 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 allegealleged 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 withAugust 16, 2019, the U.S. Court of Appeals for the District of Columbia requesting thatCircuit (D.C. Circuit) affirmed the court review the class certification ruling. On August 9, 2013, the Circuitdecision of U.S. District 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(U.S. District Court) denying class certification (the Certification Denial). Only five plaintiffs remain in this multidistrict litigation (MDL) originally filed in 2007, which remains pending. They are proceeding on a consolidated basis in the appeal was conductedU.S. District Court before the Honorable Paul L. Friedman (MDL I). Since the Certification Denial, approximately 111 lawsuits have been filed in federal court based on September 28, 2018. We are awaiting a decisionclaims identical to those alleged in the class certification case. The Judicial Panel on that hearing.Multidistrict Litigation consolidated these suits for pretrial proceedings in the U.S. District Court before the Honorable Beryl A. Howell (MDL II).
On February 19, 2021, the court denied our motion to exclude plaintiffs' alleged evidence of conspiracy under a federal statute designed to incent and protect railroad communications made to further interline service (i.e., where two railroads are in the route). In August 2021, the D.C. Circuit agreed to hear Defendants' appeal. Oral argument is scheduled for March 7, 2022. The appeal will address whether the interline evidence the plaintiffs intend to utilize to prove the alleged conspiracy is admissible either for purposes of summary judgment or at trial.
We also filed a motion for summary judgment on May 14, 2021, in the MDL I proceedings, and the briefing was completed in September 2021. On October 20, 2021, Judge Friedman issued an order stating that he will not consider the motions for summary judgment until after the D.C. Circuit appeal mentioned above is decided.
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 discoveryJust as it did in this matter. For additional informationthe MDL proceedings, Union Pacific filed a motion for summary judgment on Oxbow, please refer to Item 3. Legal Proceedings, under Other Matters, Antitrust LitigationMay 14, 2021, and the briefing was completed in our Annual Report on Form 10-KSeptember 2021. As stated above, the court issued an order that will not consider the motions for summary judgment until after the year ended December 31, 2016. D.C. Circuit appeal mentioned above is decided.
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.
ItemItem 4. Mine Safety Disclosures
Not applicable.
18
ExecutiveInformation About Our Executive Officers of the Registrant and Principal Executive Officers of Our 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, 2019,4, 2022, relating to the executive officers.
Business | ||||
Experience During | ||||
Name | Position | Age | Past Five Years | |
Lance M. Fritz | Chairman, President, and Chief Executive Officer of UPC and the Railroad |
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| Executive Vice President and Chief Financial Officer of UPC and the Railroad |
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| Executive Vice President, |
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Kenny G. Rocker | Executive Vice President |
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Todd M. Rynaski | Vice President and Controller of UPC and the Railroad |
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| Executive Vice President |
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Elizabeth F. Whited | Executive Vice President – Sustainability and |
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| 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 | |
[4] | Mr. |
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| Ms. Whited was elected Executive Vice President – Sustainability and |
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ItemItem 5. Market for the Registrant’sRegistrant’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,January 28, 2022, there were 722,877,817636,898,957 shares of common stock outstanding and 30,90229,397 common shareholders of record. On that date, the closing price of the common stock on the NYSE was $159.67.$245.93. We paid dividends to our common shareholders during each of the past 119122 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).
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Period | UNP |
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| DJ Trans |
| S&P 500 |
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1 Year (2018) | 5.3 | % | 10.3 | % | (12.3) | % | (4.4) | % |
3 Year (2016 - 2018) | 89.3 |
| 121.0 |
| 27.6 |
| 30.4 |
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Period | UNP | Peer Group | DJ Trans | S&P 500 | ||||||||||||
1 Year (2021) | 23.3 | % | 26.4 | % | 33.2 | % | 28.7 | % | ||||||||
3 Year (2019 - 2021) | 94.0 | 98.7 | 87.6 | 100.3 |
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, 20132016, 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 2018,2021, we repurchased 57,669,74633,760,492 shares of our common stock at an average price of $143.70.$218.36. The following table presents common stock repurchases during each month for the fourth quarter of 2018:2021:
Period | Total Number of Shares Purchased [a] | Average Price Paid Per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | Maximum Number of Shares Remaining Under the Plan or Program [b] | ||||||||||||
Oct. 1 through Oct. 31 | 2,418,989 | $ | 220.04 | 2,344,253 | 81,178,648 | |||||||||||
Nov. 1 through Nov. 30 | 1,479,605 | 240.95 | 1,432,039 | 79,746,609 | ||||||||||||
Dec. 1 through Dec. 31 | 2,064,394 | 245.00 | 2,061,259 | 77,685,350 | ||||||||||||
Total | 5,962,988 | $ | 233.87 | 5,837,551 | N/A |
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Period | Total Number of Shares Purchased [a] |
| Average Price Paid Per Share | Total Number of Shares Purchased as Part of a Publicly Announced | Maximum Number of Shares Remaining Under the Plan or Program [b] | |
Oct. 1 through Oct. 31 | 6,091,605 | $ | 158.20 | 6,087,727 | 32,831,024 | |
Nov. 1 through Nov. 30 | 3,408,467 |
| 147.91 | 3,402,190 | 29,428,834 | |
Dec. 1 through Dec. 31 | 3,007,951 |
| 148.40 | 3,000,715 | 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 |
[b] |
| Effective |
21
ItemItem 6. Selected Financial Data[Reserved]
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
Item 7. 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.
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Millions, Except per Share Amounts, |
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Carloads, Employee Statistics, and Ratios | 2018 | 2017[a] | 2016 | 2015 | 2014 | ||||||
For the Year Ended December 31 |
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Operating revenues [b] | $ | 22,832 | $ | 21,240 | $ | 19,941 | $ | 21,813 | $ | 23,988 | |
Operating income |
| 8,517 |
| 8,106 |
| 7,243 |
| 8,082 |
| 8,765 | |
Net income |
| 5,966 |
| 10,712 |
| 4,233 |
| 4,772 |
| 5,180 | |
Earnings per share - basic [c] |
| 7.95 |
| 13.42 |
| 5.09 |
| 5.51 |
| 5.77 | |
Earnings per share - diluted [c] |
| 7.91 |
| 13.36 |
| 5.07 |
| 5.49 |
| 5.75 | |
Dividends declared per share [c] |
| 3.06 |
| 2.48 |
| 2.255 |
| 2.20 |
| 1.91 | |
Cash provided by operating activities |
| 8,686 |
| 7,230 |
| 7,525 |
| 7,344 |
| 7,385 | |
Cash used in investing activities |
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| (4,476) |
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Cash used in financing activities |
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| (4,146) |
| (4,246) |
| (3,063) |
| (2,982) | |
Cash used for common share repurchases |
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| (3,105) |
| (3,465) |
| (3,225) | |
At December 31 |
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Total assets | $ | 59,147 | $ | 57,806 | $ | 55,718 | $ | 54,600 | $ | 52,372 | |
Long-term obligations [d] |
| 34,098 |
| 29,011 |
| 32,146 |
| 30,692 |
| 27,419 | |
Debt due after one year |
| 20,925 |
| 16,144 |
| 14,249 |
| 13,607 |
| 10,952 | |
Common shareholders' equity |
| 20,423 |
| 24,856 |
| 19,932 |
| 20,702 |
| 21,189 | |
Additional Data |
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Freight revenues [b] | $ | 21,384 | $ | 19,837 | $ | 18,601 | $ | 20,397 | $ | 22,560 | |
Revenue carloads (units) (000) |
| 8,908 |
| 8,588 |
| 8,442 |
| 9,062 |
| 9,625 | |
Operating ratio (%) [e] |
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| 61.8 |
| 63.7 |
| 62.9 |
| 63.5 | |
Average employees (000) |
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| 42.9 |
| 47.5 |
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Financial Ratios (%) |
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Return on average common |
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| 47.8 |
| 20.8 |
| 22.8 |
| 24.4 |
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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 PoliciesEstimates and Cautionary Information at the end of this Item 7. The following section generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
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
20182021 Results
● |
On October 11, 2021, the Company announced that it is complying with the Presidential Executive Order 14042 (EO) that mandates employees of federal contractors and subcontractors be fully vaccinated against COVID, unless employees are legally entitled to an accommodation. A federal district court issued a nationwide injunction against the vaccine mandate in the EO. The company is complying with the injunction while continuing to encourage employees to get their vaccinations. Full implementation and enforcement of the COVID vaccine mandate may affect workforce availability ranging from, among other things, absences to obtain vaccination, recovery from any side-effects, resignations from unwillingness to comply with the mandate, and/or organized work stoppages from any of our organized union labor workforce. After receiving communications from three of our unions objecting to the vaccination requirement, we filed lawsuits on October 15, 2021, to prevent any disruption to the national rail network. We seek to resolve any vaccination dispute through the various dispute resolution procedures outlined in the Railway Labor Act. These lawsuits have been stayed pending a final disposition of the enforceability of the EO by the court. |
● | Safety – In this ever-changing environment, we remain intently focused on reducing risk and |
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| Network |
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.
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| Freight Revenues – Our freight revenues increased |
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| Financial Results –In |
[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.
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Millions, Except Per Share Amounts and |
| Operating |
| Income |
| Net |
| Diluted | Operating | Effective | ||
Percentages |
| Income |
| Taxes |
| Income |
| EPS | Ratio | Tax Rate | ||
2017 Reported results* (GAAP) | $ | 8,106 | $ | (3,080) | $ | 10,712 | $ | 13.36 | 61.8 | % | (40.4) | % |
Factors Affecting Comparability: |
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Adjustments for Tax Cuts and Jobs Act |
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Equity-method affiliates |
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| (0.17) | 1.0 | pts | - |
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Deferred taxes |
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| 5,935 |
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| 77.9 |
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2017 Adjusted results (non-GAAP) | $ | 7,894 | $ | 2,782 | $ | 4,638 | $ | 5.79 | 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 |
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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.financing. 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 | 2021 | 2020 | 2019 | |||||||||
Cash provided by operating activities | $ | 9,032 | $ | 8,540 | $ | 8,609 | ||||||
Cash used in investing activities | (2,709 | ) | (2,676 | ) | (3,435 | ) | ||||||
Dividends paid | (2,800 | ) | (2,626 | ) | (2,598 | ) | ||||||
Free cash flow | $ | 3,523 | $ | 3,238 | $ | 2,576 |
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Millions | 2018 | 2017 | 2016 | ||||
Cash provided by operating activities | $ | 8,686 | $ | 7,230 | $ | 7,525 | |
Cash used in investing activities |
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| (3,086) |
| (3,393) | |
Dividends paid |
| (2,299) |
| (1,982) |
| (1,879) | |
Free cash flow | $ | 2,976 | $ | 2,162 | $ | 2,253 |
20192022 Outlook
● |
| 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 |
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| Network Operations – In |
● | Financial Expectations – We expect volume to outpace industrial production in 2022 as the |
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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.
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● | Fuel Prices – Significant changes in fuel prices could have an impact on consumer discretionary spending, impacting demand for various consumer products we transport. Alternatively, those changes could have an inverse impact on commodities such as coal, petroleum products, and domestic drilling-related shipments. |
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 |
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RESULTS OF OPERATIONS
Operating Revenues
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Millions | 2018 | 2017 | 2016 | 2018 v 2017 | 2017 v 2016 | 2021 | 2020 | 2019 | 2021 v 2020 | 2020 v 2019 | ||||||||||||||||||||
Freight revenues | $ | 21,384 | $ | 19,837 | $ | 18,601 | 8 | % | 7 | % | $ | 20,244 | $ | 18,251 | $ | 20,243 | 11 | % | (10 | )% | ||||||||||
Other subsidiary revenues |
| 881 |
| 885 |
| 814 | - |
| 9 |
| 741 | 743 | 880 | - | (16 | ) | ||||||||||||||
Accessorial revenues |
| 502 |
| 458 |
| 455 | 10 |
| 1 |
| 752 | 473 | 514 | 59 | (8 | ) | ||||||||||||||
Other |
| 65 |
| 60 |
| 71 | 8 |
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| 67 | 66 | 71 | 2 | (7 | ) | ||||||||||||||
Total | $ | 22,832 | $ | 21,240 | $ | 19,941 | 7 | % | 7 | % | $ | 21,804 | $ | 19,533 | $ | 21,708 | 12 | % | (10 | )% |
We generate freight revenues by transporting freight or other materials from our fourthree commodity groups. Freight revenues vary with volume (carloads) and average revenue per car (ARC).ARC. Changes in price, traffic mix, and fuel surcharges drive ARC. We provide some of our customers with contractualCustomer incentives, which are primarily provided for meeting or exceeding specified cumulative volumes or shipping to and to/from specific locations which we record as reductions to freight revenuesor based on cumulative volumes, are recorded as a reduction to operating revenues. Customer incentives that include variable consideration based on cumulative volumes are estimated using the actual or projected future shipments.expected value method, which is based on available historical, current, and forecasted volumes, and recognized as the related performance obligation is satisfied. We recognize freight revenues over time as shipments move from origin to destination. We allocate freight revenuesThe allocation of revenue between reporting periods is based on the relative transit time in each reporting period and recognizewith expenses recognized as we incur them.incurred.
Other subsidiary revenues include revenues earned by our subsidiaries, revenues from(primarily logistics and commuter rail operations that we manage, accessorialoperations) 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 which we earn when customers retain equipment owned or controlled by us or when we perform additional services suchare recognized at a point in time as switching or storage, and miscellaneous contract revenue. We recognize other revenues as we perform services or meet contractual obligations.performance obligations are satisfied.
FreightOur freight revenues increased 8%11% year-over-year to $21.4$20.2 billion driven by a 4% increase in volume, growth, higher fuel surcharge revenue, and core pricing gains, partially offset by negativeand positive mix of traffic. Growthtraffic (for example, a relative increase in international
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and domestic intermodal, petroleum products, metals, rock, plastics, and industrial chemical shipments, more than offset declineswhich have a higher ARC). Volume increased in coal, grain, and frac sand shipments.
Freight revenues increased 7%every key market segment compared to 2020 due to the recovery from the depressed economy brought on by the COVID pandemic in 2017 to $19.8 billion driven by2020. While the markets have rebounded from 2020, our 2021 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.levels are 4% below 2019 pre-pandemic levels.
Our fuel surcharge programs generated freight revenues of $1.7 billion $966 million, and $560 million$1.0 billion in 2018, 2017,2021 and 2016,2020, respectively. Fuel surcharge revenue in 20182021 increased $769 million$0.7 billion as a result of a 27%49% increase in fuel price and 4% growth in carloadings. Fuel surcharge revenue in 2017 increased $406 million as a result of a 22%4% increase in fuel price, a 2% growth in carloadings, andpartially offset by the lag impact on fuel surcharge (it can generally take up to two months for changing fuel prices to affect fuel surchargesurcharges recoveries).
In 2018,2021, other subsidiary revenues were flat with 2020 as the semiconductor shortage negatively impacting 2021 automotive production offset the recovery from other COVID related declines in 2020. Accessorial revenue increased from 2017in 2021 compared to 2020 driven by higherincreased intermodal accessorial revenues associated with carload and container volume growth.charges tied to global supply chain disruptions. Other revenue was essentially flat year-over-year.
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 | % Change | % Change | ||||||||||||||||||
Millions | 2021 | 2020 | 2019 | 2021 v 2020 | 2020 v 2019 | |||||||||||||||
Grain & grain products | $ | 3,181 | $ | 2,829 | $ | 2,776 | 12 | % | 2 | % | ||||||||||
Fertilizer | 697 | 660 | 653 | 6 | 1 | |||||||||||||||
Food & refrigerated | 998 | 937 | 1,008 | 7 | (7 | ) | ||||||||||||||
Coal & renewables | 1,780 | 1,534 | 2,092 | 16 | (27 | ) | ||||||||||||||
Bulk | 6,656 | 5,960 | 6,529 | 12 | (9 | ) | ||||||||||||||
Industrial chemicals & plastics | 1,943 | 1,845 | 1,885 | 5 | (2 | ) | ||||||||||||||
Metals & minerals | 1,811 | 1,580 | 2,042 | 15 | (23 | ) | ||||||||||||||
Forest products | 1,357 | 1,160 | 1,160 | 17 | - | |||||||||||||||
Energy & specialized markets | 2,212 | 2,037 | 2,385 | 9 | (15 | ) | ||||||||||||||
Industrial | 7,323 | 6,622 | 7,472 | 11 | (11 | ) | ||||||||||||||
Automotive | 1,761 | 1,680 | 2,123 | 5 | (21 | ) | ||||||||||||||
Intermodal | 4,504 | 3,989 | 4,119 | 13 | (3 | ) | ||||||||||||||
Premium | 6,265 | 5,669 | 6,242 | 11 | (9 | ) | ||||||||||||||
Total | $ | 20,244 | $ | 18,251 | $ | 20,243 | 11 | % | (10 | )% |
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Freight Revenues |
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Millions | 2018 | 2017 | 2016 | 2018 v 2017 | 2017 v 2016 | |||||
Agricultural Products | $ | 4,469 | $ | 4,303 | $ | 4,209 | 4 | % | 2 | % |
Energy |
| 4,608 |
| 4,498 |
| 3,715 | 2 |
| 21 |
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Industrial |
| 5,679 |
| 5,204 |
| 4,964 | 9 |
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| 6,628 |
| 5,832 |
| 5,713 | 14 |
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Total | $ | 21,384 | $ | 19,837 | $ | 18,601 | 8 | % | 7 | % |
Revenue Carloads | % Change | % Change | ||||||||||||||||||
Thousands | 2021 | 2020 | 2019 | 2021 v 2020 | 2020 v 2019 | |||||||||||||||
Grain & grain products | 805 | 745 | 708 | 8 | % | 5 | % | |||||||||||||
Fertilizer | 201 | 193 | 190 | 4 | 2 | |||||||||||||||
Food & refrigerated | 189 | 185 | 192 | 2 | (4 | ) | ||||||||||||||
Coal & renewables | 819 | 797 | 997 | 3 | (20 | ) | ||||||||||||||
Bulk | 2,014 | 1,920 | 2,087 | 5 | (8 | ) | ||||||||||||||
Industrial chemicals & plastics | 606 | 587 | 611 | 3 | (4 | ) | ||||||||||||||
Metals & minerals | 697 | 646 | 744 | 8 | (13 | ) | ||||||||||||||
Forest products | 250 | 220 | 220 | 14 | - | |||||||||||||||
Energy & specialized markets | 559 | 539 | 624 | 4 | (14 | ) | ||||||||||||||
Industrial | 2,112 | 1,992 | 2,199 | 6 | (9 | ) | ||||||||||||||
Automotive | 701 | 692 | 858 | 1 | (19 | ) | ||||||||||||||
Intermodal [a] | 3,211 | 3,149 | 3,202 | 2 | (2 | ) | ||||||||||||||
Premium | 3,912 | 3,841 | 4,060 | 2 | (5 | ) | ||||||||||||||
Total | 8,038 | 7,753 | 8,346 | 4 | % | (7 | )% |
% Change | % Change | |||||||||||||||||||
Average Revenue per Car | 2021 | 2020 | 2019 | 2021 v 2020 | 2020 v 2019 | |||||||||||||||
Grain & grain products | $ | 3,953 | $ | 3,797 | $ | 3,919 | 4 | % | (3 | )% | ||||||||||
Fertilizer | 3,470 | 3,427 | 3,448 | 1 | (1 | ) | ||||||||||||||
Food & refrigerated | 5,279 | 5,047 | 5,241 | 5 | (4 | ) | ||||||||||||||
Coal & renewables | 2,173 | 1,926 | 2,098 | 13 | (8 | ) | ||||||||||||||
Bulk | 3,305 | 3,104 | 3,128 | 6 | (1 | ) | ||||||||||||||
Industrial chemicals & plastics | 3,207 | 3,144 | 3,087 | 2 | 2 | |||||||||||||||
Metals & minerals | 2,598 | 2,445 | 2,745 | 6 | (11 | ) | ||||||||||||||
Forest products | 5,424 | 5,269 | 5,264 | 3 | - | |||||||||||||||
Energy & specialized markets | 3,956 | 3,780 | 3,821 | 5 | (1 | ) | ||||||||||||||
Industrial | 3,467 | 3,324 | 3,398 | 4 | (2 | ) | ||||||||||||||
Automotive | 2,511 | 2,427 | 2,474 | 3 | (2 | ) | ||||||||||||||
Intermodal [a] | 1,403 | 1,267 | 1,286 | 11 | (1 | ) | ||||||||||||||
Premium | 1,601 | 1,476 | 1,538 | 8 | (4 | ) | ||||||||||||||
Average | $ | 2,519 | $ | 2,354 | $ | 2,425 | 7 | % | (3 | )% |
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Revenue Carloads |
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| % Change | % Change | ||
Thousands | 2018 | 2017 | 2016 | 2018 v 2017 | 2017 v 2016 | |||||
Agricultural Products |
| 1,124 |
| 1,141 |
| 1,151 | (1) | % | (1) | % |
Energy |
| 1,650 |
| 1,676 |
| 1,510 | (2) |
| 11 |
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Industrial |
| 1,752 |
| 1,655 |
| 1,656 | 6 |
| - |
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Premium [a] |
| 4,382 |
| 4,116 |
| 4,125 | 6 |
| - |
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Total |
| 8,908 |
| 8,588 |
| 8,442 | 4 | % | 2 | % |
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| % Change | % Change | ||
Average Revenue per Car | 2018 | 2017 | 2016 | 2018 v 2017 | 2017 v 2016 | |||||
Agricultural Products | $ | 3,973 | $ | 3,770 | $ | 3,657 | 5 | % | 3 | % |
Energy |
| 2,793 |
| 2,685 |
| 2,461 | 4 |
| 9 |
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Industrial |
| 3,241 |
| 3,145 |
| 2,996 | 3 |
| 5 |
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Premium |
| 1,513 |
| 1,417 |
| 1,385 | 7 |
| 2 |
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Average | $ | 2,400 | $ | 2,310 | $ | 2,203 | 4 | % | 5 | % |
[a] |
| For intermodal shipments, each container or trailer equals one carload. |
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Freight revenue from agricultural products increased in 2017 compared to 2016 driven by2021 compared to 2020 due to a 5% volume increase, 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.
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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.
Industrial – Industrial includes shipments of industrial chemicals and plastics, metals and minerals, forest products, and energy and specialized markets. Freight | 2021 Industrial Carloads |
Premium – Premium includes shipments of finished automobiles, automotive parts, and merchandise in intermodal containers, both domestic and international. Freight revenues from premium shipments increased 11% in 2021 compared to 2020, despite the weather disruptions in the first quarter of 2021, driven by higher fuel surcharges, core pricing gains, and
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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.
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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 revenueRevenue from Mexico business was $2.5$2.4 billion in 2018,2021, up 10%13% compared to 2017,2020, driven by 1% volume growth, fuel surcharge revenue, and core pricing gains. Thea 3% 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%core pricing gains, and positive mix of traffic. The volume decline. The decrease in volumeincrease was driven by lowerthe recovery from the 2020 pandemic and an increase in petroleum and grain shipments, of automotive parts, partially offset by growththe impact of the global supply chain disruptions on intermodal shipments and the semiconductor shortage in coal and refined petroleum products shipments.the automotive industry.
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Operating Expenses
% Change | % Change | |||||||||||||||||||
Millions | 2021 | 2020 | 2019 | 2021 v 2020 | 2020 v 2019 | |||||||||||||||
Compensation and benefits | $ | 4,158 | $ | 3,993 | $ | 4,533 | 4 | % | (12 | )% | ||||||||||
Depreciation | 2,208 | 2,210 | 2,216 | - | - | |||||||||||||||
Fuel | 2,049 | 1,314 | 2,107 | 56 | (38 | ) | ||||||||||||||
Purchased services and materials | 2,016 | 1,962 | 2,254 | 3 | (13 | ) | ||||||||||||||
Equipment and other rents | 859 | 875 | 984 | (2 | ) | (11 | ) | |||||||||||||
Other | 1,176 | 1,345 | 1,060 | (13 | ) | 27 | ||||||||||||||
Total | $ | 12,466 | $ | 11,699 | $ | 13,154 | 7 | % | (11 | )% |
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| % Change | % Change | ||
Millions | 2018 | 2017 | 2016 | 2018 v 2017 | 2017 v 2016 | |||||
Compensation and benefits | $ | 5,056 | $ | 4,939 | $ | 4,779 | 2 | % | 3 | % |
Fuel |
| 2,531 |
| 1,891 |
| 1,489 | 34 |
| 27 |
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Purchased services and materials |
| 2,443 |
| 2,363 |
| 2,258 | 3 |
| 5 |
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Depreciation |
| 2,191 |
| 2,105 |
| 2,038 | 4 |
| 3 |
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Equipment and other rents |
| 1,072 |
| 888 |
| 1,137 | 21 |
| (22) |
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Other |
| 1,022 |
| 948 |
| 997 | 8 |
| (5) |
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Total | $ | 14,315 | $ | 13,134 | $ | 12,698 | 9 | % | 3 | % |
Operating expenses increased
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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 2018,2021, expenses increased 2%4% compared to 2017,2020, due to volume-relatedvolume related costs, excess networkinflation, 2020 management actions responding to the sharp decline in volume (temporary unpaid leave, salary reductions, and shop closures), incentive compensation, and higher costs higher training expenses for trainmen,due to weather and wage inflation. Lower management and administrative wage and benefit costs partially offsetwildfire-related events. Partially offsetting these increases.
In 2017, expenses increasedincreases were productivity initiatives resulting in employee levels that declined 3% compared to 2016, driven by general wage2020 despite a 4% volume increase, a 2020 one-time bonus payment for agreement employees who worked during the pandemic, 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.lower severance costs.
Depreciation – The majority of depreciation relates to road property, including rail, ties, ballast, and other track material. Depreciation expense was flat in 2021 compared to 2020.
Fuel – Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy equipment. Locomotive diesel fuel prices, which averaged $2.29$2.23 per gallon (including taxes and transportation costs) in 2018,2021, compared to $1.81$1.50 per gallon in 2017,2020, increased expenses $507 million. In addition, gross-ton miles and the fuel consumption rate (c-rate) both$668 million (excluding any impact from increased 3% in 2018, alsovolume year-over-year). Gross ton-miles increased 6% driving higher fuel expense comparedexpense. Partially offsetting this increase was a 1% improvement to 2017. The c-rate isa record low fuel consumption rate, computed as gallons of fuel consumed divided by gross ton-miles in thousands.ton-miles.
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 increased5% 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
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intermodal containers; leased automobile maintenance expenses; and tools and supplies. Purchased services and materials increased 3% in 20182021 compared to 2017 primarily due to2020 driven by inflation, higher professional services expense, volume-related costs inflationary cost pressures on transportation-related contract services incurred atassociated with our subsidiaries that broker intermodal and transload services, andbusiness, higher locomotive repair costs due to weather and wildfire-related events, increased locomotive and freight car maintenance expense as we added resources to the larger active fleet in service. Lower joint facility expenses partially offset these increases.network, and higher costs for transportation of train crews.
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. Equityexpenses, offset by equity income from certain equity method investments is also included.investments. Equipment and other rents expense increased $184 milliondecreased 2% compared to 2017 largely2020 driven by a $212 million reduction to 2017lower rent expense related toon equipment in storage and higher equity income tax adjustments at certain equity-method affiliates as a result of the lower federal tax rate implemented January 1, 2018. Increasedfrom our investment in TTX Company, partially offset by increased freight car rent expense due to volume growthincreases and slower network velocity also contributed to the increase. Lower locomotive and freight car lease expenses in 2018 partially offset these increases. velocity.
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%decreased 13% in 20182021 compared to 20172020 as a result of a $278 million non-cash impairment charge related to our Brazos yard investment in 2020, lower write-offs of cancelled in-progress capital projects, 2020 lease impairments, and higher equity income. Partially offsetting these decreases were increased casualty expenses, including personal injury, damaged freight, and environmental, and higher state and local taxestaxes. Both periods in 2021 and environmental expenses related to our operating properties. Lower personal injury2020 included a reduction of expense anfor weather and wildfire-related insurance reimbursement for lost revenuereimbursements, $6 million 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. $25 million, respectively.
Non-Operating Items
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| % Change | % Change | % Change | % Change | ||||||||||||||||||||
Millions | 2018 | 2017 | 2016 | 2018 v 2017 | 2017 v 2016 | 2021 | 2020 | 2019 | 2021 v 2020 | 2020 v 2019 | ||||||||||||||||||||
Other income | $ | 94 | $ | 245 | $ | 221 | (62) | % | 11 | % | ||||||||||||||||||||
Other income, net | $ | 297 | $ | 287 | $ | 243 | 3 | % | 18 | % | ||||||||||||||||||||
Interest expense |
| (870) |
| (719) |
| (698) | 21 |
| 3 |
| (1,157 | ) | (1,141 | ) | (1,050 | ) | 1 | 9 | ||||||||||||
Income tax benefit/(expense) |
| (1,775) |
| 3,080 |
| (2,533) | U |
| F |
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Income tax expense | (1,955 | ) | (1,631 | ) | (1,828 | ) | 20 | (11 | ) |
Other Income, net – 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 20172021 compared to 2016 primarily as2020 due to a result of a $65$36 million gain onfrom the sale of an investment in a litigation settlement for back rent and a $57 milliontechnology company, partially offset by lower real estate sale gains. Real estate sales in 2021 included a $50 million gain both recognized infrom a property sale to the third quarterColorado Department of 2017. Rental income also increased in 2017 comparedTransportation, while 2020 included a $69 million gain from a land and permanent easement sale to 2016.the Illinois State Toll Highway Authority.
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Interest Expense – Interest expense increased in 20182021 compared to 20172020 due to an increased weighted-average debt level of $20.1$28.3 billion in 20182021 from $15.9$27.9 billion in 2017, partially offset by the impact of a lower2020. The effective interest rate of 4.4% in 2018 compared to 4.6 % in 2017.was 4.1% for both periods.
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 billionincreased in 20182021 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%2020 due 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.
higher pre-tax income. Our effective tax raterates 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 Iowa2021 and Missouri. The 2017 rate was substantially reduced by the impact2020 were 23.1% and 23.4%, respectively.
OTHER OPERATING/PERFORMANCE AND FINANCIAL STATISTICS
We report a number of key performance measures weekly to the AAR.STB. We provide this data on our website at www.up.com/investor/aar-stb_reports/index.htm.
Operating/Performance Statistics
Management continuously measures these key operating metrics to evaluate our operational efficiency and asset utilization in striving to provide a consistent, reliable service product to our customers.
Railroad performance measures are included in the table below:
% Change | % Change | |||||||
2021 | 2020 | 2019 | 2021 v 2020 | 2020 v 2019 | ||||
Gross ton-miles (GTMs) (billions) | 817.9 | 771.8 | 846.6 | 6 | % | (9) | % | |
Revenue ton-miles (billions) | 411.3 | 385.0 | 423.4 | 7 | (9) | |||
Freight car velocity (daily miles per car) [a] | 203 | 221 | 209 | (8) | 6 | |||
Average train speed (miles per hour) [b] | 24.6 | 25.9 | 25.1 | (5) | 3 | |||
Average terminal dwell time (hours) [b] | 23.7 | 22.7 | 24.8 | 4 | (8) | |||
Locomotive productivity (GTMs per horsepower day) | 133 | 137 | 120 | (3) | 14 | |||
Train length (feet) | 9,334 | 8,798 | 7,747 | 6 | 14 | |||
Intermodal car trip plan compliance (%) | 73 | 81 | 75 | (8) | pts | 6 | pts | |
Manifest/Automotive car trip plan compliance (%) | 63 | 71 | 65 | (8) | pts | 6 | pts | |
Workforce productivity (car miles per employee) | 1,038 | 947 | 857 | 10 | 11 | |||
Total employees (average) | 29,905 | 30,960 | 37,483 | (3) | (17) | |||
Operating ratio | 57.2 | 59.9 | 60.6 | (2.7) | pts | (0.7) | pts |
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| % Change | % Change | ||
|
| 2018 | 2017 | 2016 | 2018 v 2017 | 2017 v 2016 | ||
Average train speed (miles per hour) | 24.5 | 25.4 | 26.6 | (4) | % | (5) | % | |
Average terminal dwell time (hours) | 29.6 | 30.3 | 28.1 | (2) | % | 8 | % | |
Gross ton-miles (billions) | 928.6 | 898.7 | 856.9 | 3 | % | 5 | % | |
Revenue ton-miles (billions) | 474.0 | 466.7 | 440.1 | 2 | % | 6 | % | |
Operating ratio | 62.7 | 61.8 | 63.7 | 0.9 | pts | (1.9) | pts | |
Employees (average) | 41,967 | 41,992 | 42,919 | - | % | (2) | % |
[a] | 2019 has been recast to conform to the current year presentation which reflects minor refinements. |
[b] | As reported to the STB. |
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. GrossIn 2021, gross ton-miles and revenue ton-miles increased 3%6% and
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2% 7%, respectively, in 2018 compared to 2017, resulting from2020, driven by a 4% increase in carloads.carloadings. Changes in commodity mix drove the variancesvariance in year-over-year increases between gross ton-miles, revenue ton-miles, and carloads.carloads (smaller increases in our intermodal and automotive shipments, which are generally lighter, coupled with higher increases in grain and industrial shipments, which are generally heavier).
Gross ton-milesFreight Car Velocity – Freight car velocity measures the average daily miles per car on our network. The two key drivers of this metric are the speed of the train between terminals (average train speed) and revenue ton-milesthe time a rail car spends at the terminals (average terminal dwell time). Train speed slowed and terminal dwell increased 5% and 6%, respectively in 20172021 compared to 2016, resulting from a 2% increasethe same periods in carloads. Changes in commodity mix drove2020 as the variances in year-over-year increases betweennetwork handled additional volume and was impacted by weather and wildfire-related challenges, bridge outages caused by the California wildfires, other incidents causing delays on the network, and global supply chain disruptions. Continued implementation of our operating plan helped to partially offset these impacts.
Locomotive Productivity – Locomotive productivity is gross ton-miles revenue ton-miles, and carloads.per average daily locomotive horsepower. Locomotive productivity decreased 3% in 2021 compared to 2020 driven by the increased active fleet needed to handle the 4% volume increase as well as manage network disruptions, partially offset by transportation plan changes.
Train Length – Train length is the average maximum train length on a route measured in feet. Our train length increased 6% compared to 2020 as a result of blending service products and transportation plan changes designed to improve overall operational efficiency. However, in the second half of the year, train length declined slightly from the first half of 2021 due to California wildfire bridge outage reroutes in the third quarter and operational challenges in the fourth quarter.
Car Trip Plan Compliance – Car trip plan compliance is the percentage of cars delivered on time in accordance with our original trip plan. Our network trip plan compliance is broken into the intermodal and manifest/automotive products. Intermodal trip plan compliance deteriorated in 2021 compared to 2020 primarily due to global supply chain disruptions. Manifest/automotive trip plan compliance deteriorated in 2021 compared to 2020 as our network slowed because of the outages and incidents described above that required increased resource allocation and rebalancing.
Workforce Productivity – Workforce productivity is average daily car miles per employee. Workforce productivity improved 10%, reaching an all-time record as employee counts were down 3% compared to 2020, while average daily car miles increased 6%. Productivity initiatives and a smaller capital workforce offset higher train and engine employee levels due to weather and wildfire-related challenges, network disruptions, and reduced crew utilization keeping total employee levels lower than 2020.
Operating Ratio – Operating ratio is our operating expenses reflected as a percentage of operating revenue. Our operating ratio increased 0.9of 57.2% was an all-time record and improved 2.7 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. Core2020 mainly driven by a 2020 one-time impairment, core pricing gains, productivity initiatives, and volume growth, mostlypositive mix of traffic, which were partially offset by excess network costs, higher fuel prices, inflation, and inflation, drove 0.1 point of operating ratio improvement.other cost increases.
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
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’Shareholders’ Equity
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Millions, Except Percentages | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | ||||||||||||
Net income | $ | 5,966 | $ | 10,712 | $ | 4,233 | $ | 6,523 | $ | 5,349 | $ | 5,919 | ||||||
Average equity | $ | 22,640 | $ | 22,394 | $ | 20,317 | $ | 15,560 | $ | 17,543 | $ | 19,276 | ||||||
Return on average common shareholders' equity |
| 26.4% |
| 47.8% |
| 20.8% | 41.9 | % | 30.5 | % | 30.7 | % |
Return on Invested Capital as Adjusted (ROIC)
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Millions, Except Percentages | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | ||||||||||||
Net income | $ | 5,966 | $ | 10,712 | $ | 4,233 | $ | 6,523 | $ | 5,349 | $ | 5,919 | ||||||
Interest expense |
| 870 |
| 719 |
| 698 | 1,157 | 1,141 | 1,050 | |||||||||
Interest on average present value of operating leases |
| 82 |
| 105 |
| 121 | ||||||||||||
Interest on average operating lease liabilities | 54 | 64 | 76 | |||||||||||||||
Taxes on interest |
| (218) |
| (309) |
| (306) | (280 | ) | (282 | ) | (266 | ) | ||||||
Net operating profit after taxes as adjusted (a) | $ | 6,700 | $ | 11,227 | $ | 4,746 | ||||||||||||
Net operating profit after taxes as adjusted | $ | 7,454 | $ | 6,272 | $ | 6,779 | ||||||||||||
Average equity | $ | 22,640 | $ | 22,394 | $ | 20,317 | $ | 15,560 | $ | 17,543 | $ | 19,276 | ||||||
Average debt |
| 19,668 |
| 15,976 |
| 14,604 | 28,229 | 25,965 | 23,796 | |||||||||
Average present value of operating leases |
| 2,206 |
| 2,288 |
| 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% | ||||||||||||
Average operating lease liabilities | 1,682 | 1,719 | 2,052 | |||||||||||||||
Average invested capital as adjusted | $ | 45,471 | $ | 45,227 | $ | 45,124 | ||||||||||||
Return on Invested Capital as Adjusted | 16.4 | % | 13.9 | % | 15.0 | % |
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 criteriacriterion 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 Returnreturn on Average Common Shareholders’ Equity.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 1,2021, 2020, and 2019, the incremental borrowing rate on operating leases was 3.2%, 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%3.7%, 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.
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| 2018 |
| 2017 |
| 2016 |
Return on invested capital as adjusted |
| 15.1% |
| 27.6% |
| 12.7% |
Factors Affecting Comparability: |
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Adjustments for Tax Cuts and Jobs Act [a] |
| N/A |
| (13.9) |
| N/A |
Net Return on Invested Capital as Adjusted |
| 15.1% |
| 13.7% |
| 12.7% |
|
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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
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Millions, Except Ratios | Dec. 31, | Dec. 31, | Dec. 31, | |||
for the Twelve Months Ended | 2018 | 2017 | 2016 | |||
Net income | $ | 5,966 | $ | 10,712 | $ | 4,233 |
Less: |
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Other income |
| 94 |
| 245 |
| 221 |
Add: |
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Income tax expense/(benefit) |
| 1,775 |
| (3,080) |
| 2,533 |
Depreciation |
| 2,191 |
| 2,105 |
| 2,038 |
Interest expense |
| 870 |
| 719 |
| 698 |
EBITDA | $ | 10,708 | $ | 10,211 | $ | 9,281 |
Interest on present value of operating leases |
| 84 |
| 98 |
| 114 |
Adjusted EBITDA (a) | $ | 10,792 | $ | 10,309 | $ | 9,395 |
Debt | $ | 22,391 | $ | 16,944 | $ | 15,007 |
Net present value of operating leases |
| 2,271 |
| 2,140 |
| 2,435 |
Unfunded pension and OPEB, |
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net of taxes of $135, $238, and $261 |
| 456 |
| 396 |
| 436 |
Adjusted debt (b) | $ | 25,118 | $ | 19,480 | $ | 17,878 |
Adjusted debt / Adjusted EBITDA (b/a) |
| 2.3 |
| 1.9 |
| 1.9 |
Millions, Except Ratios | Dec. 31, | Dec. 31, | Dec. 31, | |||
for the Twelve Months Ended | 2021 | 2020 | 2019 | |||
Net income | $ | 6,523 | $ | 5,349 | $ | 5,919 |
Add: | ||||||
Income tax expense/(benefit) | 1,955 | 1,631 | 1,828 | |||
Depreciation | 2,208 | 2,210 | 2,216 | |||
Interest expense | 1,157 | 1,141 | 1,050 | |||
EBITDA | $ | 11,843 | $ | 10,331 | $ | 11,013 |
Adjustments: | ||||||
Other income, net | (297) | (287) | (243) | |||
Interest on operating lease liabilities | 56 | 59 | 68 | |||
Adjusted EBITDA | $ | 11,602 | $ | 10,103 | $ | 10,838 |
Debt | $ | 29,729 | $ | 26,729 | $ | 25,200 |
Operating lease liabilities | 1,759 | 1,604 | 1,833 | |||
Unfunded/(funded) pension and other postretirement benefits, | ||||||
net of tax cost/(benefit) of ($21), $195, and $124 | (72) | 637 | 400 | |||
Adjusted debt | $ | 31,416 | $ | 28,970 | $ | 27,433 |
Adjusted debt / Adjusted EBITDA | 2.7 | 2.9 | 2.5 |
Adjusted debt to Adjustedadjusted EBITDA (earnings before interest, taxes, depreciation, amortization, and adjustments for other income 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 Adjustedadjusted 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 1,2021, 2020, and 2019, the incremental borrowing rate on operating leases was 3.2%, 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%3.7%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We are continually evaluating our financial condition and liquidity. We analyze a wide range of economic scenarios and the impact on our ability to generate cash. These analyses inform our liquidity plans and activities outlined below and indicate we have sufficient borrowing capacity to sustain an extended period of lower volumes.
At December 31, 2018,2021, we had a working capital deficit.deficit due to upcoming debt maturities. At December 31, 2017,2020, we had a working capital surplus. The deficit at 2018 year-end was primarilysurplus due to an increase in upcoming debt maturities. As past years indicate, itincreased cash balance held due to the uncertainty related to COVID. It is not unusual for us to have a working capital deficit; however,deficit, and 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 tothe capital markets to meet any foreseeable cash requirements.
AsDuring the year, we generated $9.0 billion of December 31, 2018,cash from operating activities, completed a $1.7 billion debt exchange, and issued $3.5 billion of long-term debt. We have been, and we expect to continue to be, in compliance with our debt covenants. We increased the dividend twice during 2021 paying out $2.8 billion and repurchased shares totaling $7.3 billion, including the completion of our $2 billion accelerated share repurchase programs entered into on May 25, 2021.
Our principal sources of liquidity includedinclude cash, cash equivalents, our receivables securitization facility, andReceivables Facility, our revolving credit facility, as well as the availability of commercial paper and other sources of financing through the capital markets. WeOn December 31, 2021, we had $960 million of cash and cash equivalents, $2.0 billion of committed credit available under our revolving credit facility, with no borrowings outstanding asand up to $500 million undrawn on the Receivables Facility. As of December 31, 2018. We2021, none of the revolving credit facility was drawn, and we did not draw on our current facility or previousrevolving credit facility at any time during 2018. The value2021. At December 31, 2021, we had $300 million of the outstanding undivided interest held by investors under the $650 million capacity receivables securitization facility wasReceivables Facility drawn, $400 million as of December 31, 2018.commercial paper, and a $100 million term loan outstanding. Our access to this receivables securitization facilitythe Receivables 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 financingsfinancing 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,Receivables Facility, (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 termshort-term needs. The Company currently does not intend to make any borrowings under this facility.
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Cash Flows |
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Millions | 2018 | 2017 | 2016 | |||
Cash provided by operating activities | $ | 8,686 | $ | 7,230 | $ | 7,525 |
Cash used in investing activities |
| (3,411) |
| (3,086) |
| (3,393) |
Cash used in financing activities |
| (5,222) |
| (4,146) |
| (4,246) |
Net change in cash, cash equivalents and restricted cash | $ | 53 | $ | (2) | $ | (114) |
Operating Activities
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:
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Millions | 2018 | 2017 | 2016 | |||
Rail and other track material | $ | 608 | $ | 619 | $ | 628 |
Ties |
| 444 |
| 480 |
| 494 |
Ballast |
| 216 |
| 231 |
| 235 |
Other [a] |
| 576 |
| 503 |
| 480 |
Total road infrastructure replacements |
| 1,844 |
| 1,833 |
| 1,837 |
Line expansion and other capacity projects |
| 286 |
| 124 |
| 153 |
Commercial facilities |
| 234 |
| 189 |
| 152 |
Total capacity and commercial facilities |
| 520 |
| 313 |
| 305 |
Locomotives and freight cars [b] |
| 716 |
| 607 |
| 854 |
Positive train control |
| 158 |
| 336 |
| 371 |
Technology and other |
| 199 |
| 149 |
| 138 |
Total cash capital investments | $ | 3,437 | $ | 3,238 | $ | 3,505 |
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| 2018 | 2017 | 2016 | |||
Track miles of rail replaced |
| 700 |
| 731 |
| 791 |
Track miles of rail capacity expansion |
| 39 |
| 11 |
| 52 |
New ties installed (thousands) |
| 4,285 |
| 4,026 |
| 4,482 |
Miles of track surfaced |
| 9,466 |
| 11,071 |
| 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.
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| Number of Shares Purchased | Average Price Paid | |||||
| 2018 | 2017 |
| 2018 |
| 2017 | |
First quarter | 9,259,004 | 7,531,300 | $ | 132.84 | $ | 106.55 | |
Second quarter [a] | 33,229,992 | 7,788,283 |
| 142.74 |
| 109.10 | |
Third quarter | 2,239,405 | 11,801,755 |
| 151.94 |
| 106.69 | |
Fourth quarter [b] | 12,490,632 | 9,231,510 |
| 153.04 |
| 119.37 | |
Total | 57,219,033 | 36,352,848 | $ | 143.75 | $ | 110.40 | |
Remaining number of shares that may be repurchased under current authority | 26,428,119 |
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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 tablestable 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 tolike those of other comparable corporations, particularly within the transportation industry.
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The following tables identifytable identifies material obligations and commitments as of December 31, 2018:2021:
Payments Due by December 31, | ||||||||||||||||||||||||||||
Contractual Obligations | After | |||||||||||||||||||||||||||
Millions | Total | 2022 | 2023 | 2024 | 2025 | 2026 | 2026 | |||||||||||||||||||||
Debt [a] | $ | 53,942 | $ | 3,172 | $ | 2,337 | $ | 2,356 | $ | 2,336 | $ | 1,875 | $ | 41,866 | ||||||||||||||
Purchase obligations [b] | 2,555 | 753 | 446 | 368 | 335 | 256 | 397 | |||||||||||||||||||||
Operating leases [c] | 1,966 | 333 | 293 | 285 | 285 | 215 | 555 | |||||||||||||||||||||
Other post retirement benefits [d] | 400 | 45 | 44 | 40 | 39 | 39 | 193 | |||||||||||||||||||||
Finance lease obligations [e] | 378 | 107 | 81 | 68 | 45 | 36 | 41 | |||||||||||||||||||||
Total contractual obligations | $ | 59,241 | $ | 4,410 | $ | 3,201 | $ | 3,117 | $ | 3,040 | $ | 2,421 | $ | 43,052 |
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| Payments Due by December 31, | |||||||||||||
Contractual Obligations |
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| After |
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Millions | Total | 2019 | 2020 | 2021 | 2022 | 2023 | 2023 | Other | |||||||||
Debt [a] | $ | 38,253 | $ | 2,256 | $ | 1,679 | $ | 1,926 | $ | 1,556 | $ | 2,028 | $ | 28,808 | $ | - | |
Operating leases [b] |
| 2,646 |
| 419 |
| 378 |
| 303 |
| 272 |
| 234 |
| 1,040 |
| - | |
Capital lease obligations [c] |
| 898 |
| 148 |
| 155 |
| 159 |
| 142 |
| 94 |
| 200 |
| - | |
Purchase obligations [d] |
| 3,311 |
| 1,915 |
| 967 |
| 265 |
| 49 |
| 30 |
| 49 |
| 36 | |
Other post retirement benefits [e] |
| 477 |
| 50 |
| 49 |
| 49 |
| 48 |
| 48 |
| 233 |
| - | |
Income tax contingencies [f] |
| 174 |
| 99 |
| - |
| - |
| - |
| - |
| - |
| 75 | |
Total contractual obligations | $ | 45,759 | $ | 4,887 | $ | 3,228 | $ | 2,702 | $ | 2,067 | $ | 2,434 | $ | 30,330 | $ | 111 |
[a] |
| Excludes |
[b] |
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| Purchase obligations include locomotive maintenance contracts; purchase commitments for fuel purchases, |
[c] | Includes leases for locomotives, freight cars, other equipment, and real estate. Includes an interest component of $207 million. | |
[ | Includes estimated other post retirement, medical, and life insurance payments, and payments made under the unfunded pension plan for the next ten years. |
[e] |
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| Amount of Commitment Expiration per Period | |||||||||||
Other Commercial Commitments |
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| After | |
Millions | Total | 2019 | 2020 | 2021 | 2022 | 2023 | 2023 | ||||||||
Credit facilities [a] | $ | 2,000 | $ | - | $ | - | $ | - | $ | - | $ | 2,000 | $ | - | |
Receivables securitization facility [b] |
| 650 |
| 650 |
| - |
| - |
| - |
| - |
| - | |
Guarantees [c] |
| 22 |
| 7 |
| 5 |
| 5 |
| 5 |
| - |
| - | |
Standby letters of credit [d] |
| 18 |
| 16 |
| 2 |
| - |
| - |
| - |
| - | |
Total commercial commitments | $ | 2,690 | $ | 673 | $ | 7 | $ | 5 | $ | 5 | $ | 2,000 | $ | - |
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Off-Balance Sheet Arrangements
Guarantees LIBOR Transition– At December 31, 2018,See Note 14 to the Financial Statements and 2017, we were contingently liable for $22 million and $33 million in guarantees.Supplementary Data, Item 8. The fair valueuse of these obligations asan alternative rate or benchmark may negatively impact the terms of both December 31, 2018, and 2017, was $0. We entered into these contingent guaranteesour facilities, including in the normal courseform 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 materialan adverse effect on interest rates and higher borrowing costs and interest expense.
Cash Flows | ||||||||||||
Millions | 2021 | 2020 | 2019 | |||||||||
Cash provided by operating activities | $ | 9,032 | $ | 8,540 | $ | 8,609 | ||||||
Cash used in investing activities | (2,709 | ) | (2,676 | ) | (3,435 | ) | ||||||
Cash used in financing activities | (7,158 | ) | (4,902 | ) | (5,646 | ) | ||||||
Net change in cash, cash equivalents, and restricted cash | $ | (835 | ) | $ | 962 | $ | (472 | ) |
Operating Activities
Cash provided by operating activities increased in 2021 compared to 2020 due primarily to an increase in net income, partially offset by higher receivables and the partial payment of the deferred 2020 employment tax that was allowed by a provision in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Cash Flow Conversion – Cash flow conversion is defined as cash provided by operating activities less cash used in capital investments as a ratio of net income.
Cash flow conversion rate 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 cash flow conversion rate is important to management and investors in evaluating our consolidated financial condition, resultsperformance and measures our ability to generate cash without additional external financing. Cash flow conversion rate 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 cash flow conversion rate (non-GAAP measure):
Millions, | ||||||||||||
For the Year Ended December 31, | 2021 | 2020 | 2019 | |||||||||
Cash provided by operating activities | $ | 9,032 | $ | 8,540 | $ | 8,609 | ||||||
Cash used in capital investments | (2,936 | ) | (2,927 | ) | (3,453 | ) | ||||||
Total (a) | 6,096 | 5,613 | 5,156 | |||||||||
Net income (b) | 6,523 | 5,349 | 5,919 | |||||||||
Cash flow conversion rate (a/b) | 93 | % | 105 | % | 87 | % |
Investing Activities
Cash used in investing activities in 2021 increased compared to 2020 primarily driven by increased capital investment in road infrastructure replacements.
The following tables detail cash capital investments and track statistics for the years ended December 31:
Millions | 2021 | 2020 | 2019 | |||||||||
Ties | $ | 443 | $ | 507 | $ | 427 | ||||||
Rail and other track material | 507 | 471 | 561 | |||||||||
Ballast | 215 | 225 | 271 | |||||||||
Other [a] | 700 | 584 | 694 | |||||||||
Total road infrastructure replacements [b] | 1,865 | 1,787 | 1,953 | |||||||||
Line expansion and other capacity projects | 284 | 332 | 357 | |||||||||
Commercial facilities | 243 | 171 | 183 | |||||||||
Total capacity and commercial facilities | 527 | 503 | 540 | |||||||||
Locomotives and freight cars [c] | 322 | 269 | 610 | |||||||||
Positive train control | 84 | 79 | 95 | |||||||||
Technology and other | 138 | 289 | 255 | |||||||||
Total cash capital investments | $ | 2,936 | $ | 2,927 | $ | 3,453 | ||||||
[a] | Other includes bridges and tunnels, signals, other road assets, and road work equipment. |
[b] | Includes weather and wildfire-related damages to our property of $60 million, $40 million, and $113 million in 2021, 2020, and 2019, respectively. |
[c] | Locomotives and freight cars include early lease buyouts of $34 million, $38 million, and $290 million in 2021, 2020, and 2019, respectively. |
2021 | 2020 | 2019 | ||||||||||
Track miles of rail replaced | 502 | 468 | 534 | |||||||||
Track miles of rail capacity expansion | 70 | 83 | 55 | |||||||||
New ties installed (thousands) | 4,058 | 4,671 | 3,475 | |||||||||
Miles of track surfaced | 10,441 | 10,414 | 7,741 |
Capital Plan – In 2022, we expect our capital plan to be approximately $3.3 billion, up 10% compared to 2021. We will continue to harden our infrastructure, replace older assets, and improve the safety and resiliency of the network. In addition, the plan includes targeted freight car acquisitions, investments in growth-related projects to drive more carloads to the network, certain ramps to efficiently handle volumes from new and existing intermodal customers, continuous modernization of our locomotive fleet, and projects intended to improve operational efficiency. The capital plan may be revised if business conditions warrant or liquidity.if new laws or regulations affect our ability to generate sufficient returns on these investments.
Financing Activities
Cash used in financing activities increased in 2021 compared to 2020 driven by increased share repurchases.
See Note 14 to the Financial Statements and Supplementary Data, Item 8, for a description of all our outstanding financing arrangements and significant new borrowings, and Note 18 to the Financial Statements and Supplementary Data, Item 8, for a description of our share repurchase programs.
OTHER MATTERS
Labor Agreements Inflation– 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
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negotiations historically continue for an extended period of time, and work stoppages during negotiations are rare.
Inflation – Long periods ofFor capital-intensive companies, inflation significantly increaseincreases asset replacement costs for capital-intensive companies.long-lived assets. 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 and tax rates could have on our results of operations and financial condition. These hypothetical changes do not consider other factors that could impact actual results.
Interest Rates – At December 31, 2018,2021, we had variable-rate debt representing approximately 3.8%2.7% of our total debt. If variable interest rates average one percentage point higher in 20192022 than our December 31, 20182021, variable rate, which was approximately 3.3%0.7%, our interest expense would increase by approximately $8.5$8.0 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, 2018.2021.
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, 2018,2021, and amounts to an increase of approximately $2.4$4.9 billion to the fair value of our debt at December 31, 2018.2021. 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.
Tax Rates– Our deferred tax assets and liabilities are measured based on current tax law. 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 $500 million. Similarly, a permanent 1% decrease in future income tax rates would decrease our deferred tax liability by approximately $500 million.
Accounting Pronouncements – See Note 3 to the Consolidated Financial Statements.Statements and Supplementary Data, Item 8.
Asserted and Unasserted Claims – Various claimsSee Note 17 to the Financial Statements 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.Supplementary Data, Item 8.
Gain ContingencyIndemnities – 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 denialSee Note 17 to the U.S. Court of Appeals for the 8th Circuit (8th Circuit)Financial Statements 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. Supplementary Data, Item 8.
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
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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,In December 2021, we released our initial Climate Action Plan, which outlines the steps we are taking to reduce our environmental impact. This plan aligns with our corporate strategy: Serve (improve operational efficiency and minimize fuel consumption), Grow (offer sustainable supply chain solutions), Win (decarbonize our footprint and the environment), Together (engage our stakeholders and align interests). We continue to take steps and explore opportunities to reduce theour operational impact of our operations on the environment, including increased usage of renewable fuels, investments in new technologies, using training programs and technology to reduce fuel consumption, and changing our operations to increase fuel efficiency.efficiency (see "Sustainable Future" in the Operations section in Item 1 of this report).
CRITICALCRITICAL ACCOUNTING POLICIESESTIMATES
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 policiesestimates are a subset of our significant accounting policies described in Note 2 to the Financial Statements and Supplementary Data, Item 8. These critical accounting policiesestimates 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 injuriesSee Note 17 to employeesthe Financial Statements and others relatedSupplementary Data, Item 8, and "We May Be Subject to our activities is charged to expense based on estimates ofVarious Claims and Lawsuits That Could Result in Significant Expenditures" in 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.Risk Factors, Item 1A.
Our personal injury liability is not discountedsubject to present valueuncertainty 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 ultimatetiming and 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 toand evolving trends in litigation. There were no material changes to the assumptions used in the latest actuarial analysis.
Our personal injury liability activity was as follows:
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Millions | 2018 | 2017 | 2016 | |||
Beginning balance | $ | 285 | $ | 290 | $ | 318 |
Current year accruals |
| 74 |
| 77 |
| 75 |
Changes in estimates for prior years |
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| (7) |
| (29) |
Payments |
| (72) |
| (75) |
| (74) |
Ending balance at December 31 | $ | 271 | $ | 285 | $ | 290 |
Current portion, ending balance at December 31 | $ | 72 | $ | 66 | $ | 62 |
Our personal injurybalance and claims activity was as follows:
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Ending liability balance at December 31 (millions) | $ | 325 | $ | 270 | $ | 265 | |||||||||
Open claims, beginning balance | 2,090 | 2,157 | 2,404 | 1,897 | 1,985 | 2,025 | |||||||||
New claims | 3,188 | 3,024 | 2,453 | 2,719 | 2,577 | 3,025 | |||||||||
Settled or dismissed claims | (3,253) | (3,091) | (2,700) | (2,589 | ) | (2,665 | ) | (3,065 | ) | ||||||
Open claims, ending balance at December 31 | 2,025 | 2,090 | 2,157 | 2,027 | 1,897 | 1,985 |
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Environmental Costs – See Note 17 to the Financial Statements and Supplementary Data, Item 8, "We reassess our estimated insurance recoveries annuallyAre Subject to Significant Environmental Laws and have recognized an asset for estimated insurance recoveries at December 31, 2018, and 2017. Any changes to recorded insurance recoveries are included Regulations" in the above tableRisk Factors, Item 1A, and Environmental Matters 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.Legal Proceedings, Item 3.
Our environmental liability activity wasis subject to several factors such as follows:
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Millions | 2018 | 2017 | 2016 | |||
Beginning balance | $ | 196 | $ | 212 | $ | 190 |
Accruals |
| 84 |
| 45 |
| 84 |
Payments |
| (57) |
| (61) |
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Ending balance at December 31 | $ | 223 | $ | 196 | $ | 212 |
Current portion, ending balance at December 31 | $ | 59 | $ | 57 | $ | 55 |
Our environmental site activity was as follows:
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Open sites, beginning balance | 315 | 292 | 290 |
New sites | 91 | 77 | 85 |
Closed sites | (72) | (54) | (83) |
Open sites, ending balance at December 31 | 334 | 315 | 292 |
The environmental liability includes future costs fortype of remediation, nature and restorationvolume 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,contaminate, and number and financial viability of other potentially responsible parties, as well as uncertainty due to unknown alleged contamination, evolving trends in remediation techniques and existing technology,final remedies, and changes in 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.
Our environmental liability balance and site activity was as follows:
2021 | 2020 | 2019 | ||||||||||
Ending liability balance at December 31 (millions) | $ | 243 | $ | 233 | $ | 227 | ||||||
Open sites, beginning balance | 373 | 360 | 334 | |||||||||
New sites | 105 | 96 | 114 | |||||||||
Closed sites | (102 | ) | (83 | ) | (88 | ) | ||||||
Open sites, ending balance at December 31 | 376 | 373 | 360 |
Property and Depreciation – Our railroad operations are highly capital intensive,See Note 11 to the Financial Statements 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. Supplementary Data, Item 8.
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.
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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:
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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$69 million. If the estimated useful lives of all depreciable assets were decreased by one year, annual depreciation expense would increase by approximately $75$73 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 inWe are projecting an increase in totalour depreciation expense by approximately 3%2% in 20192022 versus 2018.2021. This is driven by an increase in our projected depreciable asset base.
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.
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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 assetsPension Plans – See Note 5 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 2018the Financial Statements and 2017, there were no valuation allowances.Supplementary Data, Item 8.
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 |
| ● | Expected return on plan assets |
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The following tables present the key assumptions used to measure net periodic pension and OPEB cost/(benefit)benefit for 20192022 and the estimated impact on 20192022 net periodic pension and OPEB cost/(benefit)benefit relative to a change in those assumptions:
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Assumptions | Pension | OPEB |
Discount rate for benefit obligations | 4.23% | 4.17% |
Discount rate for interest on benefit obligations | 3.94% | 3.84% |
Discount rate for service cost | 4.33% | 4.32% |
Discount rate for interest on service cost | 4.30% | 4.27% |
Expected return on plan assets | 7.00% | N/A |
Compensation increase | 4.19% | N/A |
Health care cost trend rate: |
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Pre-65 current | N/A | 6.09% |
Pre-65 level in 2038 | N/A | 4.50% |
Assumptions | ||||
Discount rate for benefit obligations | 2.80 | % | ||
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Sensitivities | Increase in Expense | |||
Millions | Pension | |||
0.25% decrease in discount rates | $ | 16 | ||
0.25% decrease in expected return on plan assets | $ | 11 |
The following table presents the net periodic pension and OPEB cost for the years ended December 31:
Est. | ||||||||||||||||
Millions | 2022 | 2021 | 2020 | 2019 | ||||||||||||
Net periodic pension cost | $ | 23 | $ | 85 | $ | 50 | $ | 34 |
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Net periodic pension cost | $ | 39 | $ | 71 | $ | 115 | $ | 43 |
Net periodic OPEB cost |
| 19 |
| 23 |
| 22 |
| 13 |
CAUTIONARYCAUTIONARY INFORMATION
Certain statements in this report, and statements in other reports or information filed or to be filed with the SEC (as well as information included in oral statements or other written statements made or to be made by us), are, or will be, forward-looking statements as defined by the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements and information include, without limitation, (A) statements in the Chairman’s letter preceding Part I; statements regarding planned capital expenditures under the caption “2019“2022 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“2022 Outlook”; “Liquidity and Capital Resources”; in Item 7 of Part II regarding our capital plan, share repurchase programs, contractual obligations, "Pension Benefits", and “Pension and Other Postretirement Benefits”"Other Matters" in this Item 7 of Part II,II. Forward-looking statements and (B)information also include any other statements or information in this report (including information incorporated herein by reference) regarding: potential impacts of the COVID pandemic on our business operations, financial results, liquidity, and financial position, and on the world economy (including our customers and supply chains), including as a result of fluctuations in volume and carloadings; closing of customer manufacturing, distribution or production facilities; expectations as to financial performance,operational or service improvements; expectations regarding the effectiveness of steps taken or to be taken to improve operations, service, infrastructure improvements, and transportation plan modifications (including those discussed in our Climate Change Plan); expectations as to cost savings, revenue growth, and cost savings;earnings; 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, cyber-attacks 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, results or results,outcomes, and will not necessarily be accurate indications of the times that, or by which, such performance, results or resultsoutcomes will be achieved. Forward-looking statements and information are subject to risks and uncertainties, including the impact of the COVID pandemic and responses by governments, businesses, and individuals, 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 whichthat management has little or no influence or control.control, and many of these risks and uncertainties are currently amplified by and may continue to be amplified by, or in the future may be amplified by, the COVID pandemic. 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.
ItemItem 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.
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ItemItem 8. Financial Statements and Supplementary Data
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REPORTREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and 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, 20182021 and 2017,2020, 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, 2018,2021, 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”"financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2021, 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, 2018,2021, 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, 2019,4, 2022, 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Capitalization of Properties — Refer to Notes 2 and 11 to the financial statements
Critical Audit Matter Description
The Corporation’s operations are highly capital intensive and their large network of assets turns over on a continuous basis. Each year, the Corporation develops a capital program for both the replacement of assets and for the acquisition or construction of new assets. In determining whether costs should be capitalized, the Corporation exercises significant judgment in determining whether expenditures meet the applicable minimum units of property criteria and extend the useful life, improve the safety of operations, or improve the operating efficiency of existing assets. The Corporation capitalizes all costs of capital projects necessary to make assets ready for their intended use and because a portion of the Corporation’s assets are self-constructed, management also exercises significant judgment in determining the amount of material, labor, work equipment, and indirect costs that qualify for capitalization. Properties, net were $54,871 million as of December 31, 2021 and, during 2021, the Corporation’s capital investments were $2.9 billion.
We identified the capitalization of property as a critical audit matter because of the significant judgment exercised by management in determining whether costs meet the criteria for capitalization. This, in turn, required a high degree of auditor judgment when performing audit procedures to evaluate whether the criteria to capitalize costs were met and to evaluate sufficiency of audit evidence to support management’s conclusions.
How the Critical Audit Matter Was Addressed in the Audit
Our procedures related to capitalization of property included the following, among others:
● | We tested the effectiveness of controls over the Corporation’s determination of whether costs related to the Corporation’s capital program should be capitalized or expensed. |
● | We evaluated the Corporation’s capitalization policy in accordance with accounting principles generally accepted in the United States of America. |
● | For a selection of capital projects, we performed the following: |
- | Obtained the Corporation’s evaluation of each project and determined whether the amount of costs to be capitalized met the criteria for capitalization as outlined within the Corporation’s policy by unit of property. |
- | Obtained supporting documentation that the project met the applicable minimum units of property criteria and was approved, and evaluated whether the project extended the useful life of an existing asset, improved the safety of operations, or improved the operating efficiency of existing assets. |
● | For a selection of capitalized costs during the year, we performed the following: |
- | Evaluated whether the individual cost selected met the criteria for capitalization. |
- | Evaluated whether the selection was accurately recorded at the appropriate amount based on the evidence obtained. |
/s/ Deloitte & Touche LLP
Omaha, Nebraska
February 8, 20194, 2022
We have served as the Corporation’sCorporation's auditor since 1967.
45
CONSOLIDATEDCONSOLIDATED STATEMENTS OF INCOME
Union Pacific Corporation and Subsidiary Companies
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
| ||||||||||||
Millions, Except Per Share Amounts, | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | ||||||||||||
Operating revenues: |
|
|
|
|
|
| ||||||||||||
Freight revenues | $ | 21,384 | $ | 19,837 | $ | 18,601 | $ | 20,244 | $ | 18,251 | $ | 20,243 | ||||||
Other revenues |
| 1,448 |
| 1,403 |
| 1,340 | 1,560 | 1,282 | 1,465 | |||||||||
Total operating revenues |
| 22,832 |
| 21,240 |
| 19,941 | 21,804 | 19,533 | 21,708 | |||||||||
Operating expenses: |
|
|
|
|
|
| ||||||||||||
Compensation and benefits |
| 5,056 |
| 4,939 |
| 4,779 | 4,158 | 3,993 | 4,533 | |||||||||
Depreciation | 2,208 | 2,210 | 2,216 | |||||||||||||||
Fuel |
| 2,531 |
| 1,891 |
| 1,489 | 2,049 | 1,314 | 2,107 | |||||||||
Purchased services and materials |
| 2,443 |
| 2,363 |
| 2,258 | 2,016 | 1,962 | 2,254 | |||||||||
Depreciation |
| 2,191 |
| 2,105 |
| 2,038 | ||||||||||||
Equipment and other rents |
| 1,072 |
| 888 |
| 1,137 | 859 | 875 | 984 | |||||||||
Other |
| 1,022 |
| 948 |
| 997 | 1,176 | 1,345 | 1,060 | |||||||||
Total operating expenses |
| 14,315 |
| 13,134 |
| 12,698 | 12,466 | 11,699 | 13,154 | |||||||||
Operating income |
| 8,517 |
| 8,106 |
| 7,243 | 9,338 | 7,834 | 8,554 | |||||||||
Other income (Note 7) |
| 94 |
| 245 |
| 221 | ||||||||||||
Other income, net (Note 6) | 297 | 287 | 243 | |||||||||||||||
Interest expense |
| (870) |
| (719) |
| (698) | (1,157 | ) | (1,141 | ) | (1,050 | ) | ||||||
Income before income taxes |
| 7,741 |
| 7,632 |
| 6,766 | 8,478 | 6,980 | 7,747 | |||||||||
Income tax benefit/(expense) (Note 8) |
| (1,775) |
| 3,080 |
| (2,533) | ||||||||||||
Income tax expense (Note 7) | (1,955 | ) | (1,631 | ) | (1,828 | ) | ||||||||||||
Net income | $ | 5,966 | $ | 10,712 | $ | 4,233 | $ | 6,523 | $ | 5,349 | $ | 5,919 | ||||||
Share and Per Share (Note 9): |
|
|
|
|
|
| ||||||||||||
Share and Per Share (Note 8): | ||||||||||||||||||
Earnings per share - basic | $ | 7.95 | $ | 13.42 | $ | 5.09 | $ | 9.98 | $ | 7.90 | $ | 8.41 | ||||||
Earnings per share - diluted | $ | 7.91 | $ | 13.36 | $ | 5.07 | $ | 9.95 | $ | 7.88 | $ | 8.38 | ||||||
Weighted average number of shares - basic |
| 750.9 |
| 798.4 |
| 832.4 | 653.8 | 677.3 | 703.5 | |||||||||
Weighted average number of shares - diluted |
| 754.3 |
| 801.7 |
| 835.4 | 655.4 | 679.1 | 706.1 | |||||||||
Dividends declared per share | $ | 3.06 | $ | 2.48 | $ | 2.255 |
CONSOLIDATEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Union Pacific Corporation and Subsidiary Companies
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
| ||||||||||||
Millions, | Millions, | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | ||||||||||||
Net income | Net income | $ | 5,966 | $ | 10,712 | $ | 4,233 | $ | 6,523 | $ | 5,349 | $ | 5,919 | ||||||
Other comprehensive income/(loss): | Other comprehensive income/(loss): |
|
|
|
|
|
| ||||||||||||
Defined benefit plans | Defined benefit plans |
| 62 |
| 103 |
| (29) | 723 | (231 | ) | 42 | ||||||||
Foreign currency translation | Foreign currency translation |
| (36) |
| 28 |
| (48) | (44 | ) | (6 | ) | 17 | |||||||
Total other comprehensive income/(loss) [a] | Total other comprehensive income/(loss) [a] |
| 26 |
| 131 |
| (77) | 679 | (237 | ) | 59 | ||||||||
Comprehensive income | Comprehensive income | $ | 5,992 | $ | 10,843 | $ | 4,156 | $ | 7,202 | $ | 5,112 | $ | 5,978 |
[a] |
| Net of deferred taxes of | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
46
CONSOLIDATEDCONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Union Pacific Corporation and Subsidiary Companies
|
|
|
|
| ||||||||
|
|
|
|
| ||||||||
Millions, Except Share and Per Share Amounts | 2018 | 2017 | 2021 | 2020 | ||||||||
Assets |
|
|
|
| ||||||||
Current assets: |
|
|
|
| ||||||||
Cash and cash equivalents | $ | 1,273 | $ | 1,275 | $ | 960 | $ | 1,799 | ||||
Short-term investments (Note 14) |
| 60 |
| 90 | ||||||||
Accounts receivable, net (Note 11) |
| 1,755 |
| 1,493 | ||||||||
Short-term investments (Note 13) | 46 | 60 | ||||||||||
Accounts receivable, net (Note 10) | 1,722 | 1,505 | ||||||||||
Materials and supplies |
| 742 |
| 749 | 621 | 638 | ||||||
Other current assets |
| 333 |
| 399 | 202 | 212 | ||||||
Total current assets |
| 4,163 |
| 4,006 | 3,551 | 4,214 | ||||||
Investments |
| 1,912 |
| 1,809 | 2,241 | 2,164 | ||||||
Net properties (Note 12) |
| 52,679 |
| 51,605 | ||||||||
Properties, net (Note 11) | 54,871 | 54,161 | ||||||||||
Operating lease assets (Note 16) | 1,787 | 1,610 | ||||||||||
Other assets |
| 393 |
| 386 | 1,075 | 249 | ||||||
Total assets | $ | 59,147 | $ | 57,806 | $ | 63,525 | $ | 62,398 | ||||
Liabilities and Common Shareholders' Equity |
|
|
|
| ||||||||
Current liabilities: |
|
|
|
| ||||||||
Accounts payable and other current liabilities (Note 13) | $ | 3,160 | $ | 3,139 | ||||||||
Debt due within one year (Note 15) |
| 1,466 |
| 800 | ||||||||
Accounts payable and other current liabilities (Note 12) | $ | 3,578 | $ | 3,104 | ||||||||
Debt due within one year (Note 14) | 2,166 | 1,069 | ||||||||||
Total current liabilities |
| 4,626 |
| 3,939 | 5,744 | 4,173 | ||||||
Debt due after one year (Note 15) |
| 20,925 |
| 16,144 | ||||||||
Deferred income taxes (Note 8) |
| 11,302 |
| 10,936 | ||||||||
Debt due after one year (Note 14) | 27,563 | 25,660 | ||||||||||
Operating lease liabilities (Note 16) | 1,429 | 1,283 | ||||||||||
Deferred income taxes (Note 7) | 12,675 | 12,247 | ||||||||||
Other long-term liabilities |
| 1,871 |
| 1,931 | 1,953 | 2,077 | ||||||
Commitments and contingencies (Notes 17 and 18) |
|
|
|
| ||||||||
Commitments and contingencies (Note 17) | ||||||||||||
Total liabilities |
| 38,724 |
| 32,950 | 49,364 | 45,440 | ||||||
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 |
| 2,779 |
| 2,778 | ||||||||
Common shares, $2.50 par value, 1,400,000,000 authorized; | ||||||||||||
1,112,440,400 and 1,112,227,784 issued; 638,841,656 and 671,351,360 outstanding, respectively | 2,781 | 2,781 | ||||||||||
Paid-in-surplus |
| 4,449 |
| 4,476 | 4,979 | 4,864 | ||||||
Retained earnings |
| 45,284 |
| 41,317 | 55,049 | 51,326 | ||||||
Treasury stock |
| (30,674) |
| (22,574) | (47,734 | ) | (40,420 | ) | ||||
Accumulated other comprehensive loss (Note 10) |
| (1,415) |
| (1,141) | ||||||||
Accumulated other comprehensive loss (Note 9) | (914 | ) | (1,593 | ) | ||||||||
Total common shareholders' equity |
| 20,423 |
| 24,856 | 14,161 | 16,958 | ||||||
Total liabilities and common shareholders' equity | $ | 59,147 | $ | 57,806 | $ | 63,525 | $ | 62,398 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
47
CONSOLIDATEDCONSOLIDATED STATEMENTS OF CASH FLOWS
Union Pacific Corporation and Subsidiary Companies
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
| ||||||||||||
Millions, for the Years Ended December 31, | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | ||||||||||||
Operating Activities |
|
|
|
|
|
| ||||||||||||
Net income | $ | 5,966 | $ | 10,712 | $ | 4,233 | $ | 6,523 | $ | 5,349 | $ | 5,919 | ||||||
Adjustments to reconcile net income to cash provided | Adjustments to reconcile net income to cash provided |
|
|
|
|
| Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||
Depreciation |
| 2,191 |
| 2,105 |
| 2,038 | 2,208 | 2,210 | 2,216 | |||||||||
Deferred and other income taxes |
| 338 |
| (5,067) |
| 831 | 154 | 340 | 566 | |||||||||
Net gain on non-operating asset dispositions |
| (30) |
| (111) |
| (94) | ||||||||||||
Gain on non-operating asset dispositions | (98 | ) | (115 | ) | (20 | ) | ||||||||||||
Other operating activities, net |
| 347 |
| (282) |
| (228) | 42 | 490 | 98 | |||||||||
Changes in current assets and liabilities: |
|
|
|
|
|
| ||||||||||||
Accounts receivable, net |
| (262) |
| (235) |
| 98 | (217 | ) | 90 | 160 | ||||||||
Materials and supplies |
| 7 |
| (32) |
| 19 | 17 | 113 | (9 | ) | ||||||||
Other current assets |
| (24) |
| 9 |
| 22 | 31 | (34 | ) | 87 | ||||||||
Accounts payable and other current liabilities |
| (125) |
| 182 |
| 232 | 184 | (73 | ) | (179 | ) | |||||||
Income and other taxes |
| 278 |
| (51) |
| 374 | 188 | 170 | (229 | ) | ||||||||
Cash provided by operating activities |
| 8,686 |
| 7,230 |
| 7,525 | 9,032 | 8,540 | 8,609 | |||||||||
Investing Activities |
|
|
|
|
|
| ||||||||||||
Capital investments |
| (3,437) |
| (3,238) |
| (3,505) | (2,936 | ) | (2,927 | ) | (3,453 | ) | ||||||
Purchases of short-term investments (Note 14) |
| (90) |
| (120) |
| (580) | ||||||||||||
Maturities of short-term investments (Note 14) |
| 90 |
| 90 |
| 520 | ||||||||||||
Proceeds from asset sales |
| 63 |
| 168 |
| 129 | 178 | 149 | 74 | |||||||||
Maturities of short-term investments (Note 13) | 94 | 141 | 130 | |||||||||||||||
Purchases of short-term investments (Note 13) | (70 | ) | (136 | ) | (115 | ) | ||||||||||||
Other investing activities, net |
| (37) |
| 14 |
| 43 | 25 | 97 | (71 | ) | ||||||||
Cash used in investing activities |
| (3,411) |
| (3,086) |
| (3,393) | (2,709 | ) | (2,676 | ) | (3,435 | ) | ||||||
Financing Activities |
|
|
|
|
|
| ||||||||||||
Share repurchase programs (Note 19) |
| (8,225) |
| (4,013) |
| (3,105) | ||||||||||||
Debt issued (Note 15) |
| 6,892 |
| 2,735 |
| 1,983 | ||||||||||||
Share repurchase programs (Note 18) | (7,291 | ) | (3,705 | ) | (5,804 | ) | ||||||||||||
Debt issued (Note 14) | 4,201 | 4,004 | 3,986 | |||||||||||||||
Dividends paid |
| (2,299) |
| (1,982) |
| (1,879) | (2,800 | ) | (2,626 | ) | (2,598 | ) | ||||||
Debt repaid |
| (1,736) |
| (840) |
| (1,013) | (1,299 | ) | (2,053 | ) | (817 | ) | ||||||
Net issuance of commercial paper |
| 194 |
| - |
| - | ||||||||||||
Debt exchange |
| - |
| - |
| (191) | ||||||||||||
Net issued/(paid) commercial paper (Note 14) | 325 | (127 | ) | (6 | ) | |||||||||||||
Debt exchange (Note 14) | (270 | ) | (328 | ) | (387 | ) | ||||||||||||
Other financing activities, net |
| (48) |
| (46) |
| (41) | (24 | ) | (67 | ) | (20 | ) | ||||||
Cash used in financing activities |
| (5,222) |
| (4,146) |
| (4,246) | (7,158 | ) | (4,902 | ) | (5,646 | ) | ||||||
Net change in cash, cash equivalents and restricted cash |
| 53 |
| (2) |
| (114) | ||||||||||||
Net change in cash, cash equivalents, and restricted cash | (835 | ) | 962 | (472 | ) | |||||||||||||
Cash, cash equivalents, and restricted cash at beginning of year |
| 1,275 |
| 1,277 |
| 1,391 | 1,818 | 856 | 1,328 | |||||||||
Cash, cash equivalents, and restricted cash at end of year | $ | 1,328 | $ | 1,275 | $ | 1,277 | $ | 983 | $ | 1,818 | $ | 856 | ||||||
Supplemental Cash Flow Information |
|
|
|
|
|
| ||||||||||||
Non-cash investing and financing activities: |
|
|
|
|
|
| ||||||||||||
Term loan renewals | $ | 250 | $ | - | $ | - | ||||||||||||
Term loan renewals (Note 14) | $ | 100 | $ | 250 | $ | 250 | ||||||||||||
Capital investments accrued but not yet paid |
| 205 |
| 366 |
| 223 | 263 | 166 | 224 | |||||||||
Capital lease financings |
| 12 |
| 19 |
| - | ||||||||||||
Locomotives sold for material credits | 0 | 0 | 18 | |||||||||||||||
Cash paid during the year for: |
|
|
|
|
|
| ||||||||||||
Income taxes, net of refunds | $ | (1,205) | $ | (2,112) | $ | (1,347) | $ | (1,658 | ) | $ | (1,214 | ) | $ | (1,382 | ) | |||
Interest, net of amounts capitalized |
| (728) |
| (666) |
| (652) | (1,087 | ) | (1,050 | ) | (1,033 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
48
CONSOLIDATEDCONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Union Pacific Corporation and Subsidiary Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions | Common | Treasury |
| Common | Paid-in- | Retained | Treasury | AOCI | Total | ||||||
Balance at January 1, 2016 | 1,110.4 | (261.2) |
|
| $ 2,776 |
| $ 4,417 |
| $ 30,233 |
| $ (15,529) |
| $ (1,195) |
| $ 20,702 |
Net income |
|
|
|
| - |
| - |
| 4,233 |
| - |
| - |
| 4,233 |
Other comprehensive loss |
|
|
|
| - |
| - |
| - |
| - |
| (77) |
| (77) |
Conversion, stock option | 0.6 | 1.1 |
|
| 1 |
| 4 |
| - |
| 53 |
| - |
| 58 |
Share repurchase programs | - | (35.1) |
|
| - |
| - |
| - |
| (3,105) |
| - |
| (3,105) |
Cash dividends declared | - | - |
|
| - |
| - |
| (1,879) |
| - |
| - |
| (1,879) |
Balance at December 31, 2016 | 1,111.0 | (295.2) |
|
| $ 2,777 |
| $ 4,421 |
| $ 32,587 |
| $ (18,581) |
| $ (1,272) |
| $ 19,932 |
Net income |
|
|
|
| - |
| - |
| 10,712 |
| - |
| - |
| 10,712 |
Other comprehensive income |
|
|
|
| - |
| - |
| - |
| - |
| 131 |
| 131 |
Conversion, stock option | 0.4 | 1.1 |
|
| 1 |
| 55 |
| - |
| 20 |
| - |
| 76 |
Share repurchase programs | - | (36.4) |
|
| - |
| - |
| - |
| (4,013) |
| - |
| (4,013) |
Cash dividends declared | - | - |
|
| - |
| - |
| (1,982) |
| - |
| - |
| (1,982) |
Balance at December 31, 2017 | 1,111.4 | (330.5) |
|
| $ 2,778 |
| $ 4,476 |
| $ 41,317 |
| $ (22,574) |
| $ (1,141) |
| $ 24,856 |
Net income |
|
|
|
| - |
| - |
| 5,966 |
| - |
| - |
| 5,966 |
Other comprehensive income |
|
|
|
| - |
| - |
| - |
| - |
| 26 |
| 26 |
Conversion, stock option | 0.3 | 1.1 |
|
| 1 |
| 65 |
| - |
| 33 |
| - |
| 99 |
Share repurchase programs | - | (57.2) |
|
| - |
| (92) |
| - |
| (8,133) |
| - |
| (8,225) |
Cash dividends declared | - | - |
|
| - |
| - |
| (2,299) |
| - |
| - |
| (2,299) |
Reclassification due to ASU |
|
|
|
| - |
| - |
| 300 |
| - |
| (300) |
| - |
Balance at December 31, 2018 | 1,111.7 | (386.6) |
|
| $ 2,779 |
| $ 4,449 |
| $ 45,284 |
| $ (30,674) |
| $ (1,415) |
| $ 20,423 |
Millions | Common | Treasury | Common | Paid-in- | Retained | Treasury | AOCI | Total | ||||||||||||||||||||||||
Balance at January 1, 2019 | 1,111.7 | (386.6 | ) | $ | 2,779 | $ | 4,449 | $ | 45,284 | $ | (30,674 | ) | $ | (1,415 | ) | $ | 20,423 | |||||||||||||||
Net income | 0 | 0 | 5,919 | 0 | 0 | 5,919 | ||||||||||||||||||||||||||
Other comprehensive income/(loss) | 0 | 0 | 0 | 0 | 59 | 59 | ||||||||||||||||||||||||||
Conversion, stock option exercises, forfeitures, and other | 0.3 | 1.7 | 1 | 46 | 0 | 82 | 0 | 129 | ||||||||||||||||||||||||
Share repurchase programs (Note 18) | 0 | (35.0 | ) | 0 | 28 | 0 | (5,832 | ) | 0 | (5,804 | ) | |||||||||||||||||||||
Cash dividends declared ($3.70 per share) | - | - | 0 | 0 | (2,598 | ) | 0 | 0 | (2,598 | ) | ||||||||||||||||||||||
Balance at December 31, 2019 | 1,112.0 | (419.9 | ) | $ | 2,780 | $ | 4,523 | $ | 48,605 | $ | (36,424 | ) | $ | (1,356 | ) | $ | 18,128 | |||||||||||||||
Net income | 0 | 0 | 5,349 | 0 | 0 | 5,349 | ||||||||||||||||||||||||||
Other comprehensive income/(loss) | 0 | 0 | 0 | 0 | (237 | ) | (237 | ) | ||||||||||||||||||||||||
Conversion, stock option exercises, forfeitures, and other | 0.2 | 1.1 | 1 | 31 | 0 | 19 | 0 | 51 | ||||||||||||||||||||||||
Share repurchase programs (Note 18) | 0 | (22.1 | ) | 0 | 310 | 0 | (4,015 | ) | 0 | (3,705 | ) | |||||||||||||||||||||
Cash dividends declared ($3.88 per share) | - | - | 0 | 0 | (2,628 | ) | 0 | 0 | (2,628 | ) | ||||||||||||||||||||||
Balance at December 31, 2020 | 1,112.2 | (440.9 | ) | $ | 2,781 | $ | 4,864 | $ | 51,326 | $ | (40,420 | ) | $ | (1,593 | ) | $ | 16,958 | |||||||||||||||
Net income | 0 | 0 | 6,523 | 0 | 0 | 6,523 | ||||||||||||||||||||||||||
Other comprehensive income/(loss) | 0 | 0 | 0 | 0 | 679 | 679 | ||||||||||||||||||||||||||
Conversion, stock option exercises, forfeitures, and other | 0.2 | 0.6 | 0 | 91 | 0 | 1 | 0 | 92 | ||||||||||||||||||||||||
Share repurchase programs (Note 18) | 0 | (33.3 | ) | 0 | 24 | 0 | (7,315 | ) | 0 | (7,291 | ) | |||||||||||||||||||||
Cash dividends declared ($4.29 per share) | - | - | 0 | 0 | (2,800 | ) | 0 | 0 | (2,800 | ) | ||||||||||||||||||||||
Balance at December 31, 2021 | 1,112.4 | (473.6 | ) | $ | 2,781 | $ | 4,979 | $ | 55,049 | $ | (47,734 | ) | $ | (914 | ) | $ | 14,161 |
[a] |
| AOCI = Accumulated Other Comprehensive Income/ |
The accompanying notes are an integral part of these Consolidated Financial Statements.
49
NOTESNOTES 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 32,23632,452 route miles, linkingconnecting Pacific Coast and Gulf Coast ports with the Midwest and Eastern U.S. gateways and providing several corridors to key Mexican and Canadian gateways. We own 26,03926,124 miles and operate on the remainder pursuant to trackage rights or leases. We serve the western two-thirdstwo-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:
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Millions | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | ||||||||||||
Agricultural Products | $ | 4,469 | $ | 4,303 | $ | 4,209 | ||||||||||||
Energy |
| 4,608 |
| 4,498 |
| 3,715 | ||||||||||||
Bulk | $ | 6,656 | $ | 5,960 | $ | 6,529 | ||||||||||||
Industrial |
| 5,679 |
| 5,204 |
| 4,964 | 7,323 | 6,622 | 7,472 | |||||||||
Premium |
| 6,628 |
| 5,832 |
| 5,713 | 6,265 | 5,669 | 6,242 | |||||||||
Total freight revenues | $ | 21,384 | $ | 19,837 | $ | 18,601 | $ | 20,244 | $ | 18,251 | $ | 20,243 | ||||||
Other subsidiary revenues |
| 881 |
| 885 |
| 814 | 741 | 743 | 880 | |||||||||
Accessorial revenues |
| 502 |
| 458 |
| 455 | 752 | 473 | 514 | |||||||||
Other |
| 65 |
| 60 |
| 71 | 67 | 66 | 71 | |||||||||
Total operating revenues | $ | 22,832 | $ | 21,240 | $ | 19,941 | $ | 21,804 | $ | 19,533 | $ | 21,708 |
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$2.4 billion in 2018,2021, $2.1 billion in 2020, and $2.3 billion in 2017, and $2.2 billion in 2016.2019.
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
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%(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.
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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:
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Millions |
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Cash and cash equivalents | $ | 1,273 | $ | 1,275 | $ | 1,277 | $ | 960 | $ | 1,799 | $ | 831 | ||||||
Restricted cash equivalents in other current assets |
| 42 |
| - |
| - | 19 | 7 | 13 | |||||||||
Restricted cash equivalents in other assets |
| 13 |
| - |
| - | 4 | 12 | 12 | |||||||||
Total cash, cash equivalents and restricted cash | $ | 1,328 | $ | 1,275 | $ | 1,277 | ||||||||||||
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Total cash, cash equivalents, and restricted cash equivalents shown on the Statement of Cash Flows: | $ | 983 | $ | 1,818 | $ | 856 |
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%(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 theat fair value when there is a readily determined fair value or at cost methodminus impairment when there are not readily determinable fair values. Our portion of accounting. The results of operations for ourincome/loss on equity method investments that are integral to our operations are recorded in operating expenses. Realized and unrealized gains and losses on investments that are not integral to our operations are recorded in other income.
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 whichwhere lives are measured in millions of gross tons per mile of track. We use the group method of depreciation in whichwhere 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.value.
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$169 million at December 31, 20182021, and $154$151 million at December 31, 20172020, and are expected to be recognized in the nextfollowing 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 or based on cumulative volumes, are recorded as a reduction to operating revenuesrevenues. Customer incentives that include variable consideration based on actual or projected future customer shipments.cumulative volumes are estimated using the expected value method, which is based on available historical, current, and forecasted volumes, and recognized as the related performance obligation is satisfied.
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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 StatementStatements of Financial Position as Accounts Receivables,accounts receivable, net.
Freight revenuerevenues 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.revenues.
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 termshort-term investments, certain equity 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 stock option exercises, and stock unit vestings, and ESPP shares, 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.options and ESPP awards. 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.model, and the fair value of ESPP awards is based on the Company contribution match.
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 are reported in different periods for financial reporting and income tax purposes. The majority of our deferred tax assets relate to expenses that already have been recognizedrecorded for financial reporting purposes but not deducted 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 our financial statements or tax returns.purchase accounting transactions, and differences in capitalization methods. 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.
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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
Leases – We incurdetermine if an arrangement is or contains a lease at inception. Operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. When an implicit rate is not available, we use a collateralized incremental borrowing rate for operating leases based on the information available at commencement date, including lease term, in determining the present value of future payments. The operating lease asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain employment-related expenses associatedthat the option will be exercised. Operating leases are included in operating lease assets, accounts payable and other current liabilities, and operating lease liabilities on our Consolidated Statements of Financial Position. Finance leases are included in properties, net, debt due within one year, and debt due after one year on our Consolidated Statements of Financial Position. Operating lease expense is recognized on a straight-line basis over the lease term and primarily reported in equipment and other rents and financing lease expense is recorded as depreciation and interest expense in our Consolidated Statements of Income.
We have lease agreements with pensionslease and postretirement health benefits.non-lease components, and we have elected to not separate lease and non-lease components for all classes of underlying assets. Leases with an initial term of 12 months or less are not recorded on our Consolidated Statements of Financial Position. Leases with initial terms in excess of 12 months are recorded as operating or financing leases in our Consolidated Statements of Financial Position.
Pension Benefits – In order to measure the expense associated with thesepension 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, and anticipated mortality rates, and expected future health care costs.rates. 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.liability, including unasserted claims. Our personal injury liability is not discounted to present value.value due to the uncertainty surrounding the timing of future payments. Legal fees and incidental costs are expensed as incurred.
Environmental – When environmental issues have been identified with respect to property currently or formerly owned, leased, or otherwise used in the conduct of our business, we 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,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
3. Accounting Pronouncements
In May 2014, December 2019, the FASB issued Accounting Standards Update No. 2014-092019-12 (ASU 2014-09)2019-12), Revenue from Contracts with CustomersIncome Taxes (Topic 606).740): Simplifying the Accounting for Income Taxes, which simplifies the accounting and disclosure requirements for income taxes by clarifying existing guidance to improve consistency in application of Accounting Standards Codification (ASC) 740. The Company adopted the ASU 2014-09 supersedes on January 1, 2021 (the revenue recognition guidance in Topic 605, Revenue Recognition. The core principle ofeffective date), and it did not have a material impact on the guidance is that an entity should recognize revenue to depict the transfer of promised goodsCompany’s Consolidated Financial Statements 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.related disclosures.
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, March 2020, the FASB issued Accounting Standards Update No. 2016-012020-04 (ASU 2016-01)2020-04), RecognitionReference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and Measurement of Financial Assetsexceptions for applying GAAP principles to contracts, hedging relationships, and Financial Liabilities (Subtopic 825-10). ASU 2016-01 providesother transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform. This guidance forwas effective beginning on March 12, 2020, and can be adopted on a prospective basis no later than December 31, 2022, with early adoption permitted. The Company is currently evaluating the recognition, measurement, presentation, and disclosure of financial instruments. Effective January 1, 2018,effect that the Company adopted the ASU and it did notnew guidance will have an impact on our consolidated financial position, results of operations, or cash flows.Consolidated Financial Statements and related disclosures.
In March 2017, November 2021, the FASB issued Accounting Standards Update No. 2017-072021-10 (ASU 2017-07)2021-10), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit CostGovernment Assistance (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
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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:
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| 2017 |
| 2016 |
Increase/(decrease) in operating income | $ | (13) | $ | 45 | $ | (29) |
Increase/(decrease) in other income |
| 13 |
| (45) |
| 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 Income832): Disclosures by Business Entities about Government Assistance, which allowsrequires business entities the option to reclassify from accumulatedprovide certain disclosures when they have received government assistance and use a grant or contribution accounting model by analogy to 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 2018-02accounting guidance. The guidance is effective for fiscal years beginning after December 15, 2018. Early adoption of2021. The Company is currently evaluating 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 policyeffect 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 andguidance 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:
related disclosures.
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for the Years Ended December 31, |
| 2018 |
| 2017 |
Compensation and benefits expense |
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Severance | $ | 23 | $ | 12 |
Equity compensation |
| 2 |
| 5 |
Other income |
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Pension |
| - |
| 69 |
Total expense | $ | 25 | $ | 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.
5.4. 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, 36,0002021, 28,000 restricted shares were outstanding under the Directors Plan.
The Union Pacific Corporation 2004 Stock Incentive Plan (2004(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 stock 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, 1,088,6702021, 37,778 stock 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(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 stock 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, 4,081,3602021, 1,706,288 stock options and 3,163,0051,218,397 retention shares and stock units were outstanding under the 2013 Plan. We no longer grant any stock options or other stock or unit awards under this plan.
The Union Pacific Corporation 2021 Stock Incentive Plan (2021 Plan) was approved by shareholders in May 2021. The 2021 Plan reserved 23,000,000 shares of our common stock for issuance, plus any shares subject to awards made under previous plans as of December 31, 2020, that are subsequently cancelled, expired, forfeited, or otherwise not issued under previous plans. Under the 2021 Plan, non-qualified stock 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 2021 Plan. As of December 31, 2021, 361,935 stock options and 389,207 retention shares were outstanding under the 2021 Plan.
The Union Pacific Corporation 2021 Employee Stock Purchase Plan (2021 ESPP) was approved by shareholders in May 2021. The 2021 ESPP reserved 10,000,000 shares of our common stock for issuance. Under the 2021 ESPP, eligible employees of the Corporation and its subsidiaries may elect to purchase shares with a Company match award. Non-employee directors are not eligible for awards under the 2021 ESPP. As of December 31, 2021, 97,641 shares were issued under the 2021 ESPP.
Pursuant to the above plans 70,730,692; 72,151,415;34,011,624;69,867,405; and 73,745,250;70,318,887; shares of our common stock were authorized and available for grant at December 31, 2018, 2017,2021, 2020, and 2016,2019, respectively.
Stock-Based Compensation – We have several stock-based compensation plans under which employees and non-employee directors receive nonvested stock options, nonvested retention shares, and nonvested stock units. We refer to the nonvested shares and stock units collectively as “retention awards”. We have electedEmployees are also able to issue treasury shares to cover option exercises and stock unit vestings, while new shares are issued when retention shares are granted.participate in our ESPP.
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Information regarding stock-based compensation appears in the table below:
Millions | 2021 | 2020 | 2019 | |||||||||
Stock-based compensation, before tax: | ||||||||||||
Stock options | $ | 15 | $ | 15 | $ | 16 | ||||||
Retention awards | 66 | 58 | 77 | |||||||||
ESPP | 7 | 0 | 0 | |||||||||
Total stock-based compensation, before tax | $ | 88 | $ | 73 | $ | 93 | ||||||
Excess tax benefits from equity compensation plans | $ | 26 | $ | 55 | $ | 52 |
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Stock-based compensation, before tax: |
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Stock options | $ | 17 | $ | 19 | $ | 16 |
Retention awards |
| 79 |
| 84 |
| 66 |
Total stock-based compensation, before tax | $ | 96 | $ | 103 | $ | 82 |
Excess tax benefits from equity compensation plans | $ | 28 | $ | 44 | $ | 28 |
Stock Options – Stock options are granted at the closing price on the date of grant, have 10-year contractual terms, and vest no later than 3 years from the date of grant. None of the stock options outstanding at December 31, 2021, are subject to performance or market-based vesting conditions.
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 Black-Scholes valuation purposes:
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Weighted-Average Assumptions | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | ||||||||||||
Risk-free interest rate |
| 2.6% |
| 2.0% |
| 1.3% | 0.4 | % | 1.5 | % | 2.5 | % | ||||||
Dividend yield |
| 2.3% |
| 2.3% |
| 2.9% | 1.9 | % | 2.1 | % | 2.2 | % | ||||||
Expected life (years) |
| 5.3 |
| 5.3 |
| 5.1 | 4.6 | 4.9 | 5.2 | |||||||||
Volatility |
| 21.1% |
| 21.7% |
| 23.2% | 28.3 | % | 23.4 | % | 22.7 | % | ||||||
Weighted-average grant-date fair value of options granted | $ | 21.70 | $ | 18.19 | $ | 11.36 | $ | 39.97 | $ | 32.20 | $ | 30.37 |
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 stock option.
A summary of stock option activity during 20182021 is presented below:
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| Options (thous.) | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value (millions) | |||
Outstanding at January 1, 2018 | 5,630 | $ | 83.37 | 5.8 | yrs. | $ | 286 |
Granted | 800 |
| 124.86 | N/A |
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| N/A |
Exercised | (1,128) |
| 70.88 | N/A |
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Forfeited or expired | (132) |
| 101.01 | N/A |
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| N/A |
Outstanding at December 31, 2018 | 5,170 | $ | 92.06 | 5.4 | yrs. | $ | 239 |
Vested or expected to vest | 5,118 | $ | 91.89 | 5.4 | yrs. | $ | 237 |
Options exercisable at December 31, 2018 | 3,429 | $ | 84.27 | 4.1 | yrs. | $ | 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.
Options (thous.) | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (yrs.) | Aggregate Intrinsic Value (millions) | |||||||||||||
Outstanding at January 1, 2021 | 2,569 | $ | 132.49 | 6.4 | $ | 195 | ||||||||||
Granted | 387 | 204.45 | N/A | N/A | ||||||||||||
Exercised | (753 | ) | 118.11 | N/A | N/A | |||||||||||
Forfeited or expired | (97 | ) | 154.62 | N/A | N/A | |||||||||||
Outstanding at December 31, 2021 | 2,106 | $ | 149.84 | 6.3 | $ | 215 | ||||||||||
Vested or expected to vest at December 31, 2021 | 2,083 | $ | 149.37 | 6.3 | $ | 214 | ||||||||||
Options exercisable at December 31, 2021 | 1,334 | $ | 126.38 | 5.2 | $ | 167 |
At December 31, 2018,2021, there was $17$15 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.1.0 year. Additional information regarding stock option exercises appears in the following table:
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Millions | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | ||||||||||||
Intrinsic value of stock options exercised | $ | 83 | $ | 88 | $ | 52 | $ | 84 | $ | 120 | $ | 193 | ||||||
Cash received from option exercises |
| 76 |
| 59 |
| 39 | 58 | 95 | 130 | |||||||||
Treasury shares repurchased for employee payroll taxes |
| (20) |
| (18) |
| (15) | (15 | ) | (24 | ) | (37 | ) | ||||||
Tax benefit realized from option exercises |
| 21 |
| 34 |
| 20 | 16 | 28 | 48 | |||||||||
Aggregate grant-date fair value of stock options vested |
| 19 |
| 20 |
| 19 | 14 | 15 | 15 |
56
Retention Awards – The fair value of retentionRetention awards is based onare granted at no cost to the closing price of the stock on the grant date. Dividendsemployee, vest over periods lasting up to 4 years, and dividends and dividend equivalents are paid to participants during the vesting periods.
Changes in our retention awards during 20182021 were as follows:
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| Shares (thous.) | Weighted-Average Grant-Date Fair Value | |||||||
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| Shares (thous.) | Weighted-Average | |||||||||
Nonvested at January 1, 2018 | 2,313 | $ | 95.04 | ||||||||
Nonvested at January 1, 2021 | 1,476 | $ | 141.06 | ||||||||
Granted | 542 |
| 125.51 | 297 | 205.81 | ||||||
Vested | (664) |
| 88.79 | (417 | ) | 109.23 | |||||
Forfeited | (121) |
| 103.07 | (69 | ) | 163.73 | |||||
Nonvested at December 31, 2018 | 2,070 | $ | 104.55 | ||||||||
Nonvested at December 31, 2021 | 1,287 | $ | 165.10 |
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, 2018,2021, there was $91$87 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 1.61.4 years.
Performance Retention Awards – In February 2018, 2021, our Board of Directors approved performance stock unit grants. The basic terms of theseThis plan is based on performance stock units are identical to those granted in February 2017, excepttargets for different annual return on invested capital (ROIC) performance targets. The plan also includes relativeand operating income growth (OIG) as a modifier compared to the companies included in the S&P 500100 Industrials Index.Index plus the Class I railroads. We define ROIC as net operating profit adjusted for interest expense (including interest on the present value ofaverage operating leases)lease liabilities) and taxes on interest divided by average invested capital adjusted for the present value ofaverage 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.lease liabilities.
StockThe February 2021 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 forand the relative three-year OIG. We expensetwo-thirds of the fair value of the units that are probable of being earned based on our forecasted ROIC over the 3-year3-year performance period, and with respect to the third year of the plan, the remaining one-third of the fair value is subject to the relative OIG modifier.three-year OIG. 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.grant. Dividend equivalents are accumulated during the service period and paid to participants only after the units are earned.
The assumptions used to calculate the present value of estimated future dividends relatedFebruary 2020 and 2019 performance stock unit grants expense recognition and basic terms were similar to the February 2018 2021 grant except the relative OIG targets were a modifier as follows:compared to companies included in the S&P 500 Industrials Index. The modifier can be up to +/- 25% of the award earned based on the ROIC achieved.
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Changes in our performance retention awards during 20182021 were as follows:
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| Shares (thous.) | Weighted-Average Grant-Date Fair Value | |||||||
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| Shares (thous.) | Weighted-Average | |||||||||
Nonvested at January 1, 2018 | 1,138 | $ | 92.92 | ||||||||
Nonvested at January 1, 2021 | 773 | $ | 148.17 | ||||||||
Granted | 348 |
| 117.80 | 227 | 204.45 | ||||||
Vested | (95) |
| 111.96 | (136 | ) | 141.93 | |||||
Unearned | (201) |
| 114.97 | (140 | ) | 126.47 | |||||
Forfeited | (98) |
| 93.06 | (83 | ) | 156.94 | |||||
Nonvested at December 31, 2018 | 1,092 | $ | 95.12 | ||||||||
Nonvested at December 31, 2021 | 641 | $ | 173.03 |
At December 31, 2018,2021, there was $42$16 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.
Employee Stock Purchase Plan - Our ESPP started in July 2021. Employee and Company contributions are used to issue treasury shares the month after employee contributions are withheld based on the settlement date closing price. The Company matches 40% contributed by the employee up to a maximum employee contribution of 5% of monthly salary (limited to $15,000 annually). We expense the Company contributions in the month the employee services were rendered (i.e., the month the employee contributions were withheld).
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6.5. Retirement Plans
Pension and Other Postretirement Benefits
Pension Plans – We provide defined benefit retirement income to eligible non-union employees through qualified and non-qualified (supplemental) pension plans. Qualified and non-qualified pension benefits are based on years of service and the highest compensation during the latest years of employment, with specific reductions made for early retirements. 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) plan401(k) benefit 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 31:31, 2021 and 2020:
Funded Status | ||||||||
Millions | 2021 | 2020 | ||||||
Projected Benefit Obligation | ||||||||
Projected benefit obligation at beginning of year | $ | 5,658 | $ | 4,847 | ||||
Service cost | 110 | 91 | ||||||
Interest cost | 104 | 137 | ||||||
Actuarial (gain)/loss | (346 | ) | 812 | |||||
Gross benefits paid | (230 | ) | (229 | ) | ||||
Projected benefit obligation at end of year | $ | 5,296 | $ | 5,658 | ||||
Plan Assets | ||||||||
Fair value of plan assets at beginning of year | $ | 5,016 | $ | 4,528 | ||||
Actual (loss)/return on plan assets | 737 | 686 | ||||||
Non-qualified plan benefit contributions | 31 | 31 | ||||||
Gross benefits paid | (230 | ) | (229 | ) | ||||
Fair value of plan assets at end of year | $ | 5,554 | $ | 5,016 | ||||
Funded status at end of year | $ | 258 | $ | (642 | ) |
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Funded Status | Pension | OPEB | ||||||
Millions | 2018 | 2017 | 2018 | 2017 | ||||
Projected Benefit Obligation |
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Projected benefit obligation at beginning of year | $ | 4,529 | $ | 4,110 | $ | 330 | $ | 334 |
Service cost |
| 105 |
| 90 |
| 2 |
| 2 |
Interest cost |
| 145 |
| 142 |
| 10 |
| 10 |
Plan curtailment cost |
| - |
| 20 |
| - |
| (1) |
Special termination cost |
| - |
| 49 |
| - |
| - |
Actuarial (gain)/loss |
| (371) |
| 382 |
| (20) |
| 7 |
Gross benefits paid |
| (227) |
| (264) |
| (24) |
| (22) |
Projected benefit obligation at end of year | $ | 4,181 | $ | 4,529 | $ | 298 | $ | 330 |
Plan Assets |
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Fair value of plan assets at beginning of year | $ | 4,224 | $ | 3,748 | $ | - | $ | - |
Actual (loss)/return on plan assets |
| (139) |
| 716 |
| - |
| - |
Voluntary funded pension plan contributions |
| - |
| - |
| - |
| - |
Non-qualified plan benefit contributions |
| 29 |
| 24 |
| 24 |
| 22 |
Gross benefits paid |
| (227) |
| (264) |
| (24) |
| (22) |
Fair value of plan assets at end of year | $ | 3,887 | $ | 4,224 | $ | - | $ | - |
Funded status at end of year | $ | (294) | $ | (305) | $ | (298) | $ | (330) |
Actuarial gains that decreased the PBO were driven by an increase in 2021 discount rates from 2.42% to 2.80%.
Amounts recognized in the statement of financial position as of December 31, 2018, 2021 and 20172020, consist of:
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| Pension | OPEB | ||||||
Millions | 2018 | 2017 | 2018 | 2017 | ||||
Noncurrent assets | $ | 172 | $ | 196 | $ | - | $ | - |
Current liabilities |
| (28) |
| (27) |
| (22) |
| (23) |
Noncurrent liabilities |
| (438) |
| (474) |
| (276) |
| (307) |
Net amounts recognized at end of year | $ | (294) | $ | (305) | $ | (298) | $ | (330) |
58
Millions | 2021 | 2020 | ||||||
Noncurrent assets | $ | 807 | $ | 8 | ||||
Current liabilities | (31 | ) | (30 | ) | ||||
Noncurrent liabilities | (518 | ) | (620 | ) | ||||
Net amounts recognized at end of year | $ | 258 | $ | (642 | ) |
Pre-tax amounts recognized in accumulated other comprehensive income/(loss)loss consist of $851 million and $1,805 million net actuarial loss as of December 31, 2018, 2021 and 2017 consist of:2020, respectively.
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| 2018 | 2017 | ||||||||||
Millions | Pension | OPEB | Total | Pension | OPEB | Total | ||||||
Prior service cost | $ | - | $ | - | $ | - | $ | - | $ | (1) | $ | (1) |
Net actuarial loss |
| (1,480) |
| (90) |
| (1,570) |
| (1,533) |
| (120) |
| (1,653) |
Total | $ | (1,480) | $ | (90) | $ | (1,570) | $ | (1,533) | $ | (121) | $ | (1,654) |
Pre-tax changes recognized in other comprehensive income/(loss) during 2018, 2017,loss as of December 31, 2021, 2020, and 20162019, were as follows:
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Millions | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | |||||||||||||||
Net actuarial (loss)/gain | $ | (40) | $ | 67 | $ | (112) | $ | 20 | $ | (6) | $ | (16) | $ | 813 | $ | (408 | ) | $ | (88 | ) | ||||
Amortization of: |
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Prior service cost/(credit) |
| - |
| - |
| - |
| 1 |
| 1 |
| (9) | ||||||||||||
Actuarial loss |
| 93 |
| 81 |
| 83 |
| 10 |
| 9 |
| 10 | 141 | 104 | 67 | |||||||||
Total | $ | 53 | $ | 148 | $ | (29) | $ | 31 | $ | 4 | $ | (15) | $ | 954 | $ | (304 | ) | $ | (21 | ) |
Amounts included in accumulated other comprehensive income/(loss) expected to be amortized into net periodic cost during 2019:
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Millions | Pension | OPEB | Total | |||
Prior service credit | $ | - | $ | - | $ | - |
Net actuarial loss |
| (63) |
| (7) |
| (70) |
Total | $ | (63) | $ | (7) | $ | (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 31:31, 2021 and 2020:
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Underfunded Accumulated Benefit Obligation |
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Millions | 2018 | 2017 | 2021 | 2020 | ||||||||
Projected benefit obligation | $ | 465 | $ | 501 | $ | 549 | $ | 605 | ||||
Accumulated benefit obligation | $ | 446 | $ | 481 | $ | 513 | $ | 560 | ||||
Fair value of plan assets |
| - |
| - | 0 | 0 | ||||||
Underfunded accumulated benefit obligation | $ | (446) | $ | (481) | $ | (513 | ) | $ | (560 | ) |
The ABO for all defined benefit pension plans was $3.9$4.9 billion and $4.2$5.2 billion at December 31, 2018, 2021 and 2017,2020, respectively.
59
Assumptions – The weighted-average actuarial assumptions used to determine benefit obligations at December 31:31, 2021 and 2020:
Percentages | 2021 | 2020 | ||||||
Discount rate | 2.80 | % | 2.42 | % | ||||
Compensation increase | 4.30 | % | 4.40 | % |
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| Pension | OPEB | ||
Percentages | 2018 | 2017 | 2018 | 2017 |
Discount rate | 4.23% | 3.62% | 4.17% | 3.53% |
Compensation increase | 4.19% | 4.20% | N/A | N/A |
Health care cost trend rate (employees under 65) | N/A | N/A | 5.87% | 6.09% |
Ultimate health care cost trend rate | N/A | N/A | 4.50% | 4.50% |
Year ultimate trend rate reached | N/A | N/A | 2038 | 2038 |
Expense
Both pension and OPEBPension expense areis 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-year5-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 incomeincome/loss 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 31:31, 2021, 2020, and 2019:
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Millions | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | |||||||||||||||
Net Periodic Benefit Cost: |
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Net Periodic Pension Cost: | ||||||||||||||||||||||||
Service cost | $ | 105 | $ | 90 | $ | 84 | $ | 2 | $ | 2 | $ | 1 | $ | 110 | $ | 91 | $ | 80 | ||||||
Interest cost |
| 145 |
| 142 |
| 143 |
| 10 |
| 10 |
| 11 | 104 | 137 | 160 | |||||||||
Expected return on plan assets |
| (272) |
| (267) |
| (267) |
| - |
| - |
| - | (270 | ) | (282 | ) | (273 | ) | ||||||
Plan curtailment cost |
| - |
| 20 |
| - |
| - |
| - |
| - | ||||||||||||
Special termination cost |
| - |
| 49 |
| - |
| - |
| - |
| - | ||||||||||||
Amortization of: |
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Prior service cost/(credit) |
| - |
| - |
| - |
| 1 |
| 1 |
| (9) | ||||||||||||
Actuarial loss |
| 93 |
| 81 |
| 83 |
| 10 |
| 9 |
| 10 | 141 | 104 | 67 | |||||||||
Net periodic benefit cost | $ | 71 | $ | 115 | $ | 43 | $ | 23 | $ | 22 | $ | 13 | ||||||||||||
Net periodic pension cost | $ | 85 | $ | 50 | $ | 34 |
Assumptions – The weighted-average actuarial assumptions used to determine expense were as follows:
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| Pension | OPEB | ||||||||||||||||
Percentages | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | |||||||||
Discount rate for benefit obligations | 3.62% | 4.09% | 4.37% | 3.54% | 3.89% | 4.13% | 2.42 | % | 3.26 | % | 4.23 | % | ||||||
Discount rate for interest on benefit obligations | 3.27% | 3.47% | 3.65% | 3.14% | 3.25% | 3.34% | 1.90 | % | 2.89 | % | 3.94 | % | ||||||
Discount rate for service cost | 3.77% | 4.41% | 4.69% | 3.71% | 4.25% | 4.59% | 2.61 | % | 3.42 | % | 4.33 | % | ||||||
Discount rate for interest on service cost | 3.72% | 4.27% | 4.55% | 3.64% | 4.11% | 4.44% | 2.53 | % | 3.36 | % | 4.30 | % | ||||||
Expected return on plan assets | 7.00% | 7.00% | 7.50% | N/A | N/A | 6.25 | % | 7.00 | % | 7.00 | % | |||||||
Compensation increase | 4.19% | 4.13% | 4.20% | N/A | N/A | 4.40 | % | 4.10 | % | 4.10 | % | |||||||
Health care cost trend rate (employees under 65) | N/A | N/A | 6.09% | 6.31% | 6.52% | |||||||||||||
Ultimate health care cost trend rate | N/A | N/A | 4.50% | 4.50% | 4.50% | |||||||||||||
Year ultimate trend reached | N/A | N/A | 2038 | 2038 | 2038 |
60
Beginning in 2016, weWe measure the service cost and interest cost components of our net periodic benefitpension 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 qualityhigh-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)loss on pension plan assets, net of fees, was approximately (2)% 15%in 2018, 19%2021, 16% in 2017,2020, and 8%20% in 2016.2019.
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:
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Millions | One % pt. | One % pt. | ||
Effect on total service and interest cost components | $ | 1 | $ | (1) |
Effect on accumulated benefit obligation |
| 21 |
| (17) |
Cash Contributions
The following table details our cash contributions, if any, for the qualified pension plans and the benefit payments for the non-qualified (supplemental) pension and OPEB plans:
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Millions | Qualified | Non-qualified | OPEB | ||||
2018 | $ | - | $ | 29 | $ | 24 | |
2017 |
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| - |
| 24 |
| 22 |
Millions | Qualified | Non-qualified | ||||||
2021 | $ | 0 | $ | 31 | ||||
2020 | 0 | 31 |
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.payments. We anticipate our 20192022 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 20192022 through 2028:2031:
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Millions | Pension | OPEB | ||
2019 | $ | 223 | $ | 22 |
2020 |
| 220 |
| 21 |
2021 |
| 218 |
| 20 |
2022 |
| 217 |
| 20 |
2023 |
| 217 |
| 19 |
Years 2024 - 2028 |
| 1,113 |
| 86 |
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Millions | ||||
2022 | $ | 229 | ||
2023 | 228 | |||
2024 | 227 | |||
2025 | 227 | |||
2026 | 228 | |||
Years 2027 - 2031 | 1,170 |
Asset Allocation Strategy
Our pension plan asset allocation at December 31, 2018, 2021 and 2017,2020, and target allocation for 2019,2022, are as follows:
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| Percentage of Plan Assets | Percentage of Plan Assets | ||||||||||||
| Target |
| December 31, | Target | December 31, | |||||||||||
| Allocation 2019 |
| 2018 | 2017 | Allocation 2022 | 2021 | 2020 | |||||||||
Equity securities | 60% to 70% |
| 56% | 69% | 45% to 55% | 57 | % | 63 | % | |||||||
Debt securities | 25% to 35% |
| 36 | 22 | 45% to 55% | 42 | 34 | |||||||||
Real estate | 2% to 8% |
| 6 | 5 | 0% to 2% | 1 | 3 | |||||||||
Commodities | N/A |
| 2 | 4 | ||||||||||||
Total | Total |
| 100% | 100% | Total | 100 | % | 100 | % |
The pension plan investments are held in a master trust. 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%6.25%. While we believe we can achieve a long-term average rate of return of 7.0%6.25%, 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.
Since 2020, the asset allocation targets for equity and debt have been adjusted annually to move from equity to debt as a de-risking measure. The pension plan investments are heldcurrent target endpoint for this de-risking is 45% equity and 55% debt 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.2023. Equity risks are balanced by investing a significant portion of the plans’ assets in high qualityhigh-quality debt securities. The average credit rating of the debt portfolio exceededwas A+ and A at both December 31, 2018 2021 and 2017.2020, respectively. 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 1320 years and 17 years at both December 31, 2018 2021 and 2017.2020, respectively.
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, and commercial paper 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 investmentsU.S. dollars and foreign currencies are classified as Level 1 investments. Commercial paper assets are valued using a bid evaluation process with bid data provided by independent pricing sources. Commercial paper is classified as Level 2 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.SEC. The Plan’splan’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 Planplan is calculated using each partnership’s NAV.
Real Estate Funds – Most of the Plan’splan’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 Planplan 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 termshort-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 Planplan is calculated using NAV for each investment.
As of December 31, 2018,2021, the pension plan assets measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quoted Prices |
| Significant |
|
|
|
|
|
| ||
| in Active |
| Other |
| Significant |
|
| ||||
| Markets for |
| Observable |
| Unobservable |
|
| ||||
| Identical Inputs |
| Inputs |
| Inputs |
|
|
| |||
Millions | (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
Plan assets at fair value: |
|
|
|
|
|
|
|
|
|
|
|
Temporary cash investments | $ | 21 |
| $ | - |
| $ | - |
| $ | 21 |
Registered investment companies [a] |
| 1 |
|
| - |
|
| - |
|
| 1 |
Federal government securities |
| - |
|
| 191 |
|
| - |
|
| 191 |
Bonds and debentures |
| - |
|
| 538 |
|
| - |
|
| 538 |
Corporate stock |
| 1,355 |
|
| 12 |
|
| - |
|
| 1,367 |
Total plan assets at fair value | $ | 1,377 |
| $ | 741 |
| $ | - |
| $ | 2,118 |
Plan assets at NAV: |
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies [b] |
|
|
|
|
|
|
|
|
|
| 378 |
Venture capital and buyout partnerships |
|
|
|
|
|
|
|
|
|
| 443 |
Real estate funds |
|
|
|
|
|
|
|
|
|
| 222 |
Collective trust and other funds |
|
|
|
|
|
|
|
|
|
| 745 |
Total plan assets at NAV |
|
|
|
|
|
|
|
|
| $ | 1,788 |
Other assets/(liabilities) [c] |
|
|
|
|
|
|
|
|
|
| (19) |
Total plan assets |
|
|
|
|
|
|
|
|
| $ | 3,887 |
|
|
|
|
|
|
63
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Inputs | Inputs | Inputs | ||||||||||||||
Millions | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Plan assets at fair value: | ||||||||||||||||
Temporary cash investments | $ | 9 | $ | 0 | $ | 0 | $ | 9 | ||||||||
Registered investment companies [a] | 10 | 0 | 0 | 10 | ||||||||||||
Federal government securities | 0 | 742 | 0 | 742 | ||||||||||||
Bonds and debentures | 0 | 1,116 | 0 | 1,116 | ||||||||||||
Corporate stock | 1,980 | 10 | 0 | 1,990 | ||||||||||||
Total plan assets at fair value | $ | 1,999 | $ | 1,868 | $ | 0 | $ | 3,867 | ||||||||
Plan assets at NAV: | ||||||||||||||||
Registered investment companies [b] | 185 | |||||||||||||||
Venture capital and buyout partnerships | 710 | |||||||||||||||
Real estate funds | 48 | |||||||||||||||
Collective trust and other funds | 756 | |||||||||||||||
Total plan assets at NAV | $ | 1,699 | ||||||||||||||
Other assets/(liabilities) [c] | (12 | ) | ||||||||||||||
Total plan assets | $ | 5,554 |
As of December 31, 2017,2020, the pension plan assets measured at fair value on a recurring basis were as follows:
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Inputs | Inputs | Inputs | ||||||||||||||
Millions | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Plan assets at fair value: | ||||||||||||||||
Temporary cash investments | $ | 9 | $ | 0 | $ | 0 | $ | 9 | ||||||||
Registered investment companies [a] | 252 | 0 | 0 | 252 | ||||||||||||
Federal government securities | 0 | 150 | 0 | 150 | ||||||||||||
Bonds and debentures | 0 | 831 | 0 | 831 | ||||||||||||
Corporate stock | 2,209 | 8 | 0 | 2,217 | ||||||||||||
Total plan assets at fair value | $ | 2,470 | $ | 989 | $ | 0 | $ | 3,459 | ||||||||
Plan assets at NAV: | ||||||||||||||||
Registered investment companies [b] | 312 | |||||||||||||||
Venture capital and buyout partnerships | 585 | |||||||||||||||
Real estate funds | 161 | |||||||||||||||
Collective trust and other funds | 498 | |||||||||||||||
Total plan assets at NAV | $ | 1,556 | ||||||||||||||
Other assets/(liabilities) [c] | 1 | |||||||||||||||
Total plan assets | $ | 5,016 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quoted Prices |
| Significant |
|
|
|
|
|
| ||
| in Active |
| Other |
| Significant |
|
| ||||
| Markets for |
| Observable |
| Unobservable |
|
| ||||
| Identical Inputs |
| Inputs |
| Inputs |
|
|
| |||
Millions | (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
Plan assets at fair value: |
|
|
|
|
|
|
|
|
|
|
|
Temporary cash investments | $ | 27 |
| $ | - |
| $ | - |
| $ | 27 |
Registered investment companies [a] |
| 4 |
|
| - |
|
| - |
|
| 4 |
Federal government securities |
| - |
|
| 182 |
|
| - |
|
| 182 |
Bonds and debentures |
| - |
|
| 389 |
|
| - |
|
| 389 |
Corporate stock |
| 1,171 |
|
| 8 |
|
| - |
|
| 1,179 |
Total plan assets at fair value | $ | 1,202 |
| $ | 579 |
| $ | - |
| $ | 1,781 |
Plan assets at NAV: |
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies [b] |
|
|
|
|
|
|
|
|
|
| 329 |
Venture capital and buyout partnerships |
|
|
|
|
|
|
|
|
|
| 358 |
Real estate funds |
|
|
|
|
|
|
|
|
|
| 226 |
Collective trust and other funds |
|
|
|
|
|
|
|
|
|
| 1,552 |
Total plan assets at NAV |
|
|
|
|
|
|
|
|
| $ | 2,465 |
Other assets/(liabilities) [c] |
|
|
|
|
|
|
|
|
|
| (22) |
Total plan assets |
|
|
|
|
|
|
|
|
| $ | 4,224 |
[a] |
| Registered investment companies measured at fair value are stock investments. |
[b] |
| Registered investment companies measured at NAV include bond investments. |
[c] |
|
|
For the years ended December 31, 2018 and 2017, there were no significant transfers in or out
The Master Trust’smaster 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 2021 and 2017,2020, the Master Trustmaster trust had future commitments for additional contributions to private equity partnerships totaling $248$115 million and $359$147 million, respectively, and to real estate partnerships and funds totaling $54$7 million and $67$7 million, respectively.
Other Retirement Programs
401(k)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. OPEB expense is determined based upon the annual service cost of benefits and the interest cost on those liabilities, less the expected return on plan assets. Our OPEB liability was $165 million and $190 million at December 31, 2021 and 2020, respectively. OPEB net periodic benefit cost/(benefit) was ($3) million in 2021, ($1) million in 2020, and $10 million in 2019.
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)(401(k)/thrift plan). We match 50 cents50% 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,100% for each 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. Our plan contributions were $21 million in 2021, $19 million in 2020, and $20 million in 2019.
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$550 million in 2018, $6722021, $569 million in 2017,2020, and $671$654 million in 2016.2019.
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$30 million in 2018, $602021, $30 million in 2017,2020, and $50$42 million in 2016.
2019.
64
7.6. Other Income
Other income included the following for the years ended December 31:
Millions | 2021 | 2020 | 2019 | |||||||||
Rental income | $ | 136 | $ | 123 | $ | 124 | ||||||
Gain on non-operating asset dispositions [a] | 98 | 115 | 20 | |||||||||
Gain from sale of investment | 36 | 0 | 0 | |||||||||
Net periodic pension costs | 25 | 41 | 46 | |||||||||
Interest income | 5 | 12 | 32 | |||||||||
Interest income on employment tax refund | 0 | 0 | 31 | |||||||||
Other | (3 | ) | (4 | ) | (10 | ) | ||||||
Total | $ | 297 | $ | 287 | $ | 243 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions | 2018 | 2017 | 2016 | ||||
Rental income [a] | $ | 122 | $ | 178 | $ | 96 | |
Early extinguishment of debt [b] |
| (85) |
| - |
| - | |
Net gain on non-operating asset dispositions [c] [d] |
| 30 |
| 111 |
| 94 | |
Interest income |
| 30 |
| 16 |
| 11 | |
Net periodic pension and OPEB |
| 13 |
| (45) |
| 29 | |
Non-operating environmental costs and other |
| (16) |
| (15) |
| (9) | |
Total | $ | 94 | $ | 245 | $ | 221 |
[a] |
|
|
|
|
|
|
|
|
8.7. Income Taxes
Components of income tax expense were as follows for the years ended December 31:
Millions | 2021 | 2020 | 2019 | |||||||||
Current tax expense: | ||||||||||||
Federal | $ | 1,446 | $ | 1,026 | $ | 1,000 | ||||||
State | 347 | 259 | 254 | |||||||||
Foreign | 8 | 6 | 8 | |||||||||
Total current tax expense | 1,801 | 1,291 | 1,262 | |||||||||
Deferred and other tax expense/(benefit): | ||||||||||||
Federal | 199 | 295 | 417 | |||||||||
State [a] | (44 | ) | 45 | 128 | ||||||||
Foreign | (1 | ) | 0 | 21 | ||||||||
Total deferred and other tax expense | 154 | 340 | 566 | |||||||||
Total income tax expense | $ | 1,955 | $ | 1,631 | $ | 1,828 |
[a] | In 2021, Nebraska, Oklahoma, Idaho, Louisiana and Arkansas enacted corporate income tax legislation that resulted in a net $32 million reduction of our deferred tax expense. In 2019, Arkansas enacted legislation to reduce their corporate income tax rate for future years resulting in a $21 million reduction of our deferred tax expense. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions | 2018 | 2017 | 2016 | |||
Current tax expense: |
|
|
|
|
|
|
Federal | $ | 1,144 | $ | 1,750 | $ | 1,518 |
State |
| 287 |
| 235 |
| 176 |
Foreign |
| 5 |
| 2 |
| 8 |
Total current tax expense |
| 1,436 |
| 1,987 |
| 1,702 |
Deferred and other tax expense: |
|
|
|
|
|
|
Federal |
| 344 |
| (5,260) |
| 692 |
State |
| 5 |
| 183 |
| 139 |
Foreign |
| (10) |
| 10 |
| - |
Total deferred and other tax expense/(benefit) [a] |
| 339 |
| (5,067) |
| 831 |
Total income tax expense/(benefit) | $ | 1,775 | $ | (3,080) | $ | 2,533 |
|
|
For the years ended December 31, reconciliations between statutory and effective tax rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Rate Percentages | 2018 |
| 2017 |
| 2016 |
|
Federal statutory tax rate | 21.0 | % | 35.0 | % | 35.0 | % |
State statutory rates, net of federal benefits | 3.9 |
| 3.1 |
| 3.1 |
|
Adjustment for Tax Cuts and Jobs Act | - |
| (77.8) |
| - |
|
Excess tax benefits from equity compensation plans | (0.4) |
| (0.6) |
| (0.4) |
|
Other deferred tax adjustments | (0.6) |
| 0.4 |
| - |
|
Tax credits | (0.1) |
| 0.1 |
| (0.5) |
|
Other | (0.9) |
| (0.6) |
| 0.2 |
|
Effective tax rate | 22.9 | % | (40.4) | % | 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.
Tax Rate Percentages | 2021 | 2020 | 2019 | |||||||||
Federal statutory tax rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
State statutory rates, net of federal benefits | 3.7 | 3.7 | 3.7 | |||||||||
Deferred tax adjustments | (0.6 | ) | (0.1 | ) | (0.1 | ) | ||||||
Dividends received deduction | (0.5 | ) | (0.5 | ) | (0.6 | ) | ||||||
Excess tax benefits from equity compensation plans | (0.3 | ) | (0.8 | ) | (0.7 | ) | ||||||
Other | (0.2 | ) | 0.1 | 0.3 | ||||||||
Effective tax rate | 23.1 | % | 23.4 | % | 23.6 | % |
Deferred income tax assets/(liabilities)/assets were comprised of the following at December 31:31, 2021 and 2020:
|
|
|
|
| ||||||||
|
|
|
|
| ||||||||
Millions | 2018 | 2017 | 2021 | 2020 | ||||||||
Deferred income tax liabilities: |
|
|
|
| ||||||||
Property | $ | (11,590) | $ | (11,262) | $ | (12,657 | ) | $ | (12,474 | ) | ||
Operating lease assets | (441 | ) | (397 | ) | ||||||||
Other |
| (213) |
| (197) | (534 | ) | (444 | ) | ||||
Total deferred income tax liabilities |
| (11,803) |
| (11,459) | (13,632 | ) | (13,315 | ) | ||||
Deferred income tax assets: |
|
|
|
| ||||||||
Operating lease liabilities | 434 | 396 | ||||||||||
Accrued casualty costs | 157 | 143 | ||||||||||
Accrued wages |
| 46 |
| 46 | 45 | 40 | ||||||
Accrued casualty costs |
| 148 |
| 147 | ||||||||
Retiree benefits | 39 | 255 | ||||||||||
Stock compensation |
| 44 |
| 46 | 26 | 26 | ||||||
Retiree benefits |
| 138 |
| 141 | ||||||||
Credits |
| - |
| 1 | ||||||||
Other |
| 125 |
| 142 | 256 | 208 | ||||||
Total deferred income tax assets | $ | 501 | $ | 523 | 957 | 1,068 | ||||||
Net deferred income tax liability | $ | (11,302) | $ | (10,936) | $ | (12,675 | ) | $ | (12,247 | ) |
When appropriate, we record aIn 2021 and 2020, there were 0 valuation allowanceallowances 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.assets.
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 | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | ||||||||||||
Unrecognized tax benefits at January 1 | $ | 179 | $ | 125 | $ | 94 | $ | 74 | $ | 64 | $ | 174 | ||||||
Increases for positions taken in current year |
| 30 |
| 38 |
| 31 | ||||||||||||
Increases for positions taken in prior years |
| 9 |
| 51 |
| 10 | ||||||||||||
Decreases for positions taken in prior years |
| (30) |
| (56) |
| (20) | (24 | ) | (19 | ) | (96 | ) | ||||||
Refunds from/(payments to) and settlements with taxing authorities |
| 21 |
| 64 |
| 4 | (12 | ) | 0 | (11 | ) | |||||||
Increases for positions taken in current year | 3 | 18 | 20 | |||||||||||||||
Increases/(decreases) for interest and penalties |
| 4 |
| - |
| 6 | (3 | ) | 5 | (5 | ) | |||||||
Increases for positions taken in prior years | 1 | 7 | 44 | |||||||||||||||
Lapse of statutes of limitations |
| (39) |
| (43) |
| - | (1 | ) | (1 | ) | (62 | ) | ||||||
Unrecognized tax benefits at December 31 | $ | 174 | $ | 179 | $ | 125 | $ | 38 | $ | 74 | $ | 64 |
We recognize interest and penalties as part of income tax expense. Total accrued liabilitiesliabilities/(receivables) for interest and penalties were ($1) million and $8 million at both December 31, 2018, 2021 and 2017.2020, respectively. Total interest and penalties recognized as part of income tax expense expense/(benefit) were ($1)5) million for 2018, ($3) million for 2017, and2021, $5 million for 2016.
The IRS is examining UPC’s 2016 tax return. The statute of limitations has run2020, and ($4) million 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.2019.
Several state tax authorities are examining our state income tax returns for years 20152017 through 2016.2019.
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: $31 million for 2021, $52 million for 2020, and $39 million for 2019.
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Millions | 2018 | 2017 | 2016 | |||
Unrecognized tax benefits that would reduce the effective tax rate | $ | 63 | $ | 83 | $ | 31 |
Unrecognized tax benefits that would not reduce the effective tax rate |
| 111 |
| 96 |
| 94 |
Total unrecognized tax benefits | $ | 174 | $ | 179 | $ | 125 |
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9.8. Earnings Per Share
The following table provides a reconciliation between basic and diluted earnings per share for the years ended December 31:31, 2021, 2020 and 2019:
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Millions, Except Per Share Amounts | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | ||||||||||||
Net income | $ | 5,966 | $ | 10,712 | $ | 4,233 | $ | 6,523 | $ | 5,349 | $ | 5,919 | ||||||
Weighted-average number of shares outstanding: |
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Basic |
| 750.9 |
| 798.4 |
| 832.4 | 653.8 | 677.3 | 703.5 | |||||||||
Dilutive effect of stock options |
| 1.9 |
| 1.8 |
| 1.5 | 0.8 | 0.8 | 1.2 | |||||||||
Dilutive effect of retention shares and units |
| 1.5 |
| 1.5 |
| 1.5 | 0.8 | 1.0 | 1.4 | |||||||||
Diluted |
| 754.3 |
| 801.7 |
| 835.4 | 655.4 | 679.1 | 706.1 | |||||||||
Earnings per share – basic | $ | 7.95 | $ | 13.42 | $ | 5.09 | $ | 9.98 | $ | 7.90 | $ | 8.41 | ||||||
Earnings per share – diluted | $ | 7.91 | $ | 13.36 | $ | 5.07 | $ | 9.95 | $ | 7.88 | $ | 8.38 |
Common stock options totaling 0.2 million, 0.3 million, 1.6 million, and 2.00.5 million for 2018, 2017,2021, 2020, and 2016,2019, respectively, were excluded from the computation of diluted earnings per share because the exercise prices of these stock options exceeded the average market price of our common stock for the respective periods, and the effect of their inclusion would be anti-dilutive.
10.9. Accumulated Other Comprehensive Income/(Loss)Loss
Reclassifications out of accumulated other comprehensive income/(loss)loss were as follows (net of tax):
Millions | Defined benefit plans | Foreign currency translation | Total | |||||||||
Balance at January 1, 2021 | $ | (1,381 | ) | $ | (212 | ) | $ | (1,593 | ) | |||
Other comprehensive income/(loss) before reclassifications | 0 | (44 | ) | (44 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income/(loss) [a] | 723 | 0 | 723 | |||||||||
Net year-to-date other comprehensive income/(loss), net of taxes of ($237) million | 723 | (44 | ) | 679 | ||||||||
Balance at December 31, 2021 | $ | (658 | ) | $ | (256 | ) | $ | (914 | ) | |||
Balance at January 1, 2020 | $ | (1,150 | ) | $ | (206 | ) | $ | (1,356 | ) | |||
Other comprehensive income/(loss) before reclassifications | 2 | (6 | ) | (4 | ) | |||||||
Amounts reclassified from accumulated other comprehensive income/(loss) [a] | (233 | ) | 0 | (233 | ) | |||||||
Net year-to-date other comprehensive income/(loss), net of taxes of $75 million | (231 | ) | (6 | ) | (237 | ) | ||||||
Balance at December 31, 2020 | $ | (1,381 | ) | $ | (212 | ) | $ | (1,593 | ) |
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Millions | Defined | Foreign currency translation | Total | ||||
Balance at January 1, 2018 | $ | (1,029) | $ | (112) | $ | (1,141) | |
Other comprehensive income/(loss) before reclassifications |
| (1) |
| (36) |
| (37) | |
Amounts reclassified from accumulated other comprehensive income/(loss) [a] |
| 63 |
| - |
| 63 | |
Net year-to-date other comprehensive income/(loss), |
| 62 |
| (36) |
| 26 | |
Reclassification due to ASU 2018-02 adoption (Note 3) |
| (225) |
| (75) |
| (300) | |
Balance at December 31, 2018 | $ | (1,192) | $ | (223) | $ | (1,415) | |
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Balance at January 1, 2017 | $ | (1,132) | $ | (140) | $ | (1,272) | |
Other comprehensive income/(loss) before reclassifications |
| 2 |
| 28 |
| 30 | |
Amounts reclassified from accumulated other comprehensive income/(loss) [a] |
| 101 |
| - |
| 101 | |
Net year-to-date other comprehensive income/(loss), |
| 103 |
| 28 |
| 131 | |
Balance at December 31, 2017 | $ | (1,029) | $ | (112) | $ | (1,141) |
[a] |
| The accumulated other comprehensive income/ |
11.10. 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, 2021 and 2017,2020, our accounts receivable were reduced by $3 million.$10 million and $17 million, respectively. Receivables not expected to be collected in one year and the associated allowances are classified as other
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assets in our Consolidated Statements of Financial Position. At December 31, 2018, and 2017, receivablesReceivables classified as other assets were reduced by allowances of $27$51 million at both December 31, 2021 and $17 million, respectively.2020.
Receivables Securitization Facility – The Railroad maintains a $650an $800 million, 3-year3-year receivables securitization facility (the Receivables Facility), maturing in July 2019. 2022. Under the Receivables Facility, the Railroad sells most of its eligible third-partythird-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 outstandingrecorded under the Receivables Facility was $400$300 million and $500 million$0 at December 31, 2018, 2021 and December 31, 2017,2020, respectively. The Receivables Facility was supported by $1.4$1.3 billion and $1.1$1.2 billion of accounts receivable as collateral at December 31, 2018, 2021 and December 31, 2017,2020, 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 maintainmaintains under the Receivables Facility with a maximum of $650 million, may fluctuate based on current cash needs. The maximum allowed under the facility is $800 million with availability ofdirectly impacted by 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$4 million, $6$7 million, and $7$14 million for 2018, 2017,2021, 2020, and 2016,2019, respectively.
12.11. 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 | Accumulated | Net Book | Estimated | |||||||||||||
As of December 31, 2021 | Cost | Depreciation | Value | Useful Life | ||||||||||||
Land | $ | 5,339 | $ | N/A | $ | 5,339 | N/A | |||||||||
Road: | ||||||||||||||||
Rail and other track material | 17,980 | 6,844 | 11,136 | 44 | ||||||||||||
Ties | 11,364 | 3,516 | 7,848 | 34 | ||||||||||||
Ballast | 6,070 | 1,852 | 4,218 | 34 | ||||||||||||
Other roadway [a] | 21,593 | 4,657 | 16,936 | 47 | ||||||||||||
Total road | 57,007 | 16,869 | 40,138 | N/A | ||||||||||||
Equipment: | ||||||||||||||||
Locomotives | 9,371 | 3,779 | 5,592 | 17 | ||||||||||||
Freight cars | 2,227 | 822 | 1,405 | 24 | ||||||||||||
Work equipment and other | 1,161 | 411 | 750 | 18 | ||||||||||||
Total equipment | 12,759 | 5,012 | 7,747 | N/A | ||||||||||||
Technology and other | 1,209 | 523 | 686 | 12 | ||||||||||||
Construction in progress | 961 | 0 | 961 | N/A | ||||||||||||
Total | $ | 77,275 | $ | 22,404 | $ | 54,871 | N/A |
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Millions, Except Estimated Useful Life | Millions, Except Estimated Useful Life |
| Accumulated | Net Book | Estimated | Accumulated | Net Book | Estimated | ||||||||||||||||
As of December 31, 2018 | Cost | Depreciation | Value | Useful Life | ||||||||||||||||||||
As of December 31, 2020 | Cost | Depreciation | Value | Useful Life | ||||||||||||||||||||
Land | Land | $ | 5,264 | $ | N/A | $ | 5,264 | N/A | $ | 5,246 | $ | N/A | $ | 5,246 | N/A | |||||||||
Road: | Road: |
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Rail and other track material | Rail and other track material |
| 16,785 |
| 6,156 |
| 10,629 | 43 | 17,620 | 6,631 | 10,989 | 42 | ||||||||||||
Ties | Ties |
| 10,409 |
| 3,025 |
| 7,384 | 34 | 11,051 | 3,331 | 7,720 | 34 | ||||||||||||
Ballast | Ballast |
| 5,561 |
| 1,595 |
| 3,966 | 34 | 5,926 | 1,753 | 4,173 | 34 | ||||||||||||
Other roadway [a] | Other roadway [a] |
| 19,584 |
| 3,766 |
| 15,818 | 48 | 21,030 | 4,329 | 16,701 | 48 | ||||||||||||
Total road | Total road |
| 52,339 |
| 14,542 |
| 37,797 | N/A | 55,627 | 16,044 | 39,583 | N/A | ||||||||||||
Equipment: | Equipment: |
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Locomotives | Locomotives |
| 9,792 |
| 3,861 |
| 5,931 | 19 | 9,375 | 3,555 | 5,820 | 17 | ||||||||||||
Freight cars | Freight cars |
| 2,229 |
| 929 |
| 1,300 | 24 | 2,118 | 789 | 1,329 | 25 | ||||||||||||
Work equipment and other | Work equipment and other |
| 1,040 |
| 301 |
| 739 | 19 | 1,107 | 351 | 756 | 18 | ||||||||||||
Total equipment | Total equipment |
| 13,061 |
| 5,091 |
| 7,970 | N/A | 12,600 | 4,695 | 7,905 | N/A | ||||||||||||
Technology and other | Technology and other |
| 1,117 |
| 493 |
| 624 | 12 | 1,199 | 520 | 679 | 13 | ||||||||||||
Construction in progress | Construction in progress |
| 1,024 |
| - |
| 1,024 | N/A | 748 | 0 | 748 | N/A | ||||||||||||
Total | Total | $ | 72,805 | $ | 20,126 | $ | 52,679 | N/A | $ | 75,420 | $ | 21,259 | $ | 54,161 | N/A |
[a] |
| Other roadway includes grading, bridges and tunnels, signals, buildings, and other road assets. |
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Millions, Except Estimated Useful Life |
| Accumulated | Net Book | Estimated | ||||
As of December 31, 2017 | Cost | Depreciation | Value | Useful Life | ||||
Land | $ | 5,258 | $ | N/A | $ | 5,258 | N/A | |
Road: |
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Rail and other track material |
| 16,327 |
| 5,929 |
| 10,398 | 43 | |
Ties |
| 10,132 |
| 2,881 |
| 7,251 | 33 | |
Ballast |
| 5,406 |
| 1,509 |
| 3,897 | 34 | |
Other roadway [a] |
| 18,972 |
| 3,482 |
| 15,490 | 47 | |
Total road |
| 50,837 |
| 13,801 |
| 37,036 | N/A | |
Equipment: |
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Locomotives |
| 9,686 |
| 3,697 |
| 5,989 | 19 | |
Freight cars |
| 2,255 |
| 983 |
| 1,272 | 24 | |
Work equipment and other |
| 936 |
| 267 |
| 669 | 19 | |
Total equipment |
| 12,877 |
| 4,947 |
| 7,930 | N/A | |
Technology and other |
| 1,105 |
| 460 |
| 645 | 11 | |
Construction in progress |
| 736 |
| - |
| 736 | N/A | |
Total | $ | 70,813 | $ | 19,208 | $ | 51,605 | N/A |
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Property and Depreciation – Our railroad operations are highly capital intensive,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 three3 years for equipment and every six6 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 |
| ● | Evaluation of any expected changes in current operations and the outlook for continued use of the |
| ● | Evaluation of technological advances and changes to maintenance |
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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.
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Under the group method of 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.
We review construction in progress assets that have not yet been placed into service, for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset or assets may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of construction in progress assets when grouped with other assets and liabilities at the lowest level where identifiable cash flows are largely independent, the carrying value is reduced to the estimated fair value.
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 costsCosts incurred that extend the useful life of an asset, improve the safety of our operations, or improve operating efficiency are capitalized.capitalized, while normal repairs and maintenance are expensed as incurred. These costs are allocated using appropriate statistical bases. Total expense for repairs and maintenance incurred was $2.5$2.1 billion for 2018, $2.52021, $2.0 billion for 2017,2020, and $2.3 billion for 2016.2019.
Assets held under capitalfinance 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.Brazos Yard Impairment – In the fourth quarter of 2020, we made the strategic decision that our Brazos yard investments made to date will be used for freight car block swapping activities, rather than proceeding with additional investments required to complete the freight car classification yard. As a result, we recorded a non-cash impairment charge of $278 million, recognized in other expense in our Consolidated Statements of Income. The Brazos yard investment was recorded as construction in progress as it had not yet been placed into service. We estimated the fair value of the remaining Brazos investments not used for freight car block swapping activities based on market values of similar assets, which are Level 2 inputs.
12. Accounts Payable and Other Current Liabilities
Dec. 31, | Dec. 31, | |||||||
Millions | 2021 | 2020 | ||||||
Income and other taxes payable | $ | 823 | $ | 635 | ||||
Accounts payable | 752 | 612 | ||||||
Accrued wages and vacation | 352 | 340 | ||||||
Interest payable | 330 | 326 | ||||||
Current operating lease liabilities (Note 16) | 330 | 321 | ||||||
Accrued casualty costs | 187 | 177 | ||||||
Equipment rents payable | 98 | 101 | ||||||
Other | 706 | 592 | ||||||
Total accounts payable and other current liabilities | $ | 3,578 | $ | 3,104 |
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| Dec. 31, | Dec. 31, | ||
Millions | 2018 | 2017 | ||
Accounts payable | $ | 872 | $ | 1,013 |
Income and other taxes payable |
| 694 |
| 547 |
Accrued wages and vacation |
| 384 |
| 384 |
Interest payable |
| 317 |
| 220 |
Accrued casualty costs |
| 211 |
| 194 |
Equipment rents payable |
| 107 |
| 110 |
Other |
| 575 |
| 671 |
Total accounts payable and other current liabilities | $ | 3,160 | $ | 3,139 |
14.13. 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 Level 2 investments and are valued at amortized cost, which approximates fair value. On November 1, 2018, $30As of December 31, 2021, the Company had $46 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.investments. 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.
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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, 2018,2021, the fair value of total debt was $21.9$32.9 billion, approximately $0.5$3.2 billion lessmore than the carrying value. At December 31, 2017,2020, the fair value of total debt was $18.2$31.9 billion, approximately $1.3$5.1 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.
15.14. Debt
Total debt as of December 31, 2018, 2021 and 2017,2020 is summarized below:
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Millions | 2018 | 2017 | |||
Notes and debentures, 1.8% to 7.9% due through 2067 | $ | 20,627 | $ | 15,096 | |
Equipment obligations, 2.6% to 6.7% due through 2031 |
| 969 |
| 1,018 | |
Capitalized leases, 3.1% to 8.0% due through 2028 |
| 754 |
| 892 | |
Receivables Securitization (Note 11) |
| 400 |
| 500 | |
Term loans - floating rate, due in 2019 |
| 250 |
| 250 | |
Commercial paper, 2.6% to 2.8% due in 2019 |
| 200 |
| - | |
Medium-term notes, 9.3% to 10.0% due through 2020 |
| 8 |
| 18 | |
Mortgage bonds, redeemed March 15, 2018 |
| - |
| 57 | |
Unamortized discount and deferred issuance costs |
| (817) |
| (887) | |
Total debt |
| 22,391 |
| 16,944 | |
Less: current portion |
| (1,466) |
| (800) | |
Total long-term debt | $ | 20,925 | $ | 16,144 |
Millions | 2021 | 2020 | ||||||
Notes and debentures, 2.2% to 7.1% due through April 6, 2071 | $ | 29,508 | $ | 26,608 | ||||
Equipment obligations, 2.6% to 6.2% due through January 2, 2031 | 848 | 885 | ||||||
Commercial paper, 0.2% to 0.3% due through January 26, 2022 | 400 | 75 | ||||||
Finance leases, 3.1% to 8.0% due through December 10, 2028 | 336 | 449 | ||||||
Receivables Facility (Note 10) | 300 | 0 | ||||||
Term loans - floating rate, due August 31, 2022 | 100 | 250 | ||||||
Unamortized discount and deferred issuance costs | (1,763 | ) | (1,538 | ) | ||||
Total debt | 29,729 | 26,729 | ||||||
Less: current portion | (2,166 | ) | (1,069 | ) | ||||
Total long-term debt | $ | 27,563 | $ | 25,660 |
Debt Maturities – The following table presents aggregate debt maturities as of December 31, 2018,2021, excluding market value adjustments:
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Millions |
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2019 | $ | 1,467 | ||||
2020 |
| 981 | ||||
2021 |
| 1,267 | ||||
2022 |
| 913 | $ | 2,180 | ||
2023 |
| 1,396 | 1,385 | |||
2024 | 1,439 | |||||
2025 | 1,429 | |||||
2026 | 1,016 | |||||
Thereafter |
| 17,184 | 24,043 | |||
Total principal |
| 23,208 | 31,492 | |||
Unamortized discount and deferred issuance costs |
| (817) | (1,763 | ) | ||
Total debt | $ | 22,391 | $ | 29,729 |
Equipment Encumbrances – Equipment with a carrying value of approximately $1.8$1.2 billion and $2.0$1.3 billion at December 31, 2018, 2021 and 2017,2020, respectively, served as collateral for capitalfinance leases and other types of equipment obligations in accordance with the secured financing arrangements utilized to acquire or refinance such railroad equipment.
Debt Redemption Redemptions – Effective as of March 15, 2018, On November 1, 2020, we redeemed in entirety,all $500 million of outstanding 4.0% notes due February 1, 2021, at a redemption price equal to 100% of the Missouri Pacific 5% Income Debentures due 2045,principal amount of the Chicagonotes plus accrued 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 principalunpaid interest.
Debt Exchange - On April 6, 2021, we exchanged approximately $1.7 billion of various outstanding of $96 million and $2 million, respectively, and the bonds had principal outstanding of $30 million and $27 million, respectively. The bondsnotes and debentures were assumed bydue between 2028 and 2065 (Existing Notes) for $701 million of 2.891% notes due April 6, 2036 (New 2036 Notes) and $1.0 billion of 3.799% notes due April 6, 2071 (New 2071 Notes), plus cash consideration of approximately $257 million in addition to $14 million for accrued and unpaid interest on the Railroad inExisting Notes. In accordance with ASC 470-50-40,Debt-Modifications and Extinguishments-Derecognition, this transaction was accounted for as a debt exchange, as the 1982 acquisition ofexchanged debt instruments are not considered to be substantially different. The cash consideration was recorded as an adjustment to the Missouri Pacific Railroad Company, with a weighted average interest rate of 4.9%. The carrying value of all four bondsdebt, and debentures at the timebalance of redemptionthe unamortized discount and issue costs from the Existing Notes is being amortized as an adjustment of interest expense over the terms of the new notes. NaN gain or loss was $70 million,
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due to fair value purchase accounting adjustmentsrecognized as a result of the exchange. Costs related to the acquisition. The redemption resulteddebt exchange that were payable to parties other than the debt holders totaled approximately $13 million and were included in an early extinguishment chargeinterest expense during 2021.
On September 16, 2020, we exchanged $1,047 million of various outstanding notes and debentures due between May 1, 2037, and March 1, 2049 (the Existing Notes), for $1,047 million of 2.973% notes (the New Notes) due September 16, 2062, plus cash consideration of approximately $319 million in addition to $4 million for accrued and unpaid interest on the firstExisting Notes. In accordance with ASC 470-50-40,Debt-Modifications and Extinguishments-Derecognition, this transaction was accounted for as a debt exchange, as the exchanged debt instruments are not considered to be substantially different. The cash consideration was recorded as an adjustment to the carrying value of debt, and the balance of the unamortized discount and issue costs from the Existing Notes is being amortized as an adjustment of interest expense over the terms of the New Notes. NaN gain or loss was recognized as a result of the exchange. Costs related to the debt exchange that were payable to parties other than the debt holders totaled approximately $9 million and were included in interest expense during the quarter of 2018.ended September 30, 2020.
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, 2018,2021, 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 eitherCredit facility at any time during 2018.withdrawals totaled $0 during 2021. 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,LIBOR, plus a spread, depending upon credit ratings for our senior unsecured debt. The prior5-year facility, required UPCset to maintain a debt-to-net-worth coverage ratio. The new five-year facility expire on June 8, 2023, 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, capitalfinance leases, guarantees, unfunded and vested pension benefits under Title IV of ERISA, and unamortized debt discount and deferred debt issuance costs. At December 31, 2018,2021, the Company was in compliance with the debt-to-EBITDA coverage ratio, which allows us to carry up to $37.9$41.2 billion of debt (as defined in the Facility), and we had $23.2$31.5 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 2018,2021, we issued $8.5$2.1 billion and repaid $8.3$1.8 billion of commercial paper with maturities ranging from 17 to 34 days, and at 86 days. As of December 31, 2018, 2021 and 2017,2020, we had $200$400 million and $0$75 million of 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, 2020, we entered into a short-termthree bilateral linerevolving credit lines, totaling $600 million of available credit. Since entering into the three bilateral revolving credit agreement with $1.0 billion of credit available. During the three months ended June 30, 2018,lines, we drew $300 million and repaid $750$300 million. The line ofAll three bilateral revolving credit lines matured in August 2018. We used the proceeds for general corporate purposes, including the repurchase of common stock pursuant to our share repurchase programs.by May 18, 2021.
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). 10, 2021. The Board of Directors authorized the issuance of up to $6 billion of debt securities, replacing the prior Board authorization in July 2016, November 2019, which had $1.55$2.25 billion of authority remaining. Under our Shelfshelf 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 2018,2021, we issued the following unsecured, fixed-rate debt securities under our current shelf registration:
Date | Description of Securities |
May 20, 2021 | $850 million of 2.375% Notes due May 20, 2031 |
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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. At December 31, 2021, we had remaining authority to issue up to $2.5 billion of debt securities under our shelf registration.
On July 26, 2018, February 3, 2022, the Board of Directors renewed its authorization for the Company to issue up to $6.0$12.0 billion of debt securities under the Shelf. This authorizationreauthorization replaces the original Board authorization in
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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.2021.
Receivables Securitization Facility – As ofDecember 31, 2018, 2021 and 2017,2020, we recorded $400$300 million and $500 million,$0, respectively, of borrowings under our Receivables Facility, as secured debt. (See further discussion of our receivables securitization facility in Note 11).10.)
16.LIBOR Transition – Each of our $2.0 billion revolving credit facility, term loan, and Receivables Facility currently use LIBOR as the benchmark for the floating interest rates. Authorities that regulate LIBOR have announced plans to phase out LIBOR so that it will, at some point, cease to exist as a benchmark for floating interest rates. To address the phase out of LIBOR, the agreements for substantially all of these facilities include a mechanism to replace LIBOR with an alternative rate or benchmark under specified circumstances through an amendment to the agreements. As part of this process, we will need to renegotiate our agreements to reference that alternative rate or benchmark, and may need to modify our existing benchmark replacement language, or obtain replacement facilities.
15. Variable Interest Entities
We have entered into various lease transactions in which the structure of the leases contain variable interest entities (VIEs). These VIEs were created solely for the purpose of doing lease transactions (principally involving railroad equipment and facilities) and have no other activities, assets, or liabilities outside of the lease transactions. Within these lease arrangements, we have the right to purchase some or all of the assets at fixed prices. Depending on market conditions, fixed-price purchase options available in the leases could potentially provide benefits to us; however, these benefits are not expected to be significant.
We maintain and operate the assets based on contractual obligations within the lease arrangements, which set specific guidelines consistent within the railroad industry. As such, we have no control over activities that could materially impact the fair value of the leased assets. We do not hold the power to direct the activities of the VIEs and, therefore, do not control the ongoing activities that have a significant impact on the economic performance of the VIEs. Additionally, we do not have the obligation to absorb losses of the VIEs or the right to receive benefits of the VIEs that could potentially be significant to the VIEs.
We are not considered to be the primary beneficiary and do not consolidate these VIEs because our actions and decisions do not have the most significant effect on the VIE’s performance and our fixed-price purchase options are not considered to be potentially significant to the VIEs. The future minimum lease payments associated with the VIE leases totaled $1.7$1.1 billion as of December 31, 2018.2021, and are recorded as operating lease liabilities at present value in our Consolidated Statements of Financial Position.
17.16. 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,property for properties held under capital leases. A charge to income resulting from the depreciation for assets held under capital leases is included within depreciation expenseuse in our Consolidated Statements of Income. Future minimumrail operations.
The following are additional details related to our lease payments for operating and capital leases with initial or remaining non-cancelableportfolio:
Dec. 31, | Dec. 31, | ||||||||
Millions | Classification | 2021 | 2020 | ||||||
Assets | |||||||||
Operating leases | Operating lease assets | $ | 1,787 | $ | 1,610 | ||||
Finance leases | Properties, net [a] | 366 | 370 | ||||||
Total leased assets | $ | 2,153 | $ | 1,980 | |||||
Liabilities | |||||||||
Current | |||||||||
Operating | Accounts payable and other current liabilities | $ | 330 | $ | 321 | ||||
Finance | Debt due within one year | 92 | 109 | ||||||
Noncurrent | |||||||||
Operating | Operating lease liabilities | 1,429 | 1,283 | ||||||
Finance | Debt due after one year | 244 | 340 | ||||||
Total lease liabilities | $ | 2,095 | $ | 2,053 |
[a] | Finance lease assets are recorded net of accumulated amortization of $687million and $737 million as of December 31, 2021 and 2020, respectively. |
The lease terms in excess of one year as of December 31, 2018, werecost components are classified as follows:
Millions | Dec 31, 2021 | Dec 31, 2020 | ||||||
Operating lease cost [a] | $ | 303 | $ | 317 | ||||
Short-term lease cost | 25 | 26 | ||||||
Variable lease cost | 11 | 10 | ||||||
Finance lease cost | ||||||||
Amortization of leased assets [b] | 69 | 66 | ||||||
Interest on lease liabilities [c] | 20 | 27 | ||||||
Net lease cost | $ | 428 | $ | 446 |
[a] | Operating lease cost is primarily reported in equipment and other rents in our Consolidated Statements of Income. |
[b] | Amortization of leased assets is reported in depreciation in our Consolidated Statements of Income. |
[c] | Interest on lease liabilities is reported in interest expense in our Consolidated Statements of Income. |
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Millions | Operating | Capital | ||
2019 | $ | 419 | $ | 148 |
2020 |
| 378 |
| 155 |
2021 |
| 303 |
| 159 |
2022 |
| 272 |
| 142 |
2023 |
| 234 |
| 94 |
Later years |
| 1,040 |
| 200 |
Total minimum lease payments | $ | 2,646 | $ | 898 |
Amount representing interest |
| N/A |
| (144) |
Present value of minimum lease payments |
| N/A | $ | 754 |
The following table presents aggregate lease maturities as of December 31, 2021:
Millions | Operating Leases | Finance Leases | Total | |||||||||
2022 | $ | 333 | $ | 107 | $ | 440 | ||||||
2023 | 293 | 81 | 374 | |||||||||
2024 | 285 | 68 | 353 | |||||||||
2025 | 285 | 45 | 330 | |||||||||
2026 | 215 | 36 | 251 | |||||||||
After 2026 | 555 | 41 | 596 | |||||||||
Total lease payments | $ | 1,966 | $ | 378 | $ | 2,344 | ||||||
Less: Interest | 207 | 42 | 249 | |||||||||
Present value of lease liabilities | $ | 1,759 | $ | 336 | $ | 2,095 |
Approximately 97% of capitalThe following table presents the weighted average remaining lease payments relateterm and discount rate:
Dec. 31, | ||||
2021 | ||||
Weighted-average remaining lease term (years) | ||||
Operating leases | 7.3 | |||
Finance leases | 4.8 | |||
Weighted-average discount rate (%) | ||||
Operating leases | 3.2 | |||
Finance leases | 4.9 |
The following table presents other information related to locomotives. Rent expenseour operating and finance leases for operating leases with terms exceeding one month was $397 million in 2018, $480 million in 2017,the years ended December 31:
Millions | 2021 | 2020 | ||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||
Operating cash flows from operating leases | $ | 292 | $ | 323 | ||||
Investing cash flows from operating leases | 27 | 30 | ||||||
Operating cash flows from finance leases | 26 | 29 | ||||||
Financing cash flows from finance leases | 106 | 113 | ||||||
Leased assets obtained in exchange for finance lease liabilities | 0 | 0 | ||||||
Leased assets obtained in exchange for operating lease liabilities | 442 | 93 |
17. Commitments 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.Contingencies
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
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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, 2018.2021. 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$325 million to $297$358 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:
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Millions | 2018 | 2017 | 2016 | 2021 | 2020 | 2019 | ||||||||||||
Beginning balance | $ | 285 | $ | 290 | $ | 318 | $ | 270 | $ | 265 | $ | 271 | ||||||
Current year accruals |
| 74 |
| 77 |
| 75 | 93 | 72 | 78 | |||||||||
Changes in estimates for prior years |
| (16) |
| (7) |
| (29) | 48 | (3 | ) | (11 | ) | |||||||
Payments |
| (72) |
| (75) |
| (74) | (86 | ) | (64 | ) | (73 | ) | ||||||
Ending balance at December 31 | $ | 271 | $ | 285 | $ | 290 | $ | 325 | $ | 270 | $ | 265 | ||||||
Current portion, ending balance at December 31 | $ | 72 | $ | 66 | $ | 62 | $ | 64 | $ | 60 | $ | 63 |
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 334376 sites at whichwhere we are or may be liable for remediation costs associated with alleged contamination or for violations of environmental requirements. This includes 3328 sites that are the subject of actions taken by the U.S. government, 2118 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:
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Millions | 2018 | 2017 | 2016 | |||
Beginning balance | $ | 196 | $ | 212 | $ | 190 |
Accruals |
| 84 |
| 45 |
| 84 |
Payments |
| (57) |
| (61) |
| (62) |
Ending balance at December 31 | $ | 223 | $ | 196 | $ | 212 |
Current portion, ending balance at December 31 | $ | 59 | $ | 57 | $ | 55 |
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Millions | 2021 | 2020 | 2019 | |||||||||
Beginning balance | $ | 233 | $ | 227 | $ | 223 | ||||||
Accruals | 69 | 76 | 67 | |||||||||
Payments | (59 | ) | (70 | ) | (63 | ) | ||||||
Ending balance at December 31 | $ | 243 | $ | 233 | $ | 227 | ||||||
Current portion, ending balance at December 31 | $ | 60 | $ | 65 | $ | 62 |
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.-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 whichthat 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 participateparticipates 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.
GuaranteesIndemnities – 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 obligatedOur maximum potential exposure under a variety of indemnification arrangements, although in some cases the extent of our potential liability is limited,including certain tax indemnifications, can range from a specified dollar amount to an unlimited amount, depending on the nature of the transactions and the agreements. Due to uncertainty as to whether claims will be made or how they will be resolved, we cannot reasonably determine the probability of an adverse claim or reasonably estimate any adverse liability or the total maximum exposure under these indemnification arrangements. We do not have any reason to believe that we will be required to make any material payments under these indemnity provisions.
Effective Number of Shares Purchased Average Price Paid [a] 2021 2020 2021 2020 First quarter [b] Second quarter [c] Third quarter [d] Fourth quarter Total Remaining number of shares that may be repurchased under current authority Number of Shares Purchased Average Price Paid First quarter $ $ Second quarter [a] Third quarter Fourth quarter [b] Total $ $ Remaining number of shares that may be repurchased under current authority [a] [b] Includes 8,786,380 shares repurchased in February 2020 under accelerated share repurchase programs. [c] Includes 7,209,156 shares repurchased in May 2021 under accelerated share repurchase programs. [ Includes 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, On February Accelerated Share Repurchase Programs – On May 26, 2021, the Company received 7,209,156 shares of its common stock repurchased under ASRs for an aggregate of $2.0 billion. Upon settlement of these ASRs in the third quarter of 2021, we received 1,983,859 additional shares. On February 19, 2020, the Company received 8,786,380 shares of its common stock repurchased under ASRs for an aggregate of $2.0 billion. Upon settlement of these ASRs in the third quarter of 2020, we received 4,045,575 additional shares. 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. 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 323Investments - Equity Method and Joint Venture, UPRR applies the equity method of accounting to our investment in TTX. TTX is a UPRR had Millions, Except Per Share Amounts 2018 Mar. 31 Jun. 30 Sep. 30 Dec. 31 Operating revenues $ $ $ $ Operating income Net income Net income per share: Basic Diluted Millions, Except Per Share Amounts 2017 Mar. 31 Jun. 30 Sep. 30 Dec. 31 Operating revenues $ $ $ $ Operating income Net income Net income per share: Basic Diluted Gain Contingency – UPRR filed multiple claims with the IRS for refundsThese 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 final76judgment from the District Court has been issued and all IRS requirements for UPRR’s refunds have been fulfilled.19.18. Share Repurchase ProgramsJanuaryApril 1, 2017, 2019, our Board of Directors authorized the repurchase of up to 120150 million shares of our common stock by DecemberMarch 31, 2020, 2022, replacing our previous repurchase program. 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. As of December 31, 2018,2021, we repurchased a total of $31.4$48.2 billion of our common stock since the commencement of our repurchase programs in 2007. The table below represents shares repurchased under this repurchase program.programs during 2021 and 2020: 6,691,421 14,305,793 $ 209.50 $ 178.66 12,204,409 0 222.46 0 8,604,239 4,045,575 210.31 98.87 5,837,551 3,780,743 233.71 198.07 33,337,620 22,132,111 $ 218.69 $ 167.39 77,685,350 2018 2017 2018 2017 9,259,004 7,531,300 132.84 106.55 33,229,992 7,788,283 142.74 109.10 2,239,405 11,801,755 151.94 106.69 12,490,632 9,231,510 153.04 119.37 57,219,033 36,352,848 143.75 110.40 26,428,119 [a]IncludesIn the period of the final settlement, the average price paid under the accelerated share repurchase programs is calculated based on the total program value less the value assigned to the initial delivery of 19,870,292shares. The average price of the completed 2021 and 2020 accelerated share repurchase programs was $217.56 and $155.86, respectively.b]d]4,457,356an incremental 1,983,859 and 4,045,575 shares received upon final settlement ofin September 2021 and July 2020, respectively, under accelerated share repurchase programs.2019, 2022, through February 7, 2019, 3, 2022, we repurchased 3.42.4 million shares at an aggregate cost of approximately $521$590 million.7, 2019, 3, 2022, the Board of Directors approved a new share repurchase authorization, enabling the Company to buy up to 150100 million of its common shares by March 31, 2022. 2025. The new authorization is effective April 1, 2019, 2022, and replaces the current authorization, which will now expire on March 31, 2019.2022.On June 14, 2018, theThe Company has established accelerated share repurchase programs (ASRs) with two financial institutions to repurchase shares of our common stock. Under theseThese ASRs have been structured so that at the time of commencement, we paidpay a pre-specifiedspecified amount of $3.6 billionto the financial institutions and receivedreceive an initial delivery of 19,870,292shares. Additional shares on June 15, 2018. Upon settlementmay be received at the time of the ASRs, we received 4,457,356 additional shares in the fourth quarter of 2018.settlement. The final number of shares repurchased under the ASRs wasto be received is based on the volume weighted average stock price of the Company’s common stock during the ASR term, less a negotiated discount. discount and subject to potential adjustments pursuant to the terms of such ASR.20.19. Related Partiesrailcarrail car pooling company that owns railcarsrail cars and intermodal wells to serve North America’s railroads. TTX assists railroads in meeting the needs of their customers by providing railcarsrail cars in an efficient, pooled environment. All railroads have the ability to utilize TTX railcarsrail cars through car hire by renting railcarsrail cars at stated rates.77$1.3$1.6 billion and $1.2$1.5 billion recognized as investments related to TTX in our Consolidated Statements of Financial Position as of December 31, 2018, 2021 and 2017,2020, respectively.TTX car hire expenses of $429$375 million in 2018, $3882021, $375 million in 2017,2020, and $368$407 million in 20162019 are included in equipment and other rents in our Consolidated Statements of Income. In addition, UPRR had accounts payable to TTX of $66$57 million and $69$59 million at December 31, 2018, 2021 and 2017,2020, respectively.21. Selected Quarterly Data (Unaudited)5,475 5,672 5,928 5,757 1,939 2,099 2,269 2,210 1,310 1,509 1,593 1,554 1.69 1.98 2.16 2.13 1.68 1.98 2.15 2.12 5,132 5,250 5,408 5,450 1,788 1,998 2,073 2,247 1,072 1,168 1,194 7,278 1.32 1.45 1.50 9.29 1.32 1.45 1.50 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.78ItemItem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ItemItem 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.
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MANAGEMENT’SMANAGEMENT’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, 2018.2021. 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, 2018,2021, 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, 20193, 2022
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REPORTREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and 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"“Corporation”) as of December 31, 2018,2021, 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, 2018,2021, 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 financial statements as of financial positionand for the year ended December 31, 2021, 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, 20194, 2022, 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'sManagement’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.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
February 8, 20194, 2022
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ItemItem 9B. Other Information
None.
PART IIIItem 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
IteNot applicable.
Item 10. Directors, Executive Officers, and Corporate Governance
(a) | Directors of Registrant. |
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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. |
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Information concerning the executive officers of UPC and its subsidiaries is presented in Part I of this report under Information About Our Executive Officers of the Registrant and Principal Executive Officers of Our Subsidiaries.
(c) | Delinquent Section 16(a) |
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. |
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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.
ItemItem 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 2018,2021, Outstanding Equity Awards at 20182021 Fiscal Year-End, Option Exercises and Stock Vested in Fiscal Year 2018,2021, Pension Benefits at 20182021 Fiscal Year-End, Nonqualified Deferred Compensation at 20182021 Fiscal Year-End, Potential Payments Upon Termination or Change in Control and Director Compensation in Fiscal Year 20182021 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.
ItemItem 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.
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ItemItem 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 partythird-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.
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mItem 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.
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ItemItem 15. Exhibits,Exhibit and Financial Statement Schedules
(a) |
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(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 4433.
(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 8764. 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.
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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.
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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.
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SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Union Pacific Corporation and Subsidiary Companies
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Millions, for the Years Ended December 31, | 2018 | 2017 | 2016 | |||
Accrued casualty costs: |
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Balance, beginning of period | $ | 684 | $ | 716 | $ | 736 |
Charges to expense |
| 202 |
| 167 |
| 202 |
Cash payments and other reductions |
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Balance, end of period | $ | 709 | $ | 684 | $ | 716 |
Accrued casualty costs are presented in the |
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Current | $ | 211 | $ | 194 | $ | 185 |
Long-term |
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| 531 |
Balance, end of period | $ | 709 | $ | 684 | $ | 716 |
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UNION PACIFIC CORPORATION
Description | |||
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Filed with this Statement | |||
10(a)† | Form of Performance Stock Unit Agreement dated February | ||
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| Form of Non-Qualified Stock Option Agreement for Executives dated February | ||
10(c)† | Union Pacific Corporation Key Employee Continuity Plan, as amended December 10, 2021. | ||
21 | List of the Corporation’s significant subsidiaries and their respective states of incorporation. | ||
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31(a) | |||
31(b) | |||
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101 |
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104 | Cover Page Interactive Data File, formatted in Inline XBRL (contained in Exhibit 101). |
Incorporated by Reference | |
3(a) | |
3(b) |
4(a) |
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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. | ||
10(d)† | ||
10(e)† | ||
10(f)† | ||
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10(g)† | Supplemental Pension Plan for Officers and Managers (409A Non-Grandfathered Component) of Union Pacific Corporation | |
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10(h)† |
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10(j)† | |
10(k)† | |
10(l)† | |
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10(n)† | |
10(o)† | |
10(p)† | |
10(q)† | Union Pacific Corporation 2021 Stock Incentive Plan, effective as of May 13, 2021 is incorporated by reference to Exhibit 99.1 to the Corporation's Form S-8 dated May 25, 2021. |
10(r) | |
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† Indicates a management contract or compensatory plan or arrangement. |
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90Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 4th day of February, 2022.
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 4th day of February, 2022, 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 |
PRINCIPAL FINANCIAL OFFICER: | ||||
By | /s/ Jennifer L. Hamann | |||
Jennifer L. Hamann | ||||
Executive Vice President and | ||||
Chief Financial Officer |
PRINCIPAL ACCOUNTING OFFICER: | ||||
By | /s/ Todd M. Rynaski | |||
Todd M. Rynaski, | ||||
Vice President and Controller |
DIRECTORS:
Andrew H. Card, Jr.* | Jane H. Lute* |
William J. DeLaney* | Michael R. McCarthy* |
David B. Dillon* | Thomas F. McLarty III* |
Sheri H. Edison* | Jose H. Villarreal* |
Deborah C. Hopkins* | Christopher J. Williams* |
* By | /s/ Craig V. Richardson | |
Craig V. Richardson, Attorney-in-fact |