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# Union Pacific Corporation (UNP): Business, Risks and Management's Discussion Covers the third quarter of 2026, the quarter ended September 30, 2026. Business, risk factors and the full-year discussion come from the Annual Report on Form 10-K for fiscal year 2025 (accession 0000100885-26-000037, filed February 6, 2026). The quarter comes from the Form 10-Q for the quarter ended September 30, 2026 (accession 0000100885-26-000321, filed October 22, 2026) and the third-quarter earnings release furnished on Form 8-K (accession 0000100885-26-000319, October 22, 2026). ## Business Union Pacific sells freight transportation by rail. Through its principal operating company, Union Pacific Railroad Company, it moves bulk commodities, industrial products, finished vehicles and intermodal containers for shippers across the western two-thirds of the United States. Almost all of its revenue is freight revenue, which depends on how many carloads it hauls and the average revenue per car. Price, traffic mix and fuel surcharges drive revenue per car. In 2025 freight revenues were $23.2 billion of $24.5 billion in total operating revenues. The rest came from subsidiary logistics businesses, accessorial charges such as container and demurrage fees, and other revenue. The railroad is the company's only reportable segment. Management tracks revenue by commodity group but runs the network as one integrated system. **Network.** The railroad is a Class I carrier with 32,889 route miles in 23 states, of which it owns 26,294. Its lines link the Pacific Coast and Gulf Coast ports with the Midwest and with Eastern gateways. Union Pacific is the only railroad that serves all six major Mexico gateways. It connects with Canada's rail systems and runs coordinated schedules with other carriers to reach the East and Southeast. At the end of 2025 it owned or leased 6,964 locomotives, 53,790 freight cars and 50,716 containers and chassis. In-service utilization in 2025 was 68% for locomotives and 76% for freight cars. The company owns its Omaha headquarters and runs train movements from the Harriman Dispatching Center, also in Omaha. **Commodity groups.** Freight revenue comes from three groups, with the following 2025 shares: - **Bulk (33% of 2025 freight revenue):** grain and grain products, fertilizer, food and refrigerated goods, and coal and renewables. The network reaches most major grain markets and links them to export terminals in the Pacific Northwest and on the Gulf Coast, as well as to Mexico. Coal from Wyoming's Powder River Basin is the largest part of the coal business. - **Industrial (37%):** industrial chemicals and plastics, metals and minerals (including steel, aggregates and rock), forest products, and energy and specialized markets (petroleum, LPG, soda ash, sand, waste, salt and roofing). Infrastructure spending, construction, refinery utilization and drilling activity drive demand. - **Premium (30%):** finished automobiles, automotive parts, and domestic and international intermodal containers. Union Pacific is the largest automotive carrier west of the Mississippi River. It runs or has access to more than 40 vehicle distribution centers and serves six vehicle assembly plants. International intermodal traffic mainly enters through West Coast ports. Domestic intermodal customers are intermodal marketing companies and truckload carriers. Shipments to and from Mexico run through all three groups. They earned $2.9 billion of freight revenue in 2025, down 1% from 2024. Some traffic is seasonal: intermodal usually peaks in the third quarter ahead of holiday demand, and agricultural flows follow the harvest. **Workforce.** The company had an average of 29,287 employees in 2025. Thirteen major rail unions represent about 83% of the workforce. Under the Railway Labor Act, collective bargaining agreements can be modified every five years. Local negotiations for 2025-2029 began on January 1, 2025, and most have been concluded. The 2025 personal injury rate of 0.68 improved 24% and the derailment incident rate of 1.75 improved 19%, which the company calls its best annual safety results. **Strategy.** Management's framework is "Safety, Service, and Operational Excellence" leading to growth. Its stated aims are an industry-leading operating ratio and return on invested capital. **Competition and regulation.** BNSF Railway is the main rail competitor and runs parallel routes in many of Union Pacific's main corridors. Trucks compete in all three commodity groups, and barges compete for grain and bulk freight near inland waterways and the Gulf Coast. The Surface Transportation Board (STB) has jurisdiction over rates on regulated traffic, common-carrier service, line transfers and abandonments, and acquisitions of control of rail carriers, which includes the pending Norfolk Southern acquisition. The STB is also considering rules on reciprocal switching and commodity exemptions and on how railroad revenue adequacy is measured and used. The Federal Railroad Administration, other Department of Transportation agencies, the Department of Homeland Security and the Environmental Protection Agency regulate safety, hazardous materials and emissions. **Pending acquisition of Norfolk Southern.** On July 28, 2025, Union Pacific agreed to acquire Norfolk Southern Corporation for a combination of Union Pacific stock and cash. Norfolk Southern's railroad operates in 22 states and the District of Columbia. It serves every major container port in the East and carries coal, automobiles and automotive parts as well as industrial products. The company says the combination would create "America's first transcontinental railroad", spanning more than 50,000 miles across 43 states with access to 10 international interchanges and about 100 ports. Completion requires STB approval and is expected in the second half of 2027. Until then, Norfolk Southern's management continues to run Norfolk Southern independently. Once completed, the acquisition is expected to be accounted for as a business combination. ## Risk factors The 10-K's risk factors are condensed below. The third-quarter 10-Q refers back to them and adds none. **Pending Norfolk Southern acquisition** - **Regulatory approval and conditions.** The mergers cannot close without STB approval. The STB may impose requirements, concessions or divestitures that reduce the expected benefits and synergies. Union Pacific's reasonable-best-efforts obligations include divestitures and conduct restrictions, but it need not accept a "materially burdensome regulatory condition" as the merger agreement defines it. Competitors, customers and other parties can oppose the application or seek protective conditions. Any appeal of a final STB order could take a long time to resolve. - **Failure or delay.** Either company may terminate the agreement if the mergers have not closed by the agreement's outside date. If the deal fails, Union Pacific could owe a $2.5 billion termination fee in some circumstances and would still bear its transaction costs. Its stock price could also fall and relationships with customers and employees could suffer. The no-shop provisions may discourage competing proposals. - **Pendency effects.** Customers and suppliers may defer decisions or renegotiate while the deal is pending, and both companies operate under interim conduct restrictions. Key employees may leave. The company has been, and may again be, the target of securities class action and derivative lawsuits, which could be costly and could delay or prevent the mergers. - **Integration and leverage.** Neither company has completed a transaction of comparable size. Integrating rail operations, IT, safety systems and two corporate cultures may cost more or take longer than planned, and expected synergies may not be achieved. The combined company expects to take on significant new debt, will likely be bound by a leverage covenant, and could face negative rating-agency action. Higher debt could constrain dividends and buybacks. **Operations and markets** - **Demand and network capacity.** A sharp drop in demand raises unit costs and leads to stored equipment and workforce cuts. A surge beyond network capacity can cause congestion and slower velocity, so the company keeps a resource buffer. - **Fuel prices.** Fuel is a significant share of transportation expense. Fuel surcharges recover much of it but lag price changes by about two months, which creates quarterly volatility. Recovery is not guaranteed, and regulation could limit surcharges. Lower fuel prices can also hurt coal and drilling-related traffic. - **Hazardous materials.** As a common carrier, the railroad must carry hazardous materials such as crude oil, ethanol and chlorine. A release could produce claims, penalties and remediation costs above insurance coverage. - **International trade and tariffs.** A significant portion of revenue involves traffic to and from Mexico, Canada and Southeast Asia, including China. Trade disruptions, changes to USMCA or other agreements, and tariffs could reduce demand. Import tariffs hurt demand and raised costs in 2025, and the company said they may continue to do so in 2026. - **Technology and cybersecurity.** The company depends on systems such as Positive Train Control and its transportation control systems. As critical U.S. infrastructure it is exposed to sophisticated cyber attacks, which artificial intelligence may make harder to detect. It reports no material cyber incident to date. - **Weather and climate.** Floods, fires, earthquakes and other severe weather can cut lines. Climate regulation could raise operating costs and change demand for commodities it carries, such as coal. Meeting emission-reduction targets depends on technology that may not be available on commercial terms. - **Key suppliers.** There are only two domestic locomotive manufacturers and a limited number of steel producers that meet the company's rail specifications. Tariffs could raise rail costs. **Workforce, legal and regulatory** - **Labor.** Most employees are unionized. Disputes can lead to strikes, slowdowns or lockouts and higher wage and benefit costs. Collective bargaining agreements limit the company's flexibility to respond to labor shortages. - **Regulation.** New legislation or STB action could expand regulation of rail pricing and service, for example through reciprocal switching, revenue adequacy rules or common-carrier obligations. That could reduce returns on capital spending. - **Litigation and environmental liability.** The railroad faces personal injury, property, environmental and toxic-tort claims, and a catastrophic accident could exceed insurance coverage. Environmental liability can attach to sites it previously owned or operated. **Financial and general** - **Capital markets.** The company relies on bonds, commercial paper and its receivables facility. A rating downgrade below investment grade could restrict its use of the receivables facility and raise its borrowing costs. - **Economy, terrorism and pandemics.** Recession, inflation and interest-rate cycles affect shippers. Rail assets carrying hazardous materials could be terrorist targets. A pandemic could repeat the demand and supply-chain disruption seen during COVID. **Legal proceedings.** Since 2007, shippers have sued Union Pacific and other Class I railroads, alleging that their fuel surcharges amounted to price-fixing. About 106 individual-shipper suits are consolidated in a second multidistrict proceeding. On June 24, 2025, the U.S. District Court for the District of Columbia granted summary judgment to all defendant railroads, and the plaintiffs have appealed. Union Pacific says the suits are without merit. The 10-Q adds that on August 20, 2026, a federal court in Illinois certified a class action under the Illinois Biometric Information Privacy Act over a finger-scan system (*David Fleury, et al. v. Union Pacific Railroad Company*). The company says it cannot estimate any loss. ## Management's discussion: fiscal year 2025 **Results.** Total operating revenues were $24,510 million, up 1% from $24,250 million in 2024. Freight revenues rose 2% to $23,220 million, driven by core pricing gains and 1% volume growth. Two things partly offset them. The traffic mix shifted toward coal and rock, which earn less per car, and away from lumber. Fuel surcharge revenue also fell $218 million to $2.3 billion because of lower fuel prices and the lag in surcharge recovery. Operating expenses rose $127 million (1%) to $14,664 million because of inflation, volume costs, $72 million of Norfolk Southern acquisition expenses and higher depreciation, partly offset by productivity and cheaper fuel. Operating income rose 1% to $9,846 million, and the operating ratio improved 10 basis points to 59.8%. Net income was $7,138 million and diluted earnings per share were $11.98, up 8%. Below the operating line, two items lifted earnings: - **Other income** rose $279 million to $629 million, mainly from $295 million more real estate income, including $250 million of industrial park land sales. - **The effective tax rate** fell to 22.1% from 23.3%, helped by a $115 million cut in deferred tax expense from new Kansas legislation and by purchased tax credits. **Commodity groups.** - **Bulk:** revenue grew on 6% higher volume. More coal went to power generation because natural gas prices were high and the company won new business. Export grain to Mexico and soybean crush were also strong. - **Industrial:** revenue grew on pricing and 1% higher volume (rock, plastics and chemicals), offset by lower iron ore, petroleum and lumber. - **Premium:** revenue declined. International intermodal volume rose 17% in the first half of 2025 as U.S. West Coast imports surged on trade-policy uncertainty, then fell 24% in the second half, leaving the full year down 6%. Business wins in domestic intermodal partly offset the decline. Automotive shipments fell 4%. **Operations.** Freight car velocity rose 8% to 225 daily miles per car and terminal dwell improved 8%. Intermodal and manifest service performance indexes reached 99% and 100% for the year. Workforce productivity improved 7%, as average daily car miles rose 3% while employee levels fell 3%. Average locomotive diesel cost fell 6%, from $2.64 to $2.49 per gallon. **Cash and capital.** Operating cash flow was $9,290 million, which included about $0.3 billion of benefit from H.R.1 restoring 100% bonus depreciation. Capital investments were $3,791 million and dividends $3,236 million. Free cash flow (operating cash flow less investing cash flow and dividends) was $2,292 million. During 2025 the company repaid $1.4 billion of long-term debt and repurchased $2.7 billion of stock, then paused buybacks after agreeing to acquire Norfolk Southern. At year end it had $1.3 billion of cash, $250 million of short-term investments, an undrawn $2.0 billion revolving credit facility and up to $600 million available under its receivables facility. It reported a working capital deficit because of upcoming debt maturities, which it described as not unusual for the company. **2026 outlook as given in the 10-K.** Management expected industrial production to be roughly flat, with weaker housing starts and light-vehicle sales. It expected lower international intermodal volume as trade patterns normalized, and higher coal demand from elevated natural gas prices. It planned capital spending of about $3.3 billion. ## Current quarter: third quarter 2026 **Headline results.** Total operating revenues rose 15% to $7,197 million and freight revenues rose 15% to $6,813 million. Three things drove the increase: - **Fuel surcharge revenue** roughly doubled, from $602 million to $1.2 billion. - **Carloads** rose 6%. - **Core pricing** gains added to revenue. The mix shift toward intermodal, which earns less per car, partly offset these gains. Freight revenue excluding fuel surcharge rose 6%. Operating expenses also rose 15%, to $4,254 million. Fuel was the main driver: locomotive diesel averaged a record $4.21 per gallon against $2.56 a year earlier, a 64% increase, and fuel expense rose 69% to $1,040 million. Volume-related costs, inflation and higher depreciation also added to expenses, partly offset by productivity and lower acquisition-related expenses. Operating income rose 15% to $2,943 million. The operating ratio improved 0.1 points to 59.1%. The 10-Q says this improvement came despite the higher fuel prices. Net income rose 16% to $2,076 million, and diluted EPS rose 16% to $3.49 from $3.01. The effective tax rate rose to 23.8% from 22.9%. Interest expense fell 5% to $312 million as weighted-average debt dropped to $30.3 billion from $32.2 billion. **By commodity group.** - **Bulk: $2,116 million, up 10%,** on fuel surcharge and pricing with flat volume. Export grain, renewable fuels and ethanol grew. Wheat, soybean meal and fertilizer fell, and coal and renewables carloads fell 3%. The 10-Q attributes the coal decline to low natural gas prices and elevated plant inventories. The 10-K had expected higher coal demand in 2026 because of elevated natural gas prices. - **Industrial: $2,509 million, up 14%,** on 6% volume growth from domestic steel, construction project materials, plastics, petroleum and lumber. Metals and minerals revenue rose 17% and energy and specialized markets rose 18%. - **Premium: $2,188 million, up 21%.** Intermodal volume rose 11% and intermodal revenue 27%. Domestic intermodal grew on new business and tighter truck capacity. International intermodal recovered as U.S. West Coast imports improved. Automotive shipments rose 2% on auto parts. - **Mexico:** freight revenue rose 9% to $820 million on 4% volume growth. **Operations.** Freight car velocity rose 1% to 228 daily miles per car and terminal dwell improved 2% to 19.9 hours. Train length grew 2%. Workforce productivity rose 5% as average employees fell 1% to 28,540. Locomotive productivity was flat because the active fleet grew 2% to handle 4% more gross ton-miles. Both service performance indexes declined (intermodal by 6 points to 92%, manifest by 7 points to 93%). The company attributes the decline to a comparison against its best performance of the past three years. **Nine months.** Operating revenues rose 10% to $20,278 million and net income rose 9% to $5,770 million. Diluted EPS was $9.71, up from $8.87. The year-to-date operating ratio of 59.7% was 0.1 points worse than a year earlier. Higher fuel prices (averaging $3.59 a gallon against $2.49), inflation and acquisition costs ($93 million against $42 million) outweighed three offsets: pricing gains, productivity, and the absence of a $55 million crew-staffing ratification charge recorded in 2025. Domestic intermodal volume rose 13% and international fell 12%, reflecting elevated U.S. West Coast imports in the first half of 2025. **Cash flow and balance sheet.** Nine-month operating cash flow rose 18% to $8,302 million on lower income tax payments and higher net income. Capital investments were $2,834 million, including $320 million of early lease buyouts. Free cash flow was $2,362 million, against $1,856 million a year earlier. At September 30, 2026, the company held $2.2 billion of cash and $875 million of short-term investments. Its $2.0 billion revolver was undrawn, as was its $600 million receivables facility. Total debt was $30,324 million, down from $31,814 million at year-end 2025. On a trailing twelve-month basis, adjusted debt to adjusted EBITDA was 2.4 times, against 2.7 times at year-end 2025. It issued no debt securities in the first nine months of 2026. The Board's July 28, 2025 authorization to issue up to $20.0 billion of debt remains unused. **Guidance.** Management's October 22, 2026 outlook affirmed: - reported earnings per share growth of high-single digit for 2026, which the earnings release calls consistent with a three-year compound annual growth target for earnings per share of high-single to low-double digits through 2027; - pricing dollars in excess of inflation dollars; - an industry-leading operating ratio and return on invested capital; - continued strong cash generation and consistent annual dividend increases. The same outlook updated two items: - the operating ratio guidance now reads "operating ratio improvement from core business; reported operating ratio challenged by high fuel prices"; - the 2026 capital plan is now approximately $3.5 billion, up from the $3.3 billion in the January 2026 outlook and the 10-K, which the April and July outlooks affirmed. ## Subsequent events The 10-Q discloses one event after the September 30, 2026 balance sheet date. In October 2026, Union Pacific entered into forward-starting interest rate swaps with a notional amount of $1.2 billion. The swaps qualify for hedge accounting as cash flow hedges, and changes in their fair value will be recorded in accumulated other comprehensive income until the hedged item affects earnings. The company says it uses forward-starting swaps to reduce the risk of adverse interest rate movements and not for speculation. The 10-Q does not name the borrowing being hedged, and it discloses no other events after the quarter end.