# Table	of	Contents

# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

# (Mark	One)

# ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE SECURITIES	EXCHANGE	ACT	OF	1934

For	the	fiscal	year	ended	December	31,	2006

# TRANSITION	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE

# SECURITIES	EXCHANGE	ACT	OF	1934

# Commission	File	Number	1-6075

# UNION	PACIFIC	CORPORATION

(Exact	name	of	registrant	as	specified	in	its	charter)

(State	or	other	jurisdiction	of incorporation	or	organization)

1400	DOUGLAS	STREET,	OMAHA,	NEBRASKA

(Address	of	principal	executive	offices)

(Zip	Code)

(Registrant's	telephone	number,	including	area	code)

(I.R.S.	Employer

Identification	No.)

Securities	registered	pursuant	to	Section	12(b)	of	the	Act:

# Title	of	each	Class

# Common	Stock	(Par	Value	$2.50	per	share)

# Name	of	each	exchange	on	which	registered

# New	York	Stock	Exchange,	Inc.

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Act.

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

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of	the registrant's	knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10- K.						X

Indicate	by	check	mark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	or	a	non-accelerated	filer	(as	defined	in	Rule	12b-2	of	the	Act):

Large	accelerated	filer	x				Accelerated	filer	¨				Non-accelerated	filer	¨

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

As	of	June	30,	2006,	the	aggregate	market	value	of	the	registrant's	Common	Stock	held	by	non-affiliates	(using	the	New	York	Stock	Exchange	closing	price)	was $24.9	billion.

The	number	of	shares	outstanding	of	the	registrant's	Common	Stock	as	of	January	31,	2007,	was	270,752,306.

Documents	Incorporated	by	Reference	–	Portions	of	the	registrant's	definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareholders	to	be	held	on	May	3,	2007,	are incorporated	 by	 reference	 into	 Part	 III	 of	 this	 report.	The	 registrant's	 Proxy	 Statement	 will	 be	 filed	 with	 the	 Securities	 and	 Exchange	 Commission	 pursuant	 to Regulation	14A.

# PART	I

|  | PART	I |  |
| :--- | :--- | :--- |
| Item\t1. | Business | 3 |
| Item\t1A. | Risk\tFactors | 6 |
| Item\t1B. | Unresolved\tStaff\tComments | 9 |
| Item\t2. | Properties | 9 |
| Item\t3. | Legal\tProceedings | 10 |
| Item\t4. | Submission\tof\tMatters\tto\ta\tVote\tof\tSecurity\tHolders | 12 |
|  | Executive\tOfficers\tof\tthe\tRegistrant\tand\tPrincipal\tExecutive\tOfficers\tof\tSubsidiaries | 13 |
|  | PART\tII |  |
| Item\t5. | Market\tfor\tthe\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters,\tand\tIssuer\tPurchases\tof\tEquity\tSecurities | 14 |
| Item\t6. | Selected\tFinancial\tData | 16 |
| Item\t7. | Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 17 |
|  | Critical\tAccounting\tPolicies | 37 |
|  | Cautionary\tInformation | 41 |
| Item\t7A. | Quantitative\tand\tQualitative\tDisclosures\tAbout\tMarket\tRisk | 41 |
| Item\t8. | Financial\tStatements\tand\tSupplementary\tData | 42 |
|  | Report\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm | 43 |
| Item\t9. | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 71 |
| Item\t9A. | Controls\tand\tProcedures | 71 |
|  | Management's\tAnnual\tReport\ton\tInternal\tControl\tOver\tFinancial\tReporting | 72 |
|  | Report\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm | 73 |
| Item\t9B. | Other\tInformation | 74 |
|  | PART\tIII |  |
| Item\t10. | Directors,\tExecutive\tOfficers,\tand\tCorporate\tGovernance | 75 |
| Item\t11. | Executive\tCompensation | 75 |
| Item\t12. | Security\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters | 75 |
| Item\t13. | Certain\tRelationships\tand\tRelated\tTransactions,\tand\tDirector\tIndependence | 76 |
| Item\t14. | Principal\tAccounting\tFees\tand\tServices | 76 |
|  | PART\tIV |  |
| Item\t15. | Exhibits,\tFinancial\tStatement\tSchedules | 77 |
|  | Signatures | 78 |

# Item	1.	Business

# GENERAL

Union	Pacific	Corporation	owns	one	of	America's	leading	transportation	companies.	Its	principal	operating	company,	Union	Pacific	Railroad	Company,	links	23	states in	the	western	two-thirds	of	the	country	and	serves	the	fastest-growing	U.S.	population	centers.	Union	Pacific	Railroad	Company's	diversified	business	mix	includes agricultural	products,	automotive,	chemicals,	energy,	industrial	products,	and	intermodal.	It	offers	competitive	long-haul	routes	from	all	major	West	Coast	and	Gulf Coast	ports	to	eastern	gateways.	Union	Pacific	Railroad	Company	connects	with	Canada's	rail	systems	and	is	the	only	railroad	serving	all	six	major	gateways	to	Mexico, making	it	North	America's	premier	rail	franchise.

Union	Pacific	Corporation	was	incorporated	in	Utah	in	1969	and	maintains	its	principal	executive	offices	at	1400	Douglas	Street,	Omaha,	NE	68179.	The telephone	number	at	that	address	is	(402)	544-5000.	The	common	stock	of	Union	Pacific	Corporation	is	listed	on	the	New	York	Stock	Exchange	(NYSE)	under	the symbol	"UNP".

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

Available	Information	–	Our	Internet	website	is	www.up.com.	We	make	available	free	of	charge	on	our	website	(under	the	"Investors"	caption	link)	our	annual	reports on	Form	10-K;	our	quarterly	reports	on	Form	10-Q;	our	current	reports	on	Form	8-K;	our	proxy	statements;	Forms	3,	4,	and	5,	filed	on	behalf	of	directors	and	executive officers;	and	amendments	to	such	reports	filed	or	furnished	pursuant	to	the	Securities	Exchange	Act	of	1934,	as	amended	(the	Exchange	Act),	as	soon	as	reasonably practicable	after	such	material	is	electronically	filed	with,	or	furnished	to,	the	Securities	and	Exchange	Commission	(SEC).	We	also	make	available	on	our	website previously	filed	SEC	reports	and	exhibits	via	a	link	to	EDGAR	on	the	SEC's	Internet	site	at	www.sec.gov.	Additionally,	our	corporate	governance	materials,	including By-Laws,	Board	Committee	charters,	governance	guidelines	and	policies,	and	codes	of	conduct	and	ethics	for	directors,	officers,	and	employees	are	on	our	website. From	time	to	time,	the	corporate	governance	materials	on	our	website	may	be	updated	as	necessary	to	comply	with	rules	issued	by	the	SEC	and	the	NYSE	or	as	desirable to	promote	the	effective	and	efficient	governance	of	our	company.	Any	security	holder	wishing	to	receive,	without	charge,	a	copy	of	any	of	our	SEC	filings	or	corporate governance	materials	should	send	a	written	request	to:	Secretary,	Union	Pacific	Corporation,	1400	Douglas	Street,	Omaha,	NE	68179.

We	have	included	the	CEO	and	CFO	certifications	regarding	our	public	disclosure	required	by	Section	302	of	the	Sarbanes-Oxley	Act	of	2002	as	Exhibits	31(a) and	(b)	to	this	report.	Additionally,	we	filed	with	the	NYSE	the	CEO's	certification	regarding	our	compliance	with	the	NYSE's	Corporate	Governance	Listing	Standards (Listing	Standards)	pursuant	to	Section	303A.12(a)	of	the	Listing	Standards,	which	was	dated	May	23,	2006,	and	indicated	that	the	CEO	was	not	aware	of	any	violations of	the	Listing	Standards	by	the	Corporation.

References	to	our	website	address	in	this	report,	including	references	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations, Item	7,	are	provided	as	a	convenience	and	do	not	constitute,	and	should	not	be	deemed,	an	incorporation	by	reference	of	the	information	contained	on,	or	available through,	the	website.	Therefore,	such	information	should	not	be	considered	part	of	this	report.

# OPERATIONS

The	Railroad,	along	with	its	subsidiaries	and	rail	affiliates,	is	our	one	reportable	operating	segment.	Although	revenue	is	analyzed	by	commodity	group,	we	analyze	the net	financial	results	of	the	Railroad	as	one	segment	due	to	the	integrated	nature	of	our	rail	network.	Additional	information	regarding	our	operations	is	presented	in Selected	Financial	Data,	Item	6;	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations,	Item	7;	and	the	Financial	Statements	and Supplementary	Data,	Item	8.

Operations	–	UPRR	is	a	Class	I	railroad	operating	in	the	United	States.	We	have 32,339	route	miles,	linking	Pacific	Coast	and	Gulf	Coast	ports	with	the	Midwest and	 eastern	 United	 States	 gateways	 and	 providing	 several	 corridors	 to	 key Mexican	gateways.	We	serve	the	western	two-thirds	of	the	country	and	maintain coordinated	 schedules	 with	 other	 rail	 carriers	 to	 move	 freight	 to	 and	 from	 the Atlantic	 Coast,	 the	 Pacific	 Coast,	 the	 Southeast,	 the	 Southwest,	 Canada,	 and Mexico.	Export	and	import	traffic	moves	through	Gulf	Coast	and	Pacific	Coast ports	 and	 across	 the	 Mexican	 and	 Canadian	 borders.	 UPRR's	 freight	 traffic consists	of	bulk,	manifest,	and	premium	business.	Bulk	traffic	is	primarily	coal, grain,	rock,	or	soda	ash	in	unit	trains	–	trains	transporting	a	single	commodity	from one	source	to	one	destination.	Manifest	traffic	is	individual	carload	or	less	than train-load	business,	including	commodities	such	as	lumber,	steel,	paper,	and	food. The	transportation	of	finished	vehicles	and	intermodal	containers	is	part	of	the Railroad's	premium	business.	In	2006,	the	Railroad	generated	commodity	revenue totaling	$14.9	billion	from	the	following	six	commodity	groups:

Agricultural	–	Transporting	agricultural	products,	including	whole	grains,	commodities	produced	from	these	grains,	and	food	and	beverage	products,	provided	16%	of the	Railroad's	2006	commodity	revenue.	With	access	to	most	major	grain	markets,	the	Railroad	provides	a	critical	link	between	the	Midwest	and	western	producing areas	and	export	terminals	in	the	Pacific	Northwest	(PNW)	and	Gulf	ports,	as	well	as	Mexico.	Unit	trains	of	grain	efficiently	shuttle	between	producers	and	export terminals	or	domestic	markets.	UPRR	also	serves	significant	domestic	markets,	including	grain	processors,	animal	feeders,	and	ethanol	producers	in	the	Midwest,	West, South,	and	Rocky	Mountain	states.	Primary	food	commodities	consist	of	a	variety	of	fresh	and	frozen	fruits	and	vegetables,	dairy	products,	and	beverages,	which	are moved	to	major	U.S.	population	centers	for	consumption.	Express	Lane	and	our	recently	inaugurated	Produce	Unit	Train,	our	premium	perishables	services	that	move fruits	and	vegetables	from	the	PNW	and	California	with	priority	service	to	destinations	in	the	East,	compete	with	the	trucking	industry.	We	transport	frozen	meat	and poultry	to	the	West	Coast	ports	for	export,	while	beverages,	primarily	beer,	enter	the	U.S.	from	Mexico.

Automotive	–	UPRR	is	the	largest	automotive	carrier	west	of	the	Mississippi	River,	serving	seven	vehicle	assembly	plants	and	distributing	imported	vehicles	from	six West	Coast	ports	and	Houston.	The	Railroad	off-loads	finished	vehicles	at	38	vehicle	distribution	centers	for	delivery	by	truck	to	all	major	western	U.S.	cities.	In addition	to	transporting	finished	vehicles,	UPRR	provides	expedited	handling	of	automotive	parts	in	both	boxcars	and	intermodal	containers	to	several	assembly	plants. The	Railroad	carries	automotive	materials	bound	for	assembly	plants	in	Mexico,	the	U.S.,	and	Canada	and	transports	finished	vehicles	from	manufacturing	facilities	in Mexico.	In	2006,	transportation	of	finished	vehicles	and	automotive	materials	accounted	for	10%	of	the	Railroad's	commodity	revenue.

Chemicals	–	Transporting	chemicals	provided	14%	of	the	Railroad's	commodity	revenue	in	2006.	The	Railroad's	franchise	enables	it	to	serve	the	chemical	producing areas	along	the	Gulf	Coast,	as	well	as	the	Rocky	Mountain	region.	Two-thirds	of	the	chemicals	business	consists	of	liquid	and	dry	chemicals,	plastics,	and	liquid petroleum	products.	In	addition	to	transporting	plastics,	customers	also	leverage	UPRR's	storage-in-transit	yards	for	intermediate	storage	of	plastic	resins.	Soda	ash shipments	originate	in	southwestern	Wyoming	and	California	destined	primarily	for	glass	producing	markets	in	the	East,	the	West,	and	abroad.	Fertilizer	movements originate

primarily	in	the	Gulf	Coast	region,	as	well	as	the	West	and	Canada,	bound	for	major	agricultural	users	in	the	Midwest	and	the	western	U.S.

Energy	–	Coal	transportation	accounted	for	20%	of	the	Railroad's	2006	commodity	revenue.	The	Railroad's	geographic	network	allows	it	to	transport	coal	destined	for utilities	and	industrial	facilities	in	27	states,	as	well	as	to	the	Gulf	and	rail/barge/ship	facilities	on	the	Mississippi	and	Ohio	Rivers	and	the	Great	Lakes.	UPRR	serves mines	located	in	the	Southern	Powder	River	Basin	of	Wyoming	(SPRB),	Colorado,	Utah,	southern	Wyoming,	and	southern	Illinois.	SPRB	coal	represents	the	largest growth	segment	of	the	market,	as	utilities	continue	to	favor	its	lower	cost	and	low-sulfur	content.

Industrial	Products	 –	The	 Railroad's	 extensive	 network	 enables	 the	 industrial	 products	 group	 to	 move	 numerous	 commodities	 between	 thousands	 of	 origin	 and destination	points	throughout	North	America.	Lumber	shipments	originate	primarily	in	the	PNW	and	Canada	for	destinations	throughout	the	United	States	for	new	home construction	and	repair	and	remodeling.	Commercial	and	highway	construction	drives	shipments	of	steel	and	construction	products,	consisting	of	rock,	cement,	and roofing	materials.	Paper	and	consumer	goods,	including	furniture	and	appliances,	are	shipped	to	major	metropolitan	areas	for	consumers.	Nonferrous	metals	and industrial	minerals	are	moved	for	industrial	manufacturing.	In	addition,	the	Railroad	provides	efficient	and	safe	transportation	for	government	entities	and	waste companies.	In	2006,	transporting	industrial	products	provided	21%	of	the	Railroad's	commodity	revenue.

Intermodal	 –	 UPRR's	 intermodal	 business,	 which	 represented	 19%	 of	 the	 Railroad's	 2006	 commodity	 revenue,	 includes	 international,	 domestic,	 and	 premium shipments.	International	business	consists	of	imported	container	traffic	that	arrives	at	West	Coast	ports	via	steamship	for	destinations	throughout	the	United	States. Domestic	business	 includes	domestic	container	and	 trailer	 traffic	for	 intermodal	marketing	companies	(primarily	shipper	agents	and	consolidators)	and	 truckload carriers.	Less-than-truckload	and	package	carriers	with	time-sensitive	business	requirements	account	for	the	majority	of	our	premium	service.

Working	Capital	–	We	currently	have,	and	historically	have	had,	a	working	capital	deficit,	which	is	common	in	our	industry	and	does	not	indicate	a	lack	of	liquidity	or financial	stability.	We	maintain	adequate	resources	to	meet	our	daily	cash	requirements,	and	we	have	sufficient	financial	capacity	to	satisfy	our	current	liabilities.

Competition	–	We	are	subject	to	competition	from	other	railroads,	motor	carriers,	and	barge	operators.	Our	main	rail	competitor	is	Burlington	Northern	Santa	Fe Corporation.	Its	rail	subsidiary,	BNSF	Railway	Company	(BNSF),	operates	parallel	routes	in	many	of	our	main	traffic	corridors.	In	addition,	we	operate	in	corridors served	by	other	railroads	and	motor	carriers.	Motor	carrier	competition	is	particularly	strong	for	five	of	our	six	commodity	groups.	Because	of	the	proximity	of	our routes	to	major	inland	and	Gulf	Coast	waterways,	barge	competition	can	be	particularly	effective,	especially	for	grain	and	bulk	commodities.	In	addition	to	price competition,	we	face	competition	with	respect	to	transit	times	and	quality	and	reliability	of	service.	While	we	must	build	or	acquire	and	maintain	our	rail	system,	trucks and	barges	are	able	to	use	public	rights-of-way	maintained	by	public	entities.	Any	future	improvements	or	expenditures	materially	increasing	the	quality	or	reducing	the costs	of	these	alternative	modes	of	transportation,	or	legislation	releasing	motor	carriers	from	their	size	or	weight	limitations,	could	have	a	material	adverse	effect	on	our results	of	operations,	financial	condition,	and	liquidity.

Equipment	Suppliers	–	We	depend	on	two	key	domestic	suppliers	of	locomotives.	Due	to	the	capital	intensive	nature	and	sophistication	of	this	equipment,	high	barriers to	entry	face	potential	new	suppliers.	Therefore,	if	one	of	these	domestic	suppliers	discontinues	manufacturing	locomotives,	we	could	experience	a	significant	cost increase	and	risk	reduced	availability	of	the	locomotives	that	are	necessary	to	our	operations.

Employees	–	Approximately	87%	of	our	50,739	full-time-equivalent	employees	are	represented	by	14	major	rail	unions.	In	January	2005,	we	began	the	current	round	of negotiations	with	the	unions.	Existing	agreements	remain	in	effect	and	will	continue	to	remain	in	effect	until	new	agreements	are	reached	or	the	Railway	Labor	Act's

procedures	(which	include	mediation,	cooling-off	periods,	and	the	possibility	of	Presidential	intervention)	are	exhausted.	Contract	negotiations	with	the	various	unions generally	take	place	over	an	extended	period	of	time,	and	we	rarely	experience	work	stoppages	during	negotiations.	The	current	agreements	provide	for	periodic	cost	of living	wage	increases	until	new	agreements	are	reached.

# GOVERNMENTAL	AND	ENVIRONMENTAL	REGULATION

Governmental	Regulation	–	Our	operations	are	subject	to	a	variety	of	federal,	state,	and	local	regulations,	generally	applicable	to	all	businesses	(see	also	the	discussion of	certain	regulatory	proceedings	in	Legal	Proceedings,	Item	3).

The	 operations	 of	 the	 Railroad	 are	 subject	 to	 the	 regulatory	 jurisdiction	 of	 the	 Surface	 Transportation	 Board	 (STB)	 of	 the	 United	 States	 Department	 of Transportation	(DOT).	The	operations	of	the	Railroad	are	also	subject	to	the	regulations	of	the	Federal	Railroad	Administration	(FRA)	of	the	DOT	and	other	federal	and state	agencies.	The	STB	has	jurisdiction	over	rates	charged	on	certain	regulated	rail	traffic;	freight	car	compensation;	transfer,	extension,	or	abandonment	of	rail	lines; and	acquisition	of	control	of	rail	common	carriers.	On	January	26,	2007,	the	STB	issued	a	decision	limiting	the	manner	in	which	U.S.	railroads	can	calculate	fuel surcharges	on	traffic	regulated	by	the	STB.

DOT	and	the	Occupational	Safety	and	Health	Administration,	along	with	other	federal	agencies,	have	jurisdiction	over	certain	aspects	of	safety,	movement	of hazardous	materials,	movement	and	disposal	of	hazardous	waste,	emissions	requirements,	and	equipment	standards.	Various	state	and	local	agencies	have	jurisdiction over	disposal	of	hazardous	waste	and	seek	to	regulate	movement	of	hazardous	materials	in	areas	not	otherwise	preempted	by	federal	law.

Environmental	Regulation	–	We	are	subject	to	extensive	federal	and	state	environmental	statutes	and	regulations	pertaining	to	public	health	and	the	environment.	The statutes	and	regulations	are	administered	and	monitored	by	the	Environmental	Protection	Agency	(EPA)	and	by	various	state	environmental	agencies.	The	primary	laws affecting	our	operations	are	the	Resource	Conservation	and	Recovery	Act,	regulating	the	management	and	disposal	of	solid	and	hazardous	wastes;	the	Comprehensive Environmental	Response,	Compensation,	and	Liability	Act,	regulating	the	cleanup	of	contaminated	properties;	the	Clean	Air	Act,	regulating	air	emissions;	and	the	Clean Water	Act,	regulating	waste	water	discharges.

Information	concerning	environmental	claims	and	contingencies	and	estimated	remediation	costs is	set	forth in	Management's	Discussion	and	Analysis	of Financial	Condition	and	Results	of	Operations	–	Critical	Accounting	Policies	–	Environmental,	Item	7.

# Item	1A.	Risk	Factors

The	information	set	forth	in	this	Item	1A	should	be	read	in	conjunction	with	the	rest	of	the	information	included	in	this	report,	including	Item	7,	Management's Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations,	and	Item	8,	Financial	Statements	and	Supplementary	Data.

We	Must	Manage	Both	Significant	Demand	for	Our	Services	and	Network	Capacity	–	Due	to	continuing	demand	for	rail	service	and	capacity	constraints,	we	may experience	network	difficulties,	including	congestion	and	reduced	velocity,	which	may	compromise	the	level	of	service	we	provide	to	our	customers.	This	level	of demand	may	compound	the	impact	of	weather	and	weather-related	events	on	our	operations	and	velocity.	Although	we	continue	to	improve	our	transportation	plan,	add capacity,	and	improve	operations	at	our	yards	and	other	facilities,	we	cannot	be	sure	that	these	measures	will	fully	or	adequately	address	any	service	shortcomings. Additionally,	ongoing	maintenance,	restoration,	and	improvements	in	the	SPRB	could	adversely	affect	coal	shipments	during	the	year.	We	also	cannot	be	sure	that	we will	not	experience	other	difficulties	related	to

network	capacity,	dramatic	and	unplanned	increases	of	demand	for	rail	service	in	one	or	more	of	our	commodity	groups,	or	other	events	that	could	have	a	negative impact	on	our	operational	efficiency,	any	of	which	could	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.

We	May	Be	Subject	to	Various	Claims	and	Lawsuits	That	Could	Result	in	Significant	Expenditures	–	The	nature	of	our	business	exposes	us	to	the	potential	for	various claims	and	litigation	related	to	labor	and	employment,	personal	injury,	property	damage,	environmental	liability,	and	other	matters.	Any	material	changes	to	litigation trends	or	a	catastrophic	rail	accident	or	series	of	accidents	involving	any	or	all	of	property	damage,	personal	injury,	and	environmental	liability	could	have	a	material adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.

We	Are	Required	to	Transport	Hazardous	Materials 	–	Federal	laws	require	railroads,	including	UPRR,	to	transport	hazardous	materials.	Any	rail	accident	involving	the release	of	hazardous	materials	could	involve	significant	costs	and	claims	for	personal	injury,	property	damage,	and	environmental	penalties	and	remediation,	which could	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.

The	Availability	of	Qualified	Personnel	Could	Adversely	Affect	Our	Operations	–	Changes	in	demographics,	training	requirements,	and	the	availability	of	qualified personnel,	particularly	engineers	and	trainmen,	could	negatively	impact	our	ability	to	meet	demand	for	rail	service.	Unpredictable	increases	in	demand	for	rail	services and	a	lack	of	network	fluidity	may	exacerbate	such	risks,	which	could	have	a	negative	impact	on	our	operational	efficiency	and	otherwise	have	a	material	adverse	effect on	our	results	of	operations,	financial	condition,	and	liquidity.

We	Are	Subject	to	Significant	Governmental	Regulation	–	We	are	subject	to	governmental	regulation	by	a	significant	number	of	federal,	state,	and	local	authorities covering	a	variety	of	health,	safety,	labor,	environmental	(as	discussed	below),	and	other	matters.	Our	failure	to	comply	with	applicable	laws	and	regulations	could	have a	material	adverse	effect	on	us.	Governments	may	change	the	legislative	or	regulatory	frameworks	within	which	we	operate	without	providing	us	with	any	recourse	for any	adverse	effects	on	our	business.	Economic	re-regulation	of	the	rail	industry	would	negatively	impact	our	ability	to	determine	prices	for	rail	services	and	reduce capital	spending	on	our	rail	network,	resulting	 in	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	 liquidity.	Also,	some	 laws	and regulations	require	us	to	obtain	and	maintain	various	licenses,	permits,	and	other	authorizations,	and	we	cannot	guarantee	that	we	will	continue	to	be	able	to	do	so.	In addition,	one	or	more	consolidations	of	Class	I	railroads	could	lead	to	future	re-regulation	of	the	rail	industry.

Severe	Weather	Could	Result	in	Significant	Business	Interruptions	and	Expenditures	–	Severe	weather	conditions,	events,	and	other	natural	phenomena,	including earthquakes,	hurricanes,	fires,	floods,	extreme	temperatures,	and	significant	precipitation	may	cause	business	interruptions,	including	line	outages	on	our	rail	network that	can	adversely	affect	our	entire	rail	network,	and	result	in	increased	costs,	increased	liabilities,	and	decreased	revenue,	which	could	have	a	material	adverse	effect	on our	results	of	operations,	financial	condition,	and	liquidity.

Strikes	or	Work	Stoppages	Could	Adversely	Affect	Our	Operations	as	the	Majority	of	Our	Employees	Belong	to	Labor	Unions	and	Labor	Agreements	–	We	are	a	party to	collective	bargaining	agreements	with	various	labor	unions.	In	January	2005,	we	began	the	current	round	of	negotiations	with	the	unions.	Disputes	with	regard	to	the terms	of	these	agreements	or	our	potential	inability	to	negotiate	acceptable	contracts	with	these	unions	could	result	in,	among	other	things,	strikes,	work	stoppages,	or other	slowdowns	by	the	affected	workers.	If	unionized	workers	were	to	engage	in	a	strike,	work	stoppage,	or	other	slowdown,	or	other	employees	were	to	become unionized,	we	could	experience	a	significant	disruption	of	our	operations	or	higher	ongoing	labor	costs,	either	of	which	could	have	a	material	adverse	effect	on	our results	of	operations,	financial	condition,	and	liquidity.	Additionally,	future	national	labor	agreements,	or	renegotiation	of	labor	agreements	or	provisions	of	labor agreements,	could	compromise	our	service	reliability	and	significantly	increase	our	costs	for	healthcare,	wages,	and	other	benefits,	which	could	have	a	material	adverse impact	on	our	results	of	operations,	financial	condition,	and	liquidity.

We	Rely	on	Technology	and	Technology	Improvements	in	Our	Business	Operations 	–	We	rely	on	information	technology	in	all	aspects	of	our	business.	If	we	do	not have	sufficient	capital	to	acquire	new	technology	or	if	we	are	unable	to	implement	new	technology,	we	may	suffer	a	competitive	disadvantage	within	the	rail	industry and	with	companies	providing	other	modes	of	transportation	service,	which	could	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and liquidity.	Additionally,	if	we	experience	significant	disruption	or	failure	of	one	or	more	of	our	information	technology	systems,	including	computer	hardware,	software, and	communications	equipment,	we	could	experience	a	service	interruption,	safety	failure,	security	breach,	or	other	operational	difficulties,	which	could	have	a	material adverse	impact	on	our	results	of	operations,	financial	condition,	and	liquidity.

We	Are	Subject	to	Significant	Environmental	Laws	and	Regulations	–	Our	operations	are	subject	to	extensive	federal,	state,	and	local	environmental	laws	and	regulations concerning,	among	other	things,	emissions	to	the	air;	discharges	to	waters;	handling,	storage,	transportation,	and	disposal	of	waste	and	other	materials;	and	hazardous material	or	petroleum	releases.	We	generate	and	transport	hazardous	and	non-hazardous	waste	in	our	operations,	and	we	did	so	in	our	former	operations.	Environmental liability	can	extend	to	previously	owned	or	operated	properties,	leased	properties,	and	properties	owned	by	third	parties,	as	well	as	to	properties	we	currently	own. Environmental	liabilities	have	arisen	and	may	also	arise	from	claims	asserted	by	adjacent	landowners	or	other	third	parties	in	toxic	tort	litigation.	We	have	been	and	may be	subject	to	allegations	or	findings	that	we	have	violated,	or	are	strictly	liable	under,	these	laws	or	regulations.	We	could	incur	significant	costs	as	a	result	of	any	of	the foregoing,	and	we	may	be	required	to	incur	significant	expenses	to	investigate	and	remediate	known,	unknown,	or	future	environmental	contamination,	which	could have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.

Rising	or	Elevated	Fuel	Costs	and	Whether	We	Are	Able	to	Mitigate	These	Costs	with	Fuel	Surcharges	Could	Materially	and	Adversely	Affect	Our	Business	–	Fuel	costs constitute	a	significant	portion	of	our	transportation	expenses.	Diesel	fuel	prices	are	subject	to	dramatic	fluctuations,	and	significant	price	increases	could	have	a	material adverse	effect	on	our	operating	results.	Although	we	currently	are	able	to	recover	a	significant	amount	of	our	increased	fuel	expenses	through	revenue	from	fuel surcharges,	we	cannot	be	certain	that	we	will	always	be	able	to	mitigate	rising	or	elevated	fuel	costs	through	surcharges.	Future	market	conditions	or	legislative	or regulatory	activities	could	adversely	affect	our	ability	to	apply	fuel	surcharges	or	adequately	recover	increased	fuel	costs	through	fuel	surcharges.	International,	political, and	economic	circumstances	affect	fuel	prices	and	supplies.	Weather	can	also	affect	fuel	supplies	and	limit	domestic	refining	capacity.	If	a	fuel	supply	shortage	were	to arise	from	OPEC	production	curtailments,	a	disruption	of	oil	imports,	or	other	causes,	higher	fuel	prices	could,	despite	our	fuel	surcharge	programs,	have	a	material adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.

We	Face	Competition	from	Other	Railroads	and	Other	Transportation	Providers	–	We	face	competition	from	other	railroads,	motor	carriers	and,	to	a	lesser	extent, ships,	barges,	and	pipelines.	In	addition	to	price	competition,	we	face	competition	with	respect	to	transit	times	and	quality	and	reliability	of	service.	While	we	must	build or	acquire	and	maintain	our	rail	system,	trucks	and	barges	are	able	to	use	public	rights-of-way	maintained	by	public	entities.	Any	future	improvements	or	expenditures materially	increasing	the	quality	or	reducing	the	cost	of	alternative	modes	of	transportation,	or	legislation	releasing	motor	carriers	from	their	size	or	weight	limitations, could	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.	Additionally,	any	future	consolidation	of	the	rail	industry	could materially	affect	the	competitive	environment	in	which	we	operate.

We	May	Be	Affected	by	General	Economic	Conditions	–	Prolonged	negative	changes	in	domestic	and	global	economic	conditions	affecting	the	producers	and	consumers of	the	commodities	carried	by	us	may	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition,	and	liquidity.

We	Utilize	Capital	Markets	–	We	rely	on	the	capital	markets	to	provide	some	of	our	capital	requirements,	including	the	issuance	of	commercial	paper	from	time	to	time and	the	sale	of	certain	of	our	receivables.	Market	instability	or	deterioration	of	our	financial	condition	due	to	internal	or	external	factors	could	restrict	or	prohibit

our	access	to	commercial	paper	and	reduce	our	credit	ratings	below	investment	grade,	which	would	prohibit	us	from	utilizing	our	sale	of	receivables	program	and significantly	increase	the	cost	of	issuing	debt.

We	Are	Dependent	on	Two	Key	Domestic	Suppliers	of	Locomotives	–	Due	to	the	capital	intensive	nature	and	sophistication	of	locomotive	equipment,	high	barriers	to entry	face	potential	new	suppliers.	Therefore,	if	one	of	these	domestic	suppliers	discontinues	manufacturing	locomotives,	we	could	experience	a	significant	cost	increase and	risk	reduced	availability	of	the	locomotives	that	are	necessary	to	our	operations.

We	May	Be	Affected	by	Acts	of	Terrorism,	War,	or	Risk	of	War 	–	Our	rail	lines,	facilities,	and	equipment,	including	rail	cars	carrying	hazardous	materials,	could	be direct	targets	or	indirect	casualties	of	terrorist	attacks.	Terrorist	attacks,	or	other	similar	events,	any	government	response	thereto,	and	war	or	risk	of	war	may	adversely affect	our	results	of	operations,	financial	condition,	and	liquidity.	In	addition,	insurance	premiums	for	some	or	all	of	our	current	coverages	could	increase	dramatically, or	certain	coverages	may	not	be	available	to	us	in	the	future.

# Item	1B.	Unresolved	Staff	Comments

None.

# Item	2.	Properties

With	operations	in	23	states,	we	employ	a	variety	of	assets	in	the	management	and	operation	of	our	rail	business.	These	assets	include	real	estate,	track	and	track structure,	equipment,	and	facilities.	We	own	and	lease	real	estate	that	we	use	in	our	operations,	and	we	also	own	real	estate	that	is	not	required	for	our	business,	which we	sell	from	time	to	time.	Our	equipment	includes	owned	and	leased	locomotives	and	rail	cars;	heavy	maintenance	equipment	and	machinery;	other	equipment	and	tools in	our	shops,	offices	and	facilities;	and	vehicles	for	maintenance,	transportation	of	crews,	and	other	activities.	We	operate	numerous	facilities,	including	terminals	for intermodal	and	other	freight;	rail	yards	for	train-building,	switching,	storage-in-transit	(the	temporary	storage	of	customer	goods	in	rail	cars	prior	to	shipment)	and	other activities;	offices	to	administer	and	manage	our	operations;	dispatch	centers	to	direct	traffic	on	our	rail	network;	crew	quarters	to	house	train	crews	along	our	network; and	shops	and	other	facilities	for	fueling,	maintenance,	and	repair	of	locomotives	and	repair	and	maintenance	of	rail	cars	and	other	equipment.	We	spent	approximately $2.2	billion	in	cash	capital	during	2006	for,	among	other	things,	building	and	maintaining	track,	structures	and	infrastructure;	upgrading	and	augmenting	equipment;	and implementing	new	technologies	(see	the	capital	investments	table	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	 – Liquidity	and	Capital	Resources	–	Financial	Condition,	Item	7).

Certain	of	our	properties	are	subject	to	federal,	state,	and	local	laws	and	regulations	governing	the	protection	of	the	environment	(see	discussion	of	environmental issues	in	Business	–	Governmental	and	Environmental	Regulation,	Item	1,	and	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations –	Critical	Accounting	Policies	–	Environmental,	Item	7).

Track	–	The	Railroad	operates	on	32,339	main	line	and	branch	line	route	miles	in	23	states	in	the	western	two-thirds	of	the	United	States.	We	own	26,466	route	miles, with	the	remainder	of	route	miles	operated	pursuant	to	trackage	rights	or	leases.	Route	miles	as	of	December	31,	2006	and	2005,	were	as	follows:

|  | 2006 | 2005 |
| :--- | :--- | :--- |
| Main\tline | 27,318 | 27,301 |
| Branch\tline | 5,021 | 5,125 |
| Yards,\tsidings\tand\tother\tlines | 19,257 | 20,241 |
| Total | 51,596 | 52,667 |

Rail	and	ties	installed	and	replaced	during	the	years	ended	December	31,	2006	and	2005	were	as	follows:

# Item	3.	Legal	Proceedings

From	time	to	time,	the	Corporation	is	involved	in	legal	proceedings,	claims,	and	litigation	that	occur	in	connection	with	the	Corporation's	business.	Management routinely	assesses	the	Corporation's	liabilities	and	contingencies	in	connection	with	these	matters	based	upon	the	latest	information	available.	Consistent	with	SEC	rules and	 requirements,	 the	 Corporation	 describes	 below	 material	 pending	 legal	 proceedings	 (other	 than	 ordinary	 routine	 litigation	 incidental	 to	 the	 business	 of	 the Corporation),	material	proceedings	known	to	be	contemplated	by	governmental	authorities,	other	proceedings	arising	under	federal,	state,	or	local	environmental	laws and	regulations	(including	governmental	proceedings	involving	potential	fines,	penalties,	or	other	monetary	sanctions	in	excess	of	$100,000)	and	such	other	pending matters	that	the	Corporation	may	determine	to	be	appropriate.

# Environmental	Matters

As	we	reported	in	our	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	March	31,	2003,	the	San	Joaquin	County	District	Attorney	filed	an	action	against	the Railroad	on	February	3,	2003,	in	the	San	Joaquin	County	Superior	Court	alleging	claims	under	the	California	Business	and	Professions	Code	section	17200	(unfair business	practices),	Fish	and	Game	Code	section	5650	and	5650.1,	California	Health	and	Safety	Code	section	25189(d),	and	Public	Nuisance,	California	Civil	Code section	3480.	The	claims	arise	from	a	February	16,	2000,	derailment	in	Stockton,	California,	in	which	a	locomotive	struck	an	object	on	the	tracks,	puncturing	a	fuel tank.	The	District	Attorney	alleged	that	diesel	fuel	from	this	spill	entered	waters	of	the	State	of	California.	The	complaint	also	asserted	claims	under	the	above	referenced statutes	for	any	other	diesel	spill	that	may	have	occurred	in	the	State	of	California	between	2000	and	2003,	in	which	diesel	may	have	passed	into	waters	of	the	State	of California.	It	sought	injunctive	relief	and	civil	penalties	of	$25,000	for	the	alleged	February	16,	2000	diesel	spill	and	total	penalties	of	not	less	than	$250,000	for	all diesel	spills	that	may	have	occurred	since	2000.	The	District	Attorney	filed	an	amended	complaint	on	April	10,	2003,	which	narrowed	the	claims	to	the	incident	of February	16,	2000.	The	amended	complaint	seeks	both	injunctive	relief	and	daily	penalties	for	each	day	that	fuel	was	in	the	affected	waterway,	which	could	exceed $100,000.

As	we	reported	in	our	Annual	Report	on	Form	10-K	for	2003,	the	District	Attorneys	of	Merced,	Madera,	and	Stanislaus	Counties	in	California	filed	a	criminal case	against	the	Railroad	relating	to	a	series	of	alleged	releases	of

calcium	oxide	(lime).	The	criminal	case	was	dismissed	in	the	last	quarter	of	2003	and	was	subsequently	refiled	as	a	civil	action	by	several	counties	in	the	San	Joaquin County	Superior	Court.	The	refiled	suit	sought	civil	penalties	against	 the	Railroad	 in	connection	with	 the	release	of	 lime	from	an	unidentified	rail	car	between Chowchilla	and	Sacramento,	California,	on	December	27,	2001,	and	another	incident	in	which	lime	leaked	from	a	rail	car	between	Chowchilla	and	Stockton,	California, on	February	21,	2002.	The	suit	contended	that	regulatory	violations	occurred	by	virtue	of	the	Railroad's	alleged	failure	to	timely	report	the	release	of	a	"hazardous material,"	its	alleged	disposal	of	hazardous	waste,	and	the	alleged	release	of	material	into	the	waters	of	the	State	of	California.	On	September	20,	2004,	the	Court dismissed	the	suit	with	prejudice.	The	State	of	California	appealed	this	decision.	On	August	2,	2006,	the	Court	of	Appeals	issued	its	decision,	reversing	the	judgment and	remanding	the	case	for	further	proceedings	consistent	with	its	opinion.	The	Court	of	Appeals	held	that	the	State	of	California's	claims	against	the	Railroad	for	civil penalties	were	preempted	by	the	Hazardous	Materials	Transportation	Act	(HMTA),	with	the	exception	of	those	claims	that	were	based	upon	the	Railroad's	alleged failure	to	timely	report	the	releases	of	calcium	oxide	to	state	and	local	authorities.	With	respect	to	these	claims,	the	Court	held	that	while	they	were	not	preempted	by	the HMTA	on	their	face,	it	remained	possible	that	those	claims	might	ultimately	be	preempted	once	the	trial	court	developed	a	record.	The	Railroad	and	the	State	of California	requested	that	the	California	Supreme	Court	review	the	decision	of	the	Court	of	Appeals.	The	California	Supreme	Court	denied	review,	and	the	case	has	been remanded	to	the	Superior	Court.

As	we	reported	in	our	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	September	30,	2004,	the	Illinois	Attorney	General's	office	filed	an	Agreed	Order	and Complaint	and	a	Complaint	for	Injunctive	and	Other	Relief	on	October	7,	2004,	in	the	Circuit	Court	for	the	Twentieth	Judicial	Circuit	(St.	Clair	County)	against	The Alton	&	Southern	Railway	Company,	a	wholly-owned	subsidiary	of	the	Railroad,	as	a	result	of	a	collision	and	derailment	on	September	21,	2004.	The	State	of	Illinois seeks	to	enjoin	The	Alton	&	Southern	Railway	Company	from	further	violations,	as	well	as	a	monetary	penalty.	The	amount	of	the	proposed	penalty	is	uncertain	but could	exceed	$100,000.

As	we	reported	in	our	Annual	Report	on	Form	10-K	for	2005,	we	received	information	in	2001	indicating	EPA	considered	the	Railroad	a	potentially	responsible party	for	the	Omaha	Lead	Site.	The	Omaha	Lead	Site	consists	of	approximately	12,800	acres	of	residential	property	in	the	eastern	part	of	Omaha,	Nebraska,	allegedly impacted	by	air	emissions	from	two	former	lead	smelters/refineries.	One	refinery	was	operated	by	ASARCO.	EPA	identified	the	Railroad	as	a	potentially	responsible party	because	more	than	60	years	ago	the	Railroad	owned	land	that	was	leased	to	ASARCO.	The	Railroad	disputes	both	the	legal	and	technical	base	for	EPA's allegations.	 It	 has	 nonetheless	 engaged	 in	 extensive	 negotiations	 with	 EPA.	 These	 negotiations	 have	 reached	 an	 apparent	 impasse.	 EPA	 issued	 a	 Unilateral Administrative	Order	with	an	effective	date	of	December	16,	2005,	directing	the	Railroad	to	implement	an	interim	remedy	at	the	site	at	an	estimated	cost	of	$50	million. Failure	to	comply	with	the	order	without	just	cause	could	subject	the	Railroad	to	penalties	of	up	to	$32,500	per	day	and	triple	EPA's	costs	in	performing	the	work.	The Railroad	believes	it	has	just	cause	not	to	comply	with	the	order,	but	it	offered	to	perform	some	of	the	work	specified	in	the	order	as	a	compromise.	EPA	rejected	this offer.	The	Railroad	will	vigorously	contest	liability	and	the	imposition	of	any	penalties.

As	we	reported	in	our	Annual	Report	on	Form	10-K	for	2005,	the	Illinois	Attorney	General's	office	filed	a	complaint	in	the	Circuit	Court	for	the	Twenty-First Judicial	Circuit	(St.	Clair	County)	seeking	injunctive	relief	and	civil	penalties	against	the	Railroad	relating	to	a	collision	between	UPRR	and	Norfolk	Southern	Railway Company	(NS)	trains	near	Momence,	Illinois,	on	November	24,	2005.	The	collision	derailed	approximately	five	locomotives	and	30	railcars.	Two	of	the	UPRR locomotives	and	two	of	the	NS	locomotives	caught	fire	and	four	of	the	locomotives	released	approximately	16,000	gallons	of	diesel	fuel.	Other	cars	carrying	food products	derailed	and	released	an	unknown	amount	of	product.	The	Railroad	promptly	responded	and	remediation	is	ongoing.	The	State	of	Illinois	seeks	a	permanent injunction	against	the	Railroad	ordering	UPRR	to	continue	remediation.	The	State	of	Illinois	seeks	to	enjoin	UPRR	from	further	violations	and	a	monetary	penalty.	The amount	of	the	proposed	penalty	is	uncertain.

As	we	reported	in	our	Annual	Report	on	Form	10-K	for	2005,	the	Illinois	Attorney	General's	office	filed	a	complaint	in	the	Circuit	Court	for	the	Twentieth Judicial	Circuit	(St.	Clair	County)	for	injunctive	and	other	relief

on	November	28,	2005,	against	the	Railroad,	alleging	a	diesel	fuel	spill	from	an	above-ground	storage	tank	in	a	rail	yard	in	Dupo,	St.	Clair	County,	Illinois.	The	State	of Illinois	seeks	to	enjoin	UPRR	from	further	violations	and	a	monetary	penalty.	The	amount	of	the	proposed	penalty	is	uncertain.

As	we	reported	in	our	Annual	Report	on	Form	10-K	for	2003,	the	United	States	Attorney	for	the	Central	District	of	California	notified	the	Railroad	that	the	office intended	to	pursue	criminal	charges	against	the	Railroad	for	alleged	violations	of	federal	environmental	laws,	including	the	federal	Clean	Water	Act,	in	connection	with releases	of	oil	contaminated	wastewater	from	our	Taylor	Yard	in	2001	and	2003.	On	July	31,	2006,	the	United	States	Attorney	filed	criminal	misdemeanor	charges against	us	for	these	releases	in	the	United	States	District	Court	for	the	Central	District	of	California,	and	we	received	the	Summons	from	the	Court	on	August	8,	2006. We	will	vigorously	defend	the	charges.

On	October	23,	2006,	the	California	Air	Resources	Board	(ARB)	notified	the	Railroad	of	its	intent	to	impose	civil	penalties	as	a	result	of	the	Railroad's	failure	to perform	and	document	annual	opacity	(smoke)	testing	for	its	heavy	duty	diesel	vehicle	fleet.	The	ARB	proposed	that	the	Railroad	pay	$135,000	and	agree	to	other	non- monetary	conditions	to	settle	these	violations.	Discussions	between	the	Railroad	and	the	ARB	are	continuing,	and	the	ultimate	amount	of	any	penalty	remains	uncertain.

We	received	notices	from	EPA	and	state	environmental	agencies	alleging	that	we	are	or	may	be	liable	under	federal	or	state	environmental	laws	for	remediation costs	at	various	sites	throughout	the	United	States,	including	sites	on	the	Superfund	National	Priorities	List	or	state	superfund	lists.	We	cannot	predict	the	ultimate	impact of	these	proceedings	and	suits	because	of	the	number	of	potentially	responsible	parties	involved,	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.

# Other	Matters

As	we	reported	in	our	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	September	30,	2004,	we	were	notified	that	a	qui	tam,	or	private	citizen,	complaint	was	filed in	the	United	States	District	Court	for	the	Central	District	of	California	against,	among	other	parties,	the	City	of	Long	Beach,	City	of	Long	Beach	Harbor	Department, Port	of	Long	Beach	(the	Port),	Union	Pacific	Corporation,	Union	Pacific	Railroad	Company,	and	Union	Pacific	Resources	Company,	also	known	as	Union	Pacific Resources	Group	Inc.	(Resources),	a	former	subsidiary	of	UPC.	A	private	citizen	filed	the	action	because	the	federal	government	and	the	State	of	California	elected	not to	pursue	the	claims.	The	complaint	alleges	that	the	defendants	violated	the	Federal	Civil	False	Claims	Act	and	the	California	False	Claims	Act	by	conspiring	to	use public	funds	to	(1)	shift	environmental	cleanup	liability	to	the	Port	when	Resources	sold	its	Terminal	Island	oil	field	property	to	the	Port	in	1994	and	(2)	effect	the acquisition	by	the	Port	of	the	Terminal	Island	property	in	which	the	Port	(or	the	State	of	California)	allegedly	already	held	certain	incidents	of	title.	The	complaint,	which has	not	been	served	on	us,	seeks	damages	of	$2.4	billion,	unspecified	costs	for	remediating	groundwater	contamination,	and	triple	damages	and	civil	penalties	of	$10,000 per	day.	The	plaintiff's	extended	time	to	serve	the	complaint	expired	on	April	4,	2005,	and	the	Corporation	filed	a	motion	to	dismiss	for	plaintiff's	failure	to	make	timely service.	However,	the	Court	extended	the	plaintiff's	time	to	provide	service.	On	December	7,	2005,	we	learned	that	a	summons	for	service	of	the	complaint	had	been issued,	and	we	were	served	with	the	complaint	during	the	fourth	quarter	of	2006.	We	dispute	the	factual	and	legal	bases	of	the	complaint.	We	notified	Anadarko Petroleum	Corporation	(Anadarko),	as	successor	to	Resources	after	its	acquisition	in	2000,	that	an	indemnification	agreement	between	Resources	and	the	Corporation obligates	Anadarko	to	indemnify	us	for	all	damages,	costs,	and	expenses	related	to	the	complaint.

# Item	4.	Submission	of	Matters	to	a	Vote	of	Security	Holders

No	matters	were	submitted	to	a	vote	of	security	holders	during	the	fourth	quarter	of	2006.

# Executive	Officers	of	the	Registrant	and	Principal	Executive	Officers	of	Subsidiaries

Our	executive	officers	generally	are	elected	and	designated	annually	by	the	Board	of	Directors	at	our	first	meeting	held	after	the	Annual	Meeting	of	Shareholders,	and they	hold	office	until	their	successors	are	elected.	Executive	officers	also	may	be	elected	and	designated	throughout	the	year,	as	the	Board	of	Directors	considers appropriate.	There	are	no	family	relationships	among	the	officers,	nor	any	arrangement	or	understanding	between	any	officer	and	any	other	person	pursuant	to	which	the officer	was	selected.	The	following	table	sets	forth	certain	information,	as	of	February	16,	2007,	relating	to	the	executive	officers.

| Name | Position | Age | Years |
| :--- | :--- | :--- | :--- |
| James\tR.\tYoung | Chairman,\tPresident\tand\tChief\tExecutive\tOfficer\tof\tUPC\tand\tthe\tRailroad | 54 | (1) |
| Robert\tM.\tKnight,\tJr. | Executive\tVice\tPresident\t–\tFinance\tand\tChief\tFinancial\tOfficer\tof\tUPC\tand\tthe\tRailroad | 49 | (2) |
| Charles\tR.\tEisele | Senior\tVice\tPresident\t–\tStrategic\tPlanning\tof\tUPC\tand\tthe\tRailroad | 57 | Current\tPosition |
| J.\tMichael\tHemmer | Senior\tVice\tPresident\t–\tLaw\tand\tGeneral\tCounsel\tof\tUPC\tand\tthe\tRailroad | 57 | (3) |
| Barbara\tW.\tSchaefer | Senior\tVice\tPresident\t–\tHuman\tResources\tand\tSecretary\tof\tUPC\tand\tthe\tRailroad | 53 | (4) |
| Lynden\tL.\tTennison | Senior\tVice\tPresident\tand\tChief\tInformation\tOfficer\tof\tUPC\tand\tthe\tRailroad | 47 | (5) |
| Robert\tW.\tTurner | Senior\tVice\tPresident\t–\tCorporate\tRelations\tof\tUPC\tand\tthe\tRailroad | 57 | Current\tPosition |
| Bernard\tR.\tGutschewski | Vice\tPresident\t–\tTaxes\tof\tUPC\tand\tVice\tPresident\tand\tGeneral\tTax\tCounsel\tof\tthe\tRailroad | 56 | Current\tPosition |
| Mary\tE.\tMcAuliffe | Vice\tPresident\t–\tExternal\tRelations\tof\tUPC | 60 | Current\tPosition |
| Richard\tJ.\tPutz | Vice\tPresident\tand\tController\tof\tUPC\tand\tChief\tAccounting\tOfficer\tand\tController\tof\tthe | 59 | Current\tPosition |
|  | Railroad |  |  |
| Mary\tSanders\tJones | Vice\tPresident\tand\tTreasurer\tof\tUPC\tand\tTreasurer\tof\tthe\tRailroad | 54 | Current\tPosition |
| Dennis\tJ.\tDuffy | Executive\tVice\tPresident\t–\tOperations\tof\tthe\tRailroad | 56 | Current\tPosition |
| John\tJ.\tKoraleski | Executive\tVice\tPresident\t–\tMarketing\tand\tSales\tof\tthe\tRailroad | 56 | Current\tPosition |

(1) Mr.	Young	was	elected	Chief	Executive	Officer	and	President	of	UPC	and	the	Railroad	effective	January	1,	2006.	He	was	elected	to	the	additional	position	of	Chairman	effective	February	1,	2007.	He	was	elected President	and	Chief	Operating	Officer	of	the	Railroad,	effective	February	1,	2004,	and	he	previously	was	Executive	Vice	President	–	Finance	of	UPC	and	Chief	Financial	Officer	of	the	Railroad.

(2) Mr.	Knight	was	elected	to	his	current	position	effective	February	1,	2004.	He	was	elected	Senior	Vice	President	–	Finance	for	UPC	and	the	Railroad	effective	February	1,	2002,	and	he	previously	was	Vice President	and	General	Manager	Automotive	for	the	Railroad.

(3) Mr.	Hemmer	was	elected	to	his	current	position	effective	June	1,	2004.	Mr.	Hemmer	was	elected	Vice	President	–	Law	of	the	Railroad	effective	September	1,	2002,	and	previously	was	a	partner	at	the	law	firm	of Covington	&	Burling	in	Washington,	D.C.

(4) Mrs.	Schaefer	has	held	the	position	of	Senior	Vice	President	–	Human	Resources	for	the	past	five	years.	In	addition,	she	was	elected	Secretary	of	UPC	and	the	Railroad	effective	June	1,	2004.

(5) Mr.	Tennison	was	elected	to	his	current	position	effective	March	1,	2005.	He	previously	was	Vice	President	and	Chief	Technology	Officer.

# PART	II

# Item	5.	Market	for	the	Registrant's	Common	Equity,	Related	Stockholder	Matters,	and	Issuer	Purchases	of	Equity	Securities

Our	common	stock	is	traded	on	the	NYSE	under	the	symbol	"UNP".	The	following	table	presents	the	dividends	declared	and	the	high	and	low	closing	prices	of	our common	stock	for	each	of	the	indicated	quarters.

| 2006	-	Dollars	Per	Share | Q1 | Q2 | Q3 | Q4 |
| :--- | :--- | :--- | :--- | :--- |
| Dividends | $0.30 | $0.30 | $0.30 | $\t\t0.30 |
| Common\tstock\tprice: |  |  |  |  |
| High | \t 93.73 | \t 97.49 | \t 92.96 | \t 96.16 |
| Low | \t 77.62 | \t 83.83 | \t 78.65 | \t 86.27 |
| 2005\t-\tDollars\tPer\tShare |  |  |  |  |
| Dividends | $0.30 | $0.30 | $0.30 | $0.30 |
| Common\tstock\tprice: |  |  |  |  |
| High | \t 70.10 | \t 70.19 | \t 72.20 | \t 81.26 |
| Low | \t 58.18 | \t 60.85 | \t 63.52 | \t 66.89 |

At	January	31,	2007,	there	were	270,752,306	shares	of	outstanding	common	stock	and	34,937	common	shareholders	of	record.	At	that	date,	the	closing	price	of the	common	stock	on	the	NYSE	was	$101.00.	We	have	paid	dividends	to	our	common	shareholders	during	each	of	the	past	107	years.	We	declared	dividends	totaling $323	million	in	2006	and	$316	million	in	2005.	On	January	30,	2007,	we	increased	the	quarterly	dividend	to	$0.35	per	share,	payable	beginning	on	April	2,	2007,	to shareholders	of	record	on	February	28,	2007.	We	are	subject	to	certain	restrictions	regarding	retained	earnings	with	respect	to	the	payment	of	cash	dividends	to	our shareholders.	The	amount	of	retained	earnings	available	for	dividends	increased	to	$7.8	billion	at	December	31,	2006,	from	$6.2	billion	at	December	31,	2005.

Five-Year	Performance	Comparison	–	The	following	graph	provides	an	indicator	of	cumulative	total	shareholder	returns	for	the	Corporation	as	compared	to	a	peer group	index,	comprised	of	Burlington	Northern	Sante	Fe	Corporation,	CSX	Corporation,	and	Norfolk	Southern	Corporation;	the	Dow	Jones	Transportation	Index	(Dow Jones);	and	the	Standard	&	Poor's	500	Stock	Index	(S&P	500).	The	graph	assumes	that	the	value	of	the	investment	in	Union	Pacific	Corporation's	common	stock	and each	index	was	$100	on	December	31,	2001,	and	that	all	dividends	were	reinvested.

Comparison	Over	One-	and	Three-Year	Periods	–	The	following	table	presents	the	cumulative	total	shareholder	returns,	assuming	reinvested	dividends,	over	one- and	three-year	periods	for	the	Corporation,	a	peer	group	index	(as	described	above),	the	Dow	Jones,	and	the	S&P	500.

|  |  | Peer | Dow | S&P |
| :--- | :--- | :--- | :--- | :--- |
| Period | UPC | Group | Jones | 500 |
| 1\tYear | 15.9% | 10.8% | 9.7% | 15.8% |
| 3\tYear | 39.4 | 125.8 | 56.5 | 34.8 |

Purchases	of	Equity	Securities	–	The	purchased	shares	presented	below	relate	solely	to	our	equity	compensation	plans	described	in	note	8	to	the	Financial	Statements and	Supplementary	Data,	Item	8.	During	the	first	nine	months	of	2006,	307,867	shares	of	our	common	stock	were	repurchased	at	an	average	price	per	share	of	$89.21. The	following	table	presents	common	stock	repurchases	during	each	month	for	the	fourth	quarter	of	2006:

|  | Total | Average | Total	Number	of	Shares | Maximum	Number	of |
| :--- | :--- | :--- | :--- | :--- |
|  | Number | Price | Purchased\tas\tPart\tof\ta | Shares\tThat\tMay\tYet |
|  | of\tShares | Paid\tper | Publicly\tAnnounced | Be\tPurchased\tUnder |
| Period | Purchased | Share | Plan\tor\tProgram | the\tPlan\tor\tProgram |
| Oct.\t1\tthrough\tOct.\t31 |  |  |  |  |
| Employee\ttransactions\t[a] | 72,599 | $90.31 | N/A | N/A |
| Nov.\t1\tthrough\tNov.\t30 |  |  |  |  |
| Employee\ttransactions\t[a] | 34,921 | 91.87 | N/A | N/A |
| Dec.\t1\tthrough\tDec.\t31 |  |  |  |  |
| Employee\ttransactions\t[a] | 12,699 | 95.38 | N/A | N/A |
| Total | 120,219 | $91.30 | N/A | N/A |
| [a] |  |  |  |  |

[a] Includes	shares	delivered	or	attested	to	UPC	to	pay	stock	option	exercise	prices	or	to	satisfy	tax	withholding	obligations	for	stock	option	exercises	or	vesting	of	retention	shares	or	units.

On	January	30,	2007,	our	Board	of	Directors	authorized	us	to	repurchase	up	to	20	million	shares	of	our	common	stock	through	December	31,	2009.	We	may make	these	repurchases	on	the	open	market	or	through	other	transactions.	Our	management	will	have	sole	discretion	with	respect	to	determining	the	timing	and	amount of	these	transactions	(subject	to	the	restrictions	described	above).

# Item	6.	Selected	Financial	Data

The	following	table	presents	as	of,	and	for	the	years	ended,	December	31,	our	selected	financial	data	for	each	of	the	last	five	years.	The	selected	financial	data	should	be read	in	conjunction	with	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations,	Item	7,	and	with	the	Financial	Statements	and Supplementary	Data,	Item	8.	The	information	below	is	not	necessarily	indicative	of	the	results	of	future	operations.

[a] 2005	net	income	includes	a	$118	million	tax	expense	reduction	to	reflect	a	reduction	in	the	estimated	deferred	income	tax	liability.

[b] 2004	operating	income	and	net	income	includes	a	$247	million	pre-tax	($154	million	after-tax)	charge	for	unasserted	asbestos-related	claims.

[c] Net	income	and	total	assets	include	the	effects	of	the	acquisitions	of	Motor	Cargo	as	of	November	30,	2002,	and	reflect	the	disposition	of	all	of	our	trucking	interests	in	2003.

[d] 2002	net	income	includes	$214	million	pre-tax	($133	million	after-tax)	gains	on	asset	dispositions.	In	addition,	net	income	includes	a	reduction	of	income	tax	expense	of	$67	million	related	to	tax	adjustments	for prior	years'	income	tax	examinations.

[f] Equity	per	common	share	is	calculated	as	follows:	common	shareholders'	equity	divided	by	common	shares	issued	less	treasury	shares	outstanding.

[g] Operating	margin	is	defined	as	operating	income	divided	by	operating	revenue.	Operating	ratio	is	defined	as	operating	expenses	divided	by	operating	revenue.

[h] Debt	to	capital	is	determined	as	follows:	total	debt	plus	convertible	preferred	securities	divided	by	total	debt	plus	convertible	preferred	securities	plus	equity.

# Item	7.	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations

The	following	discussion	should	be	read	in	conjunction	with	the	Consolidated	Financial	Statements	and	applicable	notes	to	the	Financial	Statements	and	Supplementary Data,	Item	8,	and	other	information	in	this	report,	including	Risk	Factors	set	forth	in	Item	1A	and	Critical	Accounting	Policies	and	Cautionary	Information	at	the	end	of this	Item	7.

The	Railroad,	along	with	its	subsidiaries	and	rail	affiliates,	is	our	one	reportable	operating	segment.	Although	revenue	is	analyzed	by	commodity	group,	we analyze	the	net	financial	results	of	the	Railroad	as	one	segment	due	to	the	integrated	nature	of	our	rail	network.

# EXECUTIVE	SUMMARY

· 	 Safety	–	Overall,	safety	results	improved	during	2006.	The	employee	injury	incident	rate	per	200,000	man-hours	dropped	to	its	lowest	level,	which	also	reduced the	number	of	lost	workdays.	A	continued	focus	on	derailment	prevention	in	2006	resulted	in	a	17%	reduction	in	incidents	with	associated	costs	declining	13%.	In the	area	of	public	safety,	we	closed	410	grade	crossings	to	reduce	exposure	and	have	video	cameras	in	approximately	1,900,	or	30%,	of	our	road	locomotive	fleet to	better	analyze	grade	crossing	incidents,	thereby	increasing	safety	for	our	employees	and	the	public.	The	number	of	grade	crossing	incidents,	however,	increased 5%	during	the	year,	driven	in	part	by	the	combination	of	increasing	highway	and	rail	traffic	and	urban	expansion.

· 	 Financial	Performance	–	In	2006,	we	generated	record	operating	income	of	$2.9	billion.	Solid	demand,	yield	increases,	and	improved	operational	efficiency drove	the	61%	increase	in	operating	income.	Our	operating	ratio	was	81.5%	for	the	year,	a	5	point	improvement	compared	to	2005.	Net	income	of	$1.6	billion also	topped	our	previous	milestone,	translating	into	$5.91	diluted	earnings	per	share.

· 	 Commodity	Revenue	Growth	–	Our	commodity	revenue	grew	15%	year-over-year	to	$14.9	billion,	the	highest	level	in	our	history.	We	achieved	record	revenue levels	in	all	of	our	six	commodity	groups,	primarily	driven	by	better	pricing	and	fuel	surcharges.	Since	2004,	we	repriced	approximately	two-thirds	of	our business.	Volume	increased	3%	to	record	levels	in	2006,	despite	softening	markets	in	some	sectors	in	the	second	half	of	2006.

· 	 Network	Improvement	–	In	2006,	the	fluidity	and	efficiency	of	our	transportation	network	improved	substantially,	which	allowed	us	to	handle	record	volume levels.	Continued	focus	on	increasing	velocity,	eliminating	work	events,	improving	asset	utilization,	and	expanding	capacity	were	key	drivers	of	our	operational improvement.	With	ongoing	enhancements	to	our	Unified	Plan	and	implementation	of	terminal	processing	initiatives,	productivity	improved,	as	demonstrated	by 5%	lower	average	terminal	dwell	time,	a	4%	improvement	in	car	utilization,	and	a	1%	increase	in	average	train	speed.	We	continued	implementation	of	an operational	productivity	initiative	called	CIMS	(Customer	Inventory	Management	System),	which	complements	the	Unified	Plan	by	reducing	the	number	of	cars in	our	terminals	without	adding	capacity.	By	the	end	of	2006,	CIMS	managed	the	flow	of	almost	80%	of	the	daily	interchange	of	both	loaded	and	empty	railcars with	our	customers.	We	also	expanded	capacity	and	continued	 to	use	 industrial	engineering	 techniques	 to	further	 improve	network	fluidity,	ease	capacity constraints,	and	improve	asset	utilization.	Our	customers	rated	us	higher	on	their	satisfaction	surveys	during	2006,	an	indication	that	efforts	to	improve	network operations	translated	into	better	customer	service.

· 	 Fuel	Prices	–	Fuel	prices	increased	again	in	2006	for	the	fourth	consecutive	year,	raising	our	average	system	fuel	price	by	16%	and	adding	$393	million	of operating	expenses	compared	to	2005.	After	a	fairly	stable	first	quarter,	fuel	prices	increased	dramatically	during	the	spring	and	summer	months,	as	crude	oil prices	averaged	over	$70	per	barrel	during	the	second	and	third	quarters.	July	and	August	fuel	prices	were	also	affected	by	high	diesel	conversion	spreads	and large,	regional	spreads	mainly	driven	by	new	government

regulations	that	imposed	certain	usage	restrictions	on	high	sulfur	diesel	fuel.	Many	refineries	ceased	producing	high	sulfur	diesel	fuel	and	many	pipelines	stopped transporting	high	sulfur	diesel	fuel	in	our	operating	areas,	which	drove	up	the	conversion	and	regional	spreads.	Despite	some	moderation	during	the	fourth	quarter, fuel	prices	were	still	higher	than	the	beginning	of	the	year.	Our	fuel	surcharge	programs	helped	offset	the	impact	of	these	higher	fuel	prices	in	the	form	of	higher revenue,	recovering	approximately	90%	of	the	additional	expense	incurred	above	our	base	fuel	price	of	$0.75	per	gallon	for	the	year.	In	addition,	our	fuel conservation	efforts	allowed	us	to	handle	a	3%	increase	in	gross	ton-miles	while	improving	our	consumption	rate	by	2%.	Simulator	training,	operating	practices, and	technology	are	all	driving	this	improvement,	saving	us	roughly	17	million	gallons	in	2006.

· 	 Free	Cash	Flow	–	Cash	generated	by	operating	activities	totaled	a	record	$2.9	billion,	yielding	free	cash	flow	of	$516	million	in	2006.	Free	cash	flow	is	defined as	cash	provided	by	operating	activities,	less	cash	used	in	investing	activities	and	dividends	paid.

Free	cash	flow	is	not	considered	a	financial	measure	under	accounting	principles	generally	accepted	in	the	United	States	(GAAP)	by	SEC	Regulation	G	and Item	10	of	SEC	Regulation	S-K.	We	believe	free	cash	flow	is	important	in	evaluating	our	financial	performance	and	measures	our	ability	to	generate	cash	without additional	external	financings.	Free	cash	flow	should	be	considered	in	addition	to,	rather	than	as	a	substitute	for,	cash	provided	by	operating	activities.	The	following table	reconciles	cash	provided	by	operating	activities	(GAAP	measure)	to	free	cash	flow	(non-GAAP	measure):

| Millions	of	Dollars | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Cash\tprovided\tby\toperating\tactivities | $2,880 | $2,595 | $2,257 |
| Cash\tused\tin\tinvesting\tactivities | (2,042) | (2,047) | (1,732) |
| Dividends\tpaid | (322) | (314) | (310) |
| Free\tcash\tflow | $516 | $234 | $215 |

· 	 Safety	–	Operating	a	safe	railroad	benefits	our	employees,	our	customers,	our	shareholders,	and	the	public.	We	will	continue	using	a	multi-faceted	approach	to safety,	using	technology,	risk	assessment,	quality	control,	and	training	and	education	for	our	new	and	existing	employees.	From	a	public	safety	standpoint,	we	will continue	our	efforts	to	upgrade	and	close	crossings,	install	video	cameras	on	locomotives,	and	educate	the	public	about	crossing	safety	through	various	internal and	industry	programs,	along	with	other	activities.	Additionally,	we	are	working	with	private	and	public	partners	to	develop	better	tank	cars	for	transportation	of chemicals.

· 	 Commodity	Revenue	Growth	–	We	expect	record	revenue	levels	to	continue	in	2007	based	on	current	economic	indicators,	forecasted	demand,	and	additional repricing	opportunities.	We	established	a	target	for	year-over-year	commodity	revenue	growth	of	6%	to	7%.	We	are	projecting	yield	increases	in	all	of	our	major commodity	groups	and	volume	growth	ranging	from	2%	to	3%.	We	expect	volume	growth	primarily	from	the	energy	and	intermodal	commodity	groups.	We	will continue	to	monitor	the	market	for	changing	conditions	and	adjust	our	plan	accordingly.

· 	 Transportation	Plan	–	In	2007,	we	will	continue	to	evaluate	traffic	flows	and	network	logistic	patterns	to	identify	additional	opportunities	to	simplify	operations and	improve	network	efficiency.	We	plan	to	maintain	adequate	manpower	and	locomotives,	improve	productivity	using	industrial	engineering	techniques,	and improve	our	operating	margins.

· 	 Fuel	Prices	–	We	expect	that	fuel	prices	will	remain	volatile,	with	crude	oil	prices	and	conversion	and	regional	spreads	fluctuating	throughout	the	year.	To	reduce the	impact	of	fuel	price	on	earnings,	we	will	continue	to	seek	recovery	from	our	customers	through	our	fuel	surcharge	programs	and	expand	our	fuel	conservation efforts.	As	indicated	in	Item	1	of	this	report,	the	STB	issued	a	decision	limiting	the	manner	in

which	U.S.	railroads	can	calculate	fuel	surcharges	on	traffic	regulated	by	the	STB.	Currently,	we	do	not	believe	this	decision	will	prevent	us	from	using	fuel surcharges	or	adversely	affect	our	ability	to	use	fuel	surcharges	to	mitigate	the	impact	of	rising	or	elevated	fuel	prices	on	most	or	all	of	our	traffic.

· 	 Capital	Plan	–	In	2007,	we	expect	to	make	capital	investments	of	approximately	$3.2	billion,	which	may	include	long-term	leases.	These	investments	will	be used	 to	maintain	 track	and	structures;	continue	capacity	expansions	on	our	main	 lines	 in	constrained	corridors;	remove	bottlenecks;	upgrade	and	augment equipment,	including	locomotives	and	railcars,	to	better	meet	customer	needs;	build	and	improve	facilities	and	terminals;	and	develop	and	implement	new technologies.	We	designed	these	investments	to	maintain	infrastructure	for	safety,	enhance	customer	service,	promote	growth,	and	improve	operational	fluidity. Major	capital	projects	in	2007	include	adding	more	double	track	on	the	Sunset	Corridor	and	related	line	capacity;	investing	in	new	and	existing	facilities	and terminals	in	Phoenix,	Tucson,	the	LA	Basin,	San	Antonio,	Dallas/Fort	Worth,	and	Houston;	continuing	improvements	of	the	SPRB	Joint	Line;	and	continuing installation	of	centralized	track	control	across	Iowa	and	Nebraska,	which	enables	us	to	increase	productivity	on	these	rail	lines.	We	expect	to	fund	our	2007	cash capital	investments	through	cash	generated	from	operations,	the	sale	or	lease	of	various	operating	and	non-operating	properties,	and	cash	on	hand	at	December	31, 2006.	This	focused	capital	plan	is	designed	to	help	us	improve	network	velocity	and	facilitate	revenue	growth.

· 	 Financial	 Expectations	 –	 We	 are somewhat	 cautious	 about	 the	 economic	 environment;	 however,	 we	 anticipate	 revenue	 growth	 and	 continued	 network improvement	in	2007,	with	financial	results	exceeding	2006	levels.	Our	expectations	include	generating	earnings	growth	of	10%	to	15%	and	an	operating	ratio below	80%.

# RESULTS	OF	OPERATIONS

# Operating	Revenue

|  |  |  |  | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Millions\tof\tDollars | 2006 | 2005 | 2004 | 2006\tv\t2005 | 2005\tv\t2004 |
| Commodity\trevenue | $14,862 | $12,957 | $11,692 | 15% | 11% |
| Other\trevenue | 716 | 621 | 523 | 15 | 19 |
| Total | $15,578 | $13,578 | $12,215 | 15% | 11% |

Operating	revenue	includes	commodity	revenue	and	other	revenue.	Other	revenue	consists	primarily	of	revenue	earned	by	our	subsidiaries,	revenue	from	our	commuter rail	operations,	and	accessorial	revenue,	which	we	earn	when	customers	retain	equipment	owned	or	controlled	by	us.	We	recognize	commodity	revenue	on	a	percentage- of-completion	basis	as	freight	moves	from	origin	to	destination.	We	allocate	commodity	revenue	between	reporting	periods	based	on	the	relative	transit	time	in	each reporting	period	and	recognize	expenses	as	we	incur	them.	We	recognize	other	revenue	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	revenue	based	on	actual	or projected	future	customer	shipments.

All	six	commodity	groups	experienced	double	digit	revenue	growth	during	2006,	with	particularly	strong	growth	of	over	20%	in	agricultural	commodity	revenue. Price	increases,	fuel	surcharges,	and	index-based	contract	escalators,	which	are	formulas	in	our	shipping	contracts	that	correlate	price	adjustments	to	certain	economic indices,	all	contributed	to	higher	average	revenue	per	car	(ARC).	Our	fuel	surcharge	programs	(excluding	index-based	contract	escalators	that	contain	some	provision	for fuel)	generated	an	additional	$656	million	in	commodity	revenue	compared	to	2005,	contributing	5%	to	commodity	revenue	growth.	Volume	increased	3%	during	the year	led	by	solid	growth	in	intermodal	and	energy	shipments,	which	was	partially	offset	by	lower	shipments	of	industrial	products	and	chemicals.	The	year-over-year growth	was	also	partially	attributable	to	lower	volume	in	2005	due	to	the	January	West	Coast	storm,	SPRB	Joint	Line	disruptions,	Hurricane	Rita,	and	the	Kansas washouts.

Commodity	revenue	improved	in	all	six	business	groups	during	2005,	with	double-digit	growth	in	the	agricultural,	industrial	products,	and	intermodal	commodity groups.	Fuel	surcharges,	price	increases,	and	index-based	contract	escalators	all	contributed	to	higher	ARC.	Our	fuel	surcharge	programs	(excluding	index-based	contract escalators	that	contain	some	provision	for	fuel)	generated	an	additional	$671	million	in	commodity	revenue	compared	to	2004,	which	represents	approximately	70%	of the	additional	expense	incurred	above	the	base	fuel	price	for	our	fuel	surcharge	programs	(currently,	$0.75	per	gallon).	Although	volume	grew	1%	for	the	year,	the severe	weather	and	maintenance	and	restoration	on	the	SPRB	Joint	Line	constrained	volume	growth.

Other	revenue	increased	in	2006,	mainly	driven	by	higher	volumes.	In	addition,	we	generated	higher	subsidiary	revenue	from	Bay	Pacific	Financial	L.L.C.	(Bay Pacific),	an	intermodal	leasing	entity,	following	the	acquisition	of	our	joint	venture	partner's	interest	in	Bay	Pacific	during	the	third	quarter	of	2005.	Subsidiary	and accessorial	revenue	increased	other	revenue	in	2005,	mainly	driven	by	higher	volumes	and	the	acquisition	of	Bay	Pacific.

The	following	tables	summarize	the	year-over-year	changes	in	commodity	revenue,	revenue	carloads,	and	average	revenue	per	car	by	commodity	group.

Agricultural	 –	 Price increases,	 volume	 growth,	 and	 fuel	 surcharges	 increased agricultural	commodity	revenue	in	2006	versus	2005.	Whole	grains	increased	as strong	gulf	exports	and	higher	freight	charges	for	barge	traffic	shifted	feed	grain shipments	to	rails.	Shipments	of	ethanol,	a	grain	product	used	as	an	alternative	fuel and	fuel	additive,	and	its	co-products	(primarily	livestock	feed)	also	experienced strong	growth,	reflecting	continued	demand	in	this	growing	industry.	Conversely, wheat	shipments	declined	due	to	extremely	low	crop	production	levels	in	2006 primarily	 due	 to	 drought	 conditions	 in	 wheat	 producing	 states.	 Price	 and	 fuel surcharge	increases	improved	ARC	in	2006.

Price	 increases	 and	 fuel	 surcharges	 increased	 agricultural	 commodity revenue	in	2005	compared	to	2004.	Total	carloads	were	flat	compared	to	2004. Carloads	of	grain	products	increased	during	2005	as	we	shipped	more	dry	feed ingredients	to	Mexico	and	more	ethanol.	Higher	demand	for	ethanol	reflected	the impact	 of	 energy	 demand,	 crude	 oil	 prices,	 and	 limited	 capacity	 of	 domestic refineries.	Reduced	carloadings	of	sugar	beets	partially	offset	the	gains.	Declining carloads	of	feed	grain	and	reduced	shipments	of	wheat	both	contributed	to	lower whole	grain	shipments.	ARC	improvement	in	2005	resulted	from	price	increases, fuel	surcharges,	and	the	positive	impact	of	a	larger	percentage	of	carloads	with longer	average	lengths	of	haul.

Automotive	–	Price	increases,	volume	growth,	and	fuel	surcharges	increased automotive	 commodity revenue in	 2006	 over	 2005.	 Shipments	 of finished vehicles	grew	as	higher	manufacturer	inventories	at	the	end	of	2005	translated into record	 volume	 growth for transportation in	 2006.	 Shipments remained relatively	strong	through	the	second	quarter	due	to	the	production	ramp-up	of new	models	at	plants	served	by	us.	Automotive	parts	shipments	also	grew	due to	 conversion	 of traffic from trucks,	 new	 business	 growth,	 and	 production increases	at	several	UPRR-served	assembly	plants.	Fuel	surcharges	and	price increases	drove	the	ARC	improvement.

Revenue	increased	in	2005	over	2004	primarily	due	to	fuel	surcharges and	price	increases,	which	also	drove	ARC	improvement.	Carloads	decreased due to lower	shipments	of	domestically	manufactured	finished	vehicles	and automotive	parts	and	materials,	reflecting	industry	weakness	during	2005.

Chemicals	–	Price	increases,	fuel	surcharges,	and	index-based	contract	escalators drove	 the	 increase	 in	 revenue	 and	ARC	 in	 2006	 versus	 2005.	 Fewer	 fertilizer shipments	 largely	 drove	 the	 volume	 decrease.	 Wet	 weather	 conditions	 in	 the Midwest	led	to	weak	demand	during	the	fall	fertilizer	season.	In	addition,	softer export	 markets	 for	 potash,	 a	 fertilizer	 product,	 also	 led	 to	 reduced	 volumes. Business	 interruptions	 in	 the	 third	 quarter	 of	 2005,	 primarily	 attributable	 to Hurricane	 Rita,	 reduced	 chemicals	 shipments	 leading	 to	 favorable	 volume comparisons	in	2006.

Price	 increases,	 fuel	 surcharges,	 and	 higher	 shipments	 of	 potash	 from Canada	to	Portland	via	the	Eastport,	Idaho	gateway	for	overseas	export	all	drove revenue	 growth	 in	 2005	 versus	 2004.	 Declines	 in	 liquid	 and	 dry	 chemicals, plastics,	and	petroleum	shipments,	in	part	due	to	the	business	interruptions	caused by	Hurricane	Rita,	reduced	volume.	In	addition,	liquid	and	dry	chemical	shipments and	plastic	shipments	were	lower	due	to	a	weak	export	market,	plant	closures	for maintenance,	and	the	impact	of	an	agreement	with	the	BNSF	for	access	to	certain facilities	in	the	Bayport,	Texas	area.	ARC	improved	in	2005	due	to	price	increases and	fuel	surcharges.

Energy	–	Price	increases,	fuel	surcharges,	and	index-based	contract	escalators primarily	drove	the	increases	in	revenue	and	ARC	in	2006	over	2005.	Volume increases	also	contributed	to	revenue	growth	as	coal	shipments	from	the	SPRB mines	improved	8%	during	the	year.	These	increases	in	2006	partially	reflect lower	 volume	 levels	 in	 2005,	 as	 SPRB	 Joint	 Line	 disruptions,	 network disruptions	resulting	from	Hurricane	Rita,	and	the	October	Kansas	washouts hampered	coal	shipments	in	2005.	Conversely,	shipments	from	the	Colorado and	Utah	mines	declined	6%	in	2006	due	to	mine	shutdowns	during	the	first quarter	of	2006,	along	with	 the	 impact	of	mining	production	problems	and network	maintenance	throughout	the	third	quarter	of	2006.

Revenue	 growth	 in	 2005	 over	 2004	 reflects	 higher	 prices,	 fuel surcharges,	and	index-based	contract	escalators.	Although	volume	grew	in	the first	 quarter,	 carloads	 for	 2005	 were	 flat	 as	 a	 result	 of	 the	 extensive maintenance	and	restoration	work	on	the	SPRB	Joint	Line	during	the	second, third,	and	fourth	quarters,	the	impact	of	Hurricane	Rita,	the	Kansas	washouts, and	temporary	outages	at	mines	in	Colorado	and	Utah	during	the	fourth	quarter of	2005.	ARC	was	higher	due	to	price	increases,	higher	fuel	surcharges,	and index-based	contract	escalators.

Industrial	Products	–	Price	increases	and	fuel	surcharges	improved	revenue	and ARC	in	2006	over	2005.	Volume	levels	declined	due	to	lower	lumber,	paper,	and newsprint	shipments,	which	were	partially	offset	by	higher	steel	shipments.	The softening	 of	 the	 housing	 market,	 lower	 production	 levels,	 and	 general	 market uncertainty	drove	the	reduction	in	lumber	shipments.	Conversely,	strong	domestic markets	 throughout	most	of	 the	year	drove	 the	 increase	 in	construction-related steel	material	and	pipe,	particularly	those	materials	used	in	oil	and	gas	drilling. Hurricane	Rita	reduced	shipment	volumes	of	industrial	products	in	2005,	which favorably	affected	volume	comparisons	with	2006.

Price	increases	and	fuel	surcharges	generated	revenue	growth	in	2005	versus 2004.	 In	 particular,	 lumber	 shipments	 contributed	 to	 this	 growth	 due	 to	 solid pricing	 gains	 and	 fuel	 surcharges.	 Revenue	 from	 stone	 shipments	 increased revenue	from	construction	products	due	to	strong	construction	demand,	larger	train sizes,	and	improved	car	cycle	times.	Car	cycle	time	is	defined	as	the	amount	of time	that	a	car	spends	on	our	system	measured	from	the	origin	of	the	loaded	or empty	move	until	arrival	at	final	destination.	Overall	carloads	were	flat	compared to	2004.	Partially	offsetting	substantial	volume	growth	of	stone	shipments	were reduced	 paper	 moves,	 primarily	 newsprint	 and	 fiber,	 and	 fewer	 shipments	 of government	materials,	steel,	and	cement,	resulting	from	softening	markets,	cement shortages	 in	 certain	 markets,	 and	 higher	 inventories.	 Price	 increases	 and	 fuel surcharges	drove	ARC	increases.

Intermodal	 –	 Record	 volume	 growth,	 fuel	 surcharges,	 price	 increases,	 and index-based	contract	escalators	combined	 to	 improve	revenue	 in	2006	over 2005	 in	 addition	 to	 the	 favorable	 impact	 from	 weaker	 intermodal	 revenue during	2005	due	to	the	January	West	Coast	storm.	Carloadings	grew	due	to strong	 imports,	 primarily	 from	Asia,	 partially	 offset	 by	 decreased	 domestic traffic.	ARC	 improved	due	 to	price	 increases,	fuel	surcharges,	and	contract escalators.

Revenue	in	2005	improved	over	2004	due	to	strong	imports,	primarily from	China	and	the	rest	of	Asia.	However,	business	interruptions	during	the first	quarter	of	2005	due	to	the	January	West	Coast	storm	limited	full-year revenue	growth.	ARC	improved	due	to	price	increases,	fuel	surcharges,	and contract	escalators.

Mexico	Business	–	Each	commodity	group	discussed	above	includes	revenue	from	shipments	to	and	from	Mexico.	Revenue	from	Mexico	business	increased	23%	to $1.4	billion	in	2006	compared	to	2005.	Price	increases,	fuel	surcharges,	and	shipments	of	finished	vehicles,	automotive	parts,	import	beer,	dry	feed	ingredients,	and 23

intermodal	drove	revenue	growth	in	2006.	Volume	declines	in	coal,	newsprint,	and	sulfur	shipments	partially	offset	the	increases.

In	2005,	revenue	from	Mexico	grew	15%	to	$1.1	billion,	resulting	primarily	from	price	increases	and	fuel	surcharges.	Carloads	were	flat	versus	2004,	as	fewer automotive	parts,	energy,	and	intermodal	shipments	offset	higher	agricultural	and	industrial	shipments.

# Operating	Expenses

|  |  |  |  | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Millions\tof\tDollars | 2006 | 2005 | 2004 | 2006\tv\t2005 | 2005\tv\t2004 |
| Salaries,\twages,\tand\temployee\tbenefits | $4,599 | $4,375 | $4,167 | 5% | 5% |
| Fuel\tand\tutilities | 3,012 | 2,562 | 1,816 | 18 | 41 |
| Equipment\tand\tother\trents | 1,455 | 1,402 | 1,374 | 4 | 2 |
| Depreciation | 1,237 | 1,175 | 1,111 | 5 | 6 |
| Materials\tand\tsupplies | 691 | 546 | 488 | 27 | 12 |
| Casualty\tcosts | 410 | 411 | 694 | - | (41) |
| Purchased\tservices\tand\tother\tcosts | 1,290 | 1,312 | 1,270 | (2) | 3 |
| Total | $12,694 | $11,783 | $10,920 | 8% | 8% |

Operating	expenses	increased	$911	million	in	2006.	Higher	fuel	prices,	which	rose 16%	 during the	 period,	 accounted	 for	 $393	 million	 of	 the	 increase.	 Our	 fuel surcharge	programs	helped	offset	these	expenses	in	the	form	of	higher	revenue, recovering	approximately	90%	of	the	additional	expense	incurred	above	our	base fuel	 price	 of	 $0.75	 per	 gallon	 for	 the	 year.	 We	 base	 a	 majority	 of	 our	 fuel surcharges	on	the	average	U.S.	diesel	fuel	price	effective	two	months	prior.	Our recovery	percentage	improved	from	the	first	part	of	2006	due	to	the	timing	impact of	our	surcharges.	Surcharge	revenue	began	to	recover	higher	fuel	costs	earlier	in the	year,	and	the	two-month	price	lag	caught	up	with	declining	fuel	prices	during the	fourth	quarter	of	2006.	Conversely,	fuel	surcharge	revenue	during	 the	first quarter	of	2007	will	decline	as	lower	fourth	quarter	fuel	prices	will	reduce	most	of our	surcharges.

Wages,	benefits,	and	materials	and	supplies	inflation;	a	larger	workforce; volume-related	expenses;	and	higher	locomotive	and	freight	car	maintenance	and lease	expenses	accounted	for	most	of	the	additional	increase	in	2006.	Settlement	of all	remaining	insurance	claims	related	to	the	2005	January	West	Coast	storm,	an improved	fuel	consumption	rate,	and	improved	car	cycle	times	(which	reduced freight	car	rental	expense)	partially	offset	the	cost	increases.	Additional	clean-up and	restoration	costs	for	 the	2005	January	West	Coast	storm	favorably	affects comparison	of	2005	operating	expenses	with	those	in	2006.

Operating	expenses	increased	$863	million	in	2005	versus	2004.	Excluding	the	asbestos	charge	of	$247	million	(pre-tax)	in	2004,	operating	expenses	increased $1.1	billion,	or	10%.	Significantly	higher	locomotive	fuel	prices	accounted	for	$740	million	of	this	increase	(our	fuel	surcharge	programs	helped	offset	these	expenses	in the	form	of	higher	revenue).	Inflation	in	wages,	benefits,	materials,	and	services,	as	well	as	a	larger	workforce,	resulted	in	most	of	the	additional	increase.	Also	driving higher	operating	expenses	were	increased	contract	services	and	clean-up	and	restoration	costs	associated	with	the	2005	January	West	Coast	storm.

Salaries,	Wages,	and	Employee	Benefits	–	General	wage	and	benefit	inflation	increased	expenses	in	2006,	reflecting	higher	salaries	and	wages	and	the	impact	of	higher healthcare	costs	and	other	benefit	costs.	A	larger	workforce,	driven	by	higher	volume	levels,	and	stock	option	expense	required	by	new	accounting	rules	also	contributed to	higher	expenses.	Conversely,	reduced	protection	costs	and	operational	 improvements,	boosted	by	network	management	 initiatives	and	 investment	 in	capacity, partially	offset	these	increases.	Protection	costs	represent	the	differential	payment	when	the	wage	earned	for	active	employment	is	lower	than	an	employee's	protected rate	of	pay.	An	individual's	protected	rate	is	imposed	by	the	STB	for	employees	adversely	affected	by	a	merger	or	is	established	by	collective	bargaining	agreements with	our	labor	unions	in	certain	cases.	Additionally,	we	incurred	higher	labor	expenses	in	2005	for	clean-up	and	restoration	of	property	damaged	by	the	January	West Coast	storm.

Several	factors	drove	higher	employment	expenses	in	2005.	General	wage	and	benefit	inflation	increased	expenses,	reflecting	higher	salaries	and	wages	and	the year-over-year	impact	of	higher	healthcare	and	other	benefits	costs.	We	also	incurred	higher	expenses	for	management	bonuses	in	2005,	as	executive	bonuses	were	not awarded	for	2004	and	bonuses	for	the	professional	workforce	were	significantly	reduced	in	2004.	A	3%	increase	in	our	workforce	and	higher	demand	during	2005	also contributed	to	the	increases.	Additionally,	labor	expenses,	in	the	form	of	higher	train	crew	costs	and	labor	incurred	for	repair	and	clean-up	activities,	increased	due	to	the hurricanes	in	the	third	quarter	and	the	West	Coast	storm	in	the	first	quarter.	Reduced	severance	and	relocation	costs,	increased	network	efficiency,	and	reduced	training expenses	partially	offset	these	increases.	Transferring	various	support	personnel	to	Omaha,	Nebraska,	resulted	in	higher	severance	and	relocation	costs	in	2004.

# Fuel	and	Utilities

|  |  |  | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- |
| 2006 | 2005 | 2004 | 2006\tv\t2005 | 2005\tv\t2004 |
| $2,821 | $2,393 | $1,684 | 18% | 42% |
| \t 1,619 | 963 | 292 | 68 | 230 |

Fuel	and	utilities	include	locomotive	fuel,	utilities	other	than	telephone,	and	gasoline	and	other	fuels.	Higher	diesel	fuel	prices,	which	averaged	$2.06	per	gallon (including	taxes	and	transportation	costs)	in	2006	compared	to	$1.77	per	gallon	in	2005,	increased	expenses	by	$393	million.	A	3%	increase	in	gross	ton-miles	resulted in	$63	million	of	additional	expenses,	which	was	partially	offset	by	a	2%	improvement	in	our	fuel	consumption	rate	due	to	the	use	of	newer,	more	fuel-efficient locomotives	and	our	fuel	conservation	programs.	As	noted	above	(and	described	in	this	Item	7),	we	offset	a	significant	portion	of	increased	locomotive	fuel	expenses through	revenue	from	fuel	surcharges.	Gasoline,	utilities,	and	propane	and	other	fuel	expenses	increased	$20	million	in	2006	due	to	higher	prices	and	increased	usage.

In	2005,	diesel	fuel	prices	averaged	$1.77	per	gallon	compared	to	$1.22	per	gallon	in	2004,	increasing	expenses	by	$740	million.	A	1%	increase	in	gross	ton- miles	resulted	in	$8	million	of	additional	expenses.	We	offset	$39	million	of	these	increases	with	a	2%	improvement	in	our	consumption	rate	in	2005	versus	2004.	The Railroad	had	no	fuel	hedges	in	place	during	2005,	whereas	we	hedged	120	million	gallons	of	fuel	in	2004.	Gasoline,	utilities,	and	propane	expenses	increased	$37 million	in	2005	versus	2004	due	to	higher	prices.

Equipment	and	Other	Rents	–	Equipment	and	other	rents	primarily	includes	rental	expense	the	Railroad	pays	for	freight	cars	owned	by	other	railroads	or	private companies;	freight	car,	intermodal,	and	locomotive	leases;	other

specialty	equipment	leases;	and	office	and	other	rentals.	Lease	expense	increased	in	2006	compared	to	2005	as	we	leased	more	locomotives	and	freight	cars.	Growth	in automotive	and	intermodal	shipments	also	increased	our	short-term	freight	car	rental	expense.	Improved	car-cycle	times	driven	by	network	management	initiatives partially	offset	this	increase.

In	2005,	the	number	of	leased	locomotives	and	freight	cars	increased,	resulting	in	higher	lease	expense.	Carload	volume	growth	also	increased	2005	expenses. Improved	car-cycle	times	partially	offset	these	increases	which	lowered	our	short-term	freight	car	rental	expense.

Depreciation	–	The	majority	of	depreciation	relates	to	track	structure,	including	rail,	ties,	and	other	track	material.	A	higher	depreciable	asset	base,	reflecting	higher capital	spending	in	recent	years,	and	increased	usage	of	our	assets	combined	for	higher	depreciation	expense	in	2006	and	2005.

Materials	and	Supplies	–	Materials	used	to	maintain	the	Railroad's	lines,	structures,	and	equipment	are	the	principal	components	of	materials	and	supplies	expense.	This expense	item	also	includes	small	tools,	office	supplies,	other	materials,	and	the	costs	of	freight	services	to	ship	Railroad	supplies	and	materials.	We	used	more	repair materials	at	higher	component	costs	to	repair	and	maintain	freight	cars	and	our	fleet	of	locomotives	in	2006,	including	a	growing	number	of	units	not	covered	by warranties.	In	addition,	we	performed	more	maintenance	on	locomotives	that	were	maintained	internally	and	not	subject	to	maintenance	contracts	with	third-party contractors	compared	to	2005.

During	2005,	materials	and	supplies	expense	increased,	primarily	due	to	locomotive	and	freight	car	maintenance.	We	used	more	repair	materials	to	maintain	a larger	fleet	of	locomotives,	including	a	growing	number	of	units	not	covered	by	warranties.	Additionally,	we	incurred	higher	costs	for	car	wheel	sets,	traction	motors, and	lube	oil.	Conversely,	we	incurred	lower	freight	charges	for	shipping	Railroad	materials,	and	stationery	and	office	supplies.

Casualty	Costs	–	Personal	injury	costs,	freight	and	property	damage,	insurance,	and	environmental	expense	are	the	primary	components	of	casualty	costs.	Costs	were	flat in	2006	compared	to	2005	as	lower	bad	debt	expenses,	lower	freight	damage	expenses,	and	lower	expenses	for	destruction	of	foreign	or	leased	equipment	all	offset personal	injury	costs	and	higher	settlement	expenses.

In	2005,	casualty	costs	were	lower	than	the	previous	year	primarily	due	to	higher	expenses	incurred	in	2004	for	an	asbestos	charge,	a	costly	derailment	near	San Antonio,	and	a	large	jury	verdict	–	affirmed	in	2004	–	for	a	1998	crossing	accident.	Lower	freight	and	property	damage	expense	and	lower	costs	for	destruction	of foreign	or	leased	equipment	also	reduced	casualty	costs.	Conversely,	we	incurred	higher	insurance	costs	and	increased	costs	for	third-party	personal	injuries	and damages	related	to	environmental	exposures.

Purchased	Services	and	Other	Costs	–	Purchased	services	and	other	costs	include	the	costs	of	services	purchased	from	outside	contractors,	state	and	local	taxes,	net costs	of	operating	facilities	jointly	used	by	UPRR	and	other	railroads,	transportation	and	lodging	for	train	crew	employees,	trucking	and	contracting	costs	for	intermodal containers,	leased	automobile	maintenance	expenses,	telephone	and	cellular	expense,	employee	travel	expense,	and	computer	and	other	general	expenses.	Volume- related	expenses,	including	crew	transportation	and	lodging	costs,	increased	in	2006	driven	by	3%	growth	of	carloads.	Higher	state	and	local	taxes	(primarily	sales	and use	taxes	related	to	higher	diesel	fuel	prices)	also	increased	expenses	in	2006	compared	to	2005.	Conversely,	lower	locomotive	contract	maintenance	costs	and	lower expenses	associated	with	jointly-owned	operating	facilities	reduced	expenses	in	2006	compared	to	2005.	Settlement	of	all	remaining	insurance	claims	related	to	the 2005	January	West	Coast	storm	and	the	gain	from	the	sale	of	two	airplanes	also	reduced	expenses	in	2006.	Finally,	clean-up	and	restoration	costs	related	to	the	January West	Coast	storm	increased	expenses	in	2005,	which	also	contributed	to	lower	year-over-year	expenses	in	2006.

Expenses	increased	in	2005	versus	2004	because	we	experienced	higher	volume-related	costs	for	freight	car	and	locomotive	contract	maintenance	and	crew transportation	and	lodging.	Although	our	intermodal	carloadings

increased	over	4%	in	2005,	costs	for	trucking	services	provided	by	intermodal	carriers	remained	flat	as	we	substantially	reduced	expenses	associated	with	network inefficiencies.	Higher	diesel	fuel	prices	increased	sales	and	use	taxes	in	2005,	which	resulted	in	higher	state	and	local	taxes.	Other	contract	expenses	for	equipment maintenance	and	other	services	increased	in	2005.	The	2005	January	West	Coast	storm	and	Hurricanes	Katrina	and	Rita	also	contributed	to	higher	expenses	in	2005	(net of	insurance	settlements	received).	Partially	offsetting	these	increases	was	a	reduction	in	relocation	expenses	as	we	incurred	higher	relocation	costs	associated	with moving	support	personnel	to	Omaha,	Nebraska	during	2004.

# Non-Operating	Items

|  |  |  | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- |
| \t 2006 | \t 2005 | \t 2004 | 2006\tv\t2005 | 2005\tv\t2004 |
| $118 | $145 | $88 | (19)% | 65% |
| (477) | (504) | (527) | (5) | (4) |
| (919) | (410) | (252) | 124 | 63 |

Other	Income	–	Lower	net	gains	from	non-operating	asset	sales	and	higher	expenses	due	to	rising	interest	rates	associated	with	our	sale	of	receivables	program	resulted in	a	reduction	in	other	income	in	2006,	which	was	partially	offset	by	higher	rental	income	for	the	use	of	our	right-of-way	(including	2006	settlements	of	rate	disputes from	prior	years)	and	cash	investment	returns	due	to	higher	interest	rates.

In	2005,	other	income	increased	largely	as	a	result	of	higher	gains	from	real	estate	sales	partially	offset	by	higher	expenses	due	to	rising	interest	rates	associated with	our	sale	of	receivables	program.

Interest	Expense	–	Lower	interest	expense	in	2006	and	2005	was	primarily	due	to	declining	weighted-average	debt	levels	of	$7.1	billion,	$7.8	billion,	and	$8.1	billion	in 2006,	2005,	and	2004,	respectively.	A	higher	effective	interest	rate	of	6.7%	in	2006,	compared	to	6.5%	in	both	2005	and	2004,	partially	offset	the	effects	of	the	declining debt	level.

Income	Taxes	–	Income	tax	expense	was	$509	million	higher	in	2006	than	2005.	Higher	pre-tax	income	resulted	in	additional	taxes	of	$414	million	and	$118	million	of the	increase	resulted	from	the	one-time	reduction	in	2005	described	below.	Our	effective	tax	rate	was	36.4%	and	28.6%	in	2006	and	2005,	respectively.

Income	taxes	were	greater	in	2005	than	2004	due	to	higher	pre-tax	income	partially	offset	by	a	previously	reported	reduction	in	income	tax	expense.	In	our Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	June	30,	2005,	we	reported	that	the	Corporation	analyzed	the	impact	that	final	settlements	of	pre-1995	tax	years had	on	previously	recorded	estimates	of	deferred	tax	assets	and	liabilities.	The	completed	analysis	of	the	final	settlements	for	pre-1995	tax	years,	along	with	Internal Revenue	Service	Examination	Reports	for	tax	years	1995	through	2002	were	considered,	among	other	things,	in	a	review	and	re-evaluation	of	the	Corporation's estimated	deferred	tax	assets	and	liabilities	as	of	September	30,	2005,	resulting	in	an	income	tax	expense	reduction	of	$118	million	in	2005.

# OPERATING	AND	FINANCIAL	STATISTICS

# Railroad	Performance	Measures

We	report	key	Railroad	performance	measures	weekly	to	the	Association	of	American	Railroads,	including	carloads,	average	daily	inventory	of	rail	cars	on	our	system, average	train	speed,	and	average	terminal	dwell	time.	This	operating	data	is	available	on	our	website	at	www.up.com/investors/reports/index.shtml.

# Operating	Statistics

| 2006 | 2005 | 2004 | 2006	v	2005 | 2005	v	2004 |
| :--- | :--- | :--- | :--- | :--- |
| 21.4 | 21.1 | 21.4 | 1% | (1)% |
| 27.2 | 28.7 | 30.5 | (5) | (6) |
| 1,072.5 | 1,043.9 | 1,037.5 | 3 | 1 |
| 565.2 | 548.8 | 546.3 | 3 | - |
| 50,739 | 49,747 | 48,329 | 2 | 3 |

Average	Train	Speed	–	Average	train	speed	is	calculated	by	dividing	train	miles	by	hours	operated	on	our	main	lines	between	terminals.	Ongoing	network	management initiatives	and	capacity	expansion	allowed	us	to	move	3%	more	carloads	in	2006	and	improve	average	train	speed	1%.	In	2005,	the	January	West	Coast	storm, disruptions	on	the	SPRB	Joint	Line,	business	interruptions	caused	by	Hurricane	Rita,	and	the	Kansas	washouts	in	October	hampered	efforts	to	improve	our	average	train speed.

Average	Terminal	Dwell	Time	–	Average	terminal	dwell	time	is	the	average	time	that	a	rail	car	spends	at	our	terminals.	Lower	average	terminal	dwell	time	is	favorable. Average	terminal	dwell	improved	5%	and	6%	in	2006	and	2005,	respectively,	as	a	result	of	ongoing	management	initiatives	and	directed	efforts	to	more	timely	deliver rail	cars	offline	to	our	interchange	partners	and	customers.

Gross	and	Revenue	Ton-Miles	–	Gross	ton-miles	are	calculated	by	multiplying	the	weight	of	loaded	or	empty	freight	cars	by	the	number	of	miles	hauled.	Revenue	ton- miles	are	calculated	by	multiplying	the	weight	of	freight	by	the	number	of	tariff	miles.	In	2006,	gross	and	revenue	ton-miles	grew	3%	in	relation	to	the	3%	increase	in carloadings	as	volume	was	balanced	between	the	higher	and	lower	density	commodities.	In	2005,	gross	ton-miles	grew	1%,	in	relation	to	a	1%	increase	of	carloadings. Revenue	ton-miles	were	flat	in	2005.

Average	Full-Time	Equivalent	Employees	–	Higher	employee	levels	in	2006	and	2005	included	more	people	to	maintain	our	larger	locomotive	and	freight	car	fleet,	the addition	of	employees	needed	to	complete	increased	track	repair	and	replacement	programs,	the	hiring	of	operations	management	personnel,	including	an	expanded management	training	program,	and	train	and	engine	personnel	to	manage	current	demand.

# Return	on	Invested	Capital

| Millions	of	Dollars,	Except	Percentages | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Net\tincome | $1,606 | $1,026 | $604 |
| Add:\tInterest\texpense | 477 | 504 | 527 |
| Add:\tSale\tof\treceivables\tfees | 33 | 23 | 11 |
| Add:\tInterest\ton\tpresent\tvalue\tof\toperating\tleases | 268 | 218 | 172 |
| Less:\tTaxes\ton\tinterest\tand\tfees | (283) | (213) | (209) |
| Net\toperating\tprofit\tafter\ttaxes\tas\tadjusted\t(a) | $2,101 | $1,558 | $1,105 |
| Average\tequity | $14,510 | $13,181 | $12,505 |
| Add:\tAverage\tdebt | 7,098 | 7,774 | 8,060 |
| Add:\tAverage\tvalue\tof\tsold\treceivables | 600 | 595 | 590 |
| Add:\tAverage\tpresent\tvalue\tof\toperating\tleases | 3,349 | 2,729 | 2,147 |
| Average\tinvested\tcapital\tas\tadjusted\t(b) | $25,557 | $24,279 | $23,302 |
| Return\ton\tinvested\tcapital\tas\tadjusted\t(a/b) | 8.2% | 6.4% | 4.7% |

Return	on	invested	capital	(ROIC)	is	considered	a	non-GAAP	financial	measure	by	SEC	Regulation	G	and	Item	10	of	SEC	Regulation	S-K.	We	believe	this	measure	is important	in	evaluating	the	efficiency	and	effectiveness	of	the	Corporation's	long-term	capital	investments,	and	we	currently	use	ROIC	as	a	performance	criteria	in determining	certain	elements	of	compensation	for	our	executive	officers	and	senior	management.	ROIC	should	be	considered	in	addition	to,	rather	than	as	a	substitute for,	other	information	provided	in	accordance	with	GAAP.	A	comparable	GAAP	measure	is	Return	on	Equity,	which	is	included	in	Selected	Financial	Data,	Item	6.

# Debt	to	Capital/Lease	Adjusted	Debt	to	Capital

Lease	adjusted	debt	to	capital	is	considered	a	non-GAAP	financial	measure	by	SEC	Regulation	G	and	Item	10	of	SEC	Regulation	S-K.	We	believe	this	measure	is important	in	evaluating	the	total	amount	of	leverage	in	our	capital	structure	including	off-balance	sheet	lease	obligations.	We	monitor	the	ratio	of	lease	adjusted	debt	to capital	as	we	manage	our	capital	structure	to	balance	cost	effective	and	efficient	access	to	the	capital	markets	with	the	Corporation's	overall	cost	of	capital.	Lease adjusted	debt	to	capital	should	be	considered	in	addition	to,	rather	than	as	a	substitute	for,	debt	to	capital.	The	table	above	provides	support	for	the	lease	adjusted	debt	to capital	calculation.	Our	debt	to	capital	ratios	improved	as	a	result	of	a	$636	million	reduction	in	debt	from	December	31,	2005,	and	an	increase	in	retained	earnings	due to	higher	net	income	in	2006.

# LIQUIDITY	AND	CAPITAL	RESOURCES

As	of	December	31,	2006,	our	principal	sources	of	liquidity	included	cash,	cash	equivalents,	the	sale	of	receivables,	and	our	revolving	credit	facilities,	as	well	as	the availability	of	commercial	paper	and	other	sources	of	financing	through	the	capital	markets.	We	had	$2	billion	of	committed	credit	facilities	available,	of	which	there were	no	borrowings	outstanding	as	of	December	31,	2006,	and	we	did	not	make	any	short-term	borrowings	under	these	facilities	during	the	year.	The	value	of	the outstanding	undivided	interest	held	by	investors	under	the	sale	of	receivables	program	was	$600	million	as	of	December	31,	2006.	The	sale	of	receivables	program	is subject	to	certain	requirements,	including	the	maintenance	of	an	investment	grade	bond	rating.	If	our	bond	rating	were	to	deteriorate,	it	could	have	an	adverse	impact	on our	liquidity.	Access	to	commercial	paper	is	dependent	on	market	conditions.	Deterioration	of	our	operating	results	or	financial	condition	due	to	internal	or	external factors	could	negatively	impact	our	ability	to	utilize	commercial	paper	as	a	source	of	liquidity.	Liquidity	through	the	capital	markets	is	also	dependent	on	our	financial stability.

At	both	December	31,	2006	and	2005,	we	had	a	working	capital	deficit	of	approximately	$1.1	billion.	A	working	capital	deficit	is	common	in	our	industry	and does	not	indicate	a	lack	of	liquidity.	We	maintain	adequate	resources	to	meet	our	daily	cash	requirements,	and	we	have	sufficient	financial	capacity	to	satisfy	our	current liabilities.

# Financial	Condition

| Millions	of	Dollars | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Cash\tprovided\tby\toperating\tactivities | $2,880 | $2,595 | $2,257 |
| Cash\tused\tin\tinvesting\tactivities | (2,042) | (2,047) | (1,732) |
| Cash\tused\tin\tfinancing\tactivities | (784) | (752) | (75) |
| Net\tchange\tin\tcash\tand\tcash\tequivalents | $54 | $(204) | $450 |

Cash	Provided	by	Operating	Activities	–	Higher	income	in	2006	generated	the	increased	cash	provided	by	operating	activities,	which	was	partially	offset	by	higher income	tax	payments,	$150	million	in	voluntary	pension	contributions,	higher	material	and	supply	inventories,	and	higher	management	incentive	payments	in	2006. Higher	income,	lower	management	incentive	payments	in	2005	(executive	bonuses,	which	would	have	been	paid	to	individuals	in	2005,	were	not	awarded	based	on company	performance	in	2004	and	bonuses	for	the	professional	workforce	that	were	paid	out	in	2005	were	significantly	reduced),	and	working	capital	performance generated	higher	cash	from	operating	activities	in	2005.	A	voluntary	pension	contribution	of	$100	million	in	2004	also	augmented	the	positive	year-over-year	variance	in 2005	as	no	pension	contribution	was	made	in	2005.	This	improvement	was	partially	offset	by	cash	received	in	2004	for	income	tax	refunds.

Cash	Used	in	Investing	Activities	–	An	insurance	settlement	for	the	2005	January	West	Coast	storm	and	lower	balances	for	work	in	process	decreased	the	amount	of	cash used	in	investing	activities	in	2006.	Higher	capital	investments	and	lower	proceeds	from	asset	sales	partially	offset	this	decrease.	Increased	capital	spending,	partially offset	by	higher	proceeds	from	asset	sales,	increased	the	amount	of	cash	used	in	investing	activities	in	2005	compared	to	2004.

Cash	Used	in	Financing	Activities	–	The	increase	in	cash	used	in	financing	activities	primarily	resulted	from	lower	net	proceeds	from	equity	compensation	plans	($189 million	in	2006	compared	to	$262	million	in	2005).	The	increase	in	2005	results	from	debt	issuances	in	2004	and	higher	debt	repayments	in	2005.	We	did	not	issue	debt in	2005	versus	$745	million	of	debt	issuances	in	2004,	and	we	repaid	$699	million	of	debt	in	2005	compared	to	$588	million	in	2004.	The	higher	outflows	in	2005	were partially	offset	by	higher	net	proceeds	from	equity	compensation	plans	($262	million	in	2005	compared	to	$80	million	in	2004).

The	table	below	details	cash	capital	investments	for	the	years	ended	December	31,	2006,	2005,	and	2004.

| Millions	of	Dollars | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Track | $1,487 | $1,472 | $1,328 |
| Capacity\tand\tcommercial\tfacilities | 510 | 509 | 347 |
| Locomotives\tand\tfreight\tcars | 135 | 98 | 125 |
| Other | 110 | 90 | 76 |
| Total | $2,242 | $2,169 | $1,876 |

In	2007,	we	expect	our	total	capital	investments	to	be	approximately	$3.2	billion,	which	may	include	long-term	leases.	These	investments	will	be	used	to	maintain track	and	structures,	continue	capacity	expansions	on	our	main	lines	in	constrained	corridors,	remove	bottlenecks,	upgrade	and	augment	equipment	to	better	meet customer	needs,	build	and	improve	facilities	and	terminals,	and	develop	and	implement	new	technologies.	We	designed	these	investments	to	maintain	infrastructure	for safety,	enhance	customer	service,	promote	growth,	and	improve	operational	fluidity.	We	expect	to	fund	our	2007	cash	capital	investments	through	cash	generated	from operations,	the	sale	or	lease	of	various	operating	and	non-operating	properties,	and	cash	on	hand	at	December	31,	2006.	We	expect	that	these	sources	will	continue	to provide	sufficient	funds	to	meet	our	expected	capital	requirements	for	2007.

For	the	years	ended	December	31,	2006,	2005,	and	2004,	our	ratio	of	earnings	to	fixed	charges	was	4.4,	2.9,	and	2.1,	respectively.	The	increases	in	2006	and	2005 were	driven	by	higher	net	income.	The	ratio	of	earnings	to	fixed	charges	was	computed	on	a	consolidated	basis.	Earnings	represent	income	from	continuing	operations, less	equity	earnings	net	of	distributions,	plus	fixed	charges	and	income	taxes.	Fixed	charges	represent	interest	charges,	amortization	of	debt	discount,	and	the	estimated amount	representing	the	interest	portion	of	rental	charges.	See	Exhibit	12	for	the	calculation	of	the	ratio	of	earnings	to	fixed	charges.

# Financing	Activities

Credit	Facilities		–	On	December	31,	2006,	we	had	$2	billion	in	revolving	credit	facilities	available,	including	$1	billion	under	a	five-year	facility	expiring	in	March 2009	and	$1	billion	under	a	five-year	facility	expiring	in	March	2010	(collectively,	the	"facilities").	The	facilities	are	designated	for	general	corporate	purposes	and support	the	issuance	of	commercial	paper.	Neither	of	the	facilities	were	drawn	on	in	2006.	Commitment	fees	and	interest	rates	payable	under	the	facilities	are	similar	to fees	and	rates	available	to	comparably	rated	investment-grade	borrowers.	These	facilities	allow	for	borrowings	at	floating	rates	based	on	London	Interbank	Offered Rates,	plus	a	spread,	depending	upon	our	senior	unsecured	debt	ratings.	The	facilities	require	the	maintenance	of	a	minimum	net	worth	and	a	debt	to	net	worth	coverage ratio.	At	December	31,	2006,	we	were	in	compliance	with	these	covenants.	The	facilities	do	not	include	any	other	financial	restrictions,	credit	rating	triggers	(other	than rating-dependent	pricing),	or	any	other	provision	that	could	require	the	posting	of	collateral.

In	addition	to	our	revolving	credit	facilities,	we	had	$150	million	in	uncommitted	lines	of	credit	available,	including	$75	million	that	expires	in	March	2007	and $75	million	expiring	in	May	2007.	Neither	of	these	lines	of	credit	were	used	as	of	December	31,	2006.	We	must	have	equivalent	credit	available	under	our	five-year facilities	to	draw	on	these	$75	million	lines.

Dividends	–	On	January	30,	2007,	we	increased	the	quarterly	dividend	to	$0.35	per	share,	payable	beginning	on	April	2,	2007,	to	shareholders	of	record	on	February	28, 2007.	We	expect	to	fund	the	increase	in	the	quarterly	dividend	through	cash	generated	from	operations,	the	sale	or	lease	of	various	operating	and	non-operating properties,	and	cash	on	hand	at	December	31,	2006.

Dividend	Restrictions	–	We	are	subject	to	certain	restrictions	related	to	the	payment	of	cash	dividends	to	our	shareholders	due	to	minimum	net	worth	requirements under	our	credit	facilities.	Retained	earnings	available

for	dividends	increased	to	$7.8	billion	at	December	31,	2006,	from	$6.2	billion	at	December	31,	2005.	We	do	not	expect	that	these	restrictions	will	have	a	material adverse	effect	on	our	consolidated	results	of	operations,	financial	condition,	or	liquidity.

Common	Stock	Repurchases	–	On	January	30,	2007,	our	Board	of	Directors	authorized	us	to	repurchase	up	to	20	million	shares	of	our	common	stock	through December	31,	2009.	We	may	make	these	repurchases	on	the	open	market	or	through	other	transactions.	Our	management	will	have	sole	discretion	with	respect	to determining	the	timing	and	amount	of	these	transactions.	We	expect	to	fund	our	common	stock	repurchases	through	cash	generated	from	operations,	the	sale	or	lease	of various	operating	and	non-operating	properties,	and	cash	on	hand	at	December	31,	2006.

Shelf	Registration	Statement	–	Under	a	current	shelf	registration	statement,	we	may	issue	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,	2006,	we	had	$500	million	remaining	for	issuance	under	the	current	shelf registration	statement.	We	have	no	immediate	plans	to	issue	any	securities;	however,	we	routinely	consider	and	evaluate	opportunities	to	replace	existing	debt	or	access capital	through	issuances	of	debt	securities	under	this	shelf	registration,	and,	therefore,	we	may	issue	debt	securities	at	any	time.

# Operating	Lease	Activities

As	of	December	31,	2006,	our	contractual	obligations	for	operating	leases	totaled	approximately	$5.5	billion.	Discounted	at	8%,	the	present	value	of	this	obligation	was approximately	$3.5	billion.	The	Railroad,	as	lessee,	entered	into	long-term	operating	lease	arrangements	during	2006	to	finance	the	majority	of	its	new	equipment acquisitions.	In	2006,	the	lessors	under	these	lease	arrangements	purchased	200	locomotives	and	2,100	freight	cars	from	the	Corporation	through	various	financing transactions	with	a	total	equipment	cost	of	approximately	$523	million	and	a	present	value	of	$427	million.	These	new	lease	arrangements	provide	for	minimum	total rental	payments	of	approximately	$777	million	and	are	reflected	in	the	contractual	obligations	table	as	of	December	31,	2006.

The	lessors	financed	the	purchase	of	the	locomotives	and	freight	cars,	in	part,	by	the	issuance	of	equipment	notes	that	are	non-recourse	to	the	Railroad	and	are secured	by	an	assignment	of	the	underlying	leases	and	a	security	interest	in	the	various	types	of	equipment.	Neither	the	Railroad	nor	UPC	guarantees	payment	of	the equipment	notes.	The	Railroad's	obligations	to	make	operating	lease	payments	under	the	leases	are	recourse	obligations	and	are	not	recorded	in	the	Consolidated Statements	of	Financial	Position.

The	Railroad	has	certain	renewal	and	purchase	options	with	respect	to	the	locomotives	and	freight	cars.	If	the	Railroad	does	not	exercise	any	such	options,	the equipment	will	be	returned	to	the	lessors	at	the	end	of	the	lease	term.

# Contractual	Obligations	and	Commitments

As	described	in	the	notes	to	the	Financial	Statements	and	Supplementary	Data,	Item	8,	and	as	referenced	in	the	tables	below,	we	have	contractual	obligations	and commercial	commitments	that	may	affect	our	financial	condition.	However,	based	on	our	assessment	of	the	underlying	provisions	and	circumstances	of	our	contractual obligations	and	commercial	commitments,	including	material	sources	of	off-balance	sheet	and	structured	finance	arrangements,	there	is	no	known	trend,	demand, commitment,	event,	or	uncertainty	that	is	reasonably	likely	to	occur	that	would	have	a	material	adverse	effect	on	our	consolidated	results	of	operations,	financial condition,	or	liquidity.	In	addition,	the	commercial	obligations,	financings,	and	commitments	made	by	us	are	customary	transactions	that	are	similar	to	those	of	other comparable	corporations,	particularly	within	the	transportation	industry.

The	following	tables	identify	material	obligations	and	commitments	as	of	December	31,	2006:

| Contractual	Obligations |  |  |  |  |  |  | After |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Millions\tof\tDollars | Total | 2007 | 2008 | 2009 | 2010 | 2011 | 2011 |
| Debt\t[a] | $9,102 | $1,035 | $880 | $693 | $606 | $656 | $5,232 |
| Operating\tleases | 5,457 | 624 | 546 | 498 | 456 | 419 | 2,914 |
| Capital\tlease\tobligations\t[b] | 1,916 | 180 | 173 | 168 | 148 | 157 | 1,090 |
| Purchase\tobligations\t[c] | 4,516 | 1,362 | 573 | 502 | 248 | 199 | 1,632 |
| Other\tpost\tretirement\tbenefits\t[d] | 298 | 27 | 28 | 29 | 31 | 31 | 152 |
| Total\tcontractual\tobligations | $21,289 | $3,228 | $2,200 | $1,890 | $1,489 | $1,462 | $11,020 |

[a] Excludes	capital	lease	obligations	of	$1,236	million,	unamortized	discount	of	$103	million,	and	market	value	adjustments	of	$14	million	for	debt	with	qualifying	hedges	that	are	recorded	as	liabilities	on	the Consolidated	Statements	of	Financial	Position.	Includes	an	interest	component	of	$3,441	million.

[b] Represents	total	obligations,	including	interest	component	of	$680	million.

[c] Purchase	obligations	include	locomotive	maintenance	contracts;	purchase	commitments	for	locomotives,	ties,	ballast,	and	track;	and	agreements	to	purchase	other	goods	and	services.

[d] Includes	estimated	other	postretirement,	medical,	and	life	insurance	payments	and	payments	made	under	the	unfunded	pension	plan	for	the	next	ten	years.	No	amounts	are	included	for	funded	pension	as	no contributions	are	currently	required.

| Other	Commercial	Commitments |  |  |  |  |  |  | After |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Millions\tof\tDollars | Total | 2007 | 2008 | 2009 | 2010 | 2011 | 2011 |
| Credit\tfacilities\t[a] | $2,000 | $- | $- | $1,000 | $1,000 | $- | $- |
| Sale\tof\treceivables\t[b] | 600 | 600 | - | - | - | - | - |
| Guarantees\t[c] | 464 | 5 | 6 | 18 | 45 | 75 | 315 |
| Standby\tletters\tof\tcredit\t[d] | 37 | 12 | 25 | - | - | - | - |
| Total\tcommercial\tcommitments | $3,101 | $617 | $31 | $1,018 | $1,045 | $75 | $315 |

[a] None	of	the	credit	facilities	were	used	as	of	December	31,	2006.

[b] $600	million	of	the	sale	of	receivables	program	was	utilized	at	December	31,	2006.

[c] Includes	guaranteed	obligations	related	to	our	headquarters	building,	equipment	financings,	and	affiliated	operations.

[d] None	of	the	letters	of	credit	were	drawn	upon	as	of	December	31,	2006.

# Off-Balance	Sheet	Arrangements

Sale	of	Receivables	–	The	Railroad	transfers	most	of	its	accounts	receivable	to	Union	Pacific	Receivables,	Inc.	(UPRI),	a	bankruptcy-remote	subsidiary,	as	part	of	a	sale of	receivables	facility.	UPRI	sells,	without	recourse	on	a	364-day	revolving	basis,	an	undivided	interest	in	such	accounts	receivable	to	investors.	The	total	capacity	to	sell undivided	interests	to	investors	under	the	facility	was	$600	million	at	both	December	31,	2006	and	2005.	The	value	of	the	outstanding	undivided	interest	held	by investors	under	the	facility	was	$600	million	at	both	December	31,	2006	and	2005,	respectively.	The	value	of	the	outstanding	undivided	interest	held	by	investors	is	not included	in	our	Consolidated	Financial	Statements.	The	value	of	the	undivided	interest	held	by	investors	was	supported	by	$1,158	million	and	$1,226	million	of accounts	receivable	held	by	UPRI	at	December	31,	2006	and	2005,	respectively.	At	December	31,	2006	and	2005,	the	value	of	the	interest	retained	by	UPRI	was	$558 million	and	$626	million,	respectively.	This	retained	interest	is	included	in	accounts	receivable	in	our	Consolidated	Financial	Statements.	The	interest	sold	to	investors	is sold	at	carrying	value,	which	approximates	fair	value,	and	there	is	no	gain	or	loss	recognized	from	the	transaction.

The	value	of	the	outstanding	undivided	interest	held	by	investors	could	fluctuate	based	upon	the	availability	of	eligible	receivables	and	is	directly	affected	by changing	business	volumes	and	credit	risks,	including	default	and	dilution.	If	default	or	dilution	percentages	were	to	increase	one	percentage	point,	the	amount	of eligible	receivables	would	decrease	by	$6	million.	Should	our	credit	rating	fall	below	investment	grade,	the	value	of	the	outstanding	undivided	interest	held	by	investors would	be	reduced,	and,	in	certain	cases,	the	investors	would	have	the	right	to	discontinue	the	facility.

The	Railroad	services	the	sold	receivables;	however,	the	Railroad	does	not	recognize	any	servicing	asset	or	liability	as	the	servicing	fees	adequately	compensate the	Railroad	for	 its	responsibilities.	The	Railroad	collected	approximately	$15.5	billion	and	$13.4	billion	during	 the	years	ended	December	31,	2006	and	2005, respectively.	UPRI	used	certain	of	these	proceeds	to	purchase	new	receivables	under	the	facility.

The	costs	of	the	sale	of	receivables	program	are	included	in	other	income	and	were	$33	million,	$23	million,	and	$11	million	for	2006,	2005,	and	2004, respectively.	The	costs	include	interest,	program	fees	paid	to	banks,	commercial	paper	issuing	costs,	and	fees	for	unused	commitment	availability.

The	investors	have	no	recourse	to	the	Railroad's	other	assets	except	for	customary	warranty	and	indemnity	claims.	Creditors	of	the	Railroad	have	no	recourse	to the	assets	of	UPRI.	In	August	2006,	the	sale	of	receivables	program	was	renewed	for	an	additional	364-day	period	without	any	significant	changes	in	terms.

Guarantees	–	At	December	31,	2006,	we	were	contingently	liable	for	$464	million	in	guarantees.	We	have	recognized	a	$6	million	liability	for	the	fair	value	of	these obligations	as	of	December	31,	2006.	We	entered	into	these	contingent	guarantees	in	the	normal	course	of	business,	and	they	include	guaranteed	obligations	related	to our	headquarters	building,	equipment	financings,	and	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.

Inflation	–	The	cumulative	effect	of	long	periods	of	inflation	significantly	increases	asset	replacement	costs	for	capital-intensive	companies.	As	a	result,	assuming	that we	replace	all	operating	assets	at	current	price	levels,	depreciation	charges	(on	an	inflation-adjusted	basis)	would	be	substantially	greater	than	historically	reported amounts.

Derivative	Financial	Instruments	–	We	may	use	derivative	financial	instruments	in	limited	instances	for	other	than	trading	purposes	to	assist	in	managing	our	overall exposure	to	fluctuations	in	interest	rates	and	fuel	prices.	We	are	not	a	party	to	leveraged	derivatives	and,	by	policy,	do	not	use	derivative	financial	instruments	for speculative	purposes.	Derivative	financial	instruments	qualifying	for	hedge	accounting	must	maintain	a	specified	level	of	effectiveness	between	the	hedging	instrument and	the	item	being	hedged,	both	at	inception	and	throughout	the	hedged	period.	We	formally	document	the	nature	and	relationships	between	the	hedging	instruments and	hedged	items,	as	well	as	our	risk-management	objectives,	strategies	for	undertaking	the	various	hedge	transactions,	and	method	of	assessing	hedge	effectiveness. Changes	in	the	fair	market	value	of	derivative	financial	instruments	that	do	not	qualify	for	hedge	accounting	are	charged	to	earnings.	We	may	use	swaps,	collars,	futures, and/or	forward	contracts	to	mitigate	the	risk	of	adverse	movements	in	interest	rates	and	fuel	prices;	however,	the	use	of	these	derivative	financial	instruments	may	limit future	benefits	from	favorable	price	movements.

Market	and	Credit	Risk	–	We	address	market	risk	related	to	derivative	financial	instruments	by	selecting	instruments	with	value	fluctuations	that	highly	correlate	with the	underlying	hedged	item.	Credit	risk	related	to	derivative	financial	instruments,	which	is	minimal,	is	managed	by	requiring	high	credit	standards	for	counterparties and	periodic	settlements.	At	December	31,	2006	and	2005,	we	were	not	required	to	provide	collateral,	nor	had	we	received	collateral,	relating	to	our	hedging	activities.

Determination	of	Fair	Value	–	We	determined	the	fair	values	of	our	derivative	financial	instrument	positions	at	December	31,	2006	and	2005	based	upon	current	fair values	as	quoted	by	recognized	dealers	or	developed	based	upon	the	present	value	of	expected	future	cash	flows.

Sensitivity	Analyses	–	The	sensitivity	analyses	that	follow	illustrate	the	economic	effect	that	hypothetical	changes	in	interest	rates	could	have	on	our	results	of	operations and	financial	condition.	These	hypothetical	changes	do	not	consider	other	factors	that	could	impact	actual	results.

Interest	Rate	Fair	Value	Hedges	–	We	manage	our	overall	exposure	 to	fluctuations	 in	 interest	 rates	 by	 adjusting	 the	 proportion	 of	 fixed	 and	 floating	 rate	 debt instruments	within	our	debt	portfolio	over	a	given	period.	We	generally	manage	the	mix	of	fixed	and	floating	rate	debt	through	the	issuance	of	targeted	amounts	of	each as	debt	matures	or	as	we	require	incremental	borrowings.	We	employ	derivatives,	primarily	swaps,	as	one	of	the	tools	to	obtain	the	targeted	mix.	In	addition,	we	also obtain	flexibility	in	managing	interest	costs	and	the	interest	rate	mix	within	our	debt	portfolio	by	evaluating	the	issuance	of	and	managing	outstanding	callable	fixed-rate debt	securities.

Swaps	allow	us	to	convert	debt	from	fixed	rates	to	variable	rates	and	thereby	hedge	the	risk	of	changes	in	the	debt's	fair	value	attributable	to	the	changes	in interest	rates.	We	account	for	swaps	as	fair	value	hedges	using	the	short-cut	method	pursuant	to	Financial	Accounting	Standards	Board	(FASB)	Statement	No.	133, Accounting	for	Derivative	Instruments	and	Hedging	Activities;	therefore,	we	do	not	record	any	ineffectiveness	within	our	Consolidated	Financial	Statements.	As	of December	31,	2006	and	2005,	we	had	interest	rate	swaps	hedging	debt	of	$500	million	and	$750	million,	respectively.

At	December	31,	2006	and	2005,	we	had	variable-rate	debt	representing	approximately	7%	and	10%,	respectively,	of	our	total	debt.	If	variable	interest	rates average	 one	 percentage	 point	 higher	 in	 2007	 than	 our	 December	 31,	 2006	 variable	 rate,	 which	 was	 approximately	 8%,	 our	 interest	 expense	 would	 increase	 by approximately	$5	million.	If	variable	interest	rates	averaged	one	percentage	point	higher	in	2006	than	our	December	31,	2005	variable	rate,	which	was	approximately 7%,	our	interest	expense	would	have	increased	by	approximately	$7	million.	These	amounts	were	determined	by	considering	the	impact	of	the	hypothetical	interest	rates on	the	balances	of	our	variable-rate	debt	at	December	31,	2006	and	2005,	respectively.

Market	risk	for	fixed-rate	debt	is	estimated	as	the	potential	increase	in	fair	value	resulting	from	a	hypothetical	one	percentage	point	decrease	in	interest	rates	as	of December	31,	2006,	and	amounts	to	approximately	$462	million	at	December	31,	2006.	Market	risk	resulting	from	a	hypothetical	one	percentage	point	decrease	in interest	rates	as	of	December	31,	2005,	amounted	 to	approximately	$535	million	at	December	31,	2005.	We	estimated	 the	fair	values	of	our	fixed-rate	debt	by considering	the	impact	of	the	hypothetical	interest	rates	on	quoted	market	prices	and	current	borrowing	rates.

Interest	Rate	Cash	Flow	Hedges	–	We	report	changes	in	the	fair	value	of	cash	flow	hedges	in	accumulated	other	comprehensive	loss	until	the	hedged	item	affects earnings.	At	December	31,	2006,	we	had	a	reduction	of	$5	million	recorded	as	an	accumulated	other	comprehensive	loss	that	is	being	amortized	on	a	straight-line	basis through	September	30,	2014.	As	of	December	31,	2006	and	2005,	we	had	no	interest	rate	cash	flow	hedges	outstanding.

Fuel	Cash	Flow	Hedges	–	Fuel	costs	are	a	significant	portion	of	our	total	operating	expenses.	In	2006	and	2005,	our	primary	means	of	mitigating	the	impact	of	adverse fuel	price	changes	was	our	fuel	surcharge	programs.	However,	we	may	use	swaps,	collars,	futures	and/or	forward	contracts	to	further	mitigate	the	impact	of	adverse	fuel price	changes.	We	did	not	have	any	fuel	hedges	in	place	during	2006	or	2005.	We	hedged	120	million	gallons	of	fuel	during	2004	using	collars	with	average	cap,	floor, and	ceiling	prices	of	$0.74,	$0.64,	and	$0.86	per	gallon,	respectively.

Fuel	Swaps	–	We	entered	into	two	fuel	basis	swaps	for	the	period	August	2006	through	July	2008,	which	cover	a	total	of	151	million	gallons	of	diesel	fuel.	These commodity	basis	swaps	require	us	to	make	payments	to,

or	receive	payments	from,	the	counterparty	based	on	the	difference	between	certain	price	indices.	Changes	in	the	fair	value	of	these	swaps	are	reflected	in	fuel	expense. We	reported	a	derivative	asset	of	approximately	$2	million	at	December	31,	2006,	which	represents	the	fair	value	of	the	swaps.	The	swaps	reduced	fuel	expense	for	2006 by	$3	million,	which	included	monthly	net	settlements	with	the	counterparty	and	the	fair	value	recognition	at	December	31,	2006.

Accounting	Pronouncements	–	In	June	2006,	the	FASB	issued	Interpretation	No.	48,	Accounting	for	Uncertainty	in	Income	Taxes,	an	interpretation	of	FASB	Statement No.	109	(FIN	48).	Under	the	interpretation,	we	will	recognize	tax	benefits	only	for	tax	positions	that	are	more	likely	than	not	to	be	sustained	upon	examination	by	tax authorities.	The	amount	recognized	will	be	measured	as	the	largest	amount	of	benefit	that	is	greater	than	50	percent	likely	of	being	realized	upon	ultimate	settlement.	The interpretation	is	effective	for	us	beginning	in	the	first	quarter	of	2007.	The	cumulative	effect	of	adopting	FIN	48	will	be	a	one-time	reduction	in	the	January	1,	2007 balance	of	retained	earnings.	Future	changes	in	uncertain	tax	positions	will	be	included	in	income	tax	expense.	We	do	not	expect	that	the	cumulative	effect	of	adopting FIN	48	will	have	a	material	impact	on	our	Consolidated	Financial	Statements.

In	 September	 2006,	 the	 FASB	 issued	 Statement	 No.	 157,	Fair	 Value	 Measurement	 (FAS	 157).	 While	 this	 statement	 does	 not	 require	 new	 fair	 value measurements,	it	provides	guidance	on	applying	fair	value	and	expands	required	disclosures.	FAS	157	is	effective	for	us	beginning	in	the	first	quarter	of	2008.	We	are currently	assessing	the	impact	FAS	157	may	have	on	our	Consolidated	Financial	Statements.

In	September	2006,	the	FASB	issued	Statement	No.	158,	Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans	(FAS	158).	FAS 158	required	us	to	recognize	the	funded	status	of	our	pension	and	postretirement	plans	in	the	balance	sheet,	along	with	a	corresponding	noncash,	after-tax	adjustment	to shareholders'	equity.	Funded	status	is	determined	as	the	difference	between	the	fair	value	of	plan	assets	and	the	benefit	obligation.	Changes	in	the	funded	status	will	be recognized	in	other	comprehensive	loss.	We	adopted	FAS	158	at	the	end	of	2006	and	have	disclosed	the	impact	of	the	adoption	in	note	7	of	the	Financial	Statements	and Supplementary	Data,	Item	8.

In	September	2006,	the	SEC	issued	Staff	Accounting	Bulletin	No.	108,	Considering	the	Effects	of	Prior	Year	Misstatements	when	Quantifying	Misstatements	in Current	 Year	 Financial	 Statements (SAB	 108).	 SAB	 108	 provides	 interpretive	 guidance	 on	 how	 the	 effects	 of	 prior-year	 uncorrected	 misstatements	 should	 be considered	when	quantifying	misstatements	in	the	current-year	financial	statements.	SAB	108	requires	registrants	to	quantify	misstatements	using	both	an	income statement	and	balance	sheet	approach	and	then	evaluate	whether	either	approach	results	in	a	misstatement	that,	when	all	relevant	quantitative	and	qualitative	factors	are considered,	is	material.	If	prior-year	errors	that	had	been	previously	considered	immaterial	are	now	considered	material	based	on	either	approach,	no	restatement	is required	so	long	as	management	properly	applied	its	previous	approach	and	all	relevant	facts	and	circumstances	were	considered.	If	prior-year's	financial	statements	are not	restated,	the	cumulative	effect	adjustment	is	recorded	in	opening	accumulated	earnings	(deficit)	as	of	the	beginning	of	the	fiscal	year	of	adoption.	SAB	108	was effective	for	us	at	the	end	of	2006.	The	adoption	of	SAB	108	did	not	have	any	impact	on	our	Consolidated	Financial	Statements.

In	February	2007,	the	FASB	issued	Statement	No.	159,	The	Fair	Value	Option	for	Financial	Assets	and	Financial	Liabilities	(FAS	159).	This	statement,	which	is expected	to	expand	fair	value	measurement,	permits	entities	to	choose	to	measure	many	financial	instruments	and	certain	other	items	at	fair	value.	FAS	159	is	effective for	us	beginning	in	the	first	quarter	of	2008.	We	are	currently	assessing	the	impact	FAS	159	may	have	on	our	Consolidated	Financial	Statements.

Asserted	and	Unasserted	Claims	–	Various	claims	and	lawsuits	are	pending	against	us	and	certain	of	our	subsidiaries.	It	is	not	possible	at	this	time	for	us	to	determine fully	the	effect	of	all	unasserted	claims	on	our	consolidated	results	of	operations,	financial	condition,	or	liquidity;	however,	to	the	extent	possible,	where	unasserted claims	are	considered	probable	and	where	such	claims	can	be	reasonably	estimated,	we	have	recorded

a	liability.	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	previously	recorded	for	these	matters.

Indemnities	–	Our	maximum	potential	exposure	under	indemnification	arrangements,	including	certain	tax	indemnifications,	can	range	from	a	specified	dollar	amount to	an	unlimited	amount,	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.

Insurance	Subsidiaries	–	We	have	two	consolidated,	wholly-owned	subsidiaries	that	provide	insurance	coverage	for	certain	risks,	including	physical	loss	or	property damage	and	certain	other	claims	that	are	subject	to	reinsurance.

# CRITICAL	ACCOUNTING	POLICIES

Our	Consolidated	Financial	Statements	have	been	prepared	in	accordance	with	GAAP.	The	preparation	of	these	financial	statements	requires	estimation	and	judgment that	affect	the	reported	amounts	of	revenue,	expenses,	assets,	and	liabilities.	We	base	our	estimates	on	historical	experience	and	on	various	other	assumptions	that	are believed	to	be	reasonable	under	the	circumstances,	the	results	of	which	form	the	basis	for	making	judgments	about	the	carrying	values	of	assets	and	liabilities	that	are not	readily	apparent	from	other	sources.	The	following	critical	accounting	policies	are	a	subset	of	our	significant	accounting	policies	described	in	note	1	to	the	Financial Statements	and	Supplementary	Data,	Item	8.	These	critical	accounting	policies	affect	significant	areas	of	our	financial	statements	and	involve	judgment	and	estimates.	If these	estimates	differ	significantly	from	actual	results,	the	impact	on	our	Consolidated	Financial	Statements	may	be	material.

Asbestos	–	We	are	a	defendant	in	a	number	of	lawsuits	in	which	current	and	former	employees	allege	exposure	to	asbestos.	During	2004,	we	engaged	a	third	party	with extensive	experience	in	estimating	resolution	costs	for	asbestos-related	claims	to	assist	us	in	assessing	our	potential	liability.	As	a	result	of	this	assessment,	we	increased our	liability	in	2004	for	resolving	both	asserted	and	unasserted	asbestos-related	claims	through	2034.	This	liability	excludes	future	defense	and	processing	costs.	The liability	for	resolving	both	asserted	and	unasserted	claims	was	based	on	the	following	assumptions:

•	 The	number	of	future	claims	received	would	be	consistent	with	historical	averages.

•	 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	asbestos-related	 liabilities	were	$302	million	and	$311	million	at	December	31,	2006	and	2005,	respectively.	The	current	portion	of	asbestos-related liabilities	was	$13	million	and	$16	million,	respectively.	Approximately	16%	of	the	recorded	liability	related	to	asserted	claims	and	approximately	84%	related	to unasserted	claims.	These	claims	are	expected	to	be	paid	out	over	the	next	28	years.	We	have	insurance	coverage	for	a	portion	of	the	costs	incurred	to	resolve	asbestos- related	claims,	and,	as	a	result	of	the	2004	assessment,	we	increased	our	receivable	for	insurance	recoveries	related	to	asbestos	during	2004.	We	have	recognized	an	asset for	estimated	insurance	recoveries	at	December	31,	2006	and	2005.

Our	asbestos-related	claims	activity	was	as	follows:

| Claims	Activity | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Open\tclaims,\tbeginning\tbalance | 2,435 | 2,316 | 2,560 |
| New\tclaims | 316 | 741 | 474 |
| Settled\tor\tdismissed\tclaims | (474) | (622) | (718) |
| Open\tclaims,\tending\tbalance\tat\tDecember\t31 | 2,277 | 2,435 | 2,316 |

During	2006	and	2005	our	third-party	consultants	assisted	us	in	reviewing	our	actual	asbestos	claim	experience	compared	to	the	assumptions	used	in	the	2004 estimate,	and	we	determined	that	no	adjustment	was	necessary.	We	will	continue	to	review	actual	experience	and	adjust	our	estimate	as	warranted.

We	believe	that	our	liability	for	asbestos-related	claims	and	the	estimated	insurance	recoveries	reflect	reasonable	and	probable	estimates.	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	to	be 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	 may	 also	 vary	 due	 to	 changes	 to	 strategies,	 activities,	 and	 outcomes	 of	 asbestos	 litigation,	 federal	 and	 state	 law	 governing	 litigation	 and compensation	of	asbestos	claimants,	and	the	level	of	payments	made	to	claimants	by	other	defendants.

Environmental	–	We	are	subject	 to	federal,	state,	and	 local	environmental	 laws	and	regulations.	We	 identified	367	sites	at	which	we	are	or	may	be	 liable	for remediation	costs	associated	with	alleged	contamination	or	for	violations	of	environmental	requirements.	This	includes	44	sites	that	are	the	subject	of	actions	taken	by the	 U.S.	 government,	 25	 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.

Our	environmental	site	activity	was	as	follows:

| Site	Activity | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Open\tsites,\tbeginning\tbalance | 370 | 384 | 417 |
| New\tsites | 50 | 56 | 59 |
| Closed\tsites | (53) | (70) | (92) |
| Open\tsites,\tending\tbalance\tat\tDecember\t31 | 367 | 370 | 384 |

When	we	identify	an	environmental	issue	with	respect	to	property	owned,	leased,	or	otherwise	used	in	the	conduct	of	our	business,	we	and	our	consultants perform	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	we	can	reasonably	estimate	such	costs.	We	do	not	discount	our	environmental	liabilities	when	the	timing	of	the	anticipated	cash	payments	is	not	fixed	or readily	determinable.

Environmental	expense	for	the	years	ended	December	31,	2006,	2005,	and	2004	were	$39	million,	$45	million,	and	$46	million,	respectively.	As	of	December	31, 2006	and	2005,	we	had	a	liability	of	$210	million	and	$213	million,	respectively,	accrued	for	future	environmental	costs,	of	which	$54	million	and	$46	million, respectively,	were	recorded	in	current	liabilities	as	accrued	casualty	costs.	The	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 38

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	involved,	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.	Current	obligations	are	not	expected	to	have	a material	adverse	effect	on	our	consolidated	results	of	operations,	financial	condition,	or	liquidity.

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	third-party	actuaries	to	assist	us	with	measuring	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.	Annual	expenses	for	personal	injury- related	events	were	$240	million	in	2006,	$247	million	in	2005,	and	$288	million	in	2004.	As	of	December	31,	2006	and	2005,	we	had	accrued	liabilities	of	$631 million	and	$619	million	for	future	personal	injury	costs,	respectively,	of	which	$233	million	and	$274	million	was	recorded	in	current	liabilities	as	accrued	casualty costs,	respectively.	Our	personal	injury	liability	is	discounted	to	present	value	using	applicable	U.S.	Treasury	rates.	Approximately	87%	of	the	recorded	liability	related to	asserted	claims,	and	approximately	13%	related	to	unasserted	claims.	Estimates	can	vary	over	time	due	to	evolving	trends	in	litigation.

Our	personal	injury	claims	activity	was	as	follows:

| Claims	Activity | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Open\tclaims,\tbeginning\tbalance | 4,197 | 4,028 | 4,085 |
| New\tclaims | 4,190 | 4,584 | 4,366 |
| Settled\tor\tdismissed\tclaims | (4,261) | (4,415) | (4,423) |
| Open\tclaims,\tending\tbalance\tat\tDecember\t31 | 4,126 | 4,197 | 4,028 |

Depreciation	–	The	railroad	industry	is	capital	intensive.	Properties	are	carried	at	cost.	Provisions	for	depreciation	are	computed	principally	on	the	straight-line	method based	on	estimated	service	lives	of	depreciable	property.	The	lives	are	calculated	using	a	separate	composite	annual	percentage	rate	for	each	depreciable	property	group, based	on	the	results	of	internal	depreciation	studies.	We	are	required	to	submit	a	report	on	depreciation	studies	and	proposed	depreciation	rates	to	the	STB	for	review	and approval	every	three	years	for	equipment	property	and	every	six	years	for	road	property.	The	cost	(net	of	salvage)	of	depreciable	railroad	property	retired	or	replaced	in the	ordinary	course	of	business	is	charged	to	accumulated	depreciation,	and	no	gain	or	loss	is	recognized.	A	gain	or	loss	is	recognized	in	other	income	for	all	other property	upon	disposition	because	the	gain	or	loss	is	not	part	of	rail	operations.	The	cost	of	internally	developed	software	is	capitalized	and	amortized	over	a	five-year period.

Significant	capital	spending	in	recent	years	increased	the	total	value	of	our	depreciable	assets.	Cash	capital	spending	totaled	$2.2	billion	for	the	year	ended December	31,	2006.	For	the	year	ended	December	31,	2006,	depreciation	expense	was	$1.2	billion.	We	use	various	methods	to	estimate	useful	lives	for	each	group	of depreciable	property.	Due	to	the	capital	intensive	nature	of	the	business	and	the	large	base	of	depreciable	assets,	variances	to	those	estimates	could	have	a	material	effect on	our	Consolidated	Financial	Statements.	If	the	estimated	useful	lives	of	all	depreciable	assets	were	increased	by	one	year,	annual	depreciation	expense	would	decrease by	approximately	$43	million.	If	the	estimated	useful	lives	of	all	assets	to	be	depreciated	were	decreased	by	one	year,	annual	depreciation	expense	would	increase	by approximately	$45	million.

Income	Taxes	–	As	required	under	FASB	Statement	No.	109,	Accounting	for	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	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	provisions	of	tax	law	as	currently	enacted;	the	effects	of	future	changes	in	tax	laws	are	not	anticipated.	Future tax	law	changes,	such	as	a	change	in	the	corporate	tax	rate,	could	have	a	material	impact	on	our	financial	condition	or	results	of	operations.	For	example,	a	1%	increase in	the	federal	income	tax	rate	would	increase	our	deferred	tax	liability	by	approximately	$245	million.

When	appropriate,	we	record	a	valuation	allowance	against	deferred	tax	assets	to	offset	future	tax	benefits	that	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	in	part	on management's	judgments	regarding	the	best	available	evidence	about	future	events.	Based	on	that	analysis,	we	recorded	a	valuation	allowance	of	$5	million	against certain	deferred	tax	assets	as	of	December	31,	2005.	There	was	no	valuation	allowance	as	of	December	31,	2006.

Pension	and	Other	Postretirement	Benefits	–	We	use	third-party	actuaries	to	assist	us	in	properly	measuring	the	liabilities	and	expenses	associated	with	providing pension	and	defined	contribution	medical	and	life	insurance	benefits	(OPEB)	to	eligible	employees.	In	order	to	use	actuarial	methods	to	value	the	liabilities	and	expenses we	must	make	several	assumptions.	The	critical	assumptions	used	to	measure	pension	obligations	and	expenses	are	the	discount	rate	and	expected	rate	of	return	on pension	assets.	For	OPEB,	the	critical	assumptions	are	the	discount	rate	and	healthcare	cost	trend	rate.

We	evaluate	our	critical	assumptions	at	least	annually,	and	selected	assumptions	are	based	on	the	following	factors:

•	 Discount	rate	is	based	on	a	hypothetical	portfolio	of	high	quality	corporate	bonds	(rated	AA	by	a	recognized	rating	agency)	for	which	the	timing	and amount	of	cash	flows	matches	our	plan's	expected	benefit	payments.

•	 Expected	return	on	plan	assets	is	based	on	our	asset	allocation	mix	and	our	historical	return,	taking	into	consideration	current	and	expected	market conditions.

•	 Healthcare	cost	trend	rate	is	based	on	our	historical	rates	of	inflation	and	expected	market	conditions.

The	following	tables	present	the	key	assumptions	used	to	measure	pension	and	OPEB	expense	for	2006	and	the	estimated	impact	on	2006	pension	and	OPEB expense	relative	to	a	change	in	those	assumptions:

| Millions	of	Dollars | Pension | OPEB |
| :--- | :--- | :--- |
| 0.25%\tdecrease\tin\tdiscount\trate | $\t\t\t\t6 | $— |
| 0.25%\tincrease\tin\tsalary\tscale | $1 | N/A |
| 0.25%\tdecrease\tin\texpected\treturn\ton\tplan\tassets | $4 | N/A |
| 1%\tincrease\tin\thealthcare\tcost\ttrend\trate | N/A | $\t\t\t\t5 |

# CAUTIONARY	INFORMATION

Certain	statements	in	this	report,	and	statements	in	other	reports	or	information	filed	or	to	be	filed	with	the	SEC	(as	well	as	information	included	in	oral	statements	or other	written	statements	made	or	to	be	made	by	us),	are,	or	will	be,	forward-looking	statements	as	defined	by	the	Securities	Act	of	1933	and	the	Securities	Exchange	Act of	1934.	These	forward-looking	statements	include,	without	limitation,	statements	and	information	set	forth	under	the	caption	"2007	Outlook"	in	this	Item	7,	and	any other	 statements	 or	 information	 in	 this	 report	 (including	 information	 incorporated	 herein	 by	 reference)	 regarding:	 expectations	 as	 to	 operational	 or	 service improvements;	expectations	regarding	the	effectiveness	of	steps	taken	or	to	be	taken	to	improve	operations,	service,	infrastructure	improvements,	transportation	plan modifications,	and	management	of	customer	traffic	on	the	system	to	meet	demand;	expectations	as	to	cost	savings,	revenue	growth,	and	earnings;	the	time	by	which goals,	targets,	or	objectives	will	be	achieved;	projections,	predictions,	expectations,	estimates,	or	forecasts	as	to	our	business,	financial	and	operational	results,	future economic	performance,	and	general	economic	conditions;	proposed	new	products	and	services;	estimates	of	costs	relating	to	environmental	remediation	and	restoration; expectations	that	claims,	litigation,	environmental	costs,	commitments,	contingent	liabilities,	labor	negotiations	or	agreements,	or	other	matters	will	not	have	a	material adverse	effect	on	our	consolidated	results	of	operations,	financial	condition,	or	liquidity	and	any	other	similar	expressions	concerning	matters	that	are	not	historical facts.

Forward-looking	statements	should	not	be	read	as	a	guarantee	of	future	performance	or	results,	and	will	not	necessarily	be	accurate	indications	of	the	times	that, or	by	which,	such	performance	or	results	will	be	achieved.	Forward-looking	information	is	subject	to	risks	and	uncertainties	that	could	cause	actual	performance	or results	to	differ	materially	from	those	expressed	in	the	statements.

Forward-looking	statements	and	 information	reflect	 the	good	faith	consideration	by	management	of	currently	available	 information,	and	may	be	based	on underlying	 assumptions	 believed	 to	 be	 reasonable	 under	 the	 circumstances.	 However,	 such	 information	 and	 assumptions	 (and,	 therefore,	 such	 forward-looking statements	and	information)	are	or	may	be	subject	to	variables	or	unknown	or	unforeseeable	events	or	circumstances	over	which	management	has	little	or	no	influence or	control.	The	Risk	Factors	in	Item	1A	of	this	report	could	affect	our	future	results	and	could	cause	those	results	or	other	outcomes	to	differ	materially	from	those expressed	or	implied	in	the	forward-looking	statements.

Forward-looking	statements	speak	only	as	of	the	date	the	statement	was	made.	We	assume	no	obligation	to	update	forward-looking	information	to	reflect	actual results,	changes	in	assumptions	or	changes	in	other	factors	affecting	forward-looking	information.	If	we	do	update	one	or	more	forward-looking	statements,	no	inference should	be	drawn	that	we	will	make	additional	updates	with	respect	thereto	or	with	respect	to	other	forward-looking	statements.

# Item	7A.	Quantitative	and	Qualitative	Disclosures	about	Market	Risk

Information	concerning	market	risk	sensitive	instruments	is	set	forth	under	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	— Other	Matters,	Item	7.

# Item	8.	Financial	Statements	and	Supplementary	Data

| Item	8.	Financial	Statements	and	Supplementary	Data |  |
| :--- | :--- |
| Index\tto\tConsolidated\tFinancial\tStatements | Page |
| Report\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm | 43 |
| Consolidated\tStatements\tof\tIncome\nFor\tthe\tYears\tEnded\tDecember\t31,\t2006,\t2005,\tand\t2004 | 44 |
| Consolidated\tStatements\tof\tFinancial\tPosition\nAt\tDecember\t31,\t2006\tand\t2005 | 45 |
| Consolidated\tStatements\tof\tCash\tFlows\nFor\tthe\tYears\tEnded\tDecember\t31,\t2006,\t2005,\tand\t2004 | 46 |
| Consolidated\tStatements\tof\tChanges\tin\tCommon\tShareholders'\tEquity\nFor\tthe\tYears\tEnded\tDecember\t31,\t2006,\t2005,\tand\t2004 | 47 |
| Notes\tto\tthe\tConsolidated\tFinancial\tStatements | 48 |

# R	EPORT	OF	INDEPENDENT	REGISTERED	PUBLIC	ACCOUNTING	FIRM

Union	Pacific	Corporation,	its	Directors,	and	Shareholders:

We	have	audited	the	accompanying	consolidated	statements	of	financial	position	of	Union	Pacific	Corporation	and	Subsidiary	Companies	(the	Corporation)	as	of December	31,	2006	and	2005,	and	the	related	consolidated	statements	of	income,	changes	in	common	shareholders'	equity,	and	cash	flows	for	each	of	the	three	years	in the	period	ended	December	31,	2006.	Our	audits	also	included	the	financial	statement	schedule	listed	in	the	Table	of	Contents	at	Part	IV,	Item	15.	These	consolidated financial	statements	and	financial	statement	schedule	are	 the	responsibility	of	 the	Corporation's	management.	Our	responsibility	 is	 to	express	an	opinion	on	 the consolidated	financial	statements	and	financial	statement	schedule	based	on	our	audits.

We	conducted	our	audits	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	the	financial	statements	are	free	of	material	misstatement.	An	audit	includes	examining,	on	a test	basis,	evidence	supporting	the	amounts	and	disclosures	in	the	financial	statements.	An	audit	also	includes	assessing	the	accounting	principles	used	and	significant estimates	made	by	management,	as	well	as	evaluating	the	overall	financial	statement	presentation.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinion.

In	our	opinion,	such	consolidated	financial	statements	present	fairly,	in	all	material	respects,	the	financial	position	of	Union	Pacific	Corporation	and	Subsidiary Companies	as	of	December	31,	2006	and	2005,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2006, in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	of	America.	Also,	in	our	opinion,	such	financial	statement	schedule,	when	considered	in relation	to	the	basic	consolidated	financial	statements	taken	as	a	whole,	presents	fairly,	in	all	material	respects,	the	information	set	forth	therein.

As	 discussed in	 Note	 7 to the	 consolidated financial	 statements, in	 2006 the	 Corporation	 adopted	 Statement	 of	 Financial	Accounting	 Standard	 No.	 158, Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans.

We	 have	 also	 audited,	 in	 accordance	 with	 the	 standards	 of	 the	 Public	 Company	 Accounting	 Oversight	 Board	 (United	 States),	 the	 effectiveness	 of	 the Corporation's	internal	control	over	financial	reporting	as	of	December	31,	2006,	based	on	the	criteria	established	in	Internal	Control	–	Integrated	Framework	issued	by the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	and	our	report	dated	February	16,	2007	expressed	an	unqualified	opinion	on	management's assessment	of	the	effectiveness	of	the	Corporation's	internal	control	over	financial	reporting	and	an	unqualified	opinion	on	the	effectiveness	of	the	Corporation's	internal control	over	financial	reporting.

Omaha,	Nebraska

# CONSOLIDATED	STATEMENTS	OF	INCOME

# Union	Pacific	Corporation	and	Subsidiary	Companies

| for	the	Years	Ended	December	31, | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Operating\trevenue | $15,578 | $13,578 | $12,215 |
| Operating\texpenses: |  |  |  |
| Salaries,\twages,\tand\temployee\tbenefits | 4,599 | 4,375 | 4,167 |
| Fuel\tand\tutilities | 3,012 | 2,562 | 1,816 |
| Equipment\tand\tother\trents | 1,455 | 1,402 | 1,374 |
| Depreciation | 1,237 | 1,175 | 1,111 |
| Materials\tand\tsupplies | 691 | 546 | 488 |
| Casualty\tcosts | 410 | 411 | 694 |
| Purchased\tservices\tand\tother\tcosts | 1,290 | 1,312 | 1,270 |
| Total\toperating\texpenses | \t 12,694 | \t 11,783 | \t 10,920 |
| Operating\tincome | 2,884 | 1,795 | 1,295 |
| Other\tincome | 118 | 145 | 88 |
| Interest\texpense | (477) | (504) | (527) |
| Income\tbefore\tincome\ttaxes | 2,525 | 1,436 | 856 |
| Income\ttaxes | (919) | (410) | (252) |
| Net\tincome | $1,606 | $1,026 | $604 |
| Share\tand\tPer\tShare: |  |  |  |
| Earnings\tper\tshare\t–\tbasic | $5.96 | $3.89 | $2.33 |
| Earnings\tper\tshare\t–\tdiluted | $5.91 | $3.85 | $2.30 |
| Weighted\taverage\tnumber\tof\tshares\t–\tbasic | 269.4 | 263.4 | 259.1 |
| Weighted\taverage\tnumber\tof\tshares\t–\tdiluted | 272.0 | 266.5 | 262.2 |
| Dividends\tdeclared\tper\tshare | $1.20 | $1.20 | $1.20 |

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

# CONSOLIDATED	STATEMENTS	OF	FINANCIAL	POSITION

| Millions	of	Dollars,	as	of	December	31, | 2006 | 2005 |
| :--- | :--- | :--- |
| Assets |  |  |
| Current\tassets: |  |  |
| Cash\tand\tcash\tequivalents | $827 | $773 |
| Accounts\treceivable,\tnet | 679 | 747 |
| Materials\tand\tsupplies | 395 | 331 |
| Current\tdeferred\tincome\ttaxes | 319 | 304 |
| Other\tcurrent\tassets | 191 | 170 |
| Total\tcurrent\tassets | 2,411 | 2,325 |
| Investments: |  |  |
| Investments\tin\tand\tadvances\tto\taffiliated\tcompanies | 865 | 789 |
| Other\tinvestments | 12 | 17 |
| Total\tinvestments | 877 | 806 |
| Properties: |  |  |
| Road | 35,634 | \t 33,812 |
| Equipment | 7,637 | 7,675 |
| Other | 177 | 210 |
| Total\tcost | 43,448 | \t 41,697 |
| Accumulated\tdepreciation | (10,575) | (9,722) |
| Net\tproperties | 32,873 | \t 31,975 |
| Other\tassets | 354 | 514 |
| Total\tassets | $36,515 | $35,620 |
| Liabilities\tand\tCommon\tShareholders'\tEquity |  |  |
| Current\tliabilities: |  |  |
| Accounts\tpayable | $684 | $783 |
| Accrued\twages\tand\tvacation | 412 | 415 |
| Accrued\tcasualty\tcosts | 409 | 478 |
| Income\tand\tother\ttaxes | 279 | 212 |
| Dividends\tand\tinterest | 238 | 252 |
| Debt\tdue\twithin\tone\tyear | 780 | 656 |
| Equipment\trents\tpayable | 108 | 130 |
| Other\tcurrent\tliabilities | 629 | 458 |
| Total\tcurrent\tliabilities | 3,539 | 3,384 |
| Debt\tdue\tafter\tone\tyear | 6,000 | 6,760 |
| Deferred\tincome\ttaxes | 9,696 | 9,482 |
| Accrued\tcasualty\tcosts | 868 | 876 |
| Retiree\tbenefits\tobligation | 504 | 855 |
| Other\tlong-term\tliabilities | 596 | 556 |
| Commitments\tand\tcontingencies\t(note\t10) |  |  |
| Total\tliabilities | 21,203 | \t 21,913 |
| Common\tshareholders'\tequity: |  |  |
| respectively | 690 | 689 |
| Paid-in-surplus | 3,943 | 3,915 |
| Retained\tearnings | 11,215 | 9,932 |
| Treasury\tstock | (394) | (599) |
| Accumulated\tother\tcomprehensive\tloss | (142) | (230) |
| Total\tcommon\tshareholders'\tequity | 15,312 | \t 13,707 |
| Total\tliabilities\tand\tcommon\tshareholders'\tequity | $36,515 | $35,620 |

# CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS

| Millions	of	Dollars,	for	the	Years	Ended	December	31, | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Operating\tActivities |  |  |  |
| Net\tincome | $1,606 | $1,026 | $604 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tcash\tprovided\tby\toperating\tactivities: |  |  |  |
| Depreciation | 1,237 | 1,175 | 1,111 |
| Deferred\tincome\ttaxes | 235 | 320 | 359 |
| Stock-based\tcompensation\texpense | 35 | 21 | 21 |
| Net\tgain\tfrom\tasset\tsales | (72) | (135) | (69) |
| Other\toperating\tactivities,\tnet | (175) | 37 | 135 |
| Changes\tin\tcurrent\tassets\tand\tliabilities,\tnet | 14 | 151 | 96 |
| Cash\tprovided\tby\toperating\tactivities | 2,880 | 2,595 | 2,257 |
| Investing\tActivities |  |  |  |
| Capital\tinvestments | (2,242) | (2,169) | (1,876) |
| Proceeds\tfrom\tasset\tsales | 133 | 185 | 145 |
| Acquisition\tof\tequipment\tpending\tfinancing | (536) | (872) | (674) |
| Proceeds\tfrom\tcompleted\tequipment\tfinancings | 536 | 872 | 674 |
| Other\tinvesting\tactivities,\tnet | 67 | (63) | (1) |
| Cash\tused\tin\tinvesting\tactivities | (2,042) | (2,047) | (1,732) |
| Financing\tActivities |  |  |  |
| Dividends\tpaid | (322) | (314) | (310) |
| Debt\trepaid | (657) | (699) | (588) |
| Debt\tissued | - | - | 745 |
| Net\tproceeds\tfrom\tequity\tcompensation\tplans | 160 | 262 | 80 |
| Excess\ttax\tbenefits\tfrom\tequity\tcompensation\tplans | 29 | - | - |
| Other\tfinancing\tactivities,\tnet | 6 | (1) | (2) |
| Cash\tused\tin\tfinancing\tactivities | (784) | (752) | (75) |
| Net\tchange\tin\tcash\tand\tcash\tequivalents | 54 | (204) | 450 |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | 773 | 977 | 527 |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $827 | $773 | $977 |
| Changes\tin\tCurrent\tAssets\tand\tLiabilities,\tNet\tof\tAcquisitions |  |  |  |
| Accounts\treceivable,\tnet | $68 | $(201) | $(40) |
| Materials\tand\tsupplies | (64) | (22) | (42) |
| Other\tcurrent\tassets | (21) | 12 | 101 |
| Accounts,\twages,\tand\tvacation\tpayable | (102) | 224 | 100 |
| Other\tcurrent\tliabilities | 133 | 138 | (23) |
| Total | $14 | $151 | $96 |
| Supplemental\tCash\tFlow\tInformation |  |  |  |
| Non-cash\tinvesting\tactivities: |  |  |  |
| Capital\tinvestments\taccrued\tbut\tnot\tyet\tpaid | $106 | $103 | $82 |
| Non-cash\tfinancing\tactivity,\tcash\tdividends\tdeclared\tbut\tnot\tyet\tpaid | 80 | 78 | 76 |
| Cash\t(paid)\treceived\tduring\tthe\tyear\tfor: |  |  |  |
| Interest | (492) | (510) | (517) |
| Income\ttaxes,\tnet | (549) | (29) | 187 |

# CONSOLIDATED	STATEMENTS	OF	CHANGES	IN	COMMON	SHAREHOLDERS'	EQUITY

|  |  |  |  |  |  |  | Defined | Foreign |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Millions\tof\tDollars | Common | Treasury | Common | Paid-in- | Retained | Treasury | Benefit | Curr. | FAS |  |
| Thousands\tof\tShares | Shares | Shares | Shares | Surplus | Earnings | Stock | Plans | Trans. | 133 | Total |
| Balance\tat\tJan.\t1,\t2004 | 275,693 | (17,532) | $689 | $3,936 | $8,930 | $(1,077) | $(109) | $(18) | $3 | $ 12,354 |
| Comprehensive\tincome/(loss): |  |  |  |  |  |  |  |  |  |  |
| Net\tincome |  |  | - | - | 604 | - | - | - | - | 604 |
| Other\tcomp.\tincome/(loss)\t[a] |  |  | - | - | - | - | (103) | - | (10) | (113) |
| Total\tcomprehensive\tincome/(loss) |  |  | - | - | 604 | - | (103) | - | (10) | 491 |
| Conversion,\texercises\tof\tstock\toptions,\tforfeitures,\tand\tother | 2 | 2,357 | - | (19) | - | 141 | - | - | - | 122 |
| Dividends\tdeclared\t($1.20\tper\tshare) | - | - | - | - | (312) | - | - | - | - | (312) |
| Balance\tat\tDec.\t31,\t2004 | 275,695 | (15,175) | $689 | $3,917 | $9,222 | $(936) | $(212) | $(18) | $(7) | $ 12,655 |
| Comprehensive\tincome/(loss): |  |  |  |  |  |  |  |  |  |  |
| Net\tincome |  |  | - | - | 1,026 | - | - | - | - | 1,026 |
| Other\tcomp.\tincome/(loss)\t[a] |  |  | - | - | - | - | 1 | 5 | 1 | 7 |
| Total\tcomprehensive\tincome/(loss) |  |  | - | - | 1,026 | - | 1 | 5 | 1 | 1,033 |
| Conversion,\texercises\tof\tstock\toptions,\tforfeitures,\tand\tother | 104 | 6,011 | - | (2) | - | 337 | - | - | - | 335 |
| Dividends\tdeclared\t($1.20\tper\tshare) | - | - | - | - | (316) | - | - | - | - | (316) |
| Balance\tat\tDec.\t31,\t2005 | 275,799 | (9,164) | $689 | $3,915 | $9,932 | $(599) | $(211) | $(13) | $(6) | $ 13,707 |
| Comprehensive\tincome/(loss): |  |  |  |  |  |  |  |  |  |  |
| Net\tincome |  |  | - | - | 1,606 | - | - | - | - | 1,606 |
| Other\tcomp.\tincome/(loss)\t[a] |  |  | - | - | - | - | 170 | (4) | 1 | 167 |
| Total\tcomprehensive\tincome/(loss) |  |  | - | - | 1,606 | - | 170 | (4) | 1 | 1,773 |
| FAS\t158\tadoption\t(note\t7)\t[b] |  |  | - | - | - | - | (79) | - | - | (79) |
| Conversion,\texercises\tof\tstock\toptions,\tforfeitures,\tand\tother | 163 | 3,374 | 1 | 28 | - | 205 | - | - | - | 234 |
| Dividends\tdeclared\t($1.20\tper\tshare) | - | - | - | - | (323) | - | - | - | - | (323) |
| Balance\tat\tDec.\t31,\t2006 | 275,962 | (5,790) | $690 | $3,943 | $11,215 | $(394) | $(120) | $(17) | $(5) | $ 15,312 |
| [a] |  |  |  |  |  |  |  |  |  |  |

# NOTES	TO	THE	CONSOLIDATED	FINANCIAL	STATEMENTS

For	purposes	of	this	report,	unless	the	context	otherwise	requires,	all	references	herein	to	the	"Corporation",	"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.	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	significant	intercompany	transactions	are	eliminated.	The Corporation	evaluates	its	less	than	majority-owned	investments	for	consolidation	pursuant	to	Financial	Accounting	Standards	Board	(FASB)	Interpretation	No.	46 (Revised	 2003),	Consolidation	of	Variable	Interest	Entities,	an	Interpretation	of	Accounting	Research	Bulletin	No.	51	(FIN	46(R)).	We	currently	have	no	less	than majority-owned	investments	that	require	consolidation	under	FIN	46(R).

Cash	and	Cash	Equivalents	–	Cash	equivalents	consist	of	investments	with	original	maturities	of	three	months	or	less.

Materials	and	Supplies	–	Materials	and	supplies	are	carried	at	the	lower	of	average	cost	or	market.

Property	and	Depreciation	–	Properties	are	carried	at	cost.	Provisions	for	depreciation	are	computed	principally	on	the	straight-line	method	based	on	estimated	service lives	of	depreciable	property.	The	cost	(net	of	salvage)	of	depreciable	rail	property	retired	or	replaced	in	the	ordinary	course	of	business	is	charged	to	accumulated depreciation,	and	no	gain	or	loss	is	recognized.	A	gain	or	loss	is	recognized	in	other	income	for	all	other	property	upon	disposition	because	the	gain	or	loss	is	not	part	of rail	operations.	The	cost	of	internally	developed	software	is	capitalized	and	amortized	over	a	five-year	period.

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	commodity	revenue	on	a	percentage-of-completion	basis	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	revenue	is	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	revenue	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	adjustments	are	reflected	within common	shareholders'	equity	as	accumulated	other	comprehensive	income	or	loss.

Financial	Instruments	–	The	carrying	value	of	our	non-derivative	financial	instruments	approximates	fair	value.	The	fair	value	of	financial	instruments	is	generally determined	by	reference	to	market	values	as	quoted	by	recognized	dealers	or	developed	based	upon	the	present	value	of	expected	future	cash	flows.

We	periodically	use	derivative	financial	instruments,	for	other	than	trading	purposes,	to	manage	risk	related	to	changes	in	fuel	prices	and	interest	rates.

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	issue	treasury	shares	to	cover	option exercises	and	stock	unit	vestings,	while	new	shares	are	issued	when	retention	shares	vest.

We	 adopted	 FASB	 Statement	 No.	 123(R),	Share-Based	 Payment	 (FAS	 123(R)),	 on	 January	 1,	 2006.	 FAS	 123(R)	 requires	 us	 to	 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	stock	price	on	the	date	of	grant,	while	the	fair	value	of	stock	options	is	determined	by	using	the	Black-Scholes	option	pricing	model.	We	elected	to	use	the modified	prospective	transition	method	as	permitted	by	FAS	123(R)	and	did	not	restate	financial	results	for	prior	periods.	We	did	not	make	an	adjustment	for	the cumulative	effect	of	these	estimated	forfeitures,	as	the	impact	was	not	material.

As	a	result	of	the	adoption	of	FAS	123(R),	we	recognized	expense	for	stock	options	in	2006,	in	addition	to	retention	awards,	which	were	expensed	prior	to	2006. Stock-based	compensation	expense	for	the	year	ended	December	31,	2006	was	$22	million,	after	tax,	or	$0.08	per	basic	and	diluted	share.	This	includes	$9	million	for stock	options	and	$13	million	for	retention	awards	for	2006.	Before	taxes,	stock-based	compensation	expense	included	$14	million	for	stock	options	and	$21	million	for retention	awards	for	2006.	We	recorded	$29	million	of	excess	tax	benefits	as	an	inflow	of	financing	activities	in	the	Consolidated	Statement	of	Cash	Flows	for	the	year ended	December	31,	2006.

Prior	to	the	adoption	of	FAS	123(R),	we	applied	the	recognition	and	measurement	principles	of	Accounting	Principles	Board	Opinion	No.	25,	Accounting	for Stock	Issued	to	Employees,	and	related	interpretations.	No	stock-based	employee	compensation	expense	related	to	stock	option	grants	was	reflected	in	net	income,	as	all options	granted	under	those	plans	had	a	grant	price	equal	to	the	market	value	of	our	common	stock	on	the	date	of	grant.	Stock-based	compensation	expense	related	to retention	shares,	stock	units,	and	other	incentive	plans	was	reflected	in	net	income.	The	following	table	details	the	effect	on	net	income	and	earnings	per	share	had compensation	expense	for	all	of	our	stock-based	awards,	including	stock	options,	been	recorded	in	the	years	ended	December	31,	2005	and	2004	based	on	the	fair	value method	under	FASB	Statement	No.	123,	Accounting	for	Stock-Based	Compensation.

| Pro	Forma	Stock-Based	Compensation	Expense | Year	Ended	December	31, | Year	Ended	December	31, |
| :--- | :--- | :--- |
| Millions\tof\tDollars,\tExcept\tPer\tShare\tAmounts | 2005 | 2004 |
| Net\tincome,\tas\treported | $1,026 | $604 |
| Stock-based\temployee\tcompensation\texpense,\treported\tin\tnet\tincome,\tnet\tof\ttax | 13 | 13 |
| Total\tstock-based\temployee\tcompensation\texpense\tdetermined\tunder\tfair\tvalue–based\tmethod\tfor\tall\tawards,\tnet\tof |  |  |
| tax\t[a] | (50) | (35) |
| Pro\tforma\tnet\tincome | $989 | $582 |
| Earnings\tper\tshare\t–\tbasic,\tas\treported | $3.89 | $2.33 |
| Earnings\tper\tshare\t–\tbasic,\tpro\tforma | $3.75 | $2.25 |
| Earnings\tper\tshare\t–\tdiluted,\tas\treported | $3.85 | $2.30 |
| Earnings\tper\tshare\t–\tdiluted,\tpro\tforma | $3.71 | $2.22 |

[a] Stock	options	for	executives	granted	in	2003	and	2002	included	a	reload	feature.	This	reload	feature	allowed	executives	to	exercise	their	options	using	shares	of	Union	Pacific	Corporation	common	stock	that	they already	owned	and	obtain	a	new	grant	of	options	in	the	amount	of	the	shares	used	for	exercise	plus	any	shares	withheld	for	tax	purposes.	The	reload	feature	of	these	option	grants	could	only	be	exercised	if	the

price	of	our	common	stock	increased	at	least	20%	from	the	price	at	the	time	of	the	reload	grant.	During	the	year	ended	December	31,	2005,	reload	option	grants	represented	$19	million	of	the	pro	forma	expense noted	above.	There	were	no	reload	options	exercised	during	2004	and	no	pro	forma	expense	for	reload	option	grants	in	2004.	There	were	no	reload	option	grants	during	2006	as	stock	options	exercised	after January	1,	2006	are	not	eligible	for	the	reload	feature.

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.

Use	 of	 Estimates	 –	Our	Consolidated	Financial	Statements	include	estimates	and	assumptions	regarding	certain	assets,	liabilities,	revenue,	and	expenses	and	the disclosure	of	certain	contingent	assets	and	liabilities.	Actual	future	results	may	differ	from	such	estimates.

Income	Taxes	–	As	required	under	FASB	Statement	No.	109,	Accounting	for	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	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	provisions	of	tax	law	as	currently	enacted;	the	effects	of	future	changes	in	tax	laws	are	not	anticipated. Future	tax	law	changes,	such	as	a	change	in	the	corporate	tax	rate,	could	have	a	material	impact	on	our	financial	condition	or	results	of	operations.

When	appropriate,	we	record	a	valuation	allowance	against	deferred	tax	assets	to	offset	future	tax	benefits	that	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	in	part	on management's	judgments	regarding	the	best	available	evidence	about	future	events.

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,	salary	increases,	employee	turnover	rates,	anticipated	mortality	rates,	and	expected	future	healthcare	costs.	The	assumptions	used	by	us	are based	on	our	historical	experience	as	well	as	current	facts	and	circumstances.	We	use	third-party	actuaries	to	assist	us	in	properly	measuring	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	third-party	actuaries	to	assist	us	in	properly	measuring	the	expense	and	liability.	Our	personal	injury	liability	is	discounted	to	present	value	using applicable	U.S.	Treasury	rates.	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	and	our	consultants	perform	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.

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	an external	consulting	firm	to	assist	us	in	properly	measuring	the	expense	and	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.

# 2.	Operations	and	Segmentation

UPRR	is	a	Class	I	railroad	that	operates	in	the	United	States.	We	have	32,339	route	miles,	linking	Pacific	Coast	and	Gulf	Coast	ports	with	the	Midwest	and eastern	United	States	gateways	and	providing	several	corridors	to	key	Mexican	gateways.	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.

# 3.	Financial	Instruments

Strategy	and	Risk	–	We	may	use	derivative	financial	instruments	in	limited	instances	for	other	than	trading	purposes	to	assist	in	managing	our	overall	exposure	to fluctuations	in	interest	rates	and	fuel	prices.	We	are	not	a	party	to	leveraged	derivatives	and,	by	policy,	do	not	use	derivative	financial	instruments	for	speculative purposes.	Derivative	financial	instruments	qualifying	for	hedge	accounting	must	maintain	a	specified	level	of	effectiveness	between	the	hedging	instrument	and	the	item being	hedged,	both	at	inception	and	throughout	the	hedged	period.	We	formally	document	the	nature	and	relationships	between	the	hedging	instruments	and	hedged items,	as	well	as	our	risk-management	objectives,	strategies	for	undertaking	the	various	hedge	transactions,	and	method	of	assessing	hedge	effectiveness.	Changes	in	the fair	market	value	of	derivative	financial	instruments	that	do	not	qualify	for	hedge	accounting	are	charged	to	earnings.	We	may	use	swaps,	collars,	futures,	and/or	forward contracts	to	mitigate	the	risk	of	adverse	movements	in	interest	rates	and	fuel	prices;	however,	the	use	of	these	derivative	financial	instruments	may	limit	future	benefits from	favorable	price	movements.

Swaps	allow	us	to	convert	debt	from	fixed	rates	to	variable	rates	and	thereby	hedge	the	risk	of	changes	in	the	debt's	fair	value	attributable	to	the	changes	in interest	rates.	We	account	for	swaps	as	fair	value	hedges	using	the	short-cut	method	pursuant	to	FASB	Statement	No.	133,	Accounting	for	Derivative	Instruments	and Hedging	Activities;	therefore,	we	do	not	record	any	ineffectiveness	within	our	Consolidated	Financial	Statements.	As	of	December	31,	2006	and	2005,	we	had	interest rate	swaps	hedging	debt	of	$500	million	and	$750	million,	respectively.

The	following	is	a	summary	of	our	interest	rate	derivatives	qualifying	as	fair	value	hedges:

Fuel	Cash	Flow	Hedges	–	Fuel	costs	are	a	significant	portion	of	our	total	operating	expenses.	In	2006	and	2005,	our	primary	means	of	mitigating	the	impact	of	adverse fuel	price	changes	were	our	fuel	surcharge	programs.	However,	we	may	use	swaps,	collars,	futures	and/or	forward	contracts	to	further	mitigate	the	impact	of	adverse	fuel price	changes.	We	did	not	have	any	fuel	hedges	in	place	during	2006	or	2005.	We	hedged	120	million	gallons	of	fuel	during	2004	using	collars	with	average	cap,	floor, and	ceiling	prices	of	$0.74,	$0.64,	and	$0.86	per	gallon,	respectively.

Fuel	Swaps	–	We	entered	into	two	fuel	basis	swaps	for	the	period	August	2006	through	July	2008,	which	cover	a	total	of	151	million	gallons	of	diesel	fuel.	These commodity	basis	swaps	require	us	to	make	payments	to,	or	receive	payments	from,	the	counterparty	based	on	the	difference	between	certain	price	indices.	Changes	in the	fair	value	of	these	swaps	are	reflected	in	fuel	expense.	We	reported	a	derivative	asset	of	approximately	$2	million	at	December	31,	2006,	which	represents	the	fair value	of	the	swaps.	The	swaps	reduced	fuel	expense	for	2006	by	$3	million,	which	included	monthly	net	settlements	with	the	counterparty	and	the	fair	value	recognition at	December	31,	2006.

Earnings	Impact	–	Our	use	of	derivative	financial	instruments	had	the	following	impact	on	pre-tax	income	for	the	years	ended	December	31:

| Millions	of	Dollars | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| (Increase)/decrease\tin\tinterest\texpense\tfrom\tinterest\trate\thedging | $(8) | $5 | $24 |
| Decrease\tin\tfuel\texpense\tfrom\tfuel\tderivatives | 3 | - | 14 |
| Increase/(decrease)\tin\tpre-tax\tincome | $(5) | $5 | $38 |

Fair	Value	of	Debt	Instruments	–	The	fair	value	of	our	short-	and	long-term	debt	was	estimated	using	quoted	market	prices,	where	available,	or	current	borrowing rates.	At	December	31,	2006	and	2005,	the	fair	value	of	total	debt	exceeded	the	carrying	value	by	approximately	$273	million	and	$460	million,	respectively.	At December	31,	2006	and	2005,	approximately	$165	million	and	$169	million,	respectively,	of	fixed-rate	debt	securities	contained	call	provisions	that	allowed	us	to	retire the	debt	instruments	prior	to	final	maturity,	with	the	payment	of	fixed	call	premiums,	or	in	certain	cases,	at	par.

Sale	of	Receivables	–	The	Railroad	transfers	most	of	its	accounts	receivable	to	Union	Pacific	Receivables,	Inc.	(UPRI),	a	bankruptcy-remote	subsidiary,	as	part	of	a	sale of	receivables	facility.	UPRI	sells,	without	recourse	on	a	364-day	revolving	basis,	an	undivided	interest	in	such	accounts	receivable	to	investors.	The	total	capacity	to	sell undivided	interests	to	investors	under	the	facility	was	$600	million	at	both	December	31,	2006	and	2005.	The	value	of	the	outstanding	undivided	interest	held	by investors	under	the	facility	was	$600	million	at	both

December	31,	2006	and	2005,	respectively.	The	value	of	the	outstanding	undivided	interest	held	by	investors	is	not	included	in	our	Consolidated	Financial	Statements. The	value	of	the	undivided	interest	held	by	investors	was	supported	by	$1,158	million	and	$1,226	million	of	accounts	receivable	held	by	UPRI	at	December	31,	2006 and	2005,	respectively.	At	December	31,	2006	and	2005,	the	value	of	the	interest	retained	by	UPRI	was	$558	million	and	$626	million,	respectively.	This	retained interest	is	included	in	accounts	receivable	in	our	Consolidated	Financial	Statements.	The	interest	sold	to	investors	is	sold	at	carrying	value,	which	approximates	fair value,	and	there	is	no	gain	or	loss	recognized	from	the	transaction.

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

| Millions	of	Dollars | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Current\tincome\ttax\texpense\t(benefit): |  |  |  |
| Federal | $630 | $57 | $(99) |
| State | 54 | 33 | (8) |
| Total\tcurrent\tincome\ttax\texpense\t(benefit) | \t 684 | 90 | (107) |
| Deferred\tincome\ttax\texpense\t(benefit): |  |  |  |
| Federal | \t 205 | \t 293 | 407 |
| State | 30 | 27 | (48) |
| Total\tdeferred\tincome\ttax\texpense | \t 235 | \t 320 | 359 |
| Total | $919 | $410 | $252 |

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

| Tax	Rate	Percentages | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Federal\tstatutory\ttax\trate | 35.0% | 35.0% | 35.0% |
| State\tstatutory\trates,\tnet\tof\tfederal\tbenefits | 2.9 | 2.9 | 2.9 |
| Deferred\ttax\tadjustments | (0.5) | (8.2) | (2.9) |
| Tax\tcredits | (1.0) | (1.2) | (5.6) |
| Other | - | 0.1 | - |
| Effective\ttax\trate | 36.4% | 28.6% | 29.4% |

| Millions	of	Dollars | 2006 | 2005 |
| :--- | :--- | :--- |
| Net\tcurrent\tdeferred\tincome\ttax\tasset | $(319) | $(304) |
| Property | \t 9,356 | \t 9,216 |
| State\ttaxes,\tnet | 617 | 592 |
| Other | (277) | (326) |
| Net\tlong-term\tdeferred\tincome\ttax\tliability | \t 9,696 | \t 9,482 |
| Net\tdeferred\tincome\ttax\tliability | $9,377 | $9,178 |

All	federal	income	tax	years	prior	to	1995	are	closed.	Federal	income	tax	liabilities	for	tax	years	1986	through	1994	have	been	resolved.	Interest	calculations	for these	years	are	in	process	and	may	take	several	years	to	resolve	with	the	Internal	Revenue	Service	(IRS).	The	IRS	is	examining	the	Corporation's	federal	income	tax returns	for	tax	years	2003	and	2004	and	should	complete	their	exam	in	2007.	The	IRS	has	completed	its	examinations	and	issued	notices	of	deficiency	for	tax	years	1995 through	2002,	and	we	are	in	the	IRS	Appeals	process	for	these	years.	As	previously	reported,	among	their	proposed	adjustments	is	the	disallowance	of	tax	deductions claimed	in	connection	with	certain	donations	of	property.	In	the	fourth	quarter	of	2005,	the	IRS	National	Office	issued	a	Technical	Advice	Memorandum	that	left unresolved	whether	the	deductions	were	proper,	pending	further	factual	development.	We	continue	to	dispute	the	donation	issue,	as	well	as	many	of	the	other	proposed adjustments,	and	will	contest	the	associated	tax	deficiencies	through	the	IRS	Appeals	process,	and,	if	necessary,	litigation.	We	do	not	expect	that	the	ultimate	resolution of	these	examinations	will	have	a	material	adverse	effect	on	our	Consolidated	Financial	Statements.

As	reported	in	the	Corporation's	Forms	10-Q	for	the	quarters	ended	June	30,	2005,	and	September	30,	2005,	the	final	settlements	for	pre-1995	tax	years,	along with	the	IRS	Examination	Reports	for	tax	years	1995	through	2002,	among	other	things,	were	considered	in	a	review	and	re-evaluation	of	the	Corporation's	estimated deferred	tax	assets	and	liabilities.	This	review	resulted	in	a	reduction	of	deferred	income	tax	liabilities	and	income	tax	expense	of	$118	million	in	the	third	quarter	of 2005.

Total	debt	as	of	December	31,	2006	and	2005,	including	interest	rate	swaps	designated	as	hedges,	is	summarized	below:

| Millions	of	Dollars | 2006 | 2005 |
| :--- | :--- | :--- |
| Notes\tand\tdebentures,\t3.0%\tto\t7.4%\tdue\tthrough\t2054\t[a] | $4,803 | $5,303 |
| Capitalized\tleases,\t4.7%\tto\t9.3%\tdue\tthrough\t2026 | \t 1,236 | \t 1,318 |
| Medium-term\tnotes,\t6.8%\tto\t10.0%\tdue\tthrough\t2020 | 362 | 372 |
| Equipment\tobligations,\t6.6%\tto\t10.2%\tdue\tthrough\t2019 | 232 | 270 |
| Mortgage\tbonds,\t4.8%\tdue\tthrough\t2030 | 59 | 60 |
| Tax-exempt\tfinancings,\t4.4%\tto\t5.7%\tdue\tthrough\t2026 | 191 | 197 |
| Unamortized\tdiscount | (103) | (104) |
| Total\tdebt\t[a] | \t 6,780 | \t 7,416 |
| Less\tcurrent\tportion\t[b] | (780) | (656) |
| Total\tlong-term\tdebt | $6,000 | $6,760 |
| [a]\n2006\tand\t2005\tinclude\ta\tcollective\twrite-down\tof\t$14\tmillion\tand\t$16\tmillion,\trespectively,\tdue\tto\tmarket\tvalue\tadjustments\tfor\tdebt\twith\tqualifying\thedges\tthat\tare\trecorded\ton\tthe\tConsolidated\tStatements\tof |  |  |

[a] 2006	and	2005	include	a	collective	write-down	of	$14	million	and	$16	million,	respectively,	due	to	market	value	adjustments	for	debt	with	qualifying	hedges	that	are	recorded	on	the	Consolidated	Statements	of Financial	Position.

[b] 2006	includes	a	write-down	of	$4	million	due	to	short-term	market	value	adjustments	for	debt	with	qualifying	hedges	that	are	recorded	on	the	Consolidated	Statements	of	Financial	Position.

Debt	Maturities	–	The	following	table	presents	aggregate	debt	maturities	as	of	December	31,	2006,	excluding	market	value	adjustments.

| Millions	of	Dollars |  |
| :--- | :--- |
| 2007 | $784 |
| 2008 | 683 |
| 2009 | 532 |
| 2010 | 453 |
| 2011 | 542 |
| Thereafter | \t 3,800 |
| Total\tdebt | $6,794 |

Mortgaged	Properties	–	Equipment	with	a	carrying	value	of	approximately	$2.8	billion	and	$3.0	billion	at	December	31,	2006	and	2005,	respectively,	serves	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	–	On	December	31,	2006,	we	had	$2	billion	in	revolving	credit	facilities	available,	including	$1	billion	under	a	five-year	facility	expiring	in	March 2009	and	$1	billion	under	a	five-year	facility	expiring	in	March	2010	(collectively,	the	"facilities").	The	facilities	are	designated	for	general	corporate	purposes	and support	the	issuance	of	commercial	paper.	Neither	of	the	facilities	were	drawn	on	in	2006.	Commitment	fees	and	interest	rates	payable	under	the	facilities	are	similar	to fees	and	rates	available	to	comparably	rated	investment-grade	borrowers.	These	facilities	allow	for	borrowings	at	floating	rates	based	on	London	Interbank	Offered Rates,	plus	a	spread,

depending	 upon	 our	 senior	 unsecured	 debt	 ratings.	The	 facilities	 require	 the	 maintenance	 of	 a	 minimum	 net	 worth	 and	 a	 debt	 to	 net	 worth	 coverage	 ratio.	At December	31,	2006,	we	were	in	compliance	with	these	covenants.	The	facilities	do	not	include	any	other	financial	restrictions,	credit	rating	triggers	(other	than	rating- dependent	pricing),	or	any	other	provision	that	could	require	the	posting	of	collateral.

Dividend	Restrictions	–	We	are	subject	to	certain	restrictions	related	to	the	payment	of	cash	dividends	to	our	shareholders	due	to	minimum	net	worth	requirements under	the	credit	facilities	referred	to	above.	The	amount	of	retained	earnings	available	for	dividends	was	$7.8	billion	and	$6.2	billion	at	December	31,	2006	and	2005, respectively.	We	do	not	expect	that	these	restrictions	will	have	a	material	adverse	effect	on	our	consolidated	financial	condition,	results	of	operations,	or	liquidity.	We declared	dividends	of	$323	million	in	2006	and	$316	million	in	2005.

# 6.	Leases

We	lease	certain	locomotives,	freight	cars,	and	other	property.	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,	2006	were	as	follows:

|  | Operating | Capital |
| :--- | :--- | :--- |
| Millions\tof\tDollars | Leases | Leases |
| 2007 | $624 | $180 |
| 2008 | 546 | 173 |
| 2009 | 498 | 168 |
| 2010 | 456 | 148 |
| 2011 | 419 | 157 |
| Later\tYears | 2,914 | 1,090 |
| Total\tminimum\tlease\tpayments | $5,457 | $ 1,916 |
| Amount\trepresenting\tinterest | N/A | (680) |
| Present\tvalue\tof\tminimum\tlease\tpayments | N/A | $ 1,236 |

Rent	expense	for	operating	leases	with	terms	exceeding	one	month	was	$798	million	in	2006,	$728	million	in	2005,	and	$651	million	in	2004.	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.

# 7.	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	defined	contribution	medical	and	life	insurance	benefits	for	eligible	retirees.	These	benefits	are	funded	as	medical claims	and	life	insurance	premiums	are	paid.

# New	Accounting	Standard

We	adopted	FASB	Statement	No.	158,	Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans	(FAS	158),	at	the	end	of	2006,	which required	us	to	separately	recognize	the	overfunded	or	underfunded	status	of	our	pension	and	OPEB	plans	as	an	asset	or	liability.	The	funded	status	is	measured	as	the difference	between	the	fair	value	of	plan	assets	and	our	projected	benefit	obligations	to	current	and	retired	employees.

The	adoption	of	FAS	158	at	December	31,	2006	decreased	other	assets	and	total	assets	by	$207	million,	decreased	retiree	benefits	obligation	by	$34	million, decreased	deferred	income	tax	liabilities	by	$94	million,	decreased	total	liabilities	by	$128	million,	and	resulted	in	an	accumulated	other	comprehensive	loss	and reduction	in	total	common	shareholders'	equity	of	$79	million.	These	changes	to	our	financial	statements	were	non-cash	and	will	have	no	impact	on	existing	debt covenants,	credit	ratings,	or	financial	flexibility.

The	adoption	of	FAS	158	had	no	impact	on	years	prior	to	2006,	as	retrospective	application	was	not	allowed.	This	new	standard	does	not	change	how	pension	or OPEB	expense	is	computed,	nor	does	it	have	any	impact	on	cash	funding	requirements.	The	impact	of	the	adoption	of	FAS	158	noted	above	does	not	include	our	equity method	investees,	which	are	not	required	to	adopt	FAS	158	until	2007	because	they	do	not	have	publicly	traded	securities.	The	impact	of	this	adoption	in	2007	by	our equity	method	investees	is	not	expected	to	be	significant.

# Funded	Status

The	funded	status	represents	the	difference	between	the	projected	benefit	obligation	(PBO)	and	the	fair	value	of	the	plan	assets.	The	PBO	is	the	present	value	of	benefits earned	to	date	by	plan	participants,	including	the	effect	of	assumed	future	salary	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	salary	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	are	as	follows	for	the	years	ended	December	31:

|  | Pension |  | OPEB |  |
| :--- | :--- | :--- | :--- | :--- |
| Millions\tof\tDollars | 2006 | 2005 | 2006 | 2005 |
| Projected\tBenefit\tObligation |  |  |  |  |
| Projected\tbenefit\tobligation\tat\tbeginning\tof\tyear | $2,065 | $2,058 | $476 | $453 |
| Service\tcost | 35 | 28 | 4 | 4 |
| Interest\tcost | 117 | 115 | 21 | 25 |
| Plan\tamendments | - | - | (38) | (42) |
| Actuarial\tloss\t(gain) | 16 | (18) | (58) | 70 |
| Gross\tbenefits\tpaid | (120) | (118) | (31) | (34) |
| Projected\tbenefit\tobligation\tat\tend\tof\tyear | $2,113 | $2,065 | $374 | $476 |
| Plan\tAssets |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tat\tbeginning\tof\tyear | $1,707 | $1,693 | $- | $- |
| Actual\treturn\ton\tplan\tassets | 243 | 123 | - | - |
| Voluntary\tfunded\tpension\tplan\tcontributions | 150 | - | - | - |
| Non-qualified\tplan\tbenefit\tpayments | 9 | 9 | 31 | 34 |
| Gross\tbenefits\tpaid | (120) | (118) | (31) | (34) |
| Fair\tvalue\tof\tplan\tassets\tat\tend\tof\tyear | $1,989 | $1,707 | $- | $- |
| Funded\tstatus\tat\tend\tof\tyear | $(124) | $(358) | $(374) | $(476) |
| Unrecognized\tnet\tactuarial\tlosses | N/A | 362 | \t N/A | 194 |
| Unrecognized\tprior\tservice\tcost\t(credit) | N/A | 31 | \t N/A | (156) |
| Net\tamounts\trecognized\tat\tend\tof\tyear | $(124) | $35 | $(374) | $(438) |

| Amounts	Recognized	at	December	31,	2006 | Pension |  |  | OPEB |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Millions\tof\tDollars | 2006 | 2005 | 2006 |  | 2005 |
| Other\tassets | $45 | \t N/A | $- |  | \t N/A |
| Other\tcurrent\tliabilities | (12) | \t N/A | (27) |  | \t N/A |
| Retiree\tbenefits\tobligation | (157) | \t N/A | (347) |  | \t N/A |
| Net\tamounts\trecognized\tat\tend\tof\tyear | $(124) | \t N/A | $(374) |  | \t N/A |
| Amounts\tRecognized\tat\tDecember\t31,\t2005 |  |  |  |  |  |
| Prepaid\tbenefit\tcost | \t N/A | $122 | \t N/A |  | $- |
| Accrued\tbenefit\tcost | \t N/A | (86) | \t N/A |  | (438) |
| Additional\tminimum\tliability | \t N/A | (369) | \t N/A |  | - |
| Intangible\tassets | \t N/A | 31 | \t N/A |  | - |
| Accumulated\tother\tcomprehensive\tincome | \t N/A | 337 | \t N/A |  | - |
| Net\tamounts\trecognized\tat\tend\tof\tyear | \t N/A | $35 | \t N/A |  | $(438) |

After-tax	amounts	recognized	in	accumulated	other	comprehensive	income	(loss)	as	of	December	31,	2006	consist	of:

| Millions	of	Dollars | Pension | OPEB | Total |
| :--- | :--- | :--- | :--- |
| Prior\tservice\t(cost)\tcredit | $(15) | $99 | $84 |
| Net\tactuarial\t(loss) | (154) | (50) | (204) |
| Total | $(169) | $49 | $(120) |

Underfunded	Accumulated	Benefit	Obligation	–	The	accumulated	benefit	obligation	(ABO)	is	the	present	value	of	benefits	earned	to	date,	assuming	no	future	salary growth.	The	underfunded	accumulated	benefit	obligation	represents	the	difference	between	the	ABO	and	the	fair	value	of	plan	assets.	At	December	31,	2006,	the	only pension	plan	that	was	underfunded	was	our	non-qualified	(supplemental)	plan,	which	is	not	funded	by	design.	The	non-qualified	(supplemental)	plan	is	funded	with	cash from	operations	as	benefits	are	paid	to	plan	participants.	Each	of	our	qualified	plans	was	fully	funded	at	December	31,	2006.	The	PBO,	ABO,	and	fair	value	of	plan assets	for	pension	plans	with	accumulated	benefit	obligations	in	excess	of	the	fair	value	of	the	plan	assets	were	as	follows	for	the	years	ended	December	31:

| Millions	of	Dollars | 2006 | 2005 |
| :--- | :--- | :--- |
| Projected\tbenefit\tobligation | $(169) | $(2,044) |
| Accumulated\tbenefit\tobligation | $(168) | $(2,026) |
| Fair\tvalue\tof\tplan\tassets | - | 1,685 |
| Underfunded\taccumulated\tbenefit\tobligation | $(168) | $(341) |

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

# 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	and,	if	necessary,	amortized	as	pension	or	OPEB	expense.

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

|  |  | Pension |  |  | OPEB |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Millions\tof\tDollars | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 |
| Net\tPeriodic\tBenefit\tCost: |  |  |  |  |  |  |
| Service\tcost | $35 | $28 | $30 | $4 | $4 | $5 |
| Interest\tcost | 117 | 115 | 120 | 21 | 25 | 31 |
| Expected\treturn\ton\tplan\tassets | (134) | (134) | (137) | - | - | - |
| Amortization\tof: |  |  |  |  |  |  |
| Transition\tobligation | - | - | (2) | - | - | - |
| Prior\tservice\tcost\t(credit) | 7 | 7 | 8 | (33) | (30) | (24) |
| Actuarial\tloss | 21 | 5 | 3 | 13 | 14 | 18 |
| Net\tperiodic\tbenefit\tcost | $46 | $21 | $22 | $5 | $13 | $30 |

The	estimated	actuarial	loss	and	prior	service	cost	for	the	pension	plans	that	will	be	amortized,	on	a	pre-tax	basis,	from	accumulated	other	comprehensive	loss	into net	periodic	benefit	cost	during	2007	will	be	$17	million	and	$6	million,	respectively.	The	estimated	actuarial	loss	and	prior	service	credit	for	the	OPEB	plans	that	will be	amortized,	on	a	pre-tax	basis,	from	accumulated	other	comprehensive	loss	into	net	periodic	benefit	cost	during	2007	will	be	$10	million	and	$32	million,	respectively.

Assumptions	–	The	weighted-average	actuarial	assumptions	used	to	determine	expense	were	as	follows	for	the	years	ended	December	31:

|  |  | Pension |  |  | OPEB |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Percentages | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 |
| Discount\trate | 5.75% | 6.00% | 6.50% | 5.75% | 6.00% | 6.50% |
| Expected\treturn\ton\tplan\tassets | 8.00 | 8.00 | 8.00 | N/A | N/A | N/A |
| Salary\tincrease | 2.75 | 3.00 | 3.50 | N/A | N/A | N/A |

The	discount	rate	is	based	on	a	hypothetical	portfolio	of	high	quality	corporate	bonds	with	cash	flows	matching	our	plans'	expected	benefit	payments.	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	on	pension	plan	assets,	net	of	fees,	was	approximately	14%	in	2006,	7%	in	2005,	and	12%	in	2004.	Our	historical	annualized	ten-year	rate	of	return	on	plan	assets is	approximately	9%.

Assumed	healthcare	cost	trend	rates	have	a	significant	effect	on	the	expense	and	liabilities	reported	for	healthcare	plans.	The	assumed	healthcare	cost	trend	rate	is based	on	historical	rates	and	expected	market	conditions.	A	one-percentage	point	change	in	the	assumed	healthcare	cost	trend	rates	would	have	the	following	effects	on OPEB:

|  | One	%	pt. | One	%	pt. |
| :--- | :--- | :--- |
| Millions\tof\tDollars | Increase | Decrease |
| Effect\ton\ttotal\tservice\tand\tinterest\tcost\tcomponents | $3 | $(2) |
| Effect\ton\taccumulated\tbenefit\tobligation | 31 | (26) |

# Cash	Contributions

The	following	table	details	our	cash	contributions	for	the	years	ended	December	31,	2006	and	2005,	and	the	expected	contributions	for	2007:

| Millions	of	Dollars | Qualified | qualified | OPEB |
| :--- | :--- | :--- | :--- |
| 2005 | $- | $9 | $34 |
| 2006 | 150 | 9 | 31 |
| 2007 | - | 12 | 27 |

In	2006,	the	Pension	Protection	Act	of	2006	(the	Act)	was	signed	into	law.	The	Act	changes	the	method	of	valuing	assets	and	liabilities	for	funding	purposes,	as well	as	the	timing	of	required	contributions.	Our	pension	plans	continue	to	meet	all	funding	requirements	and	we	do	not	expect	the	Act	to	significantly	impact	our	results of	operations,	financial	condition,	or	liquidity.

Our	policy	with	respect	to	funding	the	qualified	plans	is	to	fund	at	least	the	minimum	required	by	the	Act	and	not	more	than	the	maximum	amount	deductible	for tax	purposes.	All	contributions	made	to	the	qualified	pension	plans	in	2006	were	voluntary	and	were	made	with	cash	generated	from	operations.	In	2006,	we	voluntarily contributed	$50	million	in	January	and	$100	million	in	December	to	the	qualified	pension	plan.	At	December	31,	2006,	our	qualified	pension	plans	were	fully	funded. No	required	contributions	are	expected	in	2007.

The	OPEB	plans	are	not	funded	and	are	not	subject	to	any	minimum	regulatory	funding	requirements.	Benefit	payments	for	each	year	represent	claims	paid	for medical	and	life	insurance,	and	we	anticipate	our	2007	OPEB	payments	will	be	made	from	cash	generated	from	operations.

# Benefit	Payments

The	following	table	details	expected	benefit	payments	for	the	years	2007	though	2016:

| Millions	of	Dollars | Pension | OPEB |
| :--- | :--- | :--- |
| 2007 | $124 | $27 |
| 2008 | 126 | 28 |
| 2009 | 129 | 29 |
| 2010 | 133 | 30 |
| 2011 | 139 | 31 |
| Years\t2012\t–\t2016 | 776 | 152 |

# Asset	Allocation	Strategy

Our	pension	plan	asset	allocation	at	December	31,	2006	and	2005,	and	target	allocation	for	2007,	are	as	follows:

|  |  |  | Percentage	of |
| :--- | :--- | :--- | :--- |
|  | Target |  | Plan\tAssets |
|  | Allocation |  | December\t31, |
|  | 2007 | 2006 | 2005 |
| Equity\tsecurities | 60%\tto\t70% | 70% | 75% |
| Debt\tsecurities | 20%\tto\t30% | 26 | 24 |
| Real\testate | 4%\tto\t6% | 2 | 1 |
| Commodities | 4%\tto\t6% | 2 | - |
| Total |  | 100% | 100% |

The	investment	strategy	for	pension	plan	assets	is	to	maintain	a	broadly	diversified	portfolio	designed	to	achieve	our	target	of	an	average	long-term	rate	of	return of	8%.	While	we	believe	we	can	achieve	a	long-term	average	rate	of	return	of	8%,	we	cannot	be	certain	that	the	portfolio	will	perform	to	our	expectations.	Assets	are strategically	allocated	among	equity,	debt,	and	other	instruments	in	order	to	achieve	a	diversification	level	that	mitigates	wide	swings	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	external	consulting	firm. Actual	asset	allocations	are	monitored	monthly,	and	rebalancing	actions	are	executed	at	least	quarterly,	if	needed.

The	majority	of	the	plan's	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.	The risk	of	loss	in	the	plan's	equity	portfolio	is	mitigated	by	investing	in	a	broad	range	of	equity	types.	Equity	diversification	includes	large-capitalization	and	small- capitalization	companies,	growth-oriented	and	value-oriented	investments,	and	U.S.	and	non-U.S.	securities.

Equity	risks	are	further	balanced	by	investing	a	significant	portion	of	the	plan's	assets	in	high	quality	debt	securities.	The	average	quality	rating	of	the	debt portfolio	exceeded	AA	as	of	December	31,	2006	and	2005.	The	debt	portfolio	is	also	broadly	diversified	and	invested	primarily	in	U.S.	Treasury,	mortgage,	and corporate	securities	with	an	intermediate	average	maturity.	The	weighted-average	maturity	of	the	debt	portfolio	was	6.4	years	and	6.5	years	at	December	31,	2006	and 2005,	respectively.

The	investment	of	pension	plan	assets	in	our	securities	is	specifically	prohibited	for	both	the	equity	and	debt	portfolios,	other	than	through	index	fund	holdings.

# Other	Retirement	Programs

Thrift	Plan	–	We	provide	a	defined	contribution	plan	(thrift	plan)	to	eligible	non-union	employees	and	make	matching	contributions	to	the	thrift	plan.	We	match	50	cents for	each	dollar	contributed	by	employees	up	to	the	first	six	percent	of	compensation	contributed.	Our	thrift	plan	contributions	were	$13	million	in	2006,	and	$12	million in	both	2005	and	2004.

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	$615	million	in	2006,	$595	million	in	2005,	and	$569	million	in	2004.

Collective	Bargaining	Agreements	–	Under	collective	bargaining	agreements,	we	provide	certain	postretirement	healthcare	and	life	insurance	benefits	for	eligible	union employees.	Premiums	under	the	plans	are	expensed	as	incurred	and	amounted	to	$40	million	in	2006,	$41	million	in	2005,	and	$30	million	in	2004.

# 8.	Stock	Options	and	Other	Stock	Plans

We	have	1,254,304	options	outstanding	under	the	1993	Stock	Option	and	Retention	Stock	Plan	of	Union	Pacific	Corporation	(1993	Plan).	There	are	3,570	restricted shares	outstanding	under	the	1992	Restricted	Stock	Plan	for	Non-Employee	Directors	of	Union	Pacific	Corporation.	We	no	longer	grant	options	or	awards	of	retention shares	and	units	under	these	plans.

The	UP	Shares	Stock	Option	Plan	of	Union	Pacific	Corporation	(UP	Shares	Plan)	was	approved	by	our	Board	of	Directors	on	April	30,	1998.	The	UP	Shares	Plan reserved	12,000,000	shares	of	our	common	stock	for	issuance.	The	UP	Shares	Plan	was	a	broad-based	option	program	that	granted	options	to	purchase	200	shares	of	our common	stock	at	$55.00	per	share	to	eligible	active	employees	on	April	30,	1998.	All	options	granted	were

non-qualified	options	that	became	exercisable	on	May	1,	2001,	and	remain	exercisable	until	April	30,	2008.	If	an	optionee's	employment	terminates	for	any	reason,	the option	remains	exercisable	for	a	period	of	one	year	after	the	date	of	termination,	but	no	option	is	exercisable	after	April	30,	2008.	No	further	options	may	be	granted under	the	UP	Shares	Plan.	As	of	December	31,	2006,	there	were	1,119,910	options	outstanding	under	the	UP	Shares	Plan.

In	April	2000,	the	shareholders	approved	the	Union	Pacific	Corporation	2000	Directors	Plan	(Directors	Plan)	whereby	550,000	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	1,000	shares	of	retention	shares	or	retention	stock	units.	Additionally,	each	non-employee	director	receives	annually	an	option	to	purchase	at	fair value	a	number	of	shares	of	our	common	stock,	not	to	exceed	5,000	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.	As	of December	31,	2006,	7,000	restricted	shares	were	outstanding	under	the	Directors	Plan	and	159,450	options	were	outstanding	under	the	Directors	Plan.

The	Union	Pacific	Corporation	2001	Stock	Incentive	Plan	(2001	Plan)	was	approved	by	the	shareholders	in	April	2001.	The	2001	Plan	reserved	12,000,000	shares of	our	common	stock	for	issuance	to	eligible	employees	of	the	Corporation	and	its	subsidiaries	in	the	form	of	non-qualified	options,	incentive	stock	options,	retention shares,	stock	units,	and	incentive	bonus	awards.	Non-employee	directors	were	not	eligible	for	awards	under	the	2001	Plan.	As	of	December	31,	2006,	4,224,402	options and	339,537	retention	shares	and	stock	units	were	outstanding	under	the	2001	Plan.	We	no	longer	grant	any	stock	options	or	other	stock	or	unit	awards	under	this	plan.

The	Union	Pacific	Corporation	2004	Stock	Incentive	Plan	(2004	Plan)	was	approved	by	shareholders	in	April	2004.	The	2004	Plan	reserved	21,000,000	shares	of our	common	stock	for	issuance,	plus	any	shares	subject	to	awards	made	under	the	2001	Plan	and	the	1993	Plan	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,	2006,	3,286,461	options	and	561,875	retention	shares	and	stock	units	were	outstanding	under	the	2004	Plan.

Stock	Options	–	We	estimate	the	fair	value	of	our	stock	option	awards	using	the	Black-Scholes	option	pricing	model.	Groups	of	employees	and	non-employee	directors that	have	similar	historical	and	expected	exercise	behavior	are	considered	separately	for	valuation	purposes.	The	table	below	shows	the	year-to-date	weighted-average	of the	assumptions	used	when	valuing	these	separate	groups:

| Weighted-Average	Assumptions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Risk-free\tinterest\trate | 4.5% | 3.8% | 3.3% |
| Dividend\tyield | 1.4% | 1.9% | 1.7% |
| Expected\tlife\t(years) | 6.0 | 4.8 | 5.6 |
| Volatility | 25.3% | 20.6% | 25.9% |
| Weighted-average\tgrant-date\tfair\tvalue\tof\toptions\tgranted | $24.97 | $12.92 | $16.38 |

The	risk-free	rate	is	based	on	the	U.S.	Treasury	yield	curve	in	effect	at	the	time	of	grant;	the	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	volatility	is	based	on	the	historical	volatility	of	our	stock	price,	over	a	time	period	that	is consistent	with	the	expected	life	of	the	option.

A	summary	of	stock	option	activity	during	2006	is	presented	below:

|  |  | Weighted- | Average | Aggregate |
| :--- | :--- | :--- | :--- | :--- |
|  |  | Average | Remaining | Intrinsic\tValue |
|  | Shares | Exercise\tPrice | Contractual\tTerm | (millions) |
| Outstanding\tat\tJanuary\t1,\t2006 | 12,436,209 | $59.41 | N/A | N/A |
| Granted | 1,402,200 | 86.04 | N/A | N/A |
| Exercised | (3,740,732) | 56.39 | N/A | N/A |
| Forfeited\tor\texpired | (53,150) | 65.64 | N/A | N/A |
| Outstanding\tat\tDecember\t31,\t2006 | 10,044,527 | $64.22 | 6.0\tyrs. | $279 |
| Vested\tor\texpected\tto\tvest |  |  |  |  |
| at\tDecember\t31,\t2006 | 10,001,242 | $64.13 | 6.0\tyrs. | $279 |
| Options\texercisable\tat\tDecember\t31,\t2006 | 8,601,677 | $60.75 | 5.5\tyrs. | $269 |

Stock	options	are	granted	at	market	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,	2006	are	subject	to	performance	or	market-based	vesting	conditions.

At	December	31,	2006,	there	was	$22	million	of	unrecognized	compensation	expense	related	to	nonvested	stock	options,	which	is	expected	to	be	recognized	over a	weighted-average	period	of	1.8	years.	Additional	information	regarding	stock	option	exercises	appears	in	the	table	below:

| Millions	of	Dollars | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Aggregate\tgrant-date\tfair\tvalue\tof\tstock\toptions\tvested\t[a] | $26 | $62 | $36 |
| Intrinsic\tvalue\tof\tstock\toptions\texercised | \t 124 | \t 142 | 51 |
| Cash\treceived\tfrom\toption\texercises | \t 177 | \t 296 | \t 102 |
| Tax\tbenefit\trealized\tfrom\toption\texercises | 44 | 55 | 17 |

[a] Stock	options	for	executives	granted	in	2003	and	2002	included	a	reload	feature.	This	reload	feature	allowed	executives	to	exercise	their	options	using	shares	of	Union	Pacific	Corporation	common	stock	that	they already	owned	and	obtain	a	new	grant	of	options	with	immediate	vesting	in	the	amount	of	the	shares	used	for	exercise	plus	any	shares	withheld	for	tax	purposes.	The	reload	feature	of	these	option	grants	could only	be	exercised	if	the	price	of	our	common	stock	increased	at	least	20%	from	the	price	at	the	time	of	the	reload	grant.	During	the	year	ended	December	31,	2005,	reload	option	grants	represented	$31	million	of the	aggregate	grant-date	fair	value	of	stock	options	vested.	There	were	no	reload	options	exercised	during	2004.	There	were	no	reload	option	grants	during	2006	as	stock	options	exercised	after	January	1,	2006 are	not	eligible	for	the	reload	feature.

Retention	Awards	–	The	fair	value	of	retention	awards	is	based	on	the	market	price	of	the	stock	at	the	grant	date.

Changes	in	our	retention	awards	during	2006	were	as	follows:

|  |  | Weighted- |
| :--- | :--- | :--- |
|  |  | Average |
|  |  | Grant- |
|  | Shares | Date\tFair\tValue |
| Nonvested\tat\tJanuary\t1,\t2006 | 1,005,276 | $58.88 |
| Granted | 328,150 | 86.04 |
| Vested | (539,453) | 56.53 |
| Forfeited | (16,199) | 71.21 |
| Nonvested\tat\tDecember\t31,\t2006 | 777,774 | $71.72 |

Retention	awards,	which	we	grant	at	no	cost	to	the	employee	or	non-employee	director,	vest	over	periods	lasting	up	to	four	years.	At	December	31,	2006,	there was	$26	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	January	2006,	our	Board	of	Directors	approved	a	new	long-term	plan	(LTP).	Under	the	LTP,	selected	employees	were	awarded stock	units	subject	to	continued	employment	through	January	2009	and	the	attainment	of	certain	levels	of	return	on	invested	capital	(ROIC)	as	defined	in	the	LTP.	We will	expense	the	fair	value	(grant-date	stock	price)	of	the	units	that	are	probable	of	being	earned	based	on	our	forecasted	ROIC	over	the	3-year	performance	period.

Changes	in	our	performance	retention	awards	during	2006	were	as	follows:

|  | Shares | Date	Fair	Value |
| :--- | :--- | :--- |
| Nonvested\tat\tJanuary\t1,\t2006 |  | -\t $- |
| Granted | 122,400 | 86.05 |
| Vested | - | - |
| Forfeited | - | - |
| Nonvested\tat\tDecember\t31,\t2006 | 122,400 | $86.05 |

At	December	31,	2006,	there	was	$7	million	of	total	unrecognized	compensation	expense	related	to	nonvested	performance	retention	awards,	which	is	expected	to be	recognized	over	a	weighted-average	period	of	2	years.	A	portion	of	this	expense	is	subject	to	achievement	of	the	performance	criteria	under	the	LTP.

# 9.	Earnings	Per	Share

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

| Millions	of	Dollars,	Except	Per	Share	Amounts | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Net\tincome | $1,606 | $1,026 | $604 |
| Weighted-average\tnumber\tof\tshares\toutstanding: |  |  |  |
| Basic | \t 269.4 | \t 263.4 | \t 259.1 |
| Dilutive\teffect\tof\tstock\toptions | 2.1 | 1.5 | 1.2 |
| Dilutive\teffect\tof\tretention\tshares\tand\tunits | 0.5 | 1.6 | 1.9 |
| Diluted | \t 272.0 | \t 266.5 | \t 262.2 |
| Earnings\tper\tshare\t–\tbasic | $5.96 | $3.89 | $2.33 |
| Earnings\tper\tshare\t–\tdiluted | $5.91 | $3.85 | $2.30 |

Common	stock	options	totaling	1.4	million,	1.4	million,	and	3.3	million	for	2006,	2005,	and	2004,	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.	Commitments	and	Contingencies

Asserted	and	Unasserted	Claims	–	Various	claims	and	lawsuits	are	pending	against	us	and	certain	of	our	subsidiaries.	It	is	not	possible	at	this	time	for	us	to	determine fully	the	effect	of	all	unasserted	claims	on	our

consolidated	results	of	operations,	financial	condition,	or	liquidity;	however,	to	the	extent	possible,	where	unasserted	claims	are	considered	probable	and	where	such claims	can	be	reasonably	estimated,	we	have	recorded	a	liability.	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 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	third-party	actuaries	to	assist	us	in	measuring	the	expense	and	liability,	including	unasserted	claims.	Compensation	for	work- related	accidents	is	governed	by	the	Federal	Employers'	Liability	Act	(FELA).	Under	FELA,	damages	are	assessed	based	on	a	finding	of	fault	through	litigation	or	out- of-court	settlements.

Our	personal	injury	liability	activity	was	as	follows:

| Millions	of	Dollars | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Beginning\tbalance | $619 | $639 | $619 |
| Accruals | 240 | 247 | 288 |
| Payments | (228) | (267) | (268) |
| Ending\tbalance\tat\tDecember\t31 | $631 | $619 | $639 |
| Current\tportion,\tending\tbalance\tat\tDecember\t31 | $233 | $274 | $274 |

Our	personal	injury	liability	is	discounted	to	present	value	using	applicable	U.S.	Treasury	rates.	Approximately	87%	of	the	recorded	liability	related	to	asserted claims,	and	approximately	13%	related	to	unasserted	claims.	Personal	injury	accruals	were	higher	in	2004	due	to	a	1998	crossing	accident	verdict	upheld	in	2004	and	a 2004	derailment	near	San	Antonio.

Asbestos	–	We	are	a	defendant	in	a	number	of	lawsuits	in	which	current	and	former	employees	allege	exposure	to	asbestos.	Additionally,	we	have	received	claims	for asbestos	exposure	that	have	not	been	litigated.	The	claims	and	lawsuits	(collectively	referred	to	as	"claims")	allege	occupational	illness	resulting	from	exposure	to asbestos-containing	 products.	 In	 most	 cases,	 the	 claimants	 do	 not	 have	 credible	 medical	 evidence	 of	 physical	 impairment	 resulting	 from	 the	 alleged	 exposures. Additionally,	most	claims	filed	against	us	do	not	specify	an	amount	of	alleged	damages.

During	2004,	we	engaged	a	third	party	with	extensive	experience	in	estimating	resolution	costs	for	asbestos-related	claims	to	assist	us	in	assessing	the	number	and value	of	these	unasserted	claims	through	2034,	based	on	our	average	claims	experience	over	a	multi-year	period.	As	a	result,	we	increased	our	liability	in	2004	for asbestos-related	claims	in	the	fourth	quarter	of	2004.	The	liability	for	resolving	both	asserted	and	unasserted	claims	was	based	on	the	following	assumptions:

Our	asbestos-related	liability	activity	was	as	follows:

| Millions	of	Dollars | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Beginning\tbalance | $311 | $324 | $51 |
| Accruals | - | - | \t 287 |
| Payments | (9) | (13) | (14) |
| Ending\tbalance\tat\tDecember\t31 | $302 | $311 | $324 |
| Current\tportion,\tending\tbalance\tat\tDecember\t31 | $13 | $16 | $17 |

Our	liability	for	asbestos-related	claims	is	not	discounted	to	present	value	due	to	the	uncertainty	surrounding	the	timing	of	future	payments.	Approximately	16% of	the	recorded	liability	related	to	asserted	claims,	and	approximately	84%	related	to	unasserted	claims.	These	claims	are	expected	to	be	paid	out	over	the	next	28	years. During	2006	and	2005,	our	third-party	consultants	assisted	us	in	reviewing	our	actual	asbestos	claim	experience	compared	to	the	assumptions	used	in	the	2004	estimate, and	we	determined	that	no	adjustment	to	our	estimate	was	necessary.	We	will	continue	to	review	actual	experience	and	adjust	our	estimate	as	warranted.

We	have	insurance	coverage	for	a	portion	of	the	costs	incurred	to	resolve	asbestos-related	claims,	and,	as	a	result	of	the	2004	assessment,	we	increased	our receivable	for	insurance	recoveries	related	to	asbestos	during	2004.	We	have	recognized	an	asset	for	estimated	insurance	recoveries	at	December	31,	2006	and	2005.

We	believe	that	our	liability	estimates	for	asbestos-related	claims	and	the	estimated	insurance	recoveries	reflect	reasonable	and	probable	estimates.	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 to	be	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	may	also	vary	due	to	changes	in	the	litigation	environment,	federal	and	state	law	governing	compensation	of	asbestos	claimants,	and	the level	of	payments	made	to	claimants	by	other	defendants.

Environmental	Costs	–	We	are	subject	to	federal,	state,	and	local	environmental	laws	and	regulations.	We	have	identified	approximately	367	sites	at	which	we	are	or may	be	liable	for	remediation	costs	associated	with	alleged	contamination	or	for	violations	of	environmental	requirements.	This	includes	44	sites	that	are	the	subject	of actions	taken	by	the	U.S.	government,	25	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	an	environmental	issue	has	been	identified	with	respect	to	the	property	owned,	leased,	or	otherwise	used	in	the	conduct	of	our	business,	we	and	our consultants	perform	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.	We	do	not	discount	our	environmental	liabilities	when	the	timing	of	the	anticipated	cash	payments	is not	fixed	or	readily	determinable.

Our	environmental	liability	activity	was	as	follows:

| Millions	of	Dollars | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Beginning\tbalance | $213 | $201 | $187 |
| Accruals | 39 | 45 | 46 |
| Payments | (42) | (33) | (32) |
| Ending\tbalance\tat\tDecember\t31 | $210 | $213 | $201 |
| Current\tportion,\tending\tbalance\tat\tDecember\t31 | $54 | $46 | $50 |

The	environmental	liability	includes	costs	for	remediation	and	restoration	of	sites,	as	well	as	for	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.	We	believe	that	we	have	adequately	accrued	for	our	ultimate	share	of	costs	at	sites	subject	to	joint	and	several	liability.	However,	the	ultimate liability	for	remediation	is	difficult	to	determine	because	of	the	number	of	potentially	responsible	parties	involved,	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	may	also	vary	due	to	changes	in	federal,	state,	and	local	laws	governing	environmental	remediation.	We	do	not	expect	current obligations	to	have	a	material	adverse	effect	on	our	results	of	operations	or	financial	condition.

Guarantees	–	At	December	31,	2006,	we	were	contingently	liable	for	$464	million	in	guarantees.	We	have	recorded	a	liability	of	$6	million	for	the	fair	value	of	these obligations	as	of	December	31,	2006.	We	entered	into	these	contingent	guarantees	in	the	normal	course	of	business,	and	they	include	guaranteed	obligations	related	to our	headquarters	building,	equipment	financings,	and	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.

Income	Taxes	–	As	previously	reported	in	our	Form	10-Q	for	the	quarter	ended	September	30,	2005,	the	IRS	has	completed	its	examinations	and	issued	notices	of deficiency	for	tax	years	1995	through	2002.	Among	their	proposed	adjustments	is	the	disallowance	of	tax	deductions	claimed	in	connection	with	certain	donations	of property.	In	the	fourth	quarter	of	2005,	the	IRS	National	Office	issued	a	Technical	Advice	Memorandum	which	left	unresolved	whether	the	deductions	were	proper, pending	further	factual	development.	We	continue	to	dispute	the	donation	issue,	as	well	as	many	of	the	other	proposed	adjustments,	and	will	contest	the	associated	tax deficiencies	through	the	IRS	Appeals	process,	and,	if	necessary,	litigation.	In	addition,	the	IRS	is	examining	the	Corporation's	federal	income	tax	returns	for	tax	years 2003	and	2004	and	should	complete	their	exam	in	2007.	We	do	not	expect	that	the	ultimate	resolution	of	these	examinations	will	have	a	material	adverse	effect	on	our Consolidated	Financial	Statements.

# 11.	Other	Income

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

| Millions	of	Dollars | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Rental\tincome | $83 | $59 | $55 |
| Net\tgain\ton\tnon-operating\tasset\tdispositions | 72 | \t 135 | 69 |
| Interest\tincome | 29 | 17 | 10 |
| Sale\tof\treceivables\tfees | (33) | (23) | (11) |
| Non-operating\tenvironmental\tcosts\tand\tother | (33) | (43) | (35) |
| Total | $118 | $145 | $88 |

# 12.	Accounting	Pronouncements

In	June	2006,	the	FASB	issued	Interpretation	No.	48,	Accounting	for	Uncertainty	in	Income	Taxes,	an	interpretation	of	FASB	Statement	No.	109	(FIN	48).	Under	FIN 48,	we	will	recognize	tax	benefits	only	for	tax	positions	that	are	more	likely	than	not	to	be	sustained	upon	examination	by	tax	authorities.	The	amount	recognized	will	be measured	as	the	largest	amount	of	benefit	that	is	greater	than	50	percent	likely	of	being	realized	upon	ultimate	settlement.	The	interpretation	is	effective	for	us	beginning in	the	first	quarter	of	2007.	The	cumulative	effect	of	adopting	FIN	48	will	be	a	one-time	reduction	in	the	January	1,	2007	balance	of	retained	earnings.	Future	changes	in uncertain	tax	positions	will	be	included	in	income	tax	expense.	We	do	not	expect	that	the	cumulative	effect	of	adopting	FIN	48	will	have	a	material	impact	on	our Consolidated	Financial	Statements.

In	September	2006,	the	FASB	issued	FAS	158.	FAS	158	required	us	to	recognize	the	funded	status	of	our	pension	and	postretirement	plans	in	the	balance	sheet, along	with	a	corresponding	noncash,	after-tax	adjustment	to	shareholders'	equity.	Funded	status	is	determined	as	the	difference	between	the	fair	value	of	plan	assets	and the	benefit	obligation.	Changes	in	the	funded	status	will	be	recognized	in	other	comprehensive	loss.	We	adopted	FAS	158	at	the	end	of	2006	and	have	disclosed	the impact	of	the	adoption	in	note	7.

In	 September	 2006,	 the	 Securities	 and	 Exchange	 Commission	 (SEC)	 issued	 Staff	 Accounting	 Bulletin	 No.	 108,	Considering the	 Effects	 of	 Prior	 Year Misstatements	when	Quantifying	Misstatements	in	Current	Year	Financial	Statements	(SAB	108),	which	provides	interpretive	guidance	on	how	the	effects	of	prior-year uncorrected	misstatements	should	be	considered	when	quantifying	misstatements	in	the	current-year	financial	statements.	SAB	108	requires	registrants	to	quantify misstatements	using	both	an	income	statement	and	balance	sheet	approach	and	then	evaluate	whether	either	approach	results	in	a	misstatement	that,	when	all	relevant quantitative	and	qualitative	factors	are	considered,	is	material.	If	prior-year	errors	that	had	been	previously	considered	immaterial	are	now	considered	material	based	on either	approach,	no	restatement	is	required	so	long	as	management	properly	applied	its	previous	approach	and	all	relevant	facts	and	circumstances	were	considered.	If prior-year's	financial	statements	are	not	restated,	the	cumulative	effect	adjustment	is	recorded	in	opening	accumulated	earnings	(deficit)	as	of	the	beginning	of	the	fiscal year	of	adoption.	SAB	108	was	effective	for	us	at	the	end	of	2006.	The	adoption	of	SAB	108	did	not	have	any	impact	on	our	Consolidated	Financial	Statements.

# 13.	Selected	Quarterly	Data	(Unaudited)

# Millions	of	Dollars,	Except	Per	Share	Amounts

[a] Net	income	includes	a	$118	million	tax	expense	reduction	to	reflect	a	reduction	in	the	estimated	deferred	income	tax	liability.

# Item	9.	Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial	Disclosure

# Item	9A.	Controls	and	Procedures

As	of	the	end	of	the	period	covered	by	this	report,	the	Corporation	carried	out	an	evaluation,	under	the	supervision	and	with	the	participation	of	the	Corporation's management,	 including	 the	 Corporation's	 Chief	 Executive	 Officer	 (CEO)	 and	 Executive	 Vice	 President	 –	 Finance	 and	 Chief	 Financial	 Officer	 (CFO),	 of	 the effectiveness	of	the	design	and	operation	of	the	Corporation's	disclosure	controls	and	procedures	pursuant	to	Exchange	Act	Rules	13a-15	and	15d-15.	In	designing	and evaluating	the	disclosure	controls	and	procedures,	management	recognized	that	any	controls	and	procedures,	no	matter	how	well	designed	and	operated,	can	provide only	reasonable	assurance	of	achieving	the	desired	control	objectives.	Based	upon	that	evaluation,	the	CEO	and	the	CFO	concluded	that,	as	of	the	end	of	the	period covered	by	this	report,	the	Corporation's	disclosure	controls	and	procedures	were	effective	to	provide	reasonable	assurance	that	information	required	to	be	disclosed	in our	Exchange	Act	reports	is	recorded,	processed,	summarized	and	reported	within	the	time	periods	specified	by	the	SEC,	and	that	such	information	is	accumulated	and communicated	to	management,	including	the	CEO	and	CFO,	as	appropriate,	to	allow	timely	decisions	regarding	required	disclosure.

Additionally,	the	CEO	and	CFO	determined	that	there	have	been	no	changes	to	the	Corporation's	internal	control	over	financial	reporting	(as	defined	in	Exchange Act	Rules	13a-15(f)	and	15d-15(f))	during	the	last	fiscal	quarter	that	have	materially	affected,	or	are	reasonably	likely	to	materially	affect,	the	Corporation's	internal control	over	financial	reporting.

# MANAGEMENT'S	ANNUAL	REPORT	ON	INTERNAL	CONTROL	OVER	FINANCIAL	REPORTING

The	management	of	Union	Pacific	Corporation	and	Subsidiary	Companies	(the	Corporation)	is	responsible	for	establishing	and	maintaining	adequate	internal	control over	financial	reporting	(as	defined	in	Exchange	Act	Rules	13a-15(f)	and	15d-15(f)).	The	Corporation's	internal	control	system	was	designed	to	provide	reasonable assurance	to	the	Corporation's	management	and	Board	of	Directors	regarding	the	preparation	and	fair	presentation	of	published	financial	statements.

All	internal	control	systems,	no	matter	how	well	designed,	have	inherent	limitations.	Therefore,	even	those	systems	determined	to	be	effective	can	provide	only reasonable	assurance	with	respect	to	financial	statement	preparation	and	presentation.

The	Corporation's	management	assessed	the	effectiveness	of	the	Corporation's	internal	control	over	financial	reporting	as	of	December	31,	2006.	In	making	this assessment,	 it	used	 the	criteria	set	forth	by	 the	Committee	of	Sponsoring	Organizations	of	 the	Treadway	Commission	(COSO) in	Internal	 Control	 –	 Integrated Framework.	Based	on	our	assessment	management	believes	that,	as	of	December	31,	2006,	the	Corporation's	internal	control	over	financial	reporting	is	effective	based on	those	criteria.

The	Corporation's	independent	registered	public	accounting	firm	has	issued	an	attestation	report	on	our	assessment	of	the	Corporation's	internal	control	over financial	reporting.	This	report	appears	on	page	73.

We	have	audited	management's	assessment,	included	in	the	accompanying	Management's	Annual	Report	on	Internal	Control	Over	Financial	Reporting,	that	Union Pacific	Corporation	and	Subsidiary	Companies	(the	Corporation)	maintained	effective	internal	control	over	financial	reporting	as	of	December	31,	2006,	based	on criteria	established	in	Internal	Control	–	Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.	The	Corporation's management	is	responsible	for	maintaining	effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal	control	over	financial reporting.	Our	responsibility	is	to	express	an	opinion	on	management's	assessment	and	an	opinion	on	the	effectiveness	of	the	Corporation's	internal	control	over financial	reporting	based	on	our	audit.

We	conducted	our	audit	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	effective	internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	Our audit	included	obtaining	an	understanding	of	internal	control	over	financial	reporting,	evaluating	management's	assessment,	testing	and	evaluating	the	design	and operating	effectiveness	of	internal	control,	and	performing	such	other	procedures	as	we	considered	necessary	in	the	circumstances.	We	believe	that	our	audit	provides	a reasonable	basis	for	our	opinions.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	by,	or	under	the	supervision	of,	the	company's	principal	executive	and	principal financial	officers,	or	persons	performing	similar	functions,	and	effected	by	the	company's	board	of	directors,	management,	and	other	personnel	to	provide	reasonable assurance	regarding	 the	reliability	of	financial	reporting	and	 the	preparation	of	financial	statements	for	external	purposes	 in	accordance	with	generally	accepted accounting	principles.	A	company's	internal	control	over	financial	reporting	includes	those	policies	and	procedures	that	(1)	pertain	to	the	maintenance	of	records	that,	in reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the	assets	of	the	company;	(2)	provide	reasonable	assurance	that	transactions	are recorded	as	necessary	to	permit	preparation	of	financial	statements	in	accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the company	are	being	made	only	 in	accordance	with	authorizations	of	 management	 and	 directors	 of	 the	 company;	 and	 (3)	 provide	 reasonable	 assurance	 regarding prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	the	inherent	limitations	of	internal	control	over	financial	reporting,	including	the	possibility	of	collusion	or	improper	management	override	of	controls, material	misstatements	due	to	error	or	fraud	may	not	be	prevented	or	detected	on	a	timely	basis.	Also,	projections	of	any	evaluation	of	the	effectiveness	of	the	internal control	over	financial	reporting	to	future	periods	are	subject	to	the	risk	that	the	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of compliance	with	the	policies	or	procedures	may	deteriorate.

In	our	opinion,	management's	assessment	that	the	Corporation	maintained	effective	internal	control	over	financial	reporting	as	of	December	31,	2006,	is	fairly stated,	in	all	material	respects,	based	on	the	criteria	established	in	Internal	Control	–	Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the Treadway	Commission.	Also	in	our	opinion,	the	Corporation	maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of	December	31, 2006,	based	on	the	criteria	established	in	Internal	Control	–	Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.

We	have	also	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	consolidated	financial	statements and	financial	statement	schedule	as	of	and	for	the	year	ended	December	31,	2006	of	the	Corporation	and	our	report	dated	February	16,	2007	expressed	an	unqualified opinion	on	those	consolidated	financial	statements	and	financial	statement	schedule	and	included	an	explanatory	paragraph	regarding	the	Corporation's	adoption,	in 2006,	of	Statement	of	Financial	Accounting	Standard	No.	158,	Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans.

# Item	9B.	Other	Information

# PART	III

# Item	10.	Directors,	Executive	Officers,	and	Corporate	Governance

# (a) Directors	of	Registrant.

Information	as	to	the	names,	ages,	positions	and	offices	with	UPC,	terms	of	office,	periods	of	service,	business	experience	during	the	past	five	years	and	certain other	directorships	held	by	each	director	or	person	nominated	to	become	a	director	of	UPC	is	set	forth	in	the	Election	of	Directors	segment	of	the	Proxy Statement	and	is	incorporated	herein	by	reference.

Information	concerning	our	Audit	Committee	and	the	independence	of	its	members,	along	with	information	about	the	audit	committee	financial	expert(s)	serving on	the	Audit	Committee,	is	set	forth	in	the	Audit	Committee	segment	of	the	Proxy	Statement	and	is	incorporated	herein	by	reference.

# (b) Executive	Officers	of	Registrant.

Information	concerning	the	executive	officers	of	UPC	and	its	subsidiaries	is	presented	in	Part	I	of	this	report	under	Executive	Officers	of	the	Registrant	and Principal	Executive	Officers	of	Subsidiaries.

# (c) Section	16(a)	Compliance.

Information	concerning	compliance	with	Section	16(a)	of	the	Securities	Exchange	Act	of	1934	is	set	forth	in	the	Section	16(a)	Beneficial	Ownership	Reporting Compliance	segment	of	the	Proxy	Statement	and	is	incorporated	herein	by	reference.

(d) Code	of	Ethics	for	Chief	Executive	Officer	and	Senior	Financial	Officers	of	Registrant.

The	Board	of	Directors	of	UPC	has	adopted	the	UPC	Code	of	Ethics	for	the	Chief	Executive	Officer	and	Senior	Financial	Officers	(the	Code).	A	copy	of	the Code	may	be	found	on	the	Internet	at	our	website	www.up.com/investors.	We	intend	to	disclose	any	amendments	to	the	Code	or	any	waiver	from	a	provision	of the	Code	on	our	website.

# Item	11.	Executive	Compensation

Information	concerning	compensation	received	by	our	directors	and	our	named	executive	officers	is	presented	in	the	Compensation	Discussion	and	Analysis,	Summary Compensation	Table,	Grants	of	Plan-Based	Awards	in	Fiscal	Year	2006,	Outstanding	Equity	Awards	at	2006	Fiscal	Year-End,	Option	Exercises	and	Stock	Vested	in Fiscal	Year	2006,	Pension	Benefits	at	2006	Fiscal	Year-End,	Nonqualified	Deferred	Compensation	at	2006	Fiscal	Year-End,	Potential	Payments	Upon	Termination	or Change	in	Control	and	Director	Compensation	in	Fiscal	Year	2006	segments	of	the	Proxy	Statement	and	is	incorporated	herein	by	reference.	Additional	information regarding	compensation	of	directors,	including	Board	committee	members,	is	set	forth	in	the	By-Laws	of	UPC	and	the	Stock	Unit	Grant	and	Deferred	Compensation Plan	 for	 the	 Board	 of	 Directors,	 both	 of	 which	 are	 included	 as	 exhibits	 to	 this	 report.	 Information	 regarding	 the	 Compensation	 Committee	 is	 set	 forth	 in	 the Compensation	Committee	Interlocks	and	Insider	Participation	and	Compensation	Committee	Report	segments	of	the	Proxy	Statement	and	is	incorporated	herein	by reference.

# Item	12.	Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related																	Stockholder	Matters

Information	as	to	the	number	of	shares	of	our	equity	securities	beneficially	owned	by	each	of	our	directors	and	nominees	for	director,	our	named	executive	officers,	our directors	and	executive	officers	as	a	group,	and	certain

beneficial	owners	is	set	forth	in	the	Security	Ownership	of	Certain	Beneficial	Owners	and	Management	segment	of	the	Proxy	Statement	and	is	incorporated	herein	by reference.

The	following	table	summarizes	the	equity	compensation	plans	under	which	Union	Pacific	Corporation	common	stock	may	be	issued	as	of	December	31,	2006.

|  |  | exercise | Number	of	securities |
| :--- | :--- | :--- | :--- |
|  | Number\tof\tsecurities | price\tof | remaining\tavailable\tfor |
|  | to\tbe\tissued\tupon | outstanding | future\tissuance\tunder |
|  | exercise\tof | options, | equity\tcompensation\tplans |
|  | outstanding\toptions, | warrants | (excluding\tsecurities |
|  | warrants\tand\trights | and\trights | reflected\tin\tcolumn\t(a)) |
| Plan\tCategory | (a) | (b) | (c) |
| Equity\tcompensation\tplans\tapproved\tby\tsecurity |  |  |  |
| holders | 9,389,429[1] | $65.37[2] | 18,096,434 |
| Equity\tcompensation\tplans\tnot\tapproved\tby |  |  |  |
| security\tholders\t[3] | 1,119,910 | 55.00 | - |
| Total | 10,509,339 | $64.22 | 18,096,434 |

[1] Includes	464,812	retention	units	that	do	not	have	an	exercise	price.	Does	not	include	447,170	retention	shares	that	are	actually	issued	and	outstanding.

[2] Does	not	include	the	retention	units	or	retention	shares	described	above	in	footnote	[1].

[3] The	UP	Shares	Stock	Option	Plan	(UP	Shares	Plan)	is	the	only	equity	compensation	plan	not	approved	by	shareholders.	The	UP	Shares	Plan	was	approved	by	the	Company's	Board	of	Directors	on	April	30,	1998 and	reserved	12,000,000	shares	of	common	stock	for	issuance.	The	UP	Shares	Plan	was	a	broad-based	option	program	that	granted	each	active	employee	on	April	30,	1998	non-qualified	options	to	purchase	200 shares	of	common	stock	at	$55.00	per	share.	Options	became	exercisable	on	May	1,	2001	and	expire	on	April	30,	2008.	If	an	optionee's	employment	terminates	for	any	reason,	the	option	remains	exercisable	for	a period	of	one	year	after	the	date	of	termination,	but	no	option	is	exercisable	after	April	30,	2008.	No	further	options	may	be	granted	under	the	UP	Shares	Plan.

# Item	13.	Certain	Relationships	and	Related	Transactions,	and	Director	Independence

Information	on	related	transactions	is	set	forth	in	the	Certain	Relationships	and	Related	Transactions	and	Compensation	Committee	Interlocks	and	Insider	Participation segments	of	the	Proxy	Statement	and	is	incorporated	herein	by	reference.	We	do	not	have	any	relationship	with	any	outside	third	party	that	would	enable	such	a	party	to negotiate	terms	of	a	material	transaction	that	may	not	be	available	to,	or	available	from,	other	parties	on	an	arm's-length	basis.

Information	regarding	the	independence	of	our	directors	is	set	forth	in	the	Director	Independence	segment	of	the	Proxy	Statement	and	is	incorporated	herein	by reference.

# Item	14.	Principal	Accounting	Fees	and	Services

Information	concerning	the	fees	billed	by	our	independent	registered	public	accounting	firm	and	the	nature	of	services	comprising	the	fees	for	each	of	the	two	most recent	fiscal	years	in	each	of	the	following	categories:	(i)	audit	fees,	(ii)	audit—related	fees,	(iii)	tax	fees,	and	(iv)	all	other	fees,	is	set	forth	in	the	Independent	Registered Public	Accounting	Firm's	Fees	and	Services	segment	of	the	Proxy	Statement	and	is	incorporated	herein	by	reference.

Information	 concerning	 our	Audit	 Committee's	 policies	 and	 procedures	 pertaining	 to	 pre-approval	 of	 audit	 and	 non-audit	 services rendered	 by	 our independent registered	public	accounting	firm	is	set	forth	in	the	Audit	Committee	segment	of	the	Proxy	Statement	and	is	incorporated	herein	by	reference.

# PART	IV

# Item	15.	Exhibits,	Financial	Statement	Schedules

(a) Financial	Statements,	Financial	Statement	Schedules,	and	Exhibits:

# (1) Financial	Statements

The	financial	statements	filed	as	part	of	this	filing	are	listed	on	the	index	to	the	Financial	Statements	and	Supplementary	Data,	Item	8,	on	page	42.

# (2) Financial	Statement	Schedules

# Schedule	II—Valuation	and	Qualifying	Accounts

Schedules	not	listed	above	have	been	omitted	because	they	are	not	applicable	or	not	required	or	the	information	required	to	be	set	forth	therein	is	included in	the	Financial	Statements	and	Supplementary	Data,	Item	8,	or	notes	thereto.

# (3) Exhibits

Exhibits	are	listed	in	the	exhibit	index	beginning	on	page	80.	The	exhibits	include	management	contracts,	compensatory	plans	and	arrangements	required	to be	filed	as	exhibits	to	the	Form	10-K	by	Item	601	(10)	(iii)	of	Regulation	S-K.

# SIGNATURES

Pursuant	to	the	requirements	of	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	the	registrant	has	duly	caused	this	report	to	be	signed	on	its	behalf	by	the undersigned,	thereunto	duly	authorized,	on	this	23rd	day	of	February,	2007.

James	R.	Young,

Chairman,	President,

Chief	Executive	Officer,	and	Director

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below,	on	this	23rd	day	of	February,	2007,	by	the	following	persons	on behalf	of	the	registrant	and	in	the	capacities	indicated.

# PRINCIPAL	EXECUTIVE	OFFICER

AND	DIRECTOR:

James	R.	Young, Chairman,	President,

# PRINCIPAL	FINANCIAL	OFFICER:

Robert	M.	Knight,	Jr., Executive	Vice	President—Finance	and	Chief Financial	Officer

PRINCIPAL	ACCOUNTING	OFFICER:

Richard	J.	Putz, Vice	President	and	Controller

# DIRECTORS:

Thomas	E.	Whitaker,	Attorney-in-fact

| Millions	of	Dollars,	for	the	Years	Ended	December	31, | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Allowance\tfor\tdoubtful\taccounts: |  |  |  |
| Balance,\tbeginning\tof\tperiod | $126 | $107 | $101 |
| Charges/(reduction)\tto\texpense | (7) | 2 | 11 |
| Net\trecoveries\t/\t(write-offs) | (20) | 17 | (5) |
| Balance,\tend\tof\tperiod | $99 | $126 | $107 |
| Allowance\tfor\tdoubtful\taccounts\tare\tpresented\tin\tthe\tConsolidated\tStatements\tof\tFinancial\tPosition\tas\tfollows: |  |  |  |
| Current | $6 | $16 | $19 |
| Long-term | 93 | 110 | 88 |
| Balance,\tend\tof\tperiod | $99 | $126 | $107 |
| Accrued\tcasualty\tcosts: |  |  |  |
| Balance,\tbeginning\tof\tperiod | $1,354 | $1,303 | $989 |
| Charges\tto\texpense | 417 | 409 | 683 |
| Cash\tpayments\tand\tother\treductions | (494) | (358) | (369) |
| Balance,\tend\tof\tperiod | $1,277 | $1,354 | $1,303 |
| Accrued\tcasualty\tcosts\tare\tpresented\tin\tthe\tConsolidated\tStatements\tof\tFinancial\tPