Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data


Index to Consolidated Financial Statements	Page

Report of Independent Registered Public Accounting Firm	47

Consolidated Statements of Income
For the Years Ended December 31, 2020, 2019, and 2018	49

Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2020, 2019, and 2018	49

Consolidated Statements of Financial Position
At December 31, 2020 and 2019	50

Consolidated Statements of Cash Flows
For the Years Ended December 31, 2020, 2019, and 2018	51

Consolidated Statements of Changes in Common Shareholders’ Equity
For the Years Ended December 31, 2020, 2019, and 2018	52

Notes to the Consolidated Financial Statements	53

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RE****PORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Union Pacific Corporation

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, 2020 and 2019, 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, 2020, and the related notes and the schedule listed in the Table of Contents at Part IV, Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 5, 2021, expressed an unqualified opinion on the Corporation's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 3 to the financial statements, effective January 1, 2019, the Corporation adopted Financial Accounting Standards Board Accounting Standards Update No. 2016-02, Leases (Topic 842).

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.

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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. Net properties were $54,161 million as of December 31, 2020 and, during 2020, 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 5, 2021

We have served as the Corporation’s auditor since 1967. ‎

CO****NSOLIDATED STATEMENTS OF INCOME

Union Pacific Corporation and Subsidiary Companies



Millions, Except Per Share Amounts, ‎ for the Years Ended December 31,	2020		2019		2018
Operating revenues:
Freight revenues	$	18,251	$	20,243	$	21,384
Other revenues		1,282		1,465		1,448
Total operating revenues		19,533		21,708		22,832
Operating expenses:
Compensation and benefits		3,993		4,533		5,056
Depreciation		2,210		2,216		2,191
Purchased services and materials		1,962		2,254		2,443
Fuel		1,314		2,107		2,531
Equipment and other rents		875		984		1,072
Other		1,345		1,060		1,022
Total operating expenses		11,699		13,154		14,315
Operating income		7,834		8,554		8,517
Other income (Note 6)		287		243		94
Interest expense		(1,141)		(1,050)		(870)
Income before income taxes		6,980		7,747		7,741
Income tax expense (Note 7)		(1,631)		(1,828)		(1,775)
Net income	$	5,349	$	5,919	$	5,966
Share and Per Share (Note 8):
Earnings per share - basic	$	7.90	$	8.41	$	7.95
Earnings per share - diluted	$	7.88	$	8.38	$	7.91
Weighted average number of shares - basic		677.3		703.5		750.9
Weighted average number of shares - diluted		679.1		706.1		754.3

C****ONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Union Pacific Corporation and Subsidiary Companies



Millions, ‎ for the Years Ended December 31,	2020		2019		2018
Net income	$	5,349	$	5,919	$	5,966
Other comprehensive income/(loss) :
Defined benefit plans		(231)		42		62
Foreign currency translation		(6)		17		(36)
Total other comprehensive income/(loss) [a]		(237)		59		26
Comprehensive income	$	5,112	$	5,978	$	5,992

*[a]**Net of deferred taxes of $*75 million, ($15) million, and ($22) million during 2020, 2019, and 2018, respectively.

The accompanying notes are an integral part of these Consolidated Financial Statements.

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CO****NSOLIDATED STATEMENTS OF FINANCIAL POSITION

Union Pacific Corporation and Subsidiary Companies



Millions, Except Share and Per Share Amounts ‎ as of December 31,	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	1,799	$	831
Short-term investments (Note 13)		60		60
Accounts receivable, net (Note 10)		1,505		1,595
Materials and supplies		638		751
Other current assets		212		222
Total current assets		4,214		3,459
Investments		2,164		2,050
Net properties (Note 11)		54,161		53,916
Operating lease assets (Note 16)		1,610		1,812
Other assets		249		436
Total assets	$	62,398	$	61,673
Liabilities and Common Shareholders' Equity
Current liabilities:
Accounts payable and other current liabilities (Note 12)	$	3,104	$	3,094
Debt due within one year (Note 14)		1,069		1,257
Total current liabilities		4,173		4,351
Debt due after one year (Note 14)		25,660		23,943
Operating lease liabilities (Note 16)		1,283		1,471
Deferred income taxes (Note 7)		12,247		11,992
Other long-term liabilities		2,077		1,788
Commitments and contingencies (Note 17)
Total liabilities		45,440		43,545
Common shareholders' equity:
Common shares, $2.50 par value, 1,400,000,000 authorized;
1,112,227,784 and 1,112,014,480 issued; 671,351,360 and 692,100,651
outstanding, respectively		2,781		2,780
Paid-in-surplus		4,864		4,523
Retained earnings		51,326		48,605
Treasury stock		(40,420)		(36,424)
Accumulated other comprehensive loss (Note 9)		(1,593)		(1,356)
Total common shareholders' equity		16,958		18,128
Total liabilities and common shareholders' equity	$	62,398	$	61,673

The accompanying notes are an integral part of these Consolidated Financial Statements.

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CO****NSOLIDATED STATEMENTS OF CASH FLOWS

Union Pacific Corporation and Subsidiary Companies



Millions, for the Years Ended December 31,	2020		2019		2018
Operating Activities
Net income	$	5,349	$	5,919	$	5,966
Adjustments to reconcile net income to cash provided ‎ by operating activities:
Depreciation		2,210		2,216		2,191
Deferred and other income taxes		340		566		338
Net gain on non-operating asset dispositions		(115)		(20)		(30)
Other operating activities, net		490		98		347
Changes in current assets and liabilities:
Accounts receivable, net		90		160		(262)
Materials and supplies		113		(9)		7
Other current assets		(34)		87		(24)
Accounts payable and other current liabilities		(73)		(179)		(125)
Income and other taxes		170		(229)		278
Cash provided by operating activities		8,540		8,609		8,686
Investing Activities
Capital investments		(2,927)		(3,453)		(3,437)
Proceeds from asset sales		149		74		63
Maturities of short-term investments (Note 13)		141		130		90
Purchases of short-term investments (Note 13)		(136)		(115)		(90)
Other investing activities, net		97		(71)		(37)
Cash used in investing activities		(2,676)		(3,435)		(3,411)
Financing Activities
Debt issued (Note 14)		4,004		3,986		6,892
Share repurchase programs (Note 18)		(3,705)		(5,804)		(8,225)
Dividends paid		(2,626)		(2,598)		(2,299)
Debt repaid		(2,053)		(817)		(1,736)
Debt exchange		(328)		(387)		-
Net issuance of commercial paper (Note 14)		(127)		(6)		194
Other financing activities, net		(67)		(20)		(48)
Cash used in financing activities		(4,902)		(5,646)		(5,222)
Net change in cash, cash equivalents, and restricted cash		962		(472)		53
Cash, cash equivalents, and restricted cash at beginning of year		856		1,328		1,275
Cash, cash equivalents, and restricted cash at end of year	$	1,818	$	856	$	1,328
Supplemental Cash Flow Information
Non-cash investing and financing activities:
Term loan renewals	$	250	$	250	$	250
Capital investments accrued but not yet paid		166		224		205
Locomotives sold for material credits		-		18		-
Finance lease financings		-		-		12
Cash paid during the year for:
Income taxes, net of refunds	$	(1,214)	$	(1,382)	$	(1,205)
Interest, net of amounts capitalized		(1,050)		(1,033)		(728)

The accompanying notes are an integral part of these Consolidated Financial Statements.

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CO****NSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY

Union Pacific Corporation and Subsidiary Companies



Millions	Common ‎Shares	Treasury ‎Shares	Common ‎Shares		Paid-in- ‎Surplus		Retained ‎Earnings		Treasury ‎Stock		AOCI ‎[a]		Total
Balance at January 1, 2018	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 ‎ exercises, forfeitures, and other	0.3	1.1		1		65		-		33		-		99
Share repurchase programs ‎ (Note 18)	-	(57.2)		-		(92)		-		(8,133)		-		(8,225)
Cash dividends declared ‎ ($3.06 per share)	-	-		-		-		(2,299)		-		-		(2,299)
Reclassification due to ASU ‎ 2018-02 adoption [b]				-		-		300		-		(300)		-
Balance at December 31, 2018	1,111.7	(386.6)		$ 2,779		$ 4,449		$ 45,284		$ (30,674)		$ (1,415)		$ 20,423
Net income				-		-		5,919		-		-		5,919
Other comprehensive income				-		-		-		-		59		59
Conversion, stock option ‎ exercises, forfeitures, and other	0.3	1.7		1		46		-		82		-		129
Share repurchase programs ‎ (Note 18)	-	(35.0)		-		28		-		(5,832)		-		(5,804)
Cash dividends declared ‎ ($3.70 per share)	-	-		-		-		(2,598)		-		-		(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				-		-		5,349		-		-		5,349
Other comprehensive loss				-		-		-		-		(237)		(237)
Conversion, stock option ‎ exercises, forfeitures, and other	0.2	1.1		1		31		-		19		-		51
Share repurchase programs ‎ (Note 18)	-	(22.1)		-		310		-		(4,015)		-		(3,705)
Cash dividends declared ‎ ($3.88 per share)	-	-		-		-		(2,628)		-		-		(2,628)
Balance at December 31, 2020	1,112.2	(440.9)		$ 2,781		$ 4,864		$ 51,326		$ (40,420)		$ (1,593)		$ 16,958

*[a]*AOCI = Accumulated Other Comprehensive Income/Loss (Note 9)

*[b]*ASU 2018-02 is the Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows entities the option to reclassify from accumulated other comprehensive income to retained earnings the income tax effects that remain stranded in AOCI resulting from the application of the Tax Cuts and Jobs Act.

The accompanying notes are an integral part of these Consolidated Financial Statements.

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NOT****ES 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 32,313 route miles, connecting 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 26,069 miles and operate on the remainder pursuant to trackage rights or leases. We serve the western two-thirds of the country and maintain coordinated schedules with other rail carriers for the handling of freight to and from the Atlantic Coast, the Pacific Coast, the Southeast, the Southwest, Canada, and Mexico. Export and import traffic is moved through Gulf Coast and Pacific Coast ports and across the Mexican and Canadian borders.

The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment. Although we provide and analyze revenue by commodity group, we treat the financial results of the Railroad as one segment due to the integrated nature of our rail network. Our operating revenues are primarily derived from contracts with customers for the transportation of freight from origin to destination. The following table represents a disaggregation of our freight and other revenues:



Millions	2020		2019		2018
Bulk	$	5,960	$	6,529	$	7,069
Industrial		6,622		7,472		7,689
Premium		5,669		6,242		6,626
Total freight revenues	$	18,251	$	20,243	$	21,384
Other subsidiary revenues		743		880		881
Accessorial revenues		473		514		502
Other		66		71		65
Total operating revenues	$	19,533	$	21,708	$	22,832

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 $2.1 billion in 2020, $2.3 billion in 2019, and $2.5 billion in 2018.

Basis of Presentation – The Consolidated Financial Statements are presented in accordance with accounting principles generally accepted in the U.S. (GAAP) as codified in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC).

2. Significant Accounting Policies

Principles of Consolidation – The Consolidated Financial Statements include the accounts of Union Pacific Corporation and all of its subsidiaries. Investments in affiliated companies (20% to 50% owned) are accounted for using the equity method of accounting. All intercompany transactions are eliminated. We currently have no less than majority-owned investments that require consolidation under variable interest entity requirements.

Cash, Cash Equivalents, and Restricted Cash – Cash equivalents consist of investments with original maturities of three months or less. Amounts included in restricted cash represent those required to be set aside by contractual agreement.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Statements of Financial Position that sum to the total of the same such amounts shown on the Consolidated Statements of Cash Flows:



Millions		2020	2019		2018
Cash and cash equivalents	$	1,799	$	831	$	1,273
Restricted cash equivalents in other current assets		7		13		42
Restricted cash equivalents in other assets		12		12		13
Total cash, cash equivalents, and restricted cash ‎equivalents shown on the Statement of Cash Flows:	$	1,818	$	856	$	1,328

Accounts Receivable – Accounts receivable includes receivables reduced by an allowance for doubtful accounts. The allowance is based upon historical losses, credit worthiness of customers, and current economic conditions. Receivables not expected to be collected in one year and the associated allowances are classified as other assets in our Consolidated Statements of Financial Position.

Investments – Investments represent our investments in affiliated companies (20% to 50% owned) that are accounted for under the equity method of accounting and investments in companies (less than 20% owned) accounted for at cost as there are not readily determinable fair values for such investments. Our portion of income/loss on equity method investments that are integral to our operations are recorded in operating expenses.

Materials and Supplies – Materials and supplies are carried at the lower of average cost or net realizable value.

Property and Depreciation – Properties and equipment are carried at cost and are depreciated on a straight-line basis over their estimated service lives, which are measured in years, except for rail in high-density traffic corridors (i.e., all rail lines except for those subject to abandonment, and yard and switching tracks), for which lives are measured in millions of gross tons per mile of track. We use the group method of depreciation in which all items with similar characteristics, use, and expected lives are grouped together in asset classes and are depreciated using composite depreciation rates. The group method of depreciation treats each asset class as a pool of resources, not as singular items. We determine the estimated service lives of depreciable railroad assets by means of depreciation studies. Under the group method of depreciation, no gain or loss is recognized when depreciable property is retired or replaced in the ordinary course of business.

Impairment of Long-lived Assets – We review long-lived assets, including identifiable intangibles, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the long-lived assets, the carrying value is reduced to the estimated fair value.

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 $151 million at December 31, 2020, and $127 million at December 31, 2019, and are expected to be recognized in the following 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 to/from specific locations or 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 expected value method, which is based on available historical, current, and forecasted volumes, and recognized as the related performance obligation is satisfied.

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 Statements of Financial Position as Accounts Receivables, net.

Freight revenue related to interline transportation services that involve other railroads are reported on a net basis. The portion of the gross amount billed to customers that is remitted by the Company to another party is not reflected as freight revenue.

Other revenues consist primarily of revenues earned by our other subsidiaries (primarily logistics and commuter rail operations) and accessorial revenues. Other subsidiary revenues are generally recognized over time as shipments move from origin to destination. The allocation of revenue between reporting periods is based on the relative transit time in each reporting period with expenses recognized as incurred. Accessorial revenues are recognized at a point in time as performance obligations are satisfied.

Translation of Foreign Currency – Our portion of the assets and liabilities related to foreign investments are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenue and expenses are translated at the average rates of exchange prevailing during the year. Unrealized gains or losses are reflected within common shareholders’ equity as accumulated other comprehensive income or loss.

Fair Value Measurements – We use a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. These levels include:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

We have applied fair value measurements to our short term investments, pension plan assets, impairment of long-lived assets, and short- and long-term debt.

Stock-Based Compensation – We have several stock-based compensation plans under which employees 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 issue treasury shares to cover option exercises and stock unit vestings, while new shares are issued when retention shares are granted.

We measure and recognize compensation expense for all stock-based awards made to employees, including stock options. Compensation expense is based on the fair value of the awards as measured at the grant date and is expensed ratably over the service period of the awards (generally the vesting period). The fair value of retention awards is the closing stock price on the date of grant, while the fair value of stock options is determined by using the Black-Scholes option pricing model.

Earnings Per Share – Basic earnings per share are calculated on the weighted-average number of common shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of outstanding stock options and stock-based awards where the conversion of such instruments would be dilutive.

Income Taxes – We account for income taxes by recording taxes payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. These expected future tax consequences are measured based on current tax law; the effects of future tax legislation are not anticipated. Future tax legislation, such as a change in the corporate tax rate, could have a material impact on our financial condition, results of operations, or liquidity.

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.

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.

Leases – We lease certain locomotives, freight cars, and other property for use in our rail operations. We determine 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, discounted using our collateralized incremental borrowing rate, over the lease term at commencement date. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that 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 net properties, 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 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 lease and 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 and Postretirement Benefits – We incur certain employment-related expenses associated with pensions and postretirement health benefits. In order to measure the expense associated with these benefits, we must make various assumptions including discount rates used to value certain liabilities, expected return on plan assets used to fund these expenses, compensation increases, employee turnover rates, anticipated mortality rates, and expected future health care costs. The assumptions used by us are based on our historical experience as well as current facts and circumstances. We use an actuarial analysis to measure the expense and liability associated with these benefits.

Personal Injury – The cost of injuries to employees and others on our property is charged to expense based on estimates of the ultimate cost and number of incidents each year. We use an actuarial analysis to measure the expense and liability. Our personal injury liability is not discounted to present value. Legal fees and incidental costs are expensed as incurred.

Environmental – When environmental issues have been identified with respect to property currently or formerly owned, leased, or otherwise used in the conduct of our business, we perform, with the assistance of our consultants, environmental assessments on such property. We expense the cost of the assessments as incurred. We accrue the cost of remediation where our obligation is probable and such costs can be reasonably estimated. We do not discount our environmental liabilities when the timing of the anticipated cash payments is not fixed or readily determinable. Legal fees and incidental costs are expensed as incurred.

Use of Estimates – The preparation of our Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported assets and liabilities, the disclosure of certain contingent assets and liabilities as of the date of the Consolidated Financial Statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual future results may differ from such estimates.

3. Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires companies to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. We implemented an enterprise-wide lease management system to support the new reporting requirements, and effective January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842). We elected an initial application date of January 1, 2019, and did not recast comparative periods in transition to the new standard. In addition, at the date of adoption, we elected certain practical expedients, which permit us to not 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 and nonlease components for all classes of underlying assets. Also, at the date of adoption, we elected 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.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13), Measurement of Credit Losses on Financial Instruments, which replaces the existing incurred credit loss model for an expected credit loss model. Effective January 1, 2020, the Company adopted ASU 2016-13, and it did not have a material impact on our consolidated financial position, results of operations, or cash flows.

In August 2018, the FASB issued Accounting Standards Update No. 2018-14 (ASU 2018-14), Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension and other postretirement plans. Effective January 1, 2020, the Company adopted ASU 2018-14, and it did not have a material impact on the Company’s consolidated financial statement disclosure requirements.

In December 2019, the FASB issued Accounting Standards Update No. 2019-12 (ASU 2019-12), Income Taxes (Topic 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 on January 1, 2021 (the effective date). Adoption of the standard is not expected to have a material impact on the Company’s Consolidated Statements of Income, Financial Position, and Cash Flows.

In March 2020, the FASB issued Accounting Standards Update No. 2020-04 (ASU 2020-04), Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP principles to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform. This guidance was 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 effect that the new guidance will have on our consolidated financial statements and related disclosures.

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, 2020, 32,000 restricted shares were outstanding under the Directors Plan.

The Union Pacific Corporation 2004 Stock Incentive Plan (2004 Plan) was approved by shareholders in April 2004. The 2004 Plan reserved 84,000,000 shares of our common stock for issuance, plus any shares subject to awards made under previous plans that were outstanding on April 16, 2004, and became available for regrant pursuant to the terms of the 2004 Plan. Under the 2004 Plan, non-qualified options, stock appreciation rights, retention shares, stock units, and incentive bonus awards may be granted to eligible employees of the Corporation and its subsidiaries. Non-employee directors are not eligible for awards under the 2004 Plan. As of December 31, 2020, 81,784 options were outstanding under the 2004 Plan. We no longer grant any stock options or other stock or unit awards under this plan.

The Union Pacific Corporation 2013 Stock Incentive Plan (2013 Plan) was approved by shareholders in May 2013. The 2013 Plan reserved 78,000,000 shares of our common stock for issuance, plus any shares subject to awards made under previous plans as of February 28, 2013, that are subsequently cancelled, expired, forfeited, or otherwise not issued under previous plans. Under the 2013 Plan, non-qualified options, incentive stock options, retention shares, stock units, and incentive bonus awards may be granted to eligible employees of the Corporation and its subsidiaries. Non-employee directors are not eligible for awards under the 2013 Plan. As of December 31, 2020, 2,486,758 options and 1,989,208 retention shares and stock units were outstanding under the 2013 Plan.

Pursuant to the above plans 69,867,405; 70,318,887; and 70,730,692; shares of our common stock were authorized and available for grant at December 31, 2020, 2019, and 2018, respectively.

Information regarding stock-based compensation appears in the table below:



Millions	2020		2019		2018
Stock-based compensation, before tax:
Stock options	$	15	$	16	$	17
Retention awards		58		77		79
Total stock-based compensation, before tax	$	73	$	93	$	96
Excess tax benefits from equity compensation plans	$	55	$	52	$	28

Stock Options – We estimate the fair value of our stock option awards using the Black-Scholes option pricing model. The table below shows the annual weighted-average assumptions used for valuation purposes:



Weighted-Average Assumptions	2020		2019		2018
Risk-free interest rate		1.5%		2.5%		2.6%
Dividend yield		2.1%		2.2%		2.3%
Expected life (years)		4.9		5.2		5.3
Volatility		23.4%		22.7%		21.1%
Weighted-average grant-date fair value of options granted	$	32.20	$	30.37	$	21.70

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant; the expected dividend yield is calculated as the ratio of dividends paid per share of common stock to the stock price on the date of grant; the expected life is based on historical and expected exercise behavior; and expected volatility is based on the historical volatility of our stock price over the expected life of the option.

A summary of stock option activity during 2020 is presented below:



	Options (thous.)	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value (millions)
Outstanding at January 1, 2020	3,502	$	113.38	6.1	yrs.	$	236
Granted	558		176.63	N/A			N/A
Exercised	(1,402)		100.41	N/A			N/A
Forfeited or expired	(89)		162.52	N/A			N/A
Outstanding at December 31, 2020	2,569	$	132.49	6.4	yrs.	$	195
Vested or expected to vest ‎ at December 31, 2020	2,538	$	132.11	6.4	yrs.	$	193
Options exercisable at December 31, 2020	1,547	$	112.98	5.3	yrs.	$	147

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, 2020, are subject to performance or market-based vesting conditions.

At December 31, 2020, there was $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. Additional information regarding stock option exercises appears in the following table:



Millions	2020		2019		2018
Intrinsic value of stock options exercised	$	120	$	193	$	83
Cash received from option exercises		95		130		76
Treasury shares repurchased for employee payroll taxes		(24)		(37)		(20)
Tax benefit realized from option exercises		28		48		21
Aggregate grant-date fair value of stock options vested		15		15		19

Retention Awards – The fair value of retention awards is based on the closing price of the stock on the grant date. Dividends and dividend equivalents are paid to participants during the vesting periods.

Changes in our retention awards during 2020 were as follows:



	Shares (thous.)	Weighted-Average ‎Grant-Date Fair Value
Nonvested at January 1, 2020	1,898	$	112.12
Granted	315		185.99
Vested	(645)		77.74
Forfeited	(92)		141.83
Nonvested at December 31, 2020	1,476	$	141.06

Retention awards are granted at no cost to the employee and vest over periods lasting up to 4 years. At December 31, 2020, there was $88 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 1.5 years.

Performance Retention Awards – In February 2020, our Board of Directors approved performance stock unit grants. The basic terms of these performance stock units are identical to those granted in February 2019, except for different annual return on invested capital (ROIC) performance targets. The plan also includes relative operating income growth (OIG) as a modifier compared to the companies included in the S&P 500 Industrials Index. We define ROIC as net operating profit adjusted for interest expense (including interest on average operating lease liabilities) and taxes on interest divided by average invested capital adjusted for average operating lease liabilities. The modifier can be up to +/- 25% of the award earned based on the ROIC achieved.

Stock units awarded to selected employees under these grants are subject to continued employment for 37 months and the attainment of certain levels of ROIC, modified for the relative OIG. We expense the fair value of the units that are probable of being earned based on our forecasted ROIC over the 3-year performance period, and with respect to the third year of the plan, the relative OIG modifier. We measure the fair value of these performance stock units based upon the closing price of the underlying common stock as of the date of grant. Dividend equivalents are accumulated during the service period and paid to participants only after the units are earned.

Changes in our performance retention awards during 2020 were as follows:



	Shares (thous.)	Weighted-Average ‎Grant-Date Fair Value
Nonvested at January 1, 2020	929	$	123.32
Granted	287		177.23
Vested	(339)		102.97
Unearned	(8)		153.89
Forfeited	(96)		153.74
Nonvested at December 31, 2020	773	$	148.17

At December 31, 2020, there was $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 0.9 years. This expense is subject to achievement of the performance measures established for the performance stock unit grants.

5. Retirement Plans

Pension and Other Postretirement Benefits

Pension Plans – We provide defined benefit retirement income to eligible non-union employees through qualified and non-qualified (supplemental) pension plans. Qualified and non-qualified pension benefits are based on years of service and the highest compensation during the latest years of employment, with specific reductions made for early retirements. 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) 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:



Funded Status	Pension				OPEB
Millions	2020		2019		2020		2019
Projected Benefit Obligation
Projected benefit obligation at beginning of year	$	4,847	$	4,181	$	205	$	298
Service cost		91		80		1		1
Interest cost		137		160		5		9
Plan amendment		-		-		(2)		(92)
Actuarial (gain)/loss		812		656		-		11
Gross benefits paid		(229)		(230)		(19)		(22)
Projected benefit obligation at end of year	$	5,658	$	4,847	$	190	$	205
Plan Assets
Fair value of plan assets at beginning of year	$	4,528	$	3,887	$	-	$	-
Actual (loss)/return on plan assets		686		841		-		-
Non-qualified plan benefit contributions		31		30		19		22
Gross benefits paid		(229)		(230)		(19)		(22)
Fair value of plan assets at end of year	$	5,016	$	4,528	$	-	$	-
Funded status at end of year	$	(642)	$	(319)	$	(190)	$	(205)

Actuarial gains and losses that increased the PBO were driven by a decrease in 2020 discount rates from 3.26% to 2.42%.

Amounts recognized in the statement of financial position as of December 31, 2020 and 2019 consist of:



	Pension				OPEB
Millions	2020		2019		2020		2019
Noncurrent assets	$	8	$	203	$	-	$	-
Current liabilities		(30)		(29)		(18)		(20)
Noncurrent liabilities		(620)		(493)		(172)		(185)
Net amounts recognized at end of year	$	(642)	$	(319)	$	(190)	$	(205)

Pre-tax amounts recognized in accumulated other comprehensive income/loss as of December 31, 2020 and 2019 consist of:



	2020						2019
Millions	Pension		OPEB		Total		Pension		OPEB		Total
Prior service cost	$	-	$	84	$	84	$	-	$	95	$	95
Net actuarial loss		(1,805)		(98)		(1,903)		(1,501)		(104)		(1,605)
Total	$	(1,805)	$	(14)	$	(1,819)	$	(1,501)	$	(9)	$	(1,510)

Pre-tax changes recognized in other comprehensive income/loss during 2020, 2019, and 2018 were as follows:



	Pension						OPEB
Millions	2020		2019		2018		2020		2019		2018
Prior service credit	$	-	$	-	$	-	$	2	$	92	$	-
Net actuarial (loss)/gain		(408)		(88)		(40)		-		(11)		20
Amortization of:
Prior service cost/(credit)		-		-		-		(14)		(7)		1
Actuarial loss		104		67		93		7		7		10
Total	$	(304)	$	(21)	$	53	$	(5)	$	81	$	31

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.

The following table discloses only the PBO, ABO, and fair value of plan assets for pension plans where the accumulated benefit obligation is in excess of the fair value of the plan assets as of December 31:



Underfunded Accumulated Benefit Obligation
Millions	2020		2019
Projected benefit obligation	$	605	$	522
Accumulated benefit obligation	$	560	$	498
Fair value of plan assets		-		-
Underfunded accumulated benefit obligation	$	(560)	$	(498)

The ABO for all defined benefit pension plans was $5.2 billion and $4.5 billion at December 31, 2020 and 2019, respectively.

Assumptions – The weighted-average actuarial assumptions used to determine benefit obligations at December 31:



	Pension		OPEB
Percentages	2020	2019	2020	2019
Discount rate	2.42%	3.26%	2.22%	3.13%
Compensation increase	4.40%	4.10%	N/A	N/A
Health care cost trend rate (employees under 65)	N/A	N/A	5.42%	5.64%
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 OPEB expense are determined based upon the annual service cost of benefits (the actuarial cost of benefits earned during a period) and the interest cost on those liabilities, less the expected return on plan assets. The expected long-term rate of return on plan assets is applied to a calculated value of plan assets that recognizes changes in fair value over a 5 year period. This practice is intended to reduce year-to-year volatility in pension expense, but it can have the effect of delaying the recognition of differences between actual returns on assets and expected returns based on long-term rate of return assumptions. Differences in actual experience in relation to assumptions are not recognized in net income immediately, but are deferred in accumulated other comprehensive income/loss and, if necessary, amortized as pension or OPEB expense.

On June 30, 2019, the OPEB plan was remeasured to reflect an announced plan amendment effective January 1, 2020, that reduced and eliminated certain medical benefits for Medicare-eligible retirees. This negative plan amendment resulted in a reduction in the accumulated postretirement benefit obligation of approximately $92 million with a corresponding adjustment of $69 million in other comprehensive income, net of $23 million in deferred taxes. This amount is being amortized as a reduction of future net periodic OPEB cost over approximately 8 years, which represents the future remaining service period of eligible employees.

The components of our net periodic pension and OPEB cost were as follows for the years ended December 31:



	Pension						OPEB
Millions	2020		2019		2018		2020		2019		2018
Net Periodic Benefit Cost:
Service cost	$	91	$	80	$	105	$	1	$	1	$	2
Interest cost		137		160		145		5		9		10
Expected return on plan assets		(282)		(273)		(272)
Amortization of:
Prior service cost/(credit)		-		-		-		(14)		(7)		1
Actuarial loss		104		67		93		7		7		10
Net periodic benefit cost	$	50	$	34	$	71	$	(1)	$	10	$	23

Assumptions – The weighted-average actuarial assumptions used to determine expense were as follows:



	Pension			OPEB
Percentages	2020	2019	2018	2020	2019	2018
Discount rate for benefit obligations	3.26%	4.23%	3.62%	3.14%	3.79%	3.54%
Discount rate for interest on benefit obligations	2.89%	3.94%	3.27%	2.68%	3.40%	3.14%
Discount rate for service cost	3.42%	4.33%	3.77%	3.21%	3.92%	3.71%
Discount rate for interest on service cost	3.36%	4.30%	3.72%	3.14%	3.85%	3.64%
Expected return on plan assets	7.00%	7.00%	7.00%	N/A	N/A	N/A
Compensation increase	4.10%	4.10%	4.19%	N/A	N/A	N/A
Health care cost trend rate (employees under 65)	N/A	N/A	N/A	5.64%	5.87%	6.09%
Ultimate health care cost trend rate	N/A	N/A	N/A	4.50%	4.50%	4.50%
Year ultimate trend reached	N/A	N/A	N/A	2038	2038	2038

We measure the service cost and interest cost components of our net periodic benefit cost by using individual spot discount rates matched with separate cash flows for each future year. The discount rates were based on a yield curve of high quality corporate bonds. The expected return on plan assets is based on our asset allocation mix and our historical return, taking into account current and expected market conditions. The actual return/loss on pension plan assets, net of fees, was approximately 16% in 2020, 20% in 2019, and (2%) in 2018.

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 2021 assumed health care cost trend rate for employees under 65 is 5.42%. It is assumed the rate will decrease gradually to an ultimate rate of 4.5% in 2038 and will remain at that level.

Cash Contributions

The following table details cash contributions, if any, for the qualified pension plans and the benefit payments for the non-qualified (supplemental) pension and OPEB plans:



	Pension
Millions	Qualified		Non-qualified		OPEB
2020	$	-	$	31	$	19
2019		-		30		22

Our policy with respect to funding the qualified plans is to fund at least the minimum required by law and not more than the maximum amount deductible for tax purposes.

The non-qualified pension and OPEB plans are not funded and are not subject to any minimum regulatory funding requirements. Benefit payments for each year represent supplemental pension payments and claims paid for medical and life insurance. We anticipate our 2021 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 2021 through 2030:



Millions	Pension		OPEB
2021	$	228	$	18
2022		226		14
2023		226		14
2024		225		10
2025		226		9
Years 2026 - 2030		1,158		42

Asset Allocation Strategy

Our pension plan asset allocation at December 31, 2020 and 2019, and target allocation for 2021, are as follows:



		Percentage of Plan Assets
	Target	December 31,
	Allocation 2021	2020	2019
Equity securities	50% to 60%	63%	63%
Debt securities	40% to 50%	34	31
Real estate	0% to 2%	3	6
Total		100%	100%

The investment strategy for pension plan assets is to maintain a broadly diversified portfolio designed to achieve our target average long-term rate of return. We decreased the expected rate of return for 2021 from 7% to 6.25% due to a shift of certain assets from equity to debt in alignment with our 2021 target asset allocation. While we believe we can achieve a long-term average rate of return of 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.

The pension plan investments are held in a Master Trust. The majority of pension plan assets are invested in equity securities because equity portfolios have historically provided higher returns than debt and other asset classes over extended time horizons and are expected to do so in the future. Correspondingly, equity investments also entail greater risks than other investments. Equity risks are balanced by investing a significant portion of the plans’ assets in high quality debt securities. The average credit rating of the debt portfolio was A and A+ at December 31, 2020 and 2019, 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 17 years and 14 years, respectively at December 31, 2020 and 2019.

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, 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. U.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. The Plan’s holdings of Registered Investment Companies include both public and private fund vehicles. The public vehicles are exchange-traded funds (stocks), which are classified as Level 1 investments. The private vehicles (bonds) do not have published pricing and are valued using Net Asset Value (NAV).

Federal Government Securities – Federal Government Securities consist of bills, notes, bonds, and other fixed income securities issued directly by the U.S. Treasury or by government-sponsored enterprises. These assets are valued using a bid evaluation process with bid data provided by independent pricing sources. Federal Government Securities are classified as Level 2 investments.

Bonds and Debentures – Bonds and debentures consist of debt securities issued by U.S. and non-U.S. corporations as well as state and local governments. These assets are valued using a bid evaluation process with bid data provided by independent pricing sources. Corporate, state, and municipal bonds and debentures are classified as Level 2 investments.

Corporate Stock – This investment category consists of common and preferred stock issued by U.S. and non-U.S. corporations. Most common shares are traded actively on exchanges and price quotes for these shares are readily available. Common stock is classified as a Level 1 investment. Preferred shares included in this category are valued using a bid evaluation process with bid data provided by independent pricing sources. Preferred stock is classified as a Level 2 investment.

Venture Capital and Buyout Partnerships – This investment category is comprised of interests in limited partnerships that invest primarily in privately-held companies. Due to the private nature of the partnership investments, pricing inputs are not readily observable. Asset valuations are developed by the general partners that manage the partnerships. These valuations are based on the application of public market multiples to private company cash flows, market transactions that provide valuation information for comparable companies, and other methods. The fair value recorded by the Plan is calculated using each partnership’s NAV.

Real Estate Funds – Most of the Plan’s real estate investments are primarily interests in private real estate investment trusts, partnerships, limited liability companies, and similar structures. Valuations for the holdings in this category are not based on readily observable inputs and are primarily derived from property appraisals. The fair value recorded by the Plan is calculated using the NAV for each investment.

Collective Trust and Other Funds – Collective trust and other funds are comprised of shares or units in commingled funds and limited liability companies that are not publicly traded. The underlying assets in these entities (U.S. stock funds, non-U.S. stock funds, commodity funds, hedge funds, and short term investment funds) are publicly traded on exchanges and price quotes for the assets held by these funds are readily available. The fair value recorded by the Plan is calculated using NAV for each investment.

As of December 31, 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	$	-	$	-	$	9
Registered investment companies [a]		252		-		-		252
Federal government securities		-		150		-		150
Bonds and debentures		-		831		-		831
Corporate stock		2,209		8		-		2,217
Total plan assets at fair value	$	2,470	$	989	$	-	$	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

*[a]*Registered investment companies measured at fair value are stock investments.

*[b]*Registered investment companies measured at NAV include bond investments.

*[c]*Other assets include accrued receivables, net payables, and pending broker settlements.

As of December 31, 2019, 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	$	6	$	1	$	-	$	7
Registered investment companies [a]		9		-		-		9
Federal government securities		-		202		-		202
Bonds and debentures		-		575		-		575
Corporate stock		1,932		7		-		1,939
Total plan assets at fair value	$	1,947	$	785	$	-	$	2,732
Plan assets at NAV:
Registered investment companies [b]								285
Venture capital and buyout partnerships								531
Real estate funds								261
Collective trust and other funds								707
Total plan assets at NAV							$	1,784
Other assets/(liabilities) [c]								12
Total plan assets							$	4,528

*[a]*Registered investment companies measured at fair value are stock investments.

*[b]*Registered investment companies measured at NAV include bond investments.

[c]Other assets include accrued receivables, net payables, and pending broker settlements.

The Master Trust’s investments in limited partnerships and similar structures (used to invest in private equity and real estate) are valued at fair value based on their proportionate share of the partnerships’ fair value as recorded in the limited partnerships’ audited financial statements. The limited partnerships allocate gains, losses, and expenses to the partners based on the ownership percentage as described in the partnership agreements. At December 31, 2020 and 2019, the Master Trust had future commitments for additional contributions to private equity partnerships totaling $147 million and $189 million, respectively, and to real estate partnerships and funds totaling $7 million and $8 million, respectively.

Other Retirement Programs

401(k)/Thrift Plan – For non-union employees hired prior to January 1, 2018, and eligible union employees for whom we make matching contributions, we provide a defined contribution plan (401(k)/thrift plan). We match 50% for each dollar contributed by employees up to the first 6% of compensation contributed. For non-union employees hired on or after January 1, 2018, we match 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 $19 million in 2020, $20 million in 2019, and $18 million in 2018.

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 $569 million in 2020, $654 million in 2019, and $710 million in 2018.

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 $30 million in 2020, $42 million in 2019, and $50 million in 2018.

6. Other Income

Other income included the following for the years ended December 31:



Millions	2020		2019		2018
Rental income	$	123	$	124	$	122
Net gain on non-operating asset dispositions [a]		115		20		30
Net periodic pension and OPEB costs		44		37		13
Interest income		12		32		30
Interest income on employment tax refund		-		31		-
Early extinguishment of debt		-		(2)		(85)
Non-operating environmental costs and other		(7)		1		(16)
Total	$	287	$	243	$	94

*[a]**2020 includes a $*69 million gain from a land and permanent easement sale to the Illinois State Toll Highway Authority.

7. Income Taxes

Components of income tax expense were as follows for the years ended December 31:



Millions	2020		2019		2018
Current tax expense:
Federal	$	1,026	$	1,000	$	1,144
State		259		254		287
Foreign		6		8		5
Total current tax expense		1,291		1,262		1,436
Deferred and other tax expense:
Federal		295		417		344
State		45		128		5
Foreign		-		21		(10)
Total deferred and other tax expense		340		566		339
Total income tax expense	$	1,631	$	1,828	$	1,775

For the years ended December 31, reconciliations between statutory and effective tax rates are as follows:



Tax Rate Percentages	2020		2019		2018
Federal statutory tax rate	21.0	%	21.0	%	21.0	%
State statutory rates, net of federal benefits	3.7		3.7		3.9
Excess tax benefits from equity compensation plans	(0.8)		(0.7)		(0.4)
Dividends received deduction	(0.5)		(0.6)		(0.6)
Deferred tax adjustments	(0.1)		(0.1)		(0.6)
Other	0.1		0.3		(0.4)
Effective tax rate	23.4	%	23.6	%	22.9	%

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.

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.

In 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.

Deferred income tax (liabilities)/assets were comprised of the following at December 31:



Millions	2020		2019
Deferred income tax liabilities:
Property	$	(12,474)	$	(12,184)
Operating lease assets		(397)		(447)
Other		(444)		(341)
Total deferred income tax liabilities		(13,315)		(12,972)
Deferred income tax assets:
Accrued wages		40		45
Accrued casualty costs		143		146
Stock compensation		26		37
Retiree benefits		255		171
Operating lease liabilities		396		453
Other		208		128
Total deferred income tax assets		1,068		980
Net deferred income tax liability	$	(12,247)	$	(11,992)

When appropriate, we record a valuation allowance against deferred tax assets to reflect that these tax assets may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized based on management’s judgments using available evidence for purposes of estimating whether future taxable income will be sufficient to realize a deferred tax asset. In 2020 and 2019, there were no valuation allowances.

Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.

A reconciliation of changes in unrecognized tax benefits liabilities/(assets) from the beginning to the end of the reporting period is as follows:



Millions	2020		2019		2018
Unrecognized tax benefits at January 1	$	64	$	174	$	179
Increases for positions taken in current year		18		20		30
Increases for positions taken in prior years		7		44		9
Decreases for positions taken in prior years		(19)		(96)		(30)
Refunds from/(payments to) and settlements with taxing authorities		-		(11)		21
Increases/(decreases) for interest and penalties		5		(5)		4
Lapse of statutes of limitations		(1)		(62)		(39)
Unrecognized tax benefits at December 31	$	74	$	64	$	174

We recognize interest and penalties as part of income tax expense. Total accrued liabilities for interest and penalties were $8 million and $3 million at December 31, 2020 and 2019, respectively. Total interest and penalties recognized as part of income tax expense (benefit) were $5 million for 2020, ($4) million for 2019, and ($1) million for 2018.

In the second quarter of 2019, UPC signed final Revenue Agent Reports (RARs) from the Internal Revenue Service (IRS) for the limited scope audits of UPC’s 2016 and 2017 tax returns. As a result of the signed RARs, UPC paid the IRS $11 million in the third quarter of 2019, consisting of $10 million of tax and $1 million of interest. The statute of limitations has run for all years prior to 2017.

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 reviewed our 2013 amended return, and in the second quarter of 2018 we received a refund of $19 million.

Several state tax authorities are examining our state income tax returns for years 2015 through 2018.

We do not expect our unrecognized tax benefits to change significantly in the next 12 months.

The portion of our unrecognized tax benefits that relates to permanent changes in tax and interest would reduce our effective tax rate, if recognized. The remaining unrecognized tax benefits relate to tax positions for which only the timing of the benefit is uncertain. Recognition of the tax benefits with uncertain timing would reduce our effective tax rate only through a reduction of accrued interest and penalties. The unrecognized tax benefits that would reduce our effective tax rate are as follows:



Millions	2020		2019		2018
Unrecognized tax benefits that would reduce the effective tax rate	$	52	$	39	$	63
Unrecognized tax benefits that would not reduce the effective tax rate		22		25		111
Total unrecognized tax benefits	$	74	$	64	$	174

8. Earnings Per Share

The following table provides a reconciliation between basic and diluted earnings per share for the years ended December 31:



Millions, Except Per Share Amounts	2020		2019		2018
Net income	$	5,349	$	5,919	$	5,966
Weighted-average number of shares outstanding:
Basic		677.3		703.5		750.9
Dilutive effect of stock options		0.8		1.2		1.9
Dilutive effect of retention shares and units		1.0		1.4		1.5
Diluted		679.1		706.1		754.3
Earnings per share – basic	$	7.90	$	8.41	$	7.95
Earnings per share – diluted	$	7.88	$	8.38	$	7.91

Common stock options totaling 0.3 million, 0.5 million, and 0.3 million for 2020, 2019, and 2018, respectively, were excluded from the computation of diluted earnings per share because the exercise prices of these options exceeded the average market price of our common stock for the respective periods, and the effect of their inclusion would be anti-dilutive.

9. Accumulated Other Comprehensive Income/Loss

Reclassifications out of accumulated other comprehensive income/loss were as follows (net of tax):



Millions	Defined ‎benefit ‎plans		Foreign currency translation		Total
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)		-		(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)

Balance at January 1, 2019	$	(1,192)	$	(223)	$	(1,415)
Other comprehensive income/(loss) before reclassifications		(86)		17		(69)
Amounts reclassified from accumulated other comprehensive income/(loss) [a]		36		-		36
OPEB Plan amendment (Note 5)		92		-		92
Net year-to-date other comprehensive income/(loss), ‎net of taxes of ($15) million		42		17		59
Balance at December 31, 2019	$	(1,150)	$	(206)	$	(1,356)

[a] The accumulated other comprehensive income/loss reclassification components are 1) prior service cost/(credit) and 2) net actuarial loss which are both included in the computation of net periodic pension cost. See Note 5 Retirement Plans for additional details.

10. Accounts Receivable

Accounts receivable includes freight and other receivables reduced by an allowance for doubtful accounts. The allowance is based upon historical losses, creditworthiness of customers, and current economic conditions. At December 31, 2020 and 2019, our accounts receivable were reduced by $17 million and $4 million, respectively. Receivables not expected to be collected in one year and the associated allowances are classified as other assets in our Consolidated Statements of Financial Position. At December 31, 2020 and 2019, receivables classified as other assets were reduced by allowances of $51 million and $35 million, respectively.

Receivables Securitization Facility – The Railroad maintains an $800 million, 3-year receivables securitization facility (the Receivables Facility) maturing in July 2022. Under the Receivables Facility, the Railroad sells most of its eligible third-party receivables to Union Pacific Receivables, Inc. (UPRI), a consolidated, wholly-owned, bankruptcy-remote subsidiary that may subsequently transfer, without recourse, an undivided interest in accounts receivable to investors. The investors have no recourse to the Railroad’s other assets except for customary warranty and indemnity claims. Creditors of the Railroad do not have recourse to the assets of UPRI.

The amount recorded under the Receivables Facility was $0 and $400 million at December 31, 2020 and 2019, respectively. The Receivables Facility was supported by $1.2 billion and $1.3 billion of accounts receivable as collateral at December 31, 2020 and 2019, respectively, which, as a retained interest, is included in accounts receivable, net in our Consolidated Statements of Financial Position.

The outstanding amount the Railroad is allowed to maintain under the Receivables Facility, with a maximum of $800 million, may fluctuate based on the availability of eligible receivables and is directly affected by business volumes and credit risks, including receivables payment quality measures such as default and dilution ratios. If default or dilution ratios increase one percent, the allowable outstanding amount under the Receivables Facility would not materially change.

The costs of the Receivables Facility include interest, which will vary based on prevailing benchmark and commercial paper rates, program fees paid to participating banks, commercial paper issuance costs, and fees of participating banks for unused commitment availability. The costs of the Receivables Facility are included in interest expense and were $7 million, $14 million, and $15 million for 2020, 2019, and 2018, respectively.

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, 2020	Cost		Depreciation		Value		Useful Life
Land	$	5,246	$	N/A	$	5,246	N/A
Road:
Rail and other track material		17,620		6,631		10,989	42
Ties		11,051		3,331		7,720	34
Ballast		5,926		1,753		4,173	34
Other roadway [a]		21,030		4,329		16,701	48
Total road		55,627		16,044		39,583	N/A
Equipment:
Locomotives		9,375		3,555		5,820	17
Freight cars		2,118		789		1,329	25
Work equipment and other		1,107		351		756	18
Total equipment		12,600		4,695		7,905	N/A
Technology and other		1,199		520		679	13
Construction in progress		748		-		748	N/A
Total	$	75,420	$	21,259	$	54,161	N/A



Millions, Except Estimated Useful Life			Accumulated		Net Book		Estimated
As of December 31, 2019	Cost		Depreciation		Value		Useful Life
Land	$	5,276	$	N/A	$	5,276	N/A
Road:
Rail and other track material		17,178		6,381		10,797	42
Ties		10,693		3,186		7,507	34
Ballast		5,752		1,669		4,083	34
Other roadway [a]		20,331		4,056		16,275	48
Total road		53,954		15,292		38,662	N/A
Equipment:
Locomotives		9,467		3,434		6,033	18
Freight cars		2,083		779		1,304	25
Work equipment and other		1,081		322		759	18
Total equipment		12,631		4,535		8,096	N/A
Technology and other		1,136		503		633	12
Construction in progress		1,249		-		1,249	N/A
Total	$	74,246	$	20,330	$	53,916	N/A

*[a]*Other roadway includes grading, bridges and tunnels, signals, buildings, and other road assets.

Property and Depreciation – Our railroad operations are highly capital intensive, and our large base of homogeneous, network-type assets turns over on a continuous basis. Each year we develop a capital program for the replacement of assets and for the acquisition or construction of assets that enable us to enhance our operations or provide new service offerings to customers. Assets purchased or constructed throughout the year are capitalized if they meet applicable minimum units of property criteria. Properties and equipment are carried at cost and are depreciated on a straight-line basis over their estimated service

lives, which are measured in years, except for rail in high-density traffic corridors (i.e., all rail lines except for those subject to abandonment, and yard and switching tracks) for which lives are measured in millions of gross tons per mile of track. We use the group method of depreciation in which all items with similar characteristics, use, and expected lives are grouped together in asset classes and are depreciated using composite depreciation rates. The group method of depreciation treats each asset class as a pool of resources, not as singular items. We currently have more than 60 depreciable asset classes, and we may increase or decrease the number of asset classes due to changes in technology, asset strategies, or other factors.

We determine the estimated service lives of depreciable railroad assets by means of depreciation studies. We perform depreciation studies at least every 3 years for equipment and every 6 years for track assets (i.e., rail and other track material, ties, and ballast) and other road property. Our depreciation studies take into account the following factors:

Statistical analysis of historical patterns of use and retirements of each of our asset classes;

Evaluation of any expected changes in current operations and the outlook for continued use of the assets;

Evaluation of technological advances and changes to maintenance practices; and

Expected salvage to be received upon retirement.

For rail in high-density traffic corridors, we measure estimated service lives in millions of gross tons per mile of track. It has been our experience that the lives of rail in high-density traffic corridors are closely correlated to usage (i.e., the amount of weight carried over the rail). The service lives also vary based on rail weight, rail condition (e.g., new or secondhand), and rail type (e.g., straight or curve). Our depreciation studies for rail in high-density traffic corridors consider each of these factors in determining the estimated service lives. For rail in high-density traffic corridors, we calculate depreciation rates annually by dividing the number of gross ton-miles carried over the rail (i.e., the weight of loaded and empty freight cars, locomotives and maintenance of way equipment transported over the rail) by the estimated service lives of the rail measured in millions of gross tons per mile. For all other depreciable assets, we compute depreciation based on the estimated service lives of our assets as determined from the analysis of our depreciation studies. Changes in the estimated service lives of our assets and their related depreciation rates are implemented prospectively.

Under group depreciation, the historical cost (net of salvage) of depreciable property that is retired or replaced in the ordinary course of business is charged to accumulated depreciation and no gain or loss is recognized. The historical cost of certain track assets is estimated 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 for which 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.

Costs incurred that extend the useful life of an asset, improve the safety of our operations, or improve operating efficiency are 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 $2.0 billion for 2020, $2.3 billion for 2019, and $2.5 billion for 2018.

Assets held under finance 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.

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	2020		2019
Income and other taxes payable	$	635	$	496
Accounts payable		612		749
Accrued wages and vacation		340		370
Interest payable		326		289
Current operating lease liabilities (Note 16)		321		362
Accrued casualty costs		177		190
Equipment rents payable		101		100
Other		592		538
Total accounts payable and other current liabilities	$	3,104	$	3,094

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 2 investments and are valued at amortized cost, which approximates fair value. As of December 31, 2020, the Company had $70 million of short-term investments, of which $10 million are in a trust for the purpose of providing collateral for payment of certain other long-term liabilities, and as such are reclassified as other assets. All short-term investments have a maturity of less than one year and are classified as held-to-maturity. There were no transfers out of Level 2 during the year ended December 31, 2020.

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, 2020, the fair value of total debt was $31.9 billion, approximately $5.1 billion more than the carrying value. At December 31, 2019, the fair value of total debt was $27.2 billion, approximately $2.0 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. The fair value of our cash equivalents approximates their carrying value due to the short-term maturities of these instruments.

14. Debt

Total debt as of December 31, 2020 and 2019, is summarized below:



Millions	2020		2019
Notes and debentures, 2.2% to 7.1% due through February 5, 2070	$	26,608	$	24,008
Equipment obligations, 2.6% to 6.2% due through January 2, 2031		885		923
Finance leases, 3.1% to 8.0% due through December 10, 2028		449		605
Term loans - floating rate, due October 28, 2021		250		250
Commercial paper, 0.2% to 0.3% due through January 21, 2021		75		200
Receivables securitization (Note 10)		-		400
Medium-term notes		-		8
Unamortized discount and deferred issuance costs		(1,538)		(1,194)
Total debt		26,729		25,200
Less: current portion		(1,069)		(1,257)
Total long-term debt	$	25,660	$	23,943

Debt Maturities – The following table presents aggregate debt maturities as of December 31, 2020, excluding market value adjustments:



Millions
2021	$	1,072
2022		1,384
2023		1,384
2024		1,439
2025		1,429
Thereafter		21,559
Total principal		28,267
Unamortized discount and deferred issuance costs		(1,538)
Total debt	$	26,729

Equipment Encumbrances – Equipment with a carrying value of approximately $1.3 billion and $1.6 billion at December 31, 2020 and 2019, respectively, served as collateral for finance leases and other types of equipment obligations in accordance with the secured financing arrangements utilized to acquire or refinance such railroad equipment.

Debt Redemptions – On November 1, 2020, we redeemed all $500 million of outstanding 4.0% notes due February 1, 2021, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest.

Effective October 15, 2019, we redeemed all $163 million of our outstanding 6.125% notes due February 15, 2020. The redemption resulted in an early extinguishment charge of $2 million in the fourth quarter of 2019.

Debt Exchange - 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 Existing 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. No gain or loss was recognized as a result of the exchange. Costs related to the debt exchange that were payable to parties other than the debt holders totaled approximately $9 million and were included in interest expense during the quarter ended September 30, 2020.

On November 20, 2019, we exchanged $1,839 million of various outstanding notes and debentures due between June 1, 2033, and September 10, 2058 (the Existing Notes), for $1,842 million of 3.839% notes (the New Notes) due March 20, 2060, plus cash consideration of approximately $373 million in addition to $19 million for accrued and unpaid interest on the Existing 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. No gain or loss was recognized as a result of the exchange. Costs related to the debt exchange that were payable to parties other than the debt holders totaled approximately $15 million and were included in interest expense in the fourth quarter of 2019.

Credit Facilities – At December 31, 2020, 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. Credit facility withdrawals totaled $0 during 2020. 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 LIBOR, plus a spread, depending upon credit ratings for our senior unsecured debt. The 5 year facility requires UPC to maintain a debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) coverage ratio.

The definition of debt used for purposes of calculating the debt-to-EBITDA coverage ratio includes, among other things, certain credit arrangements, finance leases, guarantees, unfunded and vested pension benefits under Title IV of ERISA, and unamortized debt discount and deferred debt issuance costs. At December 31, 2020, the Company was in compliance with the debt-to-EBITDA coverage ratio, which allows us to carry up to $36.8 billion of debt (as defined in the Facility), and we had $28.3 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 2020, we issued $2.3 billion and repaid $2.5 billion of commercial paper with maturities ranging from 14 to 74 days. As of December 31, 2020 and 2019, we had $75 million and $200 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 2020, we entered into three bilateral revolving credit lines which mature by May 18, 2021, totaling

$600 million of available credit. Since entering into the three bilateral revolving credit lines, we drew $300 million and repaid $300 million, and at December 31, 2020, we had $0 outstanding.

Shelf Registration Statement and Significant New Borrowings – In 2019, our Board of Directors reauthorized the issuance of up to $6 billion of debt securities. Under our shelf registration, we may issue, from time to time any combination of debt securities, preferred stock, common stock, or warrants for debt securities or preferred stock in one or more offerings.

During 2020, we issued the following unsecured, fixed-rate debt securities under our shelf registration:



Date	Description of Securities
January 31, 2020	$500 million of 2.150% Notes due February 5, 2027
	$750 million of 2.400% Notes due February 5, 2030
	$1.0 billion of 3.250% Notes due February 5, 2050
	$750 million of 3.750% Notes due February 5, 2070
April 7, 2020	$750 million of 3.250% Notes due February 5, 2050

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, 2020, we had remaining authority to issue up to $2.25 billion of debt securities under our shelf registration.

Receivables Securitization Facility – As of December 31, 2020 and 2019, we recorded $0 and $400 million, respectively, of borrowings under our Receivables Facility, as secured debt. (See further discussion of our receivables securitization facility in Note 10).

LIBOR Transition – Each of our $2.0 billion revolving credit facility, three bilateral revolving credit lines, two term loans, and Receivables Securitization Facility currently use LIBOR as the benchmark for its 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 $1.3 billion as of December 31, 2020, and are recorded as operating lease liabilities at present value in our Consolidated Statements of Financial Position.

16. Leases

We lease certain locomotives, freight cars, and other property for use in our rail operations. We determine if an arrangement is or contains a lease at inception. We have lease agreements with lease and 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; we recognize lease expense for these leases on a straight-line basis over the lease term. Leases with initial terms in excess of 12 months are recorded as operating or financing leases in our Consolidated Statements of Financial Position. 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 net properties, debt due within one year, and debt due after one year on our Consolidated Statements of Financial Position.

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. As most of our leases do not provide an implicit rate, we use a collateralized incremental borrowing rate for all 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 that the option will be exercised. Operating lease expense is recognized on a straight-line basis over the lease term and reported in equipment and other rents, and financing lease expense is recorded as depreciation and interest expense in our Consolidated Statements of Income.

The following are additional details related to our lease portfolio:



		Dec. 31,		Dec. 31,
Millions	Classification	2020		2019
Assets
Operating leases	Operating lease assets	$	1,610	$	1,812
Finance leases	Net properties [a]		370		468
Total leased assets		$	1,980	$	2,280
Liabilities
Current
Operating	Accounts payable and other current liabilities	$	321	$	362
Finance	Debt due within one year		109		114
Noncurrent
Operating	Operating lease liabilities		1,283		1,471
Finance	Debt due after one year		340		491
Total lease liabilities		$	2,053	$	2,438

[a] *Finance lease assets are recorded net of accumulated amortization of $*737 *million and $*797 million as of December 31, 2020 and 2019, respectively.

The lease cost components are classified as follows:



		Dec. 31,		Dec. 31,
Millions	Classification	2020		2019
Operating lease cost [a]	Equipment and other rents	$	247	$	305
Operating lease cost [a]	Purchased services and materials		40		40
Operating lease cost [a]	Capitalized in net properties		30		21
Finance lease cost
Amortization of leased assets	Depreciation		66		72
Interest on lease liabilities	Interest expense		27		34
Net lease cost		$	410	$	472

[a] *In addition to the lease cost components referenced above, we had short-term lease costs of $*26 *million and $27 million as of December 31, 2020 and 2019, respectively, and variable lease costs of $*10 *million and $*12 million as of December 31, 2020 and 2019, respectively.

The following table presents aggregate lease maturities as of December 31, 2020:



Millions		Operating Leases		Finance Leases		Total
2021	$	325	$	135	$	460
2022		273		111		384
2023		229		81		310
2024		220		68		288
2025		216		45		261
After 2025		567		77		644
Total lease payments	$	1,830	$	517	$	2,347
Less: Interest		226		68		294
Present value of lease liabilities	$	1,604	$	449	$	2,053

The following table presents the weighted average remaining lease term and discount rate:



	Dec. 31,
	2020
Weighted-average remaining lease term (years)
Operating leases		7.9
Finance leases		5.2
Weighted-average discount rate (%)
Operating leases		3.7
Finance leases		5.1

The following table presents other information related to our operating and finance leases for the year ended December 31:




Millions	2020		2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	323	$	387
Investing cash flows from operating leases		30		21
Operating cash flows from finance leases		29		35
Financing cash flows from finance leases		113		112
Leased assets obtained in exchange for finance lease liabilities		-		-
Leased assets obtained in exchange for operating lease liabilities		93		118

17. Commitments and Contingencies

Asserted and Unasserted Claims – Various claims and lawsuits are pending against us and certain of our subsidiaries. We cannot fully determine the effect of all asserted and unasserted claims on our consolidated results of operations, financial condition, or liquidity. 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.

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, 2020. 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 $270 million to $295 million. We record an accrual at the low end of the range as no amount of loss within the range is more probable than any other. Estimates can vary over time due to evolving trends in litigation.

Our personal injury liability activity was as follows:



Millions	2020		2019		2018
Beginning balance	$	265	$	271	$	285
Current year accruals		72		78		74
Changes in estimates for prior years		(3)		(11)		(16)
Payments		(64)		(73)		(72)
Ending balance at December 31	$	270	$	265	$	271
Current portion, ending balance at December 31	$	60	$	63	$	72

We reassess our estimated insurance recoveries annually and have recognized an asset for estimated insurance recoveries at December 31, 2020 and 2019. 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 373 sites at which we are or may be liable for remediation costs associated with alleged contamination or for violations of environmental requirements. This includes 29 sites that are the subject of actions taken by the U.S. government, 18 of which are currently on the Superfund National Priorities List. Certain federal legislation imposes joint and several liability for the remediation of identified sites; consequently, our ultimate environmental liability may include costs relating to activities of other parties, in addition to costs relating to our own activities at each site.

When we identify an environmental issue with respect to property owned, leased, or otherwise used in our business, we perform, with assistance of our consultants, environmental assessments on the property. We expense the cost of the assessments as incurred. We accrue the cost of remediation where our obligation is probable and such costs can be reasonably estimated. Our environmental liability is not discounted to present value due to the uncertainty surrounding the timing of future payments.

Our environmental liability activity was as follows:



Millions	2020		2019		2018
Beginning balance	$	227	$	223	$	196
Accruals		76		67		84
Payments		(70)		(63)		(57)
Ending balance at December 31	$	233	$	227	$	223
Current portion, ending balance at December 31	$	65	$	62	$	59

The environmental liability includes future costs for remediation and restoration of sites, as well as ongoing monitoring costs, but excludes any anticipated recoveries from third parties. Cost estimates are based on information available for each site, financial viability of other potentially responsible parties, and existing technology, laws, and regulations. The ultimate liability for remediation is difficult to determine because of the number of potentially responsible parties, site-specific cost sharing arrangements with other potentially responsible parties, the degree of contamination by various wastes, the scarcity and quality of volumetric data related to many of the sites, and the speculative nature of remediation costs. Estimates of liability may vary over time due to changes in federal, state, and local laws governing environmental remediation. Current obligations are not expected to have a material adverse effect on our consolidated results of operations, financial condition, or liquidity.

Insurance – The Company has a consolidated, wholly-owned captive insurance subsidiary (the captive), that provides insurance coverage for certain risks including FELA claims and property coverage that 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 no longer participates in the reinsurance treaty agreement. The Company established a trust in the fourth quarter of 2018 for the purpose of providing collateral as required under the reinsurance treaty agreement for prior years’ participation.

Guarantees – At December 31, 2020 and 2019, we were contingently liable for $10 million and $15 million, respectively, in guarantees. The fair value of these obligations as of both December 31, 2020 and 2019 was $0. We entered into these contingent guarantees in the normal course of business, and they include guaranteed obligations related to our affiliated operations. The final guarantee expires in 2022. We are not aware of any existing event of default that would require us to satisfy these guarantees. We do not expect that these guarantees will have a material adverse effect on our consolidated financial condition, results of operations, or liquidity.

Indemnities – We are contingently obligated under a variety of indemnification arrangements, although in some cases the extent of our potential liability is limited, depending on the nature of the transactions and the agreements. Due to uncertainty as to whether claims will be made or how they will be resolved, we cannot reasonably determine the probability of an adverse claim or reasonably estimate any adverse liability or the total maximum exposure under these indemnification arrangements. We do not have any reason to believe that we will be required to make any material payments under these indemnity provisions.

18. Share Repurchase Programs

Effective April 1, 2019, our Board of Directors authorized the repurchase of up to 150 million shares of our common stock by March 31, 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, 2020, we repurchased a total of $40.9 billion of our common stock since commencement of our repurchase programs in 2007. The table below represents shares repurchased under repurchase programs during 2019 and 2020:



	Number of Shares Purchased		Average Price Paid [a]
	2020	2019		2020		2019
First quarter [b]	14,305,793	18,149,450	$	178.66	$	165.79
Second quarter	-	3,732,974		-		171.24
Third quarter [c]	4,045,575	9,529,733		98.87		163.30
Fourth quarter	3,780,743	3,582,212		198.07		167.32
Total	22,132,111	34,994,369	$	167.39	$	165.85
Remaining number of shares that may be repurchased under current authority				111,022,970

*[a]*In 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 shares. The average price of the completed 2020 and

*2019 accelerated share repurchase programs was $*155.86 and $167.01, respectively.

*[b]*Includes 8,786,380 and 11,795,930 shares repurchased in February 2020 and 2019, respectively, under accelerated share repurchase programs.

*[c]*Includes an incremental 4,045,575 and 3,172,900 shares received upon final settlement in July 2020 and August 2019, respectively, under accelerated share repurchase programs.

Management's assessments of market conditions and other pertinent factors guide the timing and volume of all repurchases. We expect to fund any share repurchases under this program through cash generated from operations, the sale or lease of various operating and non-operating properties, debt issuances, and cash on hand. Open market repurchases are recorded in treasury stock at cost, which includes any applicable commissions and fees.

From January 1, 2021, through February 4, 2021, we repurchased 2.1 million shares at an aggregate cost of approximately $442 million.

Accelerated Share Repurchase Programs – The Company has established accelerated share repurchase programs (ASRs) with financial institutions to repurchase shares of our common stock. These ASRs have been structured so that at the time of commencement, we pay a specified amount to the financial institutions and receive an initial delivery of shares. Additional shares may be received at the time of settlement. The final number of shares to be received is based on the volume weighted average price of

the Company’s common stock during the ASR term, less a discount and subject to potential adjustments pursuant to the terms of such ASR.

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.

On February 26, 2019, the Company received 11,795,930 shares of its common stock repurchased under ASRs for an aggregate of $2.5 billion. Upon settlement of these ASRs in the third quarter of 2019, we received 3,172,900 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.

19. Related Parties

UPRR and other North American railroad companies jointly own TTX Company (TTX). UPRR has a 36.79% economic and voting interest in TTX while the other North American railroads own the remaining interest. In accordance with ASC 323 Investments - Equity Method and Joint Venture, UPRR applies the equity method of accounting to our investment in TTX.

TTX is a rail car pooling company that owns rail cars and intermodal wells to serve North America’s railroads. TTX assists railroads in meeting the needs of their customers by providing rail cars in an efficient, pooled environment. All railroads have the ability to utilize TTX rail cars through car hire by renting rail cars at stated rates.

UPRR had $1.5 billion and $1.4 billion recognized as investments related to TTX in our Consolidated Statements of Financial Position as of December 31, 2020 and 2019, respectively. TTX car hire expenses of $375 million in 2020, $407 million in 2019, and $429 million in 2018 are included in equipment and other rents in our Consolidated Statements of Income. In addition, UPRR had accounts payable to TTX of $59 million and $62 million at December 31, 2020 and 2019, respectively.

20. Selected Quarterly Data (Unaudited)



Millions, Except Per Share Amounts
2020	Mar. 31		Jun. 30		Sep. 30		Dec. 31
Operating revenues	$	5,229	$	4,244	$	4,919	$	5,141
Operating income		2,143		1,654		2,031		2,006
Net income		1,474		1,132		1,363		1,380
Net income per share:
Basic		2.15		1.67		2.02		2.05
Diluted		2.15		1.67		2.01		2.05



Millions, Except Per Share Amounts
2019	Mar. 31		Jun. 30		Sep. 30		Dec. 31
Operating revenues	$	5,384	$	5,596	$	5,516	$	5,212
Operating income		1,960		2,260		2,234		2,100
Net income		1,391		1,570		1,555		1,403
Net income per share:
Basic		1.94		2.23		2.22		2.03
Diluted		1.93		2.22		2.22		2.02

Per share net income for the four quarters combined may not equal the per share net income for the year due to rounding.

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