Quarterly Report (SEC Filing - 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2021

OR

For the transition period from __________ to ____________

Commission File Number 1-6075

UNION PACIFIC CORPORATION

(Exact name of registrant as specified in its charter)

1400 Douglas Street, Omaha, Nebraska

(Address of principal executive offices)

68179

(Zip Code)

(402) 544-5000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of 'large accelerated filer,' 'accelerated filer,' 'smaller reporting company,' and 'emerging growth company' in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

¨ Yes x No

As of April 16, 2021, there were 664,302,521sharesof the Registrant's Common Stock outstanding.

Table of Contents

TABLE OF CONTENTS

UNION PACIFIC CORPORATION

AND SUBSIDIARY COMPANIES

PART I. FINANCIAL INFORMATION

PART II. OTHER INFORMATION

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Union Pacific Corporation and Subsidiary Companies

[a]Net of deferred taxes of ($8) millionand ($7) million during the three months ended March 31, 2021 and 2020, respectively.

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

Condensed Consolidated Statements of Financial Position (Unaudited)

Union Pacific Corporation and Subsidiary Companies

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

Condensed Consolidated Statements of Cash Flows (Unaudited)

Union Pacific Corporation and Subsidiary Companies

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

Condensed Consolidated Statements of Changes in Common Shareholders' Equity (Unaudited)

Union Pacific Corporation and Subsidiary Companies

[a]AOCI = Accumulated Other Comprehensive Income/Loss (Note 8)

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

‎

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. Basis of Presentation

Our Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting of normal and recurring adjustments) that are, in the opinion of management, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (GAAP). Pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, this Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and notes thereto contained in our 2020 Annual Report on Form 10-K. Our Consolidated Statement of Financial Position at December 31, 2020, is derived from audited financial statements. The results of operations for the three months ended March 31, 2021, are not necessarily indicative of the results for the entire year ending December 31, 2021.

The Condensed Consolidated Financial Statements are presented in accordance with GAAP as codified in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC).

2. Accounting Pronouncements

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), and it did not have a material impact on the Company's consolidated financial statements and related disclosures.

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.

3. Operations and Segmentation

The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment. Although we provide and analyze revenue by three commodity groups, 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:

Although our revenues are principally derived from customers domiciled in the U.S., the ultimate points of origin 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 $565millionand $583million, respectively, for the three months ended March 31, 2021 and 2020.

4. 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.

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

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:

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 the three months ended March 31, 2021, is presented below:

Stock options are granted at the closing price on the date of grant, have 10year contractual terms, and vest no later than 3years from the date of grant. Noneof the stock options outstanding at March 31, 2021, are subject to performance or market-based vesting conditions.

At March 31, 2021, there was $27million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.7years. Additional information regarding stock option exercises appears in the following table:

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 the three months ended March 31, 2021, were as follows:

Retention awards are granted at no cost to the employee and vest over periods lasting up to 4years. At March 31, 2021, there was $129million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 2.2years.

Performance Retention Awards- In February 2021, our Board of Directors approved performance stock unit grants. This plan is based on performance targets for annual return on invested capital (ROIC) and operating income growth (OIG) compared to companies in the S&P 100 Industries Index plus the Class I railroads. 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 February 2021 stock units awarded to selected employees are subject to continued employment for 37months, the attainment of certain levels of ROIC, and the relative three-year OIG. We expense two-thirds of 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 remaining one-third of the fair value is subject to the relative three-year OIG.We measure the fair value of these performance stock units based upon the closing price of the underlying common stock as of the date of grant. 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 the three months ended March 31, 2021, were as follows:

At March 31, 2021, there was $34million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 1.9years. 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) plan.

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.

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 5year 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.

The components of our net periodic pension and OPEB costs were as follows for the three months ended March 31:

0

Cash Contributions

For the three months ended March 31, 2021, cash contributions totaled $0to the qualified pension plan. Any contributions made during 2021 will be based on cash generated from operations and financial market considerations. 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. At March 31, 2021, we do not have minimum cash funding requirements for 2021.

6. Other Income

Other income included the following:

7. Earnings Per Share

The following table provides a reconciliation between basic and diluted earnings per share:

8. Accumulated Other Comprehensive Income/Loss

Reclassifications out of accumulated other comprehensive income/loss for the three months ended March 31, 2021 and 2020, were as follows (net of tax):

[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.

9. 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 both March 31, 2021, and December 31, 2020, our accounts receivable were reduced by $17million. Receivables not expected to be collected in one year and the associated allowances are classified as other assets in our Condensed Consolidated Statements of Financial Position. At March 31, 2021, and December 31, 2020, receivables classified as other assets were reduced by allowances of $43million and $51million, respectively.

Receivables Securitization Facility - The Railroad maintains an $800million, 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 $0at both March 31, 2021, and December 31, 2020. The Receivables Facility was supported by $1.3billion and $1.2billion of accounts receivable as collateral at March 31, 2021, and December 31, 2020, respectively, which, as a retained interest, is included in accounts receivable, net in our Condensed 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 $1million and $3million for thethree months ended March 31, 2021 and 2020, respectively.

Subsequent Event - On April 12, 2021, we drew $400million on our Receivables Facility, increasing the amount recorded to $400million in the second quarter. We used the net proceeds for general corporate purposes, including the repurchase of common stock pursuant to our share repurchase programs.

10. 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):

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

11. Accounts Payable and Other Current Liabilities

12. 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 March 31, 2021, the Company had $70million of short-term investments, of which $10million are in a trust for the purpose of providing collateral for payment of certain other long-term liabilities, and as such are classified as other assets. All short-term investments have a maturity of less than one year and are classified as held-to-maturity.

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 March 31, 2021, the fair value of total debt was $29.3billion, approximately $2.6billion more than the carrying value. At December 31, 2020, the fair value of total debt was $31.9billion, approximately $5.1billion more than the carrying value. The fair value of the Corporation's debt is a measure of its current value under present market conditions. The fair value of our cash equivalents approximates their carrying value due to the short-term maturities of these instruments.

13. Debt

Credit Facilities - At March 31, 2021, we had $2.0billion of credit available under our revolving credit facility (the Facility), which is designated for general corporate purposes and can be used to support the issuance of commercial paper. Credit facility withdrawals totaled $0during the three months ended March 31, 2021. Commitment fees and interest rates payable under the Facility are similar to fees and rates available to comparably rated, investment-grade borrowers. The Facility allows for borrowings at floating rates based on LIBOR, plus a spread, depending upon credit ratings for our senior unsecured debt. The 5year facility, set to expire on June 8, 2023, requires UPC to maintain a debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) coverage ratio.

The definition of debt used for purposes of calculating the debt-to-EBITDA coverage ratio includes, among other things, certain credit arrangements, finance leases, guarantees, unfunded and vested pension benefits under Title IV of ERISA, and unamortized debt discount and deferred debt issuance costs. At March 31, 2021, the Company was in compliance with the debt-to-EBITDA coverage ratio, which allows us to carry up to $36.2billion of debt (as defined in the Facility), and we had $28.2billion 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 $150million cross-default provision and a change-of-control provision.

During the three months ended March 31, 2021, we issued $300million and repaid$315million of commercial paper with maturities ranging from 20to 48days, and at March 31, 2021, we had $60million of commercial paper outstanding. Our revolving credit facility can be used to support 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 $600million of available credit. During the three months ended March 31, 2021, we drew $0and repaid $0, and at March 31, 2021, we had $0outstanding.

Shelf Registration Statement and Significant New Borrowings- We filed an automatic shelf registration statement with the SEC that became effective on February 10, 2021. The Board of Directors authorized the issuance of up to $6billion of debt securities, replacing the prior Board authorization in November 2019, which had $2.25billion of authority remaining. Under our shelf registration, we may issue, from time to time, any combination of debt securities, preferred stock, common stock, or warrants for debt securities or preferred stock in one or more offerings.

During the three months ended March 31, 2021, we did not issue any debt securities under this registration statement. At March 31, 2021, we had remaining authority from the Board of Directors to issue up to $6billion of debt securities under our shelf registration.

Receivables Securitization Facility- As of both March 31, 2021, and December 31, 2020, we recorded $0of borrowings under our Receivables Facility as secured debt. (See further discussion of our receivables securitization facility in Note 9).

