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
32,070
route miles, linking Pacific Coast and Gulf Coast ports with the Midwest and Eastern U.S. gateways and providing several corridors to key Mexican gateways. We own
26,053
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.
The following table provides freight revenue by commodity group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
2016
|
2015
|
2014
|
Agricultural Products
|
$
|
3,625
|
$
|
3,581
|
$
|
3,777
|
Automotive
|
|
2,000
|
|
2,154
|
|
2,103
|
Chemicals
|
|
3,474
|
|
3,543
|
|
3,664
|
Coal
|
|
2,440
|
|
3,237
|
|
4,127
|
Industrial Products
|
|
3,348
|
|
3,808
|
|
4,400
|
Intermodal
|
|
3,714
|
|
4,074
|
|
4,489
|
Total freight revenues
|
$
|
18,601
|
$
|
20,397
|
$
|
22,560
|
Other revenues
|
|
1,340
|
|
1,416
|
|
1,428
|
Total operating revenues
|
$
|
19,941
|
$
|
21,813
|
$
|
23,988
|
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 $2.2
billion in 201
6
,
$2.
2
billion in 201
5
, and
$2.
3
billion in 201
4
.
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 and Cash Equivalents
– Cash equivalents consist of investments with original maturities of three months or less.
Accounts Receivable –
Accounts receivable includes receivables reduced by an allowance for doubtful accounts. The allowance is based upon historical losses, credit worthiness of customers, and current economic conditions. Receivables not expected to be collected in one year and the associated allowances are classified as other assets in our Consolidated Statements of Financial Position.
Investments
– Investments represent our investments in affiliated companies (20% to 50% owned) that are accounted for under the equity method of accounting and investments in companies (less than 20% owned) accounted for under the cost method of accounting.
Materials and Supplies
– Materials and supplies are carried at the lower of average cost or market.
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, yard and switching tracks, and electronic yards), for which lives are measured in millions of gross tons per mile of track. We use the group method of depreciation in which all items with similar characteristics, use, and expected lives are grouped together in asset classes, and are depreciated using composite depreciation rates. The group method of depreciation treats each asset class as a pool of resources, not as singular items. We determine the estimated service lives of depreciable railroad assets by means of depreciation studies. Under the group method of depreciation, no gain or loss is recognized when depreciable property is retired or replaced in the ordinary course of business.
Impairment of Long-lived Assets
– We review long-lived assets, including identifiable intangibles, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the long-lived assets, the carrying value is reduced to the estimated fair value as measured by the discounted cash flows.
Revenue Recognition
– We recognize freight revenues 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. Other revenues, which include revenues earned by our subsidiaries, revenues from our commuter rail operations, and accessorial revenue, are recognized as service is performed or contractual obligations are met. Customer incentives, which are primarily provided for shipping a specified cumulative volume or shipping to/from specific locations, are recorded as a reduction to operating revenues based on actual or projected future customer shipments.
Translation of Foreign Currency
– Our portion of the assets and liabilities related to foreign investments are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenue and expenses are translated at the average rates of exchange prevailing during the year. Unrealized gains or losses are reflected within common shareholders’ equity as accumulated other comprehensive income or loss.
Fair Value Measurements
– We use a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. These levels include:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
We have applied fair value measurements to our
short term investments,
pension plan assets and short- and long-term debt.
Stock-Based Compensation
– We have several stock-based compensation plans under which employees and non-employee directors receive stock options, nonvested retention shares, and nonvested stock units. We refer to the nonvested shares and stock units collectively as “retention awards”. We have elected to issue treasury shares to cover option exercises and stock unit vestings, while new shares are issued when retention shares are granted.
We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed ratably over the service period of the awards (generally the vesting period). The fair value of retention awards is the closing stock price on the date of grant, while the fair value of stock options is determined by using the Black-Scholes option pricing model.
Earnings Per Share
– Basic earnings per share are calculated on the weighted-average number of common shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of outstanding stock options and stock-based awards where the conversion of such instruments would be dilutive.
Income Taxes
– We account for income taxes by recording taxes payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. These expected future tax consequences are measured based on current tax law; the effects of future tax legislation are not anticipated. Future tax legislation, such as a change in the corporate tax rate, could have a material impact on our financial condition, results of operations, or liquidity.
When appropriate, we record a valuation allowance against deferred tax assets to reflect that these tax assets may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based on management’s judgments using available evidence for purposes of estimating whether future taxable income will be sufficient to realize a deferred tax asset.
We recognize tax benefits that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.
Pension and Postretirement Benefits
– We incur certain employment-related expenses associated with pensions and postretirement health benefits. In order to measure the expense associated with these benefits, we must make various assumptions including discount rates used to value certain liabilities, expected return on plan assets used to fund these expenses, compensation increases, employee turnover rates, anticipated mortality rates, and expected future health care costs. The assumptions used by us are based on our historical experience as well as current facts and circumstances. We use an actuarial analysis to measure the expense and liability associated with these benefits.
Personal Injury
– The cost of injuries to employees and others on our property is charged to expense based on estimates of the ultimate cost and number of incidents each year. We use an actuarial analysis to measure the expense and liability. Our personal injury liability is not discounted to present value. Legal fees and incidental costs are expensed as incurred.
Asbestos
– We estimate a liability for asserted and unasserted asbestos-related claims based on an assessment of the number and value of those claims. We use a statistical analysis to assist us in properly measuring our potential liability. Our liability for asbestos-related claims is not discounted to present value due to the uncertainty surrounding the timing of future payments. Legal fees and incidental costs are expensed as incurred.
Environmental
– When environmental issues have been identified with respect to property currently or formerly owned, leased, or otherwise used in the conduct of our business, we perform, with the assistance of our consultants, environmental assessments on such property. We expense the cost of the assessments as incurred. We accrue the cost of remediation where our obligation is probable and such costs can be reasonably estimated. We do not discount our environmental liabilities when the timing of the anticipated cash payments is not fixed or readily determinable. Legal fees and incidental costs are expensed as incurred.
Use of Estimates
– The preparation of our
Consolidated Financial Statements
in conformity with GAAP requires management to make
estimates and assumptions
that affect
certain
reported
assets
and
liabilities,
and the disclosure of certain contingent assets and liabilities
as of the date of the consolidated financial statements, as well as the reported amounts of revenue
and expenses
during the reporting period
. Actual future results may differ from such estimates.
3. Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09),
Revenue from Contracts with Customers (Topic 606)
. ASU 2014-09 supersedes the revenue recognition guidance in Topic 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in the exchange for those goods or services. This standard is effective for annual reporting periods beginning after December 15, 2017
, and can be adopted either retrospectively or as a cumulative effect adjustment as of the date of adoption
. ASU 2014-09 is not
expected to have a material impact on our consolidated financial position, results of operations, or cash flows.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01 (ASU 2016-01),
Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)
. ASU 2016-01 provides guidance for the recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted.
ASU 2016-01 is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows
.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02),
Leases (Subtopic 842)
. ASU 2016-02 will require companies to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted. Management is currently evaluating the impact of this standard on our consolidated financial position, results of operations, and cash flows, but expects that the adoption will result in a significant increase in the Company’s assets and liabilities.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09 (ASU 2016-09)
Compensation - Stock Compensation
(Topic 718), which simplifies the accounting for income taxes related to stock-based compensation. We elected to early adopt ASU 2016-09 in the first quarter of 2016 with an effective date of January 1, 2016. As a result of the adoption, we recognized excess tax benefits in the Consolidated Statements of Income and the Consolidated Statements of Cash Flows of
$
28 million for the year ended December 31, 2016. Prior periods have not been adjusted
.
4. Stock Split
On
June 6, 2014
, we completed a
two
-for-one stock split, effected in the form of a
100%
stock dividend. The stock split entitled all shareholders of record at the close of business on
May 27, 2014
, to receive one additional share of our common stock, par value
$2.50
per share, for each share of common stock held on that date. All references to common shares and per share amounts have been retroactively adjusted to reflect the stock split for all periods presented.
5. Stock Options and Other Stock Plans
There are no restricted shares outstanding under the 1992 Restricted Stock Plan for Non-Employee Directors of Union Pacific Corporation. We no longer grant awards of restricted shares under this plan.
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, receives a grant of 4,000 retention shares or retention stock units. Prior to December 31, 2007, each non-employee director received annually an option to purchase at fair value a number of shares of our common stock, not to exceed 20,000 shares during any calendar year, determined by dividing 60,000 by 1/3 of the fair market value of one share of our common stock on the date of such Board of Directors meeting, with the resulting quotient rounded up or down to the nearest 50 shares. In September 2007, the Board of Directors eliminated the annual payment of options for 2008 and all future years. As of December 31, 2016, 40,000 restricted shares and 7,400 options 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, 2016, 2,715,137 options and 726,657 retention shares and stock units were outstanding under the 2004 Plan. We no longer grant any stock options or other stock or unit awards under this plan.
The Union Pacific Corporation 2013 Stock Incentive Plan (2013 Plan) was approved by shareholders in May 2013. The 2013 Plan reserved 78,000,000 shares of our common stock for issuance, plus any shares subject to awards made under previous plans as of February 28, 2013, that are subsequently cancelled, expired, forfeited or otherwise not issued under previous plans. Under the 2013 Plan, non-qualified options, incentive stock options, retention shares, stock units, and incentive bonus awards may be granted to eligible employees of the Corporation and its subsidiaries. Non-employee directors are not eligible for awards under the 2013 Plan. As of December 31, 2016, 3,439,910 options and 3,207,689 retention shares and stock units were outstanding under the 2013 Plan.
Pursuant to the above plans 73,745,250; 76,548,520; and 77,786,772 shares of our common stock were authorized and available for grant at December 31, 2016, 2015, and 2014, respectively.
Stock-Based Compensation
– We have several stock-based compensation plans under which employees and non-employee directors receive stock options, nonvested retention shares, and nonvested stock units. We refer to the nonvested shares and stock units collectively as “retention awards”. We have elected to issue treasury shares to cover option exercises and stock unit vestings, while new shares are issued when retention shares are granted.
Information regarding stock-based compensation appears in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
2016
|
2015
|
2014
|
Stock-based compensation, before tax:
|
|
|
|
|
|
|
Stock options
|
$
|
16
|
$
|
17
|
$
|
21
|
Retention awards
|
|
66
|
|
81
|
|
91
|
Total stock-based compensation, before tax
|
$
|
82
|
$
|
98
|
$
|
112
|
Excess tax benefits from equity compensation plans
|
$
|
28
|
$
|
62
|
$
|
118
|
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
|
2016
|
2015
|
2014
|
Risk-free interest rate
|
|
1.3%
|
|
1.3%
|
|
1.6%
|
Dividend yield
|
|
2.9%
|
|
1.8%
|
|
2.1%
|
Expected life (years)
|
|
5.1
|
|
5.1
|
|
5.2
|
Volatility
|
|
23.2%
|
|
23.4%
|
|
30.0%
|
Weighted-average grant-date fair value of options granted
|
$
|
11.36
|
$
|
22.30
|
$
|
20.18
|
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 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options (thous.)
|
Weighted-Average Exercise Price
|
Weighted-Average Remaining Contractual Term
|
Aggregate Intrinsic Value (millions)
|
Outstanding at January 1, 2016
|
5,571
|
$
|
66.69
|
5.4
|
yrs.
|
$
|
114
|
Granted
|
1,672
|
|
75.52
|
N/A
|
|
|
N/A
|
Exercised
|
(978)
|
|
37.66
|
N/A
|
|
|
N/A
|
Forfeited or expired
|
(103)
|
|
100.16
|
N/A
|
|
|
N/A
|
Outstanding at December 31, 2016
|
6,162
|
$
|
73.13
|
5.9
|
yrs.
|
$
|
205
|
Vested or expected to vest
at December 31, 2016
|
6,101
|
$
|
73.05
|
5.9
|
yrs.
|
$
|
204
|
Options exercisable at December 31, 2016
|
3,639
|
$
|
62.95
|
4.2
|
yrs.
|
$
|
154
|
Stock options are granted at the closing price on the date of grant, have ten-year contractual terms, and vest no later than three years from the date of grant. None of the stock options outstanding at December 31, 2016, are subject to performance or market-based vesting conditions.
At December 31, 2016, there was $18 million of unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted-average period of 1.3 years. Additional information regarding stock option exercises appears in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
2016
|
2015
|
2014
|
Intrinsic value of stock options exercised
|
$
|
52
|
$
|
50
|
$
|
194
|
Cash received from option exercises
|
|
39
|
|
27
|
|
54
|
Treasury shares repurchased for employee payroll taxes
|
|
(15)
|
|
(12)
|
|
(24)
|
Tax benefit realized from option exercises
|
|
20
|
|
19
|
|
74
|
Aggregate grant-date fair value of stock options vested
|
|
19
|
|
19
|
|
17
|
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 2016 were as follows:
|
|
|
|
|
|
|
|
|
Shares (thous.)
|
Weighted-Average
Grant-Date Fair Value
|
Nonvested at January 1, 2016
|
2,900
|
$
|
80.01
|
Granted
|
836
|
|
75.77
|
Vested
|
(799)
|
|
57.70
|
Forfeited
|
(148)
|
|
88.42
|
Nonvested at December 31, 2016
|
2,789
|
$
|
84.68
|
Retention awards are granted at no cost to the employee or non-employee director and vest over periods lasting up to four years. At December 31, 2016, there was $84 million of total unrecognized compensation expense related to nonvested retention awards, which is expected to be recognized over a weighted-average period of 1.6 years.
Performance Retention Awards
– In February 2016, our Board of Directors approved performance stock unit grants. The basic terms of these performance stock units are identical to those granted in February 2014 and February 2015, except for different annual return on invested capital (ROIC) performance targets and the addition of relative operating income growth (OIG) as a modifier compared to the companies included in t
he S&P 500 Industrials Index.
We define ROIC as net operating profit adjusted for interest expense (including interest on the present value of operating leases) and taxes on interest divided by average invested capital adjusted for the present value of operating leases.
The modifier can be up to +/- 25% of the award earned based on the ROIC achieved.
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, and for the 2016 plan, 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 2016 plan, the relative OIG modifier. We measure the fair value of these performance stock units based upon the closing price of the underlying common stock as of the date of grant, reduced by the present value of estimated future dividends. Dividend equivalents are paid to participants only after the units are earned.
The assumptions used to calculate the present value of estimated future dividends related to the February 2016 grant were as follows:
|
|
|
|
|
|
|
2016
|
Dividend per share per quarter
|
$
|
0.55
|
Risk-free interest rate at date of grant
|
|
0.9%
|
Changes in our performance retention awards during 2016 were as follows:
|
|
|
|
|
|
|
|
|
Shares (thous.)
|
Weighted-Average
Grant-Date Fair Value
|
Nonvested at January 1, 2016
|
1,255
|
$
|
82.98
|
Granted
|
503
|
|
70.09
|
Vested
|
(530)
|
|
62.57
|
Forfeited
|
(83)
|
|
90.42
|
Nonvested at December 31, 2016
|
1,145
|
$
|
86.23
|
At December 31, 2016, there was $20 million of total unrecognized compensation expense related to nonvested performance retention awards, which is expected to be recognized over a weighted-average period of 1.2 years. This expense is subject to achievement of the performance measures established for the performance stock unit grants.
6. Retirement Plans
Pension and Other Postretirement Benefits
Pension Plans
– We provide defined benefit retirement income to eligible non-union employees through qualified and non-qualified (supplemental) pension plans. Qualified and non-qualified pension benefits are based on years of service and the highest compensation during the latest years of employment, with specific reductions made for early retirements.
Other Postretirement Benefits (OPEB)
– We provide medical and life insurance benefits for eligible retirees. 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
|
2016
|
2015
|
2016
|
2015
|
Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
$
|
3,958
|
$
|
4,142
|
$
|
329
|
$
|
354
|
Service cost
|
|
84
|
|
106
|
|
1
|
|
3
|
Interest cost
|
|
143
|
|
163
|
|
11
|
|
13
|
Actuarial loss/(gain)
|
|
124
|
|
(267)
|
|
16
|
|
(18)
|
Gross benefits paid
|
|
(199)
|
|
(186)
|
|
(23)
|
|
(23)
|
Projected benefit obligation at end of year
|
$
|
4,110
|
$
|
3,958
|
$
|
334
|
$
|
329
|
Plan Assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
3,544
|
$
|
3,654
|
$
|
-
|
$
|
-
|
Actual return/(loss) on plan assets
|
|
279
|
|
(43)
|
|
-
|
|
-
|
Voluntary funded pension plan contributions
|
|
100
|
|
100
|
|
-
|
|
-
|
Non-qualified plan benefit contributions
|
|
24
|
|
19
|
|
23
|
|
23
|
Gross benefits paid
|
|
(199)
|
|
(186)
|
|
(23)
|
|
(23)
|
Fair value of plan assets at end of year
|
$
|
3,748
|
$
|
3,544
|
$
|
-
|
$
|
-
|
Funded status at end of year
|
$
|
(362)
|
$
|
(414)
|
$
|
(334)
|
$
|
(329)
|
Amounts recognized in the statement of financial position as of December 31, 2016, and 2015 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
OPEB
|
Millions
|
2016
|
2015
|
2016
|
2015
|
Noncurrent assets
|
$
|
67
|
$
|
1
|
$
|
-
|
$
|
-
|
Current liabilities
|
|
(24)
|
|
(22)
|
|
(24)
|
|
(23)
|
Noncurrent liabilities
|
|
(405)
|
|
(393)
|
|
(310)
|
|
(306)
|
Net amounts recognized at end of year
|
$
|
(362)
|
$
|
(414)
|
$
|
(334)
|
$
|
(329)
|
Pre-tax amounts recognized in accumulated other comprehensive income/(loss) as of December 31, 2016, and 2015 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
Millions
|
Pension
|
OPEB
|
Total
|
Pension
|
OPEB
|
Total
|
Prior service (cost)/credit
|
$
|
-
|
$
|
(2)
|
$
|
(2)
|
$
|
-
|
$
|
7
|
$
|
7
|
Net actuarial loss
|
|
(1,681)
|
|
(123)
|
|
(1,804)
|
|
(1,652)
|
|
(117)
|
|
(1,769)
|
Total
|
$
|
(1,681)
|
$
|
(125)
|
$
|
(1,806)
|
$
|
(1,652)
|
$
|
(110)
|
$
|
(1,762)
|
Pre-tax changes recognized in other comprehensive income/(loss) during 2016, 2015 and 2014 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
OPEB
|
Millions
|
2016
|
2015
|
2014
|
2016
|
2015
|
2014
|
Net actuarial (loss)/gain
|
$
|
(112)
|
$
|
(31)
|
$
|
(780)
|
$
|
(16)
|
$
|
18
|
$
|
(33)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost/(credit)
|
|
-
|
|
-
|
|
-
|
|
(9)
|
|
(10)
|
|
(11)
|
Actuarial loss
|
|
83
|
|
106
|
|
71
|
|
10
|
|
13
|
|
10
|
Total
|
$
|
(29)
|
$
|
75
|
$
|
(709)
|
$
|
(15)
|
$
|
21
|
$
|
(34)
|
Amounts included in accumulated other comprehensive income/(loss) expected to be amortized into net periodic cost during 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
Pension
|
OPEB
|
Total
|
Prior service credit
|
$
|
-
|
$
|
(1)
|
$
|
(1)
|
Net actuarial loss
|
|
(79)
|
|
(10)
|
|
(89)
|
Total
|
$
|
(79)
|
$
|
(11)
|
$
|
(90)
|
Underfunded Accumulated Benefit Obligation
– The accumulated benefit obligation (ABO) is the present value of benefits earned to date, assuming no future compensation growth. The underfunded accumulated benefit obligation represents the difference between the ABO and the fair value of plan assets. At December 31, 2016, and 2015, the non-qualified (supplemental) plan ABO was $412 million and $388 million, respectively. The following table discloses only the PBO, ABO, and fair value of plan assets for pension plans where the accumulated benefit obligation is in excess of the fair value of the plan assets as of December 31
:
|
|
|
|
|
|
|
|
|
|
Underfunded Accumulated Benefit Obligation
|
|
|
Millions
|
2016
|
2015
|
Projected benefit obligation
|
$
|
428
|
$
|
398
|
Accumulated benefit obligation
|
$
|
412
|
$
|
388
|
Fair value of plan assets
|
|
-
|
|
-
|
Underfunded accumulated benefit obligation
|
$
|
(412)
|
$
|
(388)
|
The ABO for all defined benefit pension plans was
$3.9
billion and
$3.7
billion at December 31, 2016, and 2015, respectively.
Assumptions
– The weighted-average actuarial assumptions used to determine benefit obligations at December 31:
|
|
|
|
|
|
|
|
|
|
|
Pension
|
OPEB
|
Percentages
|
2016
|
2015
|
2016
|
2015
|
Discount rate
|
4.20%
|
4.37%
|
4.00%
|
4.16%
|
Compensation increase
|
4.20%
|
4.10%
|
N/A
|
N/A
|
Health care cost trend rate (employees under 65)
|
N/A
|
N/A
|
6.31%
|
6.52%
|
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
five
-year period. This practice is intended to reduce year-to-year volatility in pension expense, but it can have the effect of delaying the recognition of differences between actual returns on assets and expected returns based on long-term rate of return assumptions. Differences in actual experience in relation to assumptions are not recognized in net income immediately, but are deferred in accumulated other comprehensive income and, if necessary, amortized as pension or OPEB expense.
The components of our net periodic pension and OPEB cost were as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
OPEB
|
Millions
|
2016
|
2015
|
2014
|
2016
|
2015
|
2014
|
Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
84
|
$
|
106
|
$
|
70
|
$
|
1
|
$
|
3
|
$
|
2
|
Interest cost
|
|
143
|
|
163
|
|
158
|
|
11
|
|
13
|
|
14
|
Expected return on plan assets
|
|
(267)
|
|
(255)
|
|
(230)
|
|
-
|
|
-
|
|
-
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost/(credit)
|
|
-
|
|
-
|
|
-
|
|
(9)
|
|
(10)
|
|
(11)
|
Actuarial loss
|
|
83
|
|
106
|
|
71
|
|
10
|
|
13
|
|
10
|
Net periodic benefit cost
|
$
|
43
|
$
|
120
|
$
|
69
|
$
|
13
|
$
|
19
|
$
|
15
|
Assumptions
– The weighted-average actuarial assumptions used to determine expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
OPEB
|
Percentages
|
2016
|
2015
|
2014
|
2016
|
2015
|
2014
|
Discount rate for benefit obligations
|
4.37%
|
3.94%
|
4.72%
|
4.13%
|
3.74%
|
4.47%
|
Discount rate for interest on benefit obligations
|
3.65%
|
3.94%
|
4.72%
|
3.34%
|
3.74%
|
4.47%
|
Discount rate for service cost
|
4.69%
|
3.94%
|
4.72%
|
4.59%
|
3.74%
|
4.47%
|
Discount rate for interest on service cost
|
4.55%
|
3.94%
|
4.72%
|
4.44%
|
3.74%
|
4.47%
|
Expected return on plan assets
|
7.50%
|
7.50%
|
7.50%
|
N/A
|
N/A
|
N/A
|
Compensation increase
|
4.20%
|
4.00%
|
4.00%
|
N/A
|
N/A
|
N/A
|
Health care cost trend rate (employees under 65)
|
N/A
|
N/A
|
N/A
|
6.52%
|
6.34%
|
6.49%
|
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
|
2028
|
2028
|
Beginning in 2016, we measure the service cost and interest cost components of our net periodic benefit cost by using individual spot discount rates matched with separate cash flows for each future year.
The discount rates were based on a yield curve of high quality corporate bonds. The expected return on plan assets is based on our asset allocation mix and our historical return, taking into account current and expected market conditions. The actual return/(loss) on pension plan assets, net of fees, was approximately
8%
in 2016,
(1)%
in 2015, and
6%
in 2014.
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 2017 assumed health care cost trend rate for employees under 65 is
6.52%
. It is assumed the rate will decrease gradually to an ultimate rate of
4.5%
in
2038
and will remain at that level. A one-percentage point change in the assumed health care cost trend rates would have the following effects on OPEB:
|
|
|
|
|
|
|
|
|
|
Millions
|
One % pt.
Increase
|
One % pt.
Decrease
|
Effect on total service and interest cost components
|
$
|
1
|
$
|
(1)
|
Effect on accumulated benefit obligation
|
|
19
|
|
(16)
|
Cash Contributions
The following table details our cash contributions for the qualified pension plans and the benefit payments for the non-qualified (supplemental) pension and OPEB plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Millions
|
Qualified
|
Non-qualified
|
OPEB
|
2016
|
$
|
100
|
$
|
24
|
$
|
23
|
2015
|
|
100
|
|
19
|
|
23
|
Our policy with respect to funding the qualified plans is to fund at least the minimum required by law and not more than the maximum amount deductible for tax purposes. All contributions made to the qualified pension plans in 2016 were voluntary and were made with cash generated from operations.
The non-qualified pension and OPEB plans are not funded and are not subject to any minimum regulatory funding requirements. Benefit payments for each year represent supplemental pension payments and claims paid for medical and life insurance. We anticipate our 2017 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 2017 through 2026:
|
|
|
|
|
|
|
|
|
|
Millions
|
Pension
|
OPEB
|
2017
|
$
|
199
|
$
|
24
|
2018
|
|
201
|
|
24
|
2019
|
|
204
|
|
23
|
2020
|
|
206
|
|
22
|
2021
|
|
209
|
|
22
|
Years 2022 - 2026
|
|
1,094
|
|
98
|
Asset Allocation Strategy
Our pension plan asset allocation at December 31, 2016, and 2015, and target allocation for 2017, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Plan Assets
|
|
Target
|
|
December 31,
|
|
Allocation 2017
|
|
2016
|
2015
|
Equity securities
|
60% to 70%
|
|
68%
|
67%
|
Debt securities
|
20% to 30%
|
|
21
|
23
|
Real estate
|
2% to 8%
|
|
6
|
6
|
Commodities
|
4% to 6%
|
|
5
|
4
|
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 of 7.0%. We reduced our expected rate of return on plan assets to 7.0% in 2017 from 7.5% in 2016 to reflect our expected future returns on plan assets based on our current asset allocation strategy. While we believe we can achieve a long-term average rate of return of 7.0%, we cannot be certain that the portfolio will perform to our expectations. Assets are strategically allocated among equity, debt, and other investments in order to achieve a diversification level that reduces fluctuations in investment returns. Asset allocation target ranges for equity, debt, and other portfolios are evaluated at least every three years with the assistance of an independent consulting firm. Actual asset allocations are monitored monthly, and rebalancing actions are executed at least quarterly, if needed.
The pension plan investments are held in a Master Trust. The majority of pension plan assets are invested in equity securities because equity portfolios have historically provided higher returns than debt and other asset classes over extended time horizons and are expected to do so in the future. Correspondingly, equity investments also entail greater risks than other investments. Equity risks are balanced by investing a significant portion of the plans’ assets in high quality debt securities. The average credit rating of the debt portfolio exceeded A at both December 31, 2016 and December 31, 2015. 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
14
years and 12 years at
December 31, 2016, and 2015
, respectively.
The investment of pension plan assets in securities issued by UPC is explicitly prohibited by the plan for both the equity and debt portfolios, other than through index fund holdings.
Fair Value Measurements
The pension plan assets are valued at fair value. The following is a description of the valuation methodologies used for the investments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
Temporary Cash Investments
– These investments consist of U.S. dollars and foreign currencies held in master trust accounts at The Northern Trust Company (the Trustee). Foreign currencies held are reported in terms of U.S. dollars based on currency exchange rates readily available in active markets. These temporary cash investments are classified as Level 1 investments.
Registered Investment Companies
– Registered Investment Companies are entities primarily engaged in the business of investing in securities and are registered with the Securities and Exchange Commission. The Plan’s holdings of Registered Investment Companies include both public and private fund vehicles. The public vehicles are mutual funds (real estate) and 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 fixed income 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 Partnerships
– Most of the Plan’s real estate investments are partnership interests. The Real Estate Partnership category also includes real estate investments held in similar structures such as private real estate investment trusts and limited liability companies. 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 Fund
s – Collective trust and other funds are comprised of shares or units in commingled funds that are not publicly traded. The underlying assets in these funds (U.S. stock funds, non-U.S. stock funds, commodity 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.
This category also includes investments in limited liability companies that invest in publicly-traded securities. The limited liability company investments are funds that invest in both long and short positions in convertible securities, stocks, commodities, and fixed income securities. The underlying securities held by the funds are traded actively on public exchanges and price quotes for these investments are readily available. The fair value recorded by the plan is calculated using the NAV for each investment.
As of December 31, 2016, 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
|
$
|
27
|
|
$
|
-
|
|
$
|
-
|
|
$
|
27
|
Registered investment companies [a]
|
|
17
|
|
|
-
|
|
|
-
|
|
|
17
|
Federal government securities
|
|
-
|
|
|
142
|
|
|
-
|
|
|
142
|
Bonds and debentures
|
|
-
|
|
|
357
|
|
|
-
|
|
|
357
|
Corporate stock
|
|
1,059
|
|
|
8
|
|
|
-
|
|
|
1,067
|
Total plan assets at fair value
|
$
|
1,103
|
|
$
|
507
|
|
$
|
-
|
|
$
|
1,610
|
Plan assets at NAV:
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies [b]
|
|
|
|
|
|
|
|
|
|
|
280
|
Venture capital and buyout partnerships
|
|
|
|
|
|
|
|
|
|
|
283
|
Real estate partnerships
|
|
|
|
|
|
|
|
|
|
|
212
|
Collective trust and other funds
|
|
|
|
|
|
|
|
|
|
|
1,346
|
Total plan assets at NAV
|
|
|
|
|
|
|
|
|
|
$
|
2,121
|
Other assets [c]
|
|
|
|
|
|
|
|
|
|
|
17
|
Total plan assets
|
|
|
|
|
|
|
|
|
|
$
|
3,748
|
|
[a]
|
|
Registered investment companies measured at fair value include stock and real estate investments.
|
|
[b]
|
|
Registered investment companies measured at NAV include bond investments.
|
|
[c]
|
|
Other assets include accrued receivables and pending broker settlements.
|
As of December 31, 2015, 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
|
$
|
13
|
|
$
|
-
|
|
$
|
-
|
|
$
|
13
|
Registered investment companies [a]
|
|
179
|
|
|
-
|
|
|
-
|
|
|
179
|
Federal government securities
|
|
-
|
|
|
125
|
|
|
-
|
|
|
125
|
Bonds and debentures
|
|
-
|
|
|
383
|
|
|
-
|
|
|
383
|
Corporate stock
|
|
1,034
|
|
|
7
|
|
|
-
|
|
|
1,041
|
Total plan assets at fair value
|
$
|
1,226
|
|
$
|
515
|
|
$
|
-
|
|
$
|
1,741
|
Plan assets at NAV:
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies [b]
|
|
|
|
|
|
|
|
|
|
|
270
|
Venture capital and buyout partnerships
|
|
|
|
|
|
|
|
|
|
|
256
|
Real estate partnerships
|
|
|
|
|
|
|
|
|
|
|
199
|
Collective trust and other funds
|
|
|
|
|
|
|
|
|
|
|
1,075
|
Total plan assets at NAV
|
|
|
|
|
|
|
|
|
|
$
|
1,800
|
Other assets [c]
|
|
|
|
|
|
|
|
|
|
|
3
|
Total plan assets
|
|
|
|
|
|
|
|
|
|
$
|
3,544
|
|
[a]
|
|
Registered investment companies measured at fair value include stock and real estate investments.
|
|
[b]
|
|
Registered investment companies measured at NAV include bond investments.
|
|
[c]
|
|
Other assets include accrued receivables and pending broker settlements.
|
For the years ended December 31, 2016 and
2015
, there were
no
significant transfers in or out of Levels 1, 2, or 3.
Other Retirement Programs
401(k)/Thrift Plan
–
We provide a defined contribution plan (401(k)/thrift plan) to eligible non-union and union employees for whom we make matching contributions.
We match 50 cents for each dollar contributed by employees up to the first six percent of compensation contributed. Our plan contributions were
$19
million in 2016,
$20
million in 2015, and
$19
million in 2014.
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
$671
million in 2016,
$749
million in 2015, and
$711
million in 2014.
Collective Bargaining Agreements
–
Under collective bargaining agreements, we participate in multi-employer benefit plans that provide certain postretirement health care and life insurance benefits for eligible union employees.
Premiums paid under these plans are expensed as incurred and amounted to
$50
million in 2016,
$46
million in 2015, and
$52
million in 2014.
7. Other Income
Other income included the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
2016
|
2015
|
2014
|
Rental income
|
$
|
96
|
$
|
96
|
$
|
96
|
Net gain on non-operating asset dispositions [a] [b]
|
|
94
|
|
144
|
|
69
|
Interest income
|
|
11
|
|
5
|
|
4
|
Non-operating environmental costs and other [c]
|
|
(9)
|
|
(19)
|
|
(18)
|
Total
|
$
|
192
|
$
|
226
|
$
|
151
|
|
[a]
|
|
2016 includes $
17
million
and $50 million related to a real estate sale in the first and second quarter, respectively.
|
|
[b]
|
|
2015 includes
$113
million related to a real estate sale.
|
|
[c]
|
|
2014 includes
$14
million related to the sale of a permanent easement.
|
8. Income Taxes
Components of income tax expense were as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
2016
|
2015
|
2014
|
Current tax expense:
|
|
|
|
|
|
|
Federal
|
$
|
1,518
|
$
|
1,901
|
$
|
2,019
|
State
|
|
176
|
|
210
|
|
239
|
Foreign
|
|
8
|
|
8
|
|
10
|
Total current tax expense
|
|
1,702
|
|
2,119
|
|
2,268
|
Deferred and other tax expense:
|
|
|
|
|
|
|
Federal
|
|
692
|
|
644
|
|
753
|
State
|
|
139
|
|
121
|
|
142
|
Total deferred and other tax expense
|
|
831
|
|
765
|
|
895
|
Total income tax expense
|
$
|
2,533
|
$
|
2,884
|
$
|
3,163
|
For the years ended December 31, reconciliations between statutory and effective tax rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Rate Percentages
|
2016
|
|
2015
|
|
2014
|
|
Federal statutory tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
State statutory rates, net of federal benefits
|
3.1
|
|
3.1
|
|
3.1
|
|
Tax credits
|
(0.5)
|
|
(0.5)
|
|
(0.4)
|
|
Other
|
(0.2)
|
|
0.1
|
|
0.2
|
|
Effective tax rate
|
37.4
|
%
|
37.7
|
%
|
37.9
|
%
|
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.
Deferred income tax (liabilities)/assets were comprised of the following at December 31:
|
|
|
|
|
|
|
|
|
|
Millions
|
2016
|
2015
|
Deferred income tax liabilities:
|
|
|
|
|
Property
|
$
|
(16,687)
|
$
|
(16,079)
|
Other
|
|
(346)
|
|
(352)
|
Total deferred income tax liabilities
|
|
(17,033)
|
|
(16,431)
|
Deferred income tax assets:
|
|
|
|
|
Accrued wages
|
|
75
|
|
76
|
Accrued casualty costs
|
|
231
|
|
237
|
Stock compensation
|
|
69
|
|
72
|
Debt and leases
|
|
14
|
|
149
|
Retiree benefits
|
|
222
|
|
204
|
Credits
|
|
145
|
|
156
|
Other
|
|
281
|
|
296
|
Total deferred income tax assets
|
$
|
1,037
|
$
|
1,190
|
Net deferred income tax liability
|
$
|
(15,996)
|
$
|
(15,241)
|
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 2016 and 2015, 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
|
2016
|
2015
|
2014
|
Unrecognized tax benefits at January 1
|
$
|
94
|
$
|
151
|
$
|
59
|
Increases for positions taken in current year
|
|
31
|
|
38
|
|
92
|
Increases for positions taken in prior years
|
|
10
|
|
13
|
|
22
|
Decreases for positions taken in prior years
|
|
(20)
|
|
(87)
|
|
(14)
|
Refunds from/(payments to) and settlements with taxing authorities
|
|
4
|
|
(13)
|
|
(8)
|
Increases/(decreases) for interest and penalties
|
|
6
|
|
(5)
|
|
1
|
Lapse of statutes of limitations
|
|
-
|
|
(3)
|
|
(1)
|
Unrecognized tax benefits at December 31
|
$
|
125
|
$
|
94
|
$
|
151
|
We recognize interest and penalties as part of income tax expense. Total accrued liabilities for interest and penalties were $8 million and $2 million at December 31, 2016, and 2015, respectively. Total interest and penalties recognized as part of income tax expense (benefit) were $5 million for 2016, $(3) million for 2015, and $9 million for 2014.
Internal Revenue Service (IRS) examinations have been completed and settled for all years prior to 2011, and the statute of limitations bars any additional tax assessments. In 2016, UPC amended its 2011 and 2012 income tax returns to claim deductions resulting from the resolution of IRS examinations for years prior to 2011. The IRS is currently reviewing the 2011 amended return.
In the third quarter of 2015, UPC and the IRS signed a closing agreement resolving all tax matters for tax years 2009-2010. The settlement had an immaterial effect on our income tax expense. In connection with the settlement, UPC paid
$10
million in the fourth quarter of 2015.
In the fourth quarter of 2014, UPC and the IRS signed a closing agreement resolving all tax matters for tax years 2005-2008. The settlement had an immaterial effect on our income tax expense. In connection with the settlement, UPC paid
$11
million in 2014.
Several state tax authorities are examining our state income tax returns for years 2006 through 2014.
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
|
2016
|
2015
|
2014
|
Unrecognized tax benefits that would reduce the effective tax rate
|
$
|
31
|
$
|
31
|
$
|
33
|
Unrecognized tax benefits that would not reduce the effective tax rate
|
|
94
|
|
63
|
|
118
|
Total unrecognized tax benefits
|
$
|
125
|
$
|
94
|
$
|
151
|
9. Earnings Per Share
The following table provides a reconciliation between basic and diluted earnings per share for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions, Except Per Share Amounts
|
2016
|
2015
|
2014
|
Net income
|
$
|
4,233
|
$
|
4,772
|
$
|
5,180
|
Weighted-average number of shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
832.4
|
|
866.2
|
|
897.1
|
Dilutive effect of stock options
|
|
1.5
|
|
1.5
|
|
2.1
|
Dilutive effect of retention shares and units
|
|
1.5
|
|
1.7
|
|
1.9
|
Diluted
|
|
835.4
|
|
869.4
|
|
901.1
|
Earnings per share – basic
|
$
|
5.09
|
$
|
5.51
|
$
|
5.77
|
Earnings per share – diluted
|
$
|
5.07
|
$
|
5.49
|
$
|
5.75
|
Common stock options
totaling 2.0
million,
1.1
million, and
0.
4
million for 201
6
, 201
5
, and 201
4
, respectively, were excluded from the computation of diluted earnings per share because the exercise prices of these options exceeded the average market price of our common stock for the respective periods, and the effect of their inclusion would be anti-dilutive.
10. Accumulated Other Comprehensive Income/(Loss)
Reclassifications out of accumulated other comprehensive income/(loss) were as follows (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
Defined
benefit
plans
|
Foreign currency translation
|
Total
|
Balance at January 1, 2016
|
$
|
(1,103)
|
$
|
(92)
|
$
|
(1,195)
|
Other comprehensive income/(loss) before reclassifications
|
|
(3)
|
|
(48)
|
|
(51)
|
Amounts reclassified from accumulated other comprehensive income/(loss) [a]
|
|
(26)
|
|
-
|
|
(26)
|
Net year-to-date other comprehensive income/(loss),
net of taxes of $49 million
|
|
(29)
|
|
(48)
|
|
(77)
|
Balance at December 31, 2016
|
$
|
(1,132)
|
$
|
(140)
|
$
|
(1,272)
|
|
|
|
|
|
|
|
|
Balance at January 1, 2015
|
$
|
(1,161)
|
$
|
(49)
|
$
|
(1,210)
|
Other comprehensive income/(loss) before reclassifications
|
|
(4)
|
|
(43)
|
|
(47)
|
Amounts reclassified from accumulated other comprehensive income/(loss) [a]
|
|
62
|
|
-
|
|
62
|
Net year-to-date other comprehensive income/(loss),
net of taxes of $(8) million
|
|
58
|
|
(43)
|
|
15
|
Balance at December 31, 2015
|
$
|
(1,103)
|
$
|
(92)
|
$
|
(1,195)
|
|
[a]
|
|
The accumulated other comprehensive income/(loss) reclassification components are 1) prior service cost/(benefit) and 2) net actuarial loss which are both included in the computation of net periodic pension cost. See Note 6 Retirement Plans for additional details.
|
11. Accounts Receivable
Accounts receivable includes freight and other receivables reduced by an allowance for doubtful accounts. The allowance is based upon historical losses, credit worthiness of customers, and current economic conditions. At both
December 31, 2016, and 2015
, our accounts
receivable were reduced by $5 million. 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, 2016, and 2015
, receivables classified as other assets were reduced by allowances
of $17
million and
$1
1
million, respectively.
Receivables Securitization Facility
– The Railroad maintains a
$650
million,
3
-year receivables securitization facility
(the Receivables Facility), which now matures
in
July 201
9, after we completed a renewal in August 2016 with comparable terms. U
nder
the Receivables Facility, the Railroad
sells most of its eligible third-party receivables to Union Pacific Receivables, Inc. (UPRI), a
consolidated,
wholly-owned, bankruptcy-remote subsidiary that may subsequently transfer, without recourse, an undivided interest in accounts receivable to investors. The investors have no recourse to the Railroad’s other assets except for customary warranty and indemnity claims. Creditors of the Railroad do not have recourse to the assets of UPRI.
The amount outstanding under the
Receivables F
acility was
$0 and
$400
million at
December 31, 2016
, and
December 31, 2015
, respectively
. The
Receivables F
acility was supported
by $1.0 billion and $0.9 billion of accounts receivable as collateral at December 31, 2016, and December 31, 2015
, 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 F
acility, with a maximum of $650 million, may fluctuate based on the availability of eligible receivables and is directly affected by business volumes and credit risks, including receivables payment quality measures such as default and dilution ratios. If default or dilution ratios increase one percent, the allowable outstanding amount under the
Receivables F
acility would not materially change.
The costs of the
Receivables F
acility 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 F
acility are included in interest expense and
were $7 million
,
$
5
million and
$
4
million for 201
6
, 201
5
, and 201
4
, respectively.
12. Properties
The following tables list the major categories of property and equipment, as well as the weighted-average estimated useful life for each category (in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions, Except Estimated Useful Life
|
|
Accumulated
|
Net Book
|
Estimated
|
As of December 31, 2016
|
Cost
|
Depreciation
|
Value
|
Useful Life
|
Land
|
$
|
5,220
|
$
|
N/A
|
$
|
5,220
|
N/A
|
Road:
|
|
|
|
|
|
|
|
Rail and other track material
|
|
15,845
|
|
5,722
|
|
10,123
|
40
|
Ties
|
|
9,812
|
|
2,736
|
|
7,076
|
33
|
Ballast
|
|
5,242
|
|
1,430
|
|
3,812
|
34
|
Other roadway [a]
|
|
18,138
|
|
3,226
|
|
14,912
|
47
|
Total road
|
|
49,037
|
|
13,114
|
|
35,923
|
N/A
|
Equipment:
|
|
|
|
|
|
|
|
Locomotives
|
|
9,692
|
|
3,939
|
|
5,753
|
20
|
Freight cars
|
|
2,243
|
|
972
|
|
1,271
|
24
|
Work equipment and other
|
|
905
|
|
232
|
|
673
|
19
|
Total equipment
|
|
12,840
|
|
5,143
|
|
7,697
|
N/A
|
Technology and other
|
|
974
|
|
412
|
|
562
|
11
|
Construction in progress
|
|
987
|
|
-
|
|
987
|
N/A
|
Total
|
$
|
69,058
|
$
|
18,669
|
$
|
50,389
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions, Except Estimated Useful Life
|
|
Accumulated
|
Net Book
|
Estimated
|
As of December 31, 2015
|
Cost
|
Depreciation
|
Value
|
Useful Life
|
Land
|
$
|
5,195
|
$
|
N/A
|
$
|
5,195
|
N/A
|
Road:
|
|
|
|
|
|
|
|
Rail and other track material
|
|
15,236
|
|
5,495
|
|
9,741
|
37
|
Ties
|
|
9,439
|
|
2,595
|
|
6,844
|
33
|
Ballast
|
|
5,024
|
|
1,350
|
|
3,674
|
34
|
Other roadway [a]
|
|
17,374
|
|
3,021
|
|
14,353
|
47
|
Total road
|
|
47,073
|
|
12,461
|
|
34,612
|
N/A
|
Equipment:
|
|
|
|
|
|
|
|
Locomotives
|
|
9,027
|
|
3,726
|
|
5,301
|
19
|
Freight cars
|
|
2,203
|
|
962
|
|
1,241
|
24
|
Work equipment and other
|
|
897
|
|
191
|
|
706
|
19
|
Total equipment
|
|
12,127
|
|
4,879
|
|
7,248
|
N/A
|
Technology and other
|
|
919
|
|
358
|
|
561
|
11
|
Construction in progress
|
|
1,250
|
|
-
|
|
1,250
|
N/A
|
Total
|
$
|
66,564
|
$
|
17,698
|
$
|
48,866
|
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, yard and switching tracks, and electronic yards) for which lives are measured in millions of gross tons per mile of track. We use the group method of depreciation in which all items with similar characteristics, use, and expected lives are grouped together in asset classes, and are depreciated using composite depreciation rates. The group method of depreciation treats each asset class as a pool of resources, not as singular items.
We currently have more than 60 depreciable asset classes, and we may increase or decrease the number of asset classes due to changes in technology, asset strategies, or other factors.
We determine the estimated service lives of depreciable railroad assets by means of depreciation studies. We perform depreciation studies at least every
three
years for equipment and every
six
years for track assets (i.e., rail and other track material, ties, and ballast) and other road property. Our depreciation studies take into account the following factors:
|
·
|
|
Statistical analysis of historical patterns of use and retirements of each of our asset classes;
|
|
·
|
|
Evaluation of any expected changes in current operations and the outlook for continued use of the assets;
|
|
·
|
|
Evaluation of technological advances and changes to maintenance practices; and
|
|
·
|
|
Expected salvage to be received upon retirement.
|
For rail in high-density traffic corridors, we measure estimated service lives in millions of gross tons per mile of track. It has been our experience that the lives of rail in high-density traffic corridors are closely correlated to usage (i.e., the amount of weight carried over the rail). The service lives also vary based on rail weight, rail condition (e.g., new or secondhand), and rail type (e.g., straight or curve). Our depreciation studies for rail in high-density traffic corridors consider each of these factors in determining the estimated service lives. For rail in high-density traffic corridors, we calculate depreciation rates annually by dividing the number of gross ton-miles carried over the rail (i.e., the weight of loaded and empty freight cars, locomotives and maintenance of way equipment transported over the rail) by the estimated service lives of the rail measured in millions of gross tons per mile. For all other depreciable assets, we compute depreciation based on the estimated service lives of our assets as determined from the analysis of our depreciation studies. Changes in the estimated service lives of our assets and their related depreciation rates are implemented prospectively.
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 using (i) inflation indices published by the Bureau of Labor Statistics and (ii) the estimated useful lives of the assets as determined by our depreciation studies. The indices were selected because they closely correlate with the major costs of the properties comprising the applicable track asset classes. Because of the number of estimates inherent in the depreciation and retirement processes and because it is impossible to precisely estimate each of these variables until a group of property is completely retired, we continually monitor the estimated service lives of our assets and the accumulated depreciation associated with each asset class to ensure our depreciation rates are appropriate. In addition, we determine if the recorded amount of accumulated depreciation is deficient (or in excess) of the amount indicated by our depreciation studies. Any deficiency (or excess) is amortized as a component of depreciation expense over the remaining service lives of the applicable classes of assets.
For retirements of depreciable railroad properties that do not occur in the normal course of business, a gain or loss may be recognized if the retirement meets each of the following three conditions: (i) is unusual, (ii) is material in amount, and (iii) varies significantly from the retirement profile identified through our depreciation studies. A gain or loss is recognized in other income when we sell land or dispose of assets that are not part of our railroad operations.
When we purchase an asset, we capitalize all costs necessary to make the asset ready for its intended use. However, many of our assets are self-constructed. A large portion of our capital expenditures is for replacement of existing track assets and other road properties, which is typically performed by our employees, and for track line expansion and other capacity projects. Costs that are directly attributable to capital projects (including overhead costs) are capitalized. Direct costs that are capitalized as part of self-constructed assets include material, labor, and work equipment. Indirect costs are capitalized if they clearly relate to the construction of the asset.
Normal r
epairs and maintenance are
expensed as incurred, while costs incurred that extend the useful life of an asset, improve the safety of our operations or improve operating efficiency are capitalized. These costs are allocated using appropriate statistical bases. Total expense for repairs and maintenance
incurred was
$2.3
billion
for 201
6
,
$2.
5
billion for 201
5
, and
$2.
4
billion for 201
4
.
Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease.
13. Accounts Payable and Other Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
Dec. 31,
|
Dec. 31,
|
Millions
|
2016
|
2015
|
Accounts payable
|
$
|
955
|
$
|
743
|
Income and other taxes payable
|
|
472
|
|
434
|
Accrued wages and vacation
|
|
387
|
|
391
|
Interest payable
|
|
212
|
|
208
|
Accrued casualty costs
|
|
185
|
|
181
|
Equipment rents payable
|
|
101
|
|
105
|
Other
|
|
570
|
|
550
|
Total accounts payable and other current liabilities
|
$
|
2,882
|
$
|
2,612
|
14. Financial Instruments
Short-Term Investments
– 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 ($60 million of time deposits as of December 31, 2016). 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, 2016.
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, 2016, the fair value of total debt was $15.9 billion, approximately $0.9 billion more than the carrying value. At December 31, 2015, the fair value of total debt was $15.2 billion, approximately $1.0 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. At December 31, 2016, and 2015, approximately $155 million of debt securities contained call provisions that allow us to retire the debt instruments prior to final maturity, with the payment of fixed call premiums, or in certain cases, at par. The fair value of our cash equivalents approximates their carrying value due to the short-term maturities of these instruments.
15. Debt
Total debt as of December 31, 2016, and 2015, is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
2016
|
2015
|
Notes and debentures, 1.8% to 7.9% due through 2065
|
$
|
13,547
|
$
|
11,964
|
Capitalized leases,
3.1%
to
8.4%
due through
2028
|
|
1,105
|
|
1,268
|
Equipment obligations,
2.6%
to
6.7%
due through
2031
|
|
1,069
|
|
963
|
Term loans - floating rate, due in
2017
|
|
100
|
|
200
|
Mortgage bonds,
4.8%
due through
2030
|
|
57
|
|
57
|
Medium-term notes,
9.3%
to
10.0%
due through
2020
|
|
23
|
|
23
|
Receivables Securitization (Note 11)
|
|
-
|
|
400
|
Unamortized discount and deferred issuance costs
|
|
(894)
|
|
(674)
|
Total debt
|
|
15,007
|
|
14,201
|
Less: current portion
|
|
(758)
|
|
(594)
|
Total long-term debt
|
$
|
14,249
|
$
|
13,607
|
Debt Maturities
– The following table presents aggregate debt maturities as of December 31, 2016, excluding market value adjustments:
|
|
|
|
|
|
Millions
|
|
|
2017
|
$
|
763
|
2018
|
|
572
|
2019
|
|
645
|
2020
|
|
1,042
|
2021
|
|
673
|
Thereafter
|
|
12,206
|
Total principal
|
|
15,901
|
Unamortized discount and deferred issuance costs
|
|
(894)
|
Total debt
|
$
|
15,007
|
Equipment Encumbrances
– Equipment with a carrying value of approximately
$2.3
billion and
$2.6
billion at December 31, 2016, and 2015, respectively, served as collateral for capital leases and other types of equipment obligations in accordance with the secured financing arrangements utilized to acquire such railroad equipment.
As a result of the merger of Missouri Pacific Railroad Company (MPRR) with and into UPRR on January 1, 1997, and pursuant to the underlying indentures for the MPRR mortgage bonds, UPRR must maintain the same value of assets after the merger in order to comply with the security requirements of the mortgage bonds. As of the merger date, the value of the MPRR assets that secured the mortgage bonds was approximately
$6.0
billion. In accordance with the terms of the indentures, this collateral value must be maintained during the entire term of the mortgage bonds irrespective of the outstanding balance of such bonds.
Credit Facilities
– At December 31, 2016, we had
$1.7
billion of credit available under the facility, which is designated for general corporate purposes and supports the issuance of commercial paper. We did
not
draw on the facility during 2016. Commitment fees and interest rates payable under the facility are similar to fees and rates available to comparably rated, investment-grade borrowers. The facility allows for borrowings at floating rates based on London Interbank Offered Rates, plus a spread, depending upon credit ratings for our senior unsecured debt. The facility matures in
May 2019
under a
five
-year term and requires UPC to maintain a debt-to-net-worth coverage ratio.
The definition of debt used for purposes of calculating the debt-to-net-worth coverage ratio includes, among other things, certain credit arrangements, capital leases, guarantees and unfunded and vested pension benefits under Title IV of ERISA. At December 31, 2016, the debt-to-net-worth coverage ratio allowed us to carry up to
$39.9
billion of debt (as defined in the facility), and we had
$15.1
billion of debt (as defined in the facility) outstanding at that date. Under our current capital plans, we expect to continue
to satisfy the debt-to-net-worth coverage ratio; however, many factors beyond our reasonable control could affect our ability to comply with this provision in the future. 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
$125
million cross-default provision and a change-of-control provision.
During 2016, we did not
issue
or
repay
any commercial paper, and at December 31, 2016, and 2015, we had no commercial paper
outstanding
. 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.
Dividend Restrictions
– Our revolving credit facility includes a debt-to-net worth covenant (discussed in the Credit Facilities section above) that, under certain circumstances, restricts the payment of cash dividends to our shareholders. The amount of retained earnings available for dividends was
$12.4
billion and
$13.6
billion at December 31, 2016, and 2015, respectively.
Shelf Registration Statement and Significant New Borrowings
– On July 28, 2016, the Board of Directors renewed its authorization for the Company to issue up to
$4.0
billion of debt securities under the Company’s current
three
-year shelf registration filed in February 2015, which had
$0.9
billion of authority remaining. Under our shelf registration, we may issue, from time to time, any combination of debt securities, preferred stock, common stock, or warrants for debt securities or preferred stock in one or more offerings. At December 31, 2016, we had remaining authority to issue up to
$3.55
billion of debt securities under our shelf registration.
During 2016, we issued the following unsecured, fixed-rate debt securities under our current shelf registration:
|
|
|
|
Date
|
Description of Securities
|
March 1, 2016
|
$500
million of
2.750%
Notes due
March 1, 2026
|
|
$600
million of
4.050%
Notes due
March 1, 2046
|
|
$200
million of reopened
4.375%
Notes due
November 15, 2065
|
August 8, 2016
|
$150
million of reopened
2.750%
Notes due
March 1, 2026
|
|
$300
million of
3.350%
Notes due
August 15, 2046
|
We used the net proceeds from the offerings for general corporate purposes, including the repurchase of common stock pursuant to our share repurchase program. These debt securities include change-of-control provisions
.
Equipment Trust
– On
May 9, 2016
, UPRR consummated a pass-through (P/T) financing, whereby a P/T trust was created, which issued
$151
million of P/T trust certificates with a stated interest rate of
2.495%
. The P/T trust certificates will mature on
November 9, 2029
. The proceeds from the issuance of the P/T trust certificates were used to purchase equipment trust certificates to be issued by UPRR to finance the acquisition of
59
locomotives. The equipment trust certificates are secured by a lien on the locomotives. The
$151
million is classified as debt due after one year in our Consolidated Statements of Financial Position.
Debt Exchange
– On
October 4, 2016
, we exchanged
$1,006
million of various outstanding notes and debentures due between 2028 and 2044 (the Existing Notes) for
$1,044
million of
3.799%
notes (the New Notes) due
October 1, 2051
, plus cash consideration of approximately
$183
million in addition to
$11
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
$8
million and were included in interest expense during the year ended December 31, 2016.
The following table lists the outstanding notes and debentures that were exchanged:
|
|
|
|
|
|
|
Principal amount
|
Millions
|
exchanged
|
7.125%
Debentures due
2028
|
$
|
2
|
6.625%
Debentures due
2029
|
|
25
|
5.375%
Debentures due
2033
|
|
15
|
6.250%
Debentures due
2034
|
|
52
|
6.150%
Debentures due
2037
|
|
2
|
5.780%
Notes due
2040
|
|
4
|
4.750%
Notes due
2041
|
|
175
|
4.750%
Notes due
2043
|
|
204
|
4.821%
Notes due
2044
|
|
373
|
4.850%
Notes due
2044
|
|
154
|
Total
|
$
|
1,006
|
Receivables Securitization Facility
– As of
December 31, 2016, and 2015, we recorded
$0
and
$400
million, respectively, of borrowings under our receivables securitization facility, as secured debt. (See further discussion of our receivables securitization facility in Note 11).
16. Variable Interest Entities
We have entered into various lease transactions in which the structure of the leases contain variable interest entities (VIEs). These VIEs were created solely for the purpose of doing lease transactions (principally involving railroad equipment and facilities) and have no other activities, assets or liabilities outside of the lease transactions. Within these lease arrangements, we have the right to purchase some or all of the assets at fixed prices. Depending on market conditions, fixed-price purchase options available in the leases could potentially provide benefits to us; however, these benefits are not expected to be significant.
We maintain and operate the assets based on contractual obligations within the lease arrangements, which set specific guidelines consistent within the railroad industry. As such, we have no control over activities that could materially impact the fair value of the leased assets. We do not hold the power to direct the activities of the VIEs and, therefore, do not control the ongoing activities that have a significant impact on the economic performance of the VIEs. Additionally, we do not have the obligation to absorb losses of the VIEs or the right to receive benefits of the VIEs that could potentially be significant to the VIEs.
We are not considered to be the primary beneficiary and do not consolidate these VIEs because our actions and decisions do not have the most significant effect on the VIE’s performance and our fixed-price purchase options are not considered to be potentially significant to the VIEs. The future minimum lease payments associated with the VIE leases totaled
$2.2
billion as of
December 31, 2016
.
17. Leases
We lease certain locomotives, freight cars, and other property. The Consolidated Statements of Financial Position as of
December 31, 2016, and 2015
included
$1,997
million, net of
$
1
,
121
million of accumulated depreciation, and
$2,273
million, net of
$1
,
189
million of accumulated depreciation, respectively, for properties held under capital leases. A charge to income resulting from the depreciation for assets held under capital leases is included within depreciation expense in our Consolidated Statements of Income.
Future minimum lease payments for operating and capital leases with initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
Millions
|
Operating
Leases
|
Capital
Leases
|
2017
|
$
|
461
|
$
|
221
|
2018
|
|
390
|
|
193
|
2019
|
|
348
|
|
179
|
2020
|
|
285
|
|
187
|
2021
|
|
245
|
|
158
|
Later years
|
|
1,314
|
|
417
|
Total minimum lease payments
|
$
|
3,043
|
$
|
1,355
|
Amount representing interest
|
|
N/A
|
|
(250)
|
Present value of minimum lease payments
|
|
N/A
|
$
|
1,105
|
Approximately
96
%
of capital lease payments relate to locomotives. Rent expense for operating leases with terms exceeding one month
was $535
million in 201
6
,
$5
90
million in 201
5
, and
$
593
million in 201
4
. When cash rental payments are not made on a straight-line basis, we recognize variable rental expense on a straight-line basis over the lease term. Contingent rentals and sub-rentals are not significant.
18. Commitments and Contingencies
Asserted and Unasserted Claims
– Various claims and lawsuits are pending against us and certain of our subsidiaries. We cannot fully determine the effect of all asserted and unasserted claims on our consolidated results of operations, financial condition, or liquidity. To the extent possible, we have recorded 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, 2016. 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
$290
million to
$317
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
|
2016
|
2015
|
2014
|
Beginning balance
|
$
|
318
|
$
|
335
|
$
|
294
|
Current year accruals
|
|
75
|
|
89
|
|
96
|
Changes in estimates for prior years
|
|
(29)
|
|
(3)
|
|
9
|
Payments
|
|
(74)
|
|
(103)
|
|
(64)
|
Ending balance at December 31
|
$
|
290
|
$
|
318
|
$
|
335
|
Current portion, ending balance at December 31
|
$
|
62
|
$
|
63
|
$
|
111
|
In conjunction with the liability update performed in 201
6
, we also reassessed our estimated insurance recoveries
. We have recognized an asset for estimated insurance recoveries at December 31, 2016, and 2015.
Any changes
to recorded insurance recoveries are included in the above table in the Changes in estimates for prior years category.
Asbestos
– We are a defendant in a number of lawsuits in which current and former employees and other parties allege exposure to asbestos. We assess our potential liability using a statistical analysis of resolution costs for asbestos-related claims. This liability is updated annually and excludes future defense and processing costs. The liability for resolving both asserted and unasserted claims was based on the following assumptions:
|
·
|
|
The ratio of future claims by alleged disease would be consistent with historical averages adjusted for inflation.
|
|
·
|
|
The number of claims filed against us will decline each year.
|
|
·
|
|
The average settlement values for asserted and unasserted claims will be equivalent to historical averages.
|
|
·
|
|
The percentage of claims dismissed in the future will be equivalent to historical averages.
|
Our liability for asbestos-related claims is
not discounted to present value due to the uncertainty surrounding the timing of future payments. Approximately 20% of the recorded liability related to asserted claims and approximately 80% related to unasserted claims at December 31, 2016. Because of the uncertainty surrounding the ultimate outcome of asbestos
-related claims, it is reasonably possible that future costs to settle these claims may range from
approximately
$111
million to
$118
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.
Our asbestos-related liability activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
2016
|
2015
|
2014
|
Beginning balance
|
$
|
120
|
$
|
126
|
$
|
131
|
Accruals/(Credits)
|
|
12
|
|
-
|
|
1
|
Payments
|
|
(21)
|
|
(6)
|
|
(6)
|
Ending balance at December 31
|
$
|
111
|
$
|
120
|
$
|
126
|
Current portion, ending balance at December 31
|
$
|
8
|
$
|
6
|
$
|
8
|
In conjunction with the liability update performed in 201
6
, we also reassessed our estimated insurance recoveries. We have recognized an asset for estimated insurance recoveries at
December 31, 2016, and 2015
. The amounts recorded for asbestos-related liabilities and related insurance recoveries were based on currently known facts. However, future events, such as the number of new claims filed each year, average settlement costs, and insurance coverage issues, could cause the actual costs and insurance recoveries to be higher or lower than the projected amounts. Estimates also may vary in the future if strategies, activities, and outcomes of asbestos litigation materially change; federal and state laws governing asbestos litigation increase or decrease the probability or amount of compensation of claimants; and there are material changes with respect to payments made to claimants by other defendants.
Environmental Costs
– We are subject to federal, state, and local environmental laws and regulations. We have
identified 292 sites at which we are or may be liable for remediation costs associated with
alleged contamination or for violations of environmental requirements. This includes 33 sites that are the subject of actions taken by the U.S. government, 21 of which are currently on the Superfund National Priorities List. Certain federal legislation imposes joint and several liability for the remediation of identified sites; consequently, our ultimate
environmental liability may include costs relating to activities of other parties, in addition to costs relating to our own activities at each site.
When we identify an environmental issue with respect to property owned, leased, or otherwise used in our business, we perform, with assistance of our consultants, environmental assessments on the property. We expense the cost of the assessments as incurred. We accrue the cost of remediation where our obligation is probable and such costs can be reasonably estimated. Our environmental liability is not discounted to present value due to the uncertainty surrounding the timing of future payments.
Our environmental liability activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions
|
2016
|
2015
|
2014
|
Beginning balance
|
$
|
190
|
$
|
182
|
$
|
171
|
Accruals
|
|
84
|
|
61
|
|
56
|
Payments
|
|
(62)
|
|
(53)
|
|
(45)
|
Ending balance at December 31
|
$
|
212
|
$
|
190
|
$
|
182
|
Current portion, ending balance at December 31
|
$
|
55
|
$
|
52
|
$
|
60
|
The environmental liability includes future costs for remediation and restoration of sites, as well as ongoing monitoring costs, but excludes any anticipated recoveries from third parties. Cost estimates are based on information available for each site, financial viability of other potentially responsible parties, and existing technology, laws, and regulations. The ultimate liability for remediation is difficult to determine because of the number of potentially responsible parties, site-specific cost sharing arrangements with other potentially responsible parties, the degree of contamination by various wastes, the scarcity and quality of volumetric data related to many of the sites, and the speculative nature of remediation costs. Estimates of liability may vary over time due to changes in federal, state, and local laws governing environmental remediation. Current obligations are not expected to have a material adverse effect on our consolidated results of operations, financial condition, or liquidity.
Insurance
– The Company has a consolidated, wholly-owned captive insurance subsidiary (the captive), that provides insurance coverage for certain risks including FELA claims and property coverage which are subject to reinsurance. The captive entered into annual reinsurance treaty agreements that insure workers compensation, general liability, auto liability and FELA risk. The captive cedes a portion of its FELA exposure through the treaty and assumes a proportionate share of the entire risk. The captive receives direct premiums, which are netted against the Company’s premium costs in other expenses in the Consolidated Statements of Income. The treaty agreements provide for certain protections against the risk of treaty participants’ non-performance, and we do not believe our exposure to treaty participants’ non-performance is material at this time. In the event the Company leaves the reinsurance program, the Company is not relieved of its primary obligation to the policyholders for activity prior to the termination of the treaty agreements. We record both liabilities and reinsurance receivables using an actuarial analysis based on historical experience in our Consolidated Statements of Financial Position.
Guarantees
– At
December 31, 2016, and 2015
, we were contingently liable
for $43 million and $53 million in guarantees, respectively. The fair value of these obligations as of both December 31, 2016, and 2015 was $0. We entered into these contingent guarantees in the normal course of business, and they include guaranteed obligations related to our affiliated operations. The final guarantee expires in 2022. We are not aware of any existing event of default that would require us to satisfy these guarantees
. We do not expect that these guarantees will have a material adverse effect on our consolidated financial condition, results of operations, or liquidity.
Indemnities
– We are contingently obligated under a variety of indemnification arrangements, although in some cases the extent of our potential liability is limited, depending on the nature of the transactions and the agreements. Due to uncertainty as to whether claims will be made or how they will be resolved, we cannot reasonably determine the probability of an adverse claim or reasonably estimate any adverse liability or the total maximum exposure under these indemnification arrangements. We do not have any reason to believe that we will be required to make any material payments under these indemnity provisions.
Gain Contingency
–
UPRR and Santa Fe Pacific Pipelines (SFPP, a subsidiary of Kinder Morgan Energy Partners, L.P.) currently are engaged in a proceeding to resolve the fair market rent payable to UPRR commencing on January 1, 2004, for pipeline easements on UPRR rights-of-way (
Union Pacific Railroad Company vs. Santa Fe Pacific Pipelines, Inc., SFPP, L.P., Kinder Morgan Operating L.P. “D” Kinder Morgan G.P., Inc., et al., Superior Court of the State of California for the County of Los Angeles, filed July 28, 2004
). In February 2007, a trial began to resolve this issue, and in May 2012, the trial judge rendered an opinion establishing the fair market rent and entering judgment for back rent, including prejudgment interest. SFPP appealed the judgment. On November 5, 2014, the Second District Circuit Court of Appeal in California issued an opinion holding that UPRR was not entitled to collect rent from SFPP for easements on the portions of the property acquired solely through federal government land grants issued during the 1800s. The Appellate Court also reversed the award of prejudgment interest and remanded the case to the trial court. A favorable final judgment may materially affect UPRR's results of operations in the period of any monetary recoveries. Due to the uncertainty regarding the amount and timing of any recovery or any subsequent proceedings, we consider this a gain contingency and have not recognized any amounts in the Consolidated Financial Statements as of
December 31, 2016
.
19. Share Repurchase Program
Effective January 1, 2014, our Board of Directors authorized the repurchase of up to
120
million shares of our common stock by
December 31, 2017
, replacing our previous repurchase program. As of
December 31, 2016
, we repurchased a total of
$19.1
billion of our common stock since the commencement of our repurchase programs in 2007.
The table below represents shares repurchased under this repurchase program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Purchased
|
Average Price Paid
|
|
2016
|
2015
|
|
2016
|
|
2015
|
First quarter
|
9,315,807
|
6,881,455
|
$
|
76.49
|
$
|
117.28
|
Second quarter
|
7,026,100
|
7,975,100
|
|
85.66
|
|
104.62
|
Third quarter
|
9,088,613
|
13,800,700
|
|
93.63
|
|
89.65
|
Fourth quarter
|
9,624,667
|
6,646,899
|
|
97.60
|
|
88.19
|
Total
|
35,055,187
|
35,304,154
|
$
|
88.57
|
$
|
98.14
|
On November 17, 2016, our Board of Directors approved the early renewal of the share repurchase program, authorizing the repurchase of up to 120 million shares of our common stock by December 31, 2020. The new authorization was effective January 1, 2017, and replaces the previous authorization, which expired on Decem
ber 31, 2016
.
Management's assessments of market conditions and other pertinent factors guide the timing
and volume of all repurchases.
Repurchased shares are recorded in treasury stock at cost, which includes any applicable commissions and fees.
From January 1, 2017, through February
2, 2017, we repurchased
2
.
75
million shares at an aggregate cost of approximately $
291
million.
20. Related Parties
UPRR and other North American railroad companies jointly own TTX Company (TTX). UPRR has a
36.79%
economic and voting
interest in TTX while
the other
North American railroads own
the remaining interest. In accordance with ASC 323
Investments - Equity Method and Joint Venture
, UPRR applies the equity method of accounting to
our
investment in TTX.
TTX is a railcar pooling company that owns railcars and intermodal wells to serve
North America’s railroads
. TTX
assists
railroads
in
meet
ing
the
needs of their
customers by providing railcars in an efficient, pooled environment. All railroads have the ability to utilize TTX railcars through car hire by renting railcars at stated rates.
UPRR h
ad $877 million and $830 million recognized as inv
estments related to TTX in our Consolidated Statements of Financial P
osition as of December 31, 2016, and 2015, respectively.
TTX car hire expenses of $368 million in 2016, $376 million in 2015, and $350 million in 2014 are included in
eq
uipment and other rents in our Consolidated Statements of I
ncome. In addition, UPRR had accounts payable to TTX of $61
million
at both
December 31, 2016,
and
December 31,
2015
.
21. Selected Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions, Except Per Share Amounts
|
|
|
|
|
|
|
|
|
2016
|
Mar. 31
|
Jun. 30
|
Sep. 30
|
Dec. 31
|
Operating revenues
|
$
|
4,829
|
$
|
4,770
|
$
|
5,174
|
$
|
5,168
|
Operating income
|
|
1,687
|
|
1,660
|
|
1,960
|
|
1,965
|
Net income
|
|
979
|
|
979
|
|
1,131
|
|
1,144
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
1.16
|
|
1.17
|
|
1.36
|
|
1.40
|
Diluted
|
|
1.16
|
|
1.17
|
|
1.36
|
|
1.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Millions, Except Per Share Amounts
|
|
|
|
|
|
|
|
|
2015
|
Mar. 31
|
Jun. 30
|
Sep. 30
|
Dec. 31
|
Operating revenues
|
$
|
5,614
|
$
|
5,429
|
$
|
5,562
|
$
|
5,208
|
Operating income
|
|
1,977
|
|
1,949
|
|
2,208
|
|
1,918
|
Net income
|
|
1,151
|
|
1,204
|
|
1,300
|
|
1,117
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
1.31
|
|
1.38
|
|
1.51
|
|
1.31
|
Diluted
|
|
1.30
|
|
1.38
|
|
1.50
|
|
1.31
|
Per share net income for the four quarters combined may not equal the per share net income for the year due to rounding.