UP - Union Pacific Corporation

01/20/2022 | Press release | Distributed by Public on 01/20/2022 07:05

Union Pacific Reports Fourth Quarter and Full Year 2021 Results - Form 8-K

Union Pacific Reports Fourth Quarter and Full Year 2021 Results

Omaha, Neb., January 20, 2022 - Union Pacific Corporation (NYSE: UNP) today reported 2021 fourth quarter net income of $1.7 billion, or $2.66 per diluted share. This compares to adjusted 2020 fourth quarter net income of $1.6 billion, or $2.36 per diluted share. The 2020 adjusted results exclude a $278 million pre-tax, non-cash impairment charge.

Reported net income for the full year 2021 was $6.5 billion, or $9.95 per diluted share. These full year results compare to adjusted full year 2020 net income of $5.6 billion, or $8.19 per diluted share, which excludes the impairment charge.

"The Union Pacific team concluded its most profitable year ever in 2021. We produced double digit fourth quarter revenue growth by leveraging our great rail franchise to generate positive business mix and core pricing gains, despite ongoing global supply chain challenges that impacted volumes," said Lance Fritz, Union Pacific chairman, president and chief executive officer. "For the third consecutive year we improved our fuel consumption rate, taking steps to reduce our carbon footprint and meet the goals of our 2021 Climate Action Plan. While our safety and operational performance in 2021 did not meet expectations, we look to convert recent progress into sustained improvement in 2022. Although uncertainty remains around COVID variants and supply chain disruptions, we see a positive demand environment in 2022 and continued traction from business development efforts driving growth as we deliver value to all our stakeholders."

Fourth Quarter Summary

Financial Results: Strong Revenue Growth Drives Fourth Quarter Records for Operating Income, Net Income, and Earnings Per Share

Fourth Quarter 2021 Compared to Adjusted Fourth Quarter 2020*

Operating revenue of $5.7 billion was up 12% driven by higher fuel surcharge revenue, a positive business mix, and core pricing gains, partially offset by lower volumes.

Business volumes, as measured by total revenue carloads, were down 4%.

Union Pacific's 57.4% operating ratio deteriorated 180 basis points. Higher fuel prices negatively impacted the operating ratio by 100 basis points.

Operating Income of $2.4 billion was up 7%.

The company repurchased 5.8 million shares in fourth quarter 2021 at an aggregate cost of $1.4 billion.

* 2020 results exclude the Brazos non-cash impairment charge. Please reference page 10 of the supplemental financial information for the reconciliation to GAAP.

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Operating Performance: Network Recovery Efforts Slowed by COVID Impacts to Crew Availability

Fourth Quarter 2021 Compared to Fourth Quarter 2020

Quarterly freight car velocity of 197 daily miles per car, a 12% decline.

Quarterly locomotive productivity was 129 gross ton-miles (GTMs) per horsepower day, an 9% decline.

Average maximum train length was 9,319 feet, a 2% increase.

Quarterly workforce productivity was 1,046 car miles per employee, a 1% improvement

Fuel consumption rate, measured in gallons of fuel per thousand GTMs, was flat.

2021 Full Year Summary

Financial Results: Revenue Growth and Margin Improvement Drives Records for Operating Income, Operating Ratio, Net Income, and Earnings Per Share

Full Year 2021 Compared to Adjusted Full Year 2020*

Operating revenue of $21.8 billion was up 12% driven by volume growth, higher fuel surcharge revenue, core pricing gains, and a positive business mix.

Business volumes, as measured by total revenue carloads, were up 4%.

Union Pacific's 57.2% operating ratio deteriorated 130 basis points. Higher fuel prices negatively impacted the operating ratio by 140 basis points.

Operating Income of $9.3 billion was up 15%.

Union Pacific's capital program in 2021 totaled $3.0 billion.

The company repurchased 33.3 million shares in 2021 at an aggregate cost of $7.3 billion.

* 2020 results exclude the Brazos non-cash impairment charge. Please reference page 10 of the supplemental financial information for the reconciliation to GAAP.

Operating Performance: Network Operations Challenged by Weather Events, Wildfires, COVID Impacted Crew Availability, and Supply Chain Disruptions

Full Year 2021 Compared to Full Year 2020

Union Pacific's reportable personal injury rate deteriorated to 0.98 per 200,000 employee-hours compared to 0.90 for full year 2020

Freight car velocity of 203 daily miles per car, an 8% decline.

Locomotive productivity was 133 GTMs per horsepower day, a 3% decline.

Average maximum train length was 9,334 feet, a 6% increase.

Workforce productivity was 1,038 car miles per employee, a 10% improvement

Fuel consumption rate, measured in gallons of fuel per thousand GTMs, improved 1%.

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Fourth Quarter 2021 Earnings Conference Call

Union Pacific will webcast its fourth quarter 2021 earnings release presentation live at www.up.com/investor and via teleconference on Thursday, January 20, 2022, at 8:45 a.m. Eastern Time. Participants may join the conference call by dialing 877-407-8293 (or for international participants, 201-689-8349).

ABOUT UNION PACIFIC

Union Pacific (NYSE: UNP) delivers the goods families and businesses use every day with safe, reliable, and efficient service. Operating in 23 western states, the company connects its customers and communities to the global economy. Trains are the most environmentally responsible way to move freight, helping Union Pacific protect future generations. More information about Union Pacific is available at www.up.com.

Union Pacific Investor contact: Brad Stock at 402-544-4227 or [email protected]

Union Pacific Media contact: Clarissa Beyah at 402-957-4793 or [email protected]

Supplemental financial information is attached.

****

This news release and related materials contain statements about the Company's future that are not statements of historical fact, including specifically the statements regarding the Company's expectations with respect to economic conditions and demand levels, its ability to improve network performance, its results of operations, and potential impacts of the COVID-19 pandemic. These statements are, or will be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements also generally include, without limitation, information, or statements regarding: projections, predictions, expectations, estimates, or forecasts as to the Company's and its subsidiaries' business, financial, and operational results, and future economic performance; and management's beliefs, expectations, goals, and objectives and other similar expressions concerning matters that are not historical facts.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times that, or by which, such performance or results will be achieved. Forward-looking information, including expectations regarding operational and financial improvements and the Company's future performance or results are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statement. Important factors, including risk factors, could affect the Company's and its subsidiaries' future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. Information regarding risk factors and other cautionary information are available in the Company's Annual Report on Form 10-K for 2020, which was filed with the SEC on February 5, 2021. The Company updates information regarding risk factors if circumstances require such updates in its periodic reports on Form 10-Q and its subsequent Annual Reports on Form 10-K (or such other reports that may be filed with the SEC).

Forward-looking statements speak only as of, and are based only upon information available on, the date the statements were made. The Company assumes no obligation to update forward-looking information to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information. If the Company does update one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect thereto or with respect to other forward-looking statements. References to our website are provided for convenience and, therefore, information on or available through the website is not, and should not be deemed to be, incorporated by reference herein.

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UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Income (unaudited)

Millions, Except Per Share Amounts and Percentages,

4th Quarter

Full Year

For the Periods Ended December 31,

2021

2020

%

2021

2020

%

Operating Revenues

Freight revenues

$ 5,297 $ 4,803 10

%

$ 20,244 $ 18,251 11

%

Other

436 338 29 1,560 1,282 22

Total operating revenues

5,733 5,141 12 21,804 19,533 12

Operating Expenses

Compensation and benefits

1,070 1,021 5 4,158 3,993 4

Depreciation

556 557 - 2,208 2,210 -

Fuel

597 332 80 2,049 1,314 56

Purchased services and materials

538 492 9 2,016 1,962 3

Equipment and other rents

230 220 5 859 875 (2 )

Other

302 513 (41 ) 1,176 1,345 (13 )

Total operating expenses

3,293 3,135 5 12,466 11,699 7

Operating Income

2,440 2,006 22 9,338 7,834 19

Other income

83 66 26 297 287 3

Interest expense

(295 ) (279 ) 6 (1,157 ) (1,141 ) 1

Income before income taxes

2,228 1,793 24 8,478 6,980 21

Income taxes

(517 ) (413 ) 25 (1,955 ) (1,631 ) 20

Net Income

$ 1,711 $ 1,380 24 $ 6,523 $ 5,349 22

Share and Per Share

Earnings per share - basic

$ 2.67 $ 2.05 30

%

$ 9.98 $ 7.90 26

%

Earnings per share - diluted

$ 2.66 $ 2.05 30 $ 9.95 $ 7.88 26

Weighted average number of shares - basic

640.4 672.2 (5 ) 653.8 677.3 (3 )

Weighted average number of shares - diluted

642.1 674.1 (5 ) 655.4 679.1 (3 )

Dividends declared per share

$ 1.18 $ 0.97 22 $ 4.29 $ 3.88 11

Operating Ratio

57.4 % 61.0 % (3.6 )pts 57.2 % 59.9 % (2.7 )pts

Effective Tax Rate

23.2 % 23.0 % 0.2 23.1 % 23.4 % (0.3 )
1

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Freight Revenues Statistics (unaudited)

4th Quarter

Full Year

For the Periods Ended December 31,

2021

2020

%

2021

2020

%

Freight Revenues (Millions)

Grain & grain products

$ 889 $ 801 11

%

$ 3,181 $ 2,829 12

%

Fertilizer

176 161 9 697 660 6

Food & refrigerated

259 243 7 998 937 7

Coal & renewables

485 357 36 1,780 1,534 16

Bulk

1,809 1,562 16 6,656 5,960 12

Industrial chemicals & plastics

507 461 10 1,943 1,845 5

Metals & minerals

481 378 27 1,811 1,580 15

Forest products

351 307 14 1,357 1,160 17

Energy & specialized markets

558 515 8 2,212 2,037 9

Industrial

1,897 1,661 14 7,323 6,622 11

Automotive

469 486 (3 ) 1,761 1,680 5

Intermodal

1,122 1,094 3 4,504 3,989 13

Premium

1,591 1,580 1 6,265 5,669 11

Total

$ 5,297 $ 4,803 10

%

$ 20,244 $ 18,251 11

%

Revenue Carloads (Thousands)

Grain & grain products

213 216 (1

)%

805 745 8

%

Fertilizer

48 44 9 201 193 4

Food & refrigerated

48 48 - 189 185 2

Coal & renewables

215 190 13 819 797 3

Bulk

524 498 5 2,014 1,920 5

Industrial chemicals & plastics

157 148 6 606 587 3

Metals & minerals

181 154 18 697 646 8

Forest products

63 59 7 250 220 14

Energy & specialized markets

137 137 - 559 539 4

Industrial

538 498 8 2,112 1,992 6

Automotive

182 202 (10 ) 701 692 1

Intermodal [a]

728 853 (15 ) 3,211 3,149 2

Premium

910 1,055 (14 ) 3,912 3,841 2

Total

1,972 2,051 (4

)%

8,038 7,753 4

%

Average Revenue per Car

Grain & grain products

$ 4,187 $ 3,710 13

%

$ 3,953 $ 3,797 4

%

Fertilizer

3,705 3,647 2 3,470 3,427 1

Food & refrigerated

5,409 5,030 8 5,279 5,047 5

Coal & renewables

2,251 1,887 19 2,173 1,926 13

Bulk

3,457 3,139 10 3,305 3,104 6

Industrial chemicals & plastics

3,242 3,125 4 3,207 3,144 2

Metals & minerals

2,659 2,448 9 2,598 2,445 6

Forest products

5,521 5,184 7 5,424 5,269 3

Energy & specialized markets

4,054 3,747 8 3,956 3,780 5

Industrial

3,522 3,331 6 3,467 3,324 4

Automotive

2,576 2,399 7 2,511 2,427 3

Intermodal [a]

1,541 1,284 20 1,403 1,267 11

Premium

1,748 1,497 17 1,601 1,476 8

Average

$ 2,686 $ 2,341 15

%

$ 2,519 $ 2,354 7

%

[a]

For intermodal shipments each container or trailer equals one carload.

2

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Financial Position (unaudited)

Dec. 31,

Dec. 31,

Millions, Except Percentages

2021

2020

Assets

Cash and cash equivalents

$ 960 $ 1,799

Short-term investments

46 60

Other current assets

2,545 2,355

Investments

2,241 2,164

Properties, net

54,871 54,161

Operating lease assets

1,787 1,610

Other assets

1,075 249

Total assets

$ 63,525 $ 62,398

Liabilities and Common Shareholders' Equity

Debt due within one year

$ 2,166 $ 1,069

Other current liabilities

3,578 3,104

Debt due after one year

27,563 25,660

Operating lease liabilities

1,429 1,283

Deferred income taxes

12,675 12,247

Other long-term liabilities

1,953 2,077

Total liabilities

49,364 45,440

Total common shareholders' equity

14,161 16,958

Total liabilities and common shareholders' equity

$ 63,525 $ 62,398

Return on Average Common Shareholders' Equity

41.9 % 30.5 %

Return on Invested Capital as Adjusted (ROIC)*

16.4 % 13.9 %

*

ROIC is a non-GAAP measure; however, management believes that it is an important measure in evaluating the efficiency and effectiveness of our long-term capital investments. See page 9 for a reconciliation to GAAP.
3

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Cash Flows (unaudited)

Millions,

Full Year

For the Periods Ended December 31,

2021

2020

Operating Activities

Net income

$ 6,523 $ 5,349

Depreciation

2,208 2,210

Deferred and other income taxes

154 340

Other - net

147 641

Cash provided by operating activities

9,032 8,540

Investing Activities

Capital investments*

(2,936 ) (2,927 )

Maturities of short-term investments

94 141

Purchases of short-term investments

(70 ) (136 )

Other - net

203 246

Cash used in investing activities

(2,709 ) (2,676 )

Financing Activities

Share repurchase programs

(7,291 ) (3,705 )

Debt issued

4,201 4,004

Dividends paid

(2,800 ) (2,626 )

Debt repaid

(1,299 ) (2,053 )

Net issuance of commercial paper

325 (127 )

Debt exchange

(270 ) (328 )

Other - net

(24 ) (67 )

Cash used in financing activities

(7,158 ) (4,902 )

Net Change in Cash, Cash Equivalents, and Restricted Cash

(835 ) 962

Cash, cash equivalents, and restricted cash at beginning of year

1,818 856

Cash, Cash Equivalents, and Restricted Cash at End of Year

$ 983 $ 1,818

Free Cash Flow**

Cash provided by operating activities

$ 9,032 $ 8,540

Cash used in investing activities

(2,709 ) (2,676 )

Dividends paid

(2,800 ) (2,626 )

Free cash flow

$ 3,523 $ 3,238

*

Capital investments include locomotive and freight car early lease buyouts of $34 million in 2021 and $38 million in 2020.

**

Free cash flow is a non-GAAP measure; however, we believe this measure is important to management and investors in evaluating our financial performance and measures our ability to generate cash without additional external financing.

4

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Operating and Performance Statistics (unaudited)

4th Quarter

Full Year

For the Periods Ended December 31,

2021

2020

%

2021

2020

%

Operating/Performance Statistics

Freight car velocity (daily miles per car)

197 223 (12

)%

203 221 (8

)%

Average train speed (miles per hour) *

24.2 26.1 (7 ) 24.6 25.9 (5 )

Average terminal dwell time (hours) *

24.4 22.4 9 23.7 22.7 4

Locomotive productivity (GTMs per horsepower day)

129 142 (9 ) 133 137 (3 )

Gross ton-miles (GTMs) (millions)

209,970 202,844 4 817,919 771,765 6

Train length (feet)

9,319 9,154 2 9,334 8,798 6

Intermodal car trip plan compliance (%)

78 83 (5 )pts 73 81 (8 )pts

Manifest/Automotive car trip plan compliance (%)

58 74 (16 )pts 63 71 (8 )pts

Workforce productivity (car miles per employee)

1,046 1,032 1 1,038 947 10

Total employees (average)

29,989 29,753 1 29,905 30,960 (3 )

Locomotive Fuel Statistics

Average fuel price per gallon consumed

$ 2.53 $ 1.45 74

%

$ 2.23 $ 1.50 49

%

Fuel consumed in gallons (millions)

228 222 3 888 849 5

Fuel consumption rate**

1.088 1.092 - 1.086 1.100 (1 )

Revenue Ton-Miles (Millions)

Grain & grain products

21,656 21,591 -

%

79,520 71,979 10

%

Fertilizer

3,185 2,932 9 12,387 12,024 3

Food & refrigerated

4,651 4,662 - 18,475 17,534 5

Coal & renewables

22,795 18,128 26 85,586 76,695 12

Bulk

52,287 47,313 11 195,968 178,232 10

Industrial chemicals & plastics

7,257 7,465 (3 ) 30,048 28,095 7

Metals & minerals

8,611 7,091 21 32,993 28,562 16

Forest products

6,458 6,206 4 25,863 23,527 10

Energy & specialized markets

9,420 9,200 2 37,902 36,527 4

Industrial

31,746 29,962 6 126,806 116,711 9

Automotive

3,830 4,337 (12 ) 14,879 14,835 -

Intermodal

16,977 19,854 (14 ) 73,620 75,198 (2 )

Premium

20,807 24,191 (14 ) 88,499 90,033 (2 )

Total

104,840 101,466 3

%

411,273 384,976 7

%

*

Surface Transportation Board reported performance measures.

**

Fuel consumption is computed as follows: gallons of fuel consumed divided by gross ton-miles in thousands.

5

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Income (unaudited)

2021

Millions, Except Per Share Amounts and Percentages,

1st Qtr

2nd Qtr

3rd Qtr

4th Qtr

Full Year

Operating Revenues

Freight revenues

$ 4,649 $ 5,132 $ 5,166 $ 5,297 $ 20,244

Other

352 372 400 436 1,560

Total operating revenues

5,001 5,504 5,566 5,733 21,804

Operating Expenses

Compensation and benefits

1,026 1,022 1,040 1,070 4,158

Depreciation

549 550 553 556 2,208

Fuel

411 497 544 597 2,049

Purchased services and materials

490 478 510 538 2,016

Equipment and other rents

212 200 217 230 859

Other

320 284 270 302 1,176

Total operating expenses

3,008 3,031 3,134 3,293 12,466

Operating Income

1,993 2,473 2,432 2,440 9,338

Other income

51 125 38 83 297

Interest expense

(290 ) (282 ) (290 ) (295 ) (1,157 )

Income before income taxes

1,754 2,316 2,180 2,228 8,478

Income taxes

(413 ) (518 ) (507 ) (517 ) (1,955 )

Net Income

$ 1,341 $ 1,798 $ 1,673 $ 1,711 $ 6,523

Share and Per Share

Earnings per share - basic

$ 2.01 $ 2.73 $ 2.58 $ 2.67 $ 9.98

Earnings per share - diluted

$ 2.00 $ 2.72 $ 2.57 $ 2.66 $ 9.95

Weighted average number of shares - basic

667.6 658.5 648.7 640.4 653.8

Weighted average number of shares - diluted

669.2 660.1 650.3 642.1 655.4

Dividends declared per share

$ 0.97 $ 1.07 $ 1.07 $ 1.18 $ 4.29

Operating Ratio

60.1 % 55.1 % 56.3 % 57.4 % 57.2 %

Effective Tax Rate

23.5 % 22.4 % 23.3 % 23.2 % 23.1 %
6

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Freight Revenues Statistics (unaudited)

2021

1st Qtr

2nd Qtr

3rd Qtr

4th Qtr

Full Year

Freight Revenues (Millions)

Grain & grain products

$ 766 $ 795 $ 731 $ 889 $ 3,181

Fertilizer

170 179 172 176 697

Food & refrigerated

235 251 253 259 998

Coal & renewables

341 423 531 485 1,780

Bulk

1,512 1,648 1,687 1,809 6,656

Industrial chemicals & plastics

435 498 503 507 1,943

Metals & minerals

375 467 488 481 1,811

Forest products

316 348 342 351 1,357

Energy & specialized markets

530 546 578 558 2,212

Industrial

1,656 1,859 1,911 1,897 7,323

Automotive

447 428 417 469 1,761

Intermodal

1,034 1,197 1,151 1,122 4,504

Premium

1,481 1,625 1,568 1,591 6,265

Total

$ 4,649 $ 5,132 $ 5,166 5,297 20,244

Revenue Carloads (Thousands)

Grain & grain products

203 204 185 213 805

Fertilizer

44 54 55 48 201

Food & refrigerated

45 48 48 48 189

Coal & renewables

174 198 232 215 819

Bulk

466 504 520 524 2,014

Industrial chemicals & plastics

140 156 153 157 606

Metals & minerals

146 182 188 181 697

Forest products

60 64 63 63 250

Energy & specialized markets

139 138 145 137 559

Industrial

485 540 549 538 2,112

Automotive

180 173 166 182 701

Intermodal [a]

796 878 809 728 3,211

Premium

976 1,051 975 910 3,912

Total

1,927 2,095 2,044 1,972 8,038

Average Revenue per Car

Grain & grain products

$ 3,782 $ 3,894 $ 3,937 $ 4,187 $ 3,953

Fertilizer

3,852 3,304 3,125 3,705 3,470

Food & refrigerated

5,234 5,226 5,246 5,409 5,279

Coal & renewables

1,958 2,134 2,298 2,251 2,173

Bulk

3,246 3,266 3,244 3,457 3,305

Industrial chemicals & plastics

3,113 3,189 3,277 3,242 3,207

Metals & minerals

2,563 2,569 2,596 2,659 2,598

Forest products

5,244 5,463 5,457 5,521 5,424

Energy & specialized markets

3,828 3,944 3,996 4,054 3,956

Industrial

3,417 3,442 3,482 3,522 3,467

Automotive

2,485 2,479 2,500 2,576 2,511

Intermodal [a]

1,299 1,363 1,424 1,541 1,403

Premium

1,517 1,547 1,608 1,748 1,601

Average

$ 2,413 $ 2,449 $ 2,528 $ 2,686 $ 2,519

[a]

For intermodal shipments each container or trailer equals one carload.

7

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Non-GAAP Measures Reconciliation to GAAP

Adjusted Debt / Adjusted EBITDA*

Millions, Except Ratios

Dec. 31,

Dec. 31,

Dec. 31,

for the Twelve Months Ended

2021

2020

2019

Net income

$ 6,523 $ 5,349 $ 5,919

Add:

Income tax expense/(benefit)

1,955 1,631 1,828

Depreciation

2,208 2,210 2,216

Interest expense

1,157 1,141 1,050

EBITDA

$ 11,843 $ 10,331 $ 11,013

Adjustments:

Other income, net

(297 ) (287 ) (243 )

Interest on operating lease liabilities**

56 59 68

Adjusted EBITDA

$ 11,602 $ 10,103 $ 10,838

Debt

$ 29,729 $ 26,729 $ 25,200

Operating lease liabilities

1,759 1,604 1,833

Unfunded/(funded) pension and other postretirement benefits,

net of tax cost/(benefit) of ($21), $195, and $124

(72 ) 637 400

Adjusted debt

$ 31,416 $ 28,970 $ 27,433

Adjusted debt / Adjusted EBITDA

2.7 2.9 2.5

Comparable Adjusted Debt / Adjusted EBITDA*

Dec. 31,

Dec. 31,

Dec. 31,

2021

2020

2019

Adjusted debt / Adjusted EBITDA

2.7 2.9 2.5

Factors Affecting Comparability:

Brazos yard impairment [a]

N/A (0.1 ) N/A

Comparable Adjusted Debt / Adjusted EBITDA*

2.7 2.8 2.5

[a]

Adjustments remove the impact of $209 million from net income and $69 million from income tax expense for the year ended December 31, 2020. See page 10 for a reconciliation to GAAP.

*

Total debt plus operating lease liabilities plus after-tax unfunded pension and other postretirement benefit obligations divided by net income plus income tax expense, depreciation, amortization, interest expense, and adjustments for other income and interest on operating lease liabilities. Adjusted debt to adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, and adjustments for other income and interest on operating lease liabilities) and comparable adjusted debt to adjusted EBITDA are considered a non-GAAP financial measure by SEC Regulation G and Item 10 of SEC Regulation S-K and may not be defined and calculated by other companies in the same manner. We believe these measures are important to management and investors in evaluating the Company's ability to sustain given debt levels (including leases) with the cash generated from operations. In addition, a comparable measure is used by rating agencies when reviewing the Company's credit rating. Adjusted debt to adjusted EBITDA and comparable adjusted debt to adjusted EBITDA should be considered in addition to, rather than as a substitute for, net income. The table above provides reconciliations from net income to adjusted debt to adjusted EBITDA and comparable adjusted debt to adjusted EBITDA. At December 31, 2021, 2020, and 2019, the incremental borrowing rate on operating lease liabilities was 3.2%, 3.7% and 3.7%, respectively.

**

Represents the hypothetical interest expense we would incur (using the incremental borrowing rate) if the property under our operating leases were owned or accounted for as finance leases.

8

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Non-GAAP Measures Reconciliation to GAAP

Return on Average Common Shareholders' Equity

Millions, Except Percentages

2021

2020

2019

Net income

$

6,523

$

5,349

$

5,919

Average equity

$

15,560

$

17,543

$

19,276

Return on average common shareholders' equity

41.9%

30.5%

30.7%

Return on Invested Capital as Adjusted (ROIC)*

Millions, Except Percentages

2021

2020

2019

Net income

$

6,523

$

5,349

$

5,919

Interest expense

1,157

1,141

1,050

Interest on average operating lease liabilities

54

64

76

Taxes on interest

(280)

(282)

(266)

Net operating profit after taxes as adjusted

$

7,454

$

6,272

$

6,779

Average equity

$

15,560

$

17,543

$

19,276

Average debt

28,229

25,965

23,796

Average operating lease liabilities

1,682

1,719

2,052

Average invested capital as adjusted

$

45,471

$

45,227

$

45,124

Return on invested capital as adjusted

16.4%

13.9%

15.0%

Comparable Return on Invested Capital as Adjusted (Comparable ROIC)*

2021

2020

2019

Return on invested capital as adjusted

16.4%

13.9%

15.0%

Factors Affecting Comparability:

Brazos yard impairment [a]

N/A

0.4

N/A

Comparable return on invested capital as adjusted

16.4%

14.3%

15.0%

[a]

Adjustments remove the impact of $209 million from both net income for the year ended and shareholders' equity as of December 31, 2020. See page 10 for a reconciliation to GAAP.

*

ROIC and comparable ROIC are considered non-GAAP financial measures by SEC Regulation G and Item 10 of SEC Regulation S-K and may not be defined and calculated by other companies in the same manner. We believe these measures are important to management and investors in evaluating the efficiency and effectiveness of our long-term capital investments. In addition, we currently use ROIC as a performance criterion in determining certain elements of equity compensation for our executives. ROIC and comparable ROIC should be considered in addition to, rather than as a substitute for, other information provided in accordance with GAAP. The most comparable GAAP measure is return on average common shareholders' equity. The tables above provide reconciliations from return on average common shareholders' equity to ROIC and comparable ROIC. At December 31, 2021, 2020, and 2019, the incremental borrowing rate on operating leases was 3.2%, 3.7% and 3.7%, respectively.

9

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

Non-GAAP Measures Reconciliation to GAAP

Financial Performance*

Millions, Except Per Share Amounts and Percentages

Reported results

Brazos Yard

Adjusted results

For the Three Months Ended December 31, 2020

(GAAP)

Impairment

(non-GAAP)

Operating expense

$ 3,135 $ (278 ) $ 2,857

Operating income

2,006

278

2,284

Income taxes

413

69

482

Net income

1,380

209

1,589

Diluted EPS

2.05

0.31

2.36

Operating ratio

61.0

%

(5.4 )

pts

55.6

%

Reported results

Brazos Yard

Adjusted results
Millions, Except Per Share Amounts and Percentages

(GAAP)

Impairment

(non-GAAP)

For the Year Ended December 31, 2020

Operating expense

$ 11,699 $ (278 ) $ 11,421

Operating income

7,834

278

8,112

Income taxes

1,631

69

1,700

Net income

5,349

209

5,558

Diluted EPS

7.88

0.31

8.19

Operating ratio

59.9

%

(1.4 )

pts

58.5

%

As of December 31, 2020

Shareholders' equity

$ 16,958 $ 209 $ 17,167

*

The above tables reconcile our results for the three-months and year ended December 31, 2020, and as of December 31, 2020, to adjust results that exclude the impact of certain items identified as affecting comparability. We use adjusted operating expense, adjusted operating income, adjusted income taxes, adjusted net income, adjusted diluted earnings per share (EPS), adjusted operating ratio, and adjusted shareholders' equity, as applicable, among other measures, to evaluate our actual operating performance. We believe these non-GAAP financial measures provide valuable information regarding earnings and business trends by excluding specific items that we believe are not indicative of our ongoing operating results of our business, providing a useful way for investors to make a comparison of our performance over time and against other companies in our industry. Since these are not measures of performance calculated in accordance with GAAP, they should be considered in addition to, rather than as a substitute for, operating expense, operating income, income taxes, net income, diluted EPS, operating ratio, and shareholders' equity as indicators of operating performance.
10