Subsequent Event - On April 6, 2021, we exchanged approximately $1.7billion of various outstanding notes and debentures due between 2028and 2065(Existing Notes) for $701million of 2.891% notes due April 6, 2036(New 2036 Notes) and $1.0billion of 3.799% notes due April 6, 2071(New 2071 Notes), plus cash consideration of approximately $257million in addition to $14million 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 $12million and were included in interest expense during the quarter ended March 31, 2021.

14. 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 March 31, 2021. Because of the uncertainty surrounding the ultimate outcome of personal injury claims, it is reasonably possible that future costs to settle these claims may range from approximately $293million to $320million. 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:

We reassess our estimated insurance recoveries annually and have recognized an asset for estimated insurance recoveries at both March 31, 2021, and December 31, 2020. 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 368sites where we are or may be liable for remediation costs associated with alleged contamination or for violations of environmental requirements. This includes 26sites that are the subject of actions taken by the U.S. government, 16of 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:

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

Insurance- The Company has a consolidated, wholly-owned captive insurance subsidiary (the captive), that provides insurance coverage for certain risks including FELA claims and property coverage which are subject to reinsurance. The captive entered into annual reinsurance treaty agreements that insure workers compensation, general liability, auto liability, and FELA risk. The captive cedes a portion of its FELA exposure through the treaty and assumes a proportionate share of the entire risk. The captive receives direct premiums, which are netted against the Company's premium costs in other expenses in the

Condensed 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 Condensed 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.

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.

15. Share Repurchase Programs

Effective April 1, 2019, our Board of Directors authorized the repurchase of up to 150million shares of our common stock by March 31, 2022. 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 March 31, 2021, we repurchased a total of $42.3billion of our common stock since commencement of our repurchase programs in 2007. The table below represents shares repurchased under repurchase programs in the first quarter of 2021 and 2020:

[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 accelerated share repurchase programs was $155.86.

[b]Includes 8,786,380shares repurchased in February 2020 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 April 1, 2021, through April 21, 2021, we repurchased 1.1million shares at an aggregate cost of approximately $237million.

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 8,786,380shares of its common stock repurchased under ASRs for an aggregate of $2.0billion. Upon settlement of these ASRs in the third quarter of 2020, we received 4,045,575additional 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.

16. 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 $1.5billion recognized as investments related to TTX in our Condensed Consolidated Statements of Financial Position as of both March 31, 2021, and December 31, 2020. TTX car hire expenses of $96million for both the three months ended March 31, 2021 and 2020, are included in equipment and other rents in our Condensed Consolidated Statements of Income. In addition, UPRR had accounts payable to TTX of $64million and $59million as of March 31, 2021, and December 31, 2020, respectively.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

UNION PACIFIC CORPORATION AND SUBSIDIARY COMPANIES

RESULTS OF OPERATIONS

Three Months Ended March 31, 2021, Compared to

Three Months Ended March 31, 2020

For purposes of this report, unless the context otherwise requires, all references herein to 'UPC', 'Corporation', 'Company', 'we', 'us', and 'our' shall mean Union Pacific Corporation and its subsidiaries, including Union Pacific Railroad Company, which we separately refer to as 'UPRR' or the 'Railroad'.

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and applicable notes to the Condensed Consolidated Financial Statements, Item 1, and other information included in this report. Our Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal and recurring adjustments) that are, in the opinion of management, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (GAAP).

The Railroad, along with its subsidiaries and rail affiliates, is our one reportable business 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.

Cautionary Information

Statements in this Form 10-Q/filing, including forward-looking statements, speak only as of and are based on information we have learned as of April 22, 2021. We assume no obligation to update any such information to reflect subsequent developments, changes in assumptions, or changes in other factors affecting forward-looking information. If we do update one or more of these statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other statements.

Certain statements in this report, and statements in other reports or information filed or to be filed with the SEC (as well as information included in oral statements or other written statements made or to be made by us), are forward-looking statements within the meaning of Section 27A Securities Act of 1933 and the Section 21E of the Exchange Act. These forward-looking statements and information include, without limitation, the statements and information set forth under the caption 'Effects from COVID-19' in Item 2 regarding the impact of the coronavirus (COVID-19) pandemic on our business and operations; 'Liquidity and Capital Resources' in Item 2 regarding our capital plan, contractual obligations, and commercial commitment; and statements under the caption 'Other Matters.' Forward-looking statements and information also include any other statements or information in this report regarding: potential impacts of the COVID-19 pandemic on our business operations, financial results, liquidity, and financial position, and on the world economy (including our customers and supply chains), including as a result of decreased volume and carloadings; closing of customer manufacturing, distribution or production facilities; expectations as to operational or service improvements; expectations regarding the effectiveness of steps taken or to be taken to improve operations, service, infrastructure improvements, and transportation plan modifications; expectations as to cost savings, revenue growth, and earnings; the time by which goals, targets, or objectives will be achieved; projections, predictions, expectations, estimates, or forecasts as to our business, financial, and operational results, future economic performance, and general economic conditions; proposed new products and services; estimates of costs relating to environmental remediation and restoration; estimates and expectations regarding tax matters, expectations that claims, litigation, environmental costs, commitments, contingent liabilities, labor negotiations or agreements, or other matters will not have a material adverse effect on our consolidated results of operations, financial condition, or liquidity and any other similar expressions concerning matters that are not historical facts.

Forward-looking statements and information reflect the good faith consideration by management of currently available information, and may be based on underlying assumptions believed to be reasonable under the circumstances. However, such information and assumptions (and, therefore, such forward-looking statements and information) are or may be subject to risks and uncertainties over which management has little or no influence or control, and many of these risks and uncertainties are currently amplified by and may continue to be amplified by, or in the future may be amplified by, the COVID-19

pandemic. The Risk Factors in Item 1A of our 2020 Annual Report on Form 10-K, filed February 5, 2021, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements, and this report, including this Item 2, should be read in conjunction with these Risk Factors. 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 is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements.

Critical Accounting Policies and Estimates

We base our discussion and analysis of our financial condition and results of operations upon our Condensed Consolidated Financial Statements. The preparation of these financial statements requires estimation and judgment that affect the reported amounts of revenues, expenses, assets, and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If these estimates differ materially from actual results, the impact on the Condensed Consolidated Financial Statements may be material. Our critical accounting policies are available in Item 7 of our 2020 Annual Report on Form 10-K. There have not been any significant changes with respect to these policies during the first three months of 2021.

RESULTS OF OPERATIONS

Quarterly Summary

The Company reported earnings of $2.00 per diluted share on net income of $1.3 billion and an operating ratio of 60.1% in the first quarter of 2021 compared to earnings of $2.15 per diluted share on net income of $1.5 billion and an operating ratio of 59.0% for the first quarter of 2020. Freight revenues decreased 5% in the quarter compared to the same period in 2020 driven by a 4% lower average revenue per car (ARC) and a 1% volume decline resulting from one less day in the current quarter compared to the leap year in 2020. The ARC decrease was due to negative mix of traffic (for example, a relative increase in intermodal shipments, which have a lower ARC) and lower fuel surcharge revenue, partially offset by core pricing gains. The weather events in February, including heavy snow in the Pacific Northwest, snow and arctic temperatures across the Midwest, and snow and ice across Texas, Arkansas, and Louisiana, had a significant impact on our operations and that of our customers. Despite the weather events and softer economic conditions created by the pandemic, some market segments saw growth from the muted Lunar New Year impact, tightening truck capacity, contract wins, export grain demand, and strength in the housing market. Cost savings from productivity and lower volume drove operating expenses down 3% from 2020. These reductions were not enough to offset the revenue decline resulting in a 7% decrease in operating income in the first quarter compared to the same period in 2020.

Effects from COVID-19

A year into the pandemic our business levels continue to be impacted by slower economic activity and disruptions in supply chains, most notably the semiconductor chip shortage impacting the automotive industry, driving a decline in automotive shipments of 13% in the first quarter of 2021. As this shortage persists, our customers have idled or extended plant shutdowns that will impact our second quarter and potentially the remainder of the year depending on how quickly the semiconductor chips become available. Other markets negatively impacted in the first quarter of 2021 include ethanol, petroleum, and food and refrigerated goods. As society's behavior changes and adapts to the pandemic, certain markets have seen growth, including parcel shipments, lumber due to repairs and remodels, shelf stable canned products, and brown paper used for boxes.

The safety of our employees, our customers, and the communities we serve remains a high priority. In an effort to mitigate the spread of COVID-19, we are promoting and encouraging all of our employees to receive a vaccination. We continually update employees with the status of state vaccination plans, and we have been able to offer on-site vaccination clinics at our headquarters building and a few other locations, including Bailey Yard in North Platte, Nebraska.

Although the economy is slowly recovering, the speed of recovery still remains uncertain as governments

and consumers react to the vaccine roll-out and the trends in new infections. Therefore, the impact of the pandemic on our 2021 financial and operating results could be material, but ultimately, we continue to focus on what we can manage, such as providing excellent service to our customers, seeking new business opportunities, increasing productivity, and protecting our employees, customers, and communities.

Operating Revenues

We generate freight revenues by transporting freight or other materials from our three commodity groups. Freight revenues vary with volume (carloads) and ARC. Changes in price, traffic mix, and fuel surcharges drive ARC. 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. We recognize freight revenues 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.

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.

Freight revenue decreased 5% during the first quarter of 2021 compared to 2020, resulting from negative mix of traffic, lower fuel surcharges, and a 1% volume decline, partially offset by core pricing gains. Volume declines in automotive, coal, petroleum, rock, and industrial chemicals were partially offset by strength in intermodal and grain.

Each of our commodity groups includes revenue from fuel surcharges. Freight revenues from fuel surcharge programs were $260 million in the first quarter of 2021 compared to $351 million in the same period of 2020. The decline was driven by the lag impact on fuel surcharge recovery (it can generally take up to two months for changing fuel prices to affect fuel surcharge recoveries), slightly lower fuel prices, and reduced volume.

Other subsidiary revenues decreased in the first quarter compared to 2020 driven primarily by the disruption of the automotive supply chain, which drove lower revenue at our subsidiary that brokers intermodal and transload logistics services. Accessorial revenue increased in the first quarter driven by increased intermodal shipments.

The following tables summarize the year-over-year changes in freight revenues, revenue carloads, and ARC by commodity type:

[a] For intermodal shipments each container or trailer equals one carload.

Bulk - Bulk includes shipments of grain and grain products, fertilizer, food and refrigerated goods, and coal and renewables. Freight revenue from bulk shipments decreased in the first quarter of 2021 compared to 2020 due to a 2% volume decline and lower fuel surcharge revenue, partially offset by positive mix of traffic and core pricing gains. Coal and renewable carloads were down 16% in the first quarter of 2021 compared to 2020 as a result of continued high customer inventory levels, a contract loss, and weather related challenges, partially offset by higher natural gas prices. The COVID-19 pandemic impacted production of some food products and the demand for ethanol, which contributed to the year-over-year declines in the first quarter compared to the same period in 2020. Strong demand for export grain drove a 16% increase in shipments of grain and grain products, which partially offset the losses.

Industrial - Industrial includes shipments of industrial chemicals and plastics, metals and minerals, forest products, and energy and specialized markets. Freight revenue from industrial shipments decreased in the first quarter compared to the same period in 2020 due to lower volume, lower fuel surcharge revenue, and negative mix of traffic, partially offset by core pricing gains. In the first quarter of 2021, many of our customers in the Gulf Coast experienced weather interruptions for an extended period of time causing a significant impact on the industrial chemicals and plastics and metals and minerals industries. Market softness in rock, pipe and steel also contributed to the year-over-year decline in metals and minerals shipments. Petroleum and sand shipments continue to decline due to lower demand for crude oil, along with unfavorable regional crude oil pricing spreads impacting petroleum shipments. Forest product shipments increased due to high demand for cardboard boxes and lumber.

Premium- Premium includes shipments of finished automobiles, automotive parts, and merchandise in intermodal containers, both domestic and international. Premium freight revenue increased 2% in the first quarter compared to 2020 due to a 6% volume increase and core pricing gains, partially offset by negative mix of traffic and lower fuel surcharge revenue. Intermodal shipments increased 12% compared to the first quarter of 2020 driven by a muted Lunar New Year holiday as China's factories reduced normal closures due to demand and to discourage traveling during the holiday, contract wins, tight truck capacity, and continued strength of e-commerce parcel shipments, partially offset by weather disruptions. A 13% decline in automotive shipments was driven by the shortage of semiconductors and weather disruptions.

Mexico Business- Each of our commodity groups includes revenue from shipments to and from Mexico. Revenue from Mexico business decreased 3% to $565 million in the first quarter of 2021 compared to 2020 driven by a 4% volume decline and lower fuel surcharge revenue, partially offset by core pricing gains. The volume decline was driven by the shortage of semiconductors impacting the automotive industry.

Operating Expenses

Operating expenses decreased $78 million in the first quarter compared to 2020 driven by productivity initiatives, volume declines, and slightly lower fuel prices. Partially offsetting these decreases compared to 2020 were inflation, weather-related expenses, casualty expenses, and incentive compensation.

Compensation and Benefits- Compensation and benefits include wages, payroll taxes, health and welfare costs, pension costs, other postretirement benefits, and incentive costs. For the first quarter, expenses decreased 3% compared to 2020 due to productivity initiatives and declines in carload volumes resulting in a 12% decline in employee levels, partially offset by wage inflation, weather-related expenses, and incentive compensation.

Depreciation- The majority of depreciation relates to road property, including rail, ties, ballast, and other track material. Depreciation expense was essentially flat for the first quarter of 2021 compared to 2020.

Purchased Services and Materials -Expense for purchased services and materials includes the costs of services purchased (including equipment maintenance and contract expenses incurred by our subsidiaries for external transportation services); materials used to maintain the Railroad's lines, structures, and equipment; costs of operating facilities jointly used by UPRR and other railroads; transportation and lodging for train crew employees; trucking and contracting costs for intermodal containers; leased automobile maintenance expenses; and tools and supplies. Purchased services and materials decreased 6% in the first quarter compared to 2020 primarily due to lower volume-related costs for transload services incurred by one of our subsidiaries and lower locomotive and freight car maintenance expenses due to a smaller active fleet, partially offset by weather-related expenses.

Fuel- Fuel includes locomotive fuel and fuel for highway and non-highway vehicles and heavy equipment. Fuel expense decreased in the first quarter of 2021 compared to the same period in 2020 driven by a 4% decline in gross ton-miles and a 1% decline in locomotive diesel fuel prices, which averaged $1.85 and $1.87 per gallon (including taxes and transportation costs) in the first quarter of 2021 and 2020, respectively. The fuel consumption rate, computed as gallons of fuel consumed divided by gross ton-mile in thousands, was essentially flat versus the first quarter in 2020 as extreme cold temperatures offset the Company's conservation initiatives.

Equipment and Other Rents -Equipment and other rents expense primarily includes rental expense that the Railroad pays for freight cars owned by other railroads or private companies; freight car, intermodal, and locomotive leases; and office and other rentals. Equipment and other rents expense decreased 7% in the first quarter compared to 2020 driven by higher equity income from our investment in TTX Company.

Other -Other expenses include state and local taxes; freight, equipment, and property damage; utilities, insurance, personal injury, environmental, employee travel, telephone and cellular, computer software, bad debt, and other general expenses. Other costs increased 7% in the first quarter driven by casualty expenses including personal injury, destroyed equipment, and damaged freight.

Non-Operating Items

Other Income, net - Other income decreased in the first quarter of 2021 compared to 2020 driven by lower interest income and smaller gains from real estate sales.

Interest Expense- Interest expense increased in the first quarter of 2021 compared to 2020 due to a higher effective interest rate of 4.2% in 2021 compared to 4.1% in 2020 as a result of the debt exchange fees incurred in the first quarter of 2021, partially offset by a decrease in the weighted-average debt level of $26.7 billion in 2021 compared to $27.3 billion in 2020.

Income Taxes -Income taxes decreased in the first quarter of 2021 compared to 2020 due to lower pre-tax income. Our effective tax rates for the first quarter of 2021 and 2020 were 23.5% and 23.1%, respectively.

OTHER OPERATING/PERFORMANCE AND FINANCIAL STATISTICS

We report a number of key performance measures weekly to the Surface Transportation Board (STB). We provide this data on our website at www.up.com/investor/aar-stb_reports/index.htm.

Operating/Performance Statistics

Management continuously measures these key operating metrics to evaluate our productivity, asset utilization, and network efficiency in striving to provide a consistent, reliable service product to our customers.

Railroad performance measures are included in the table below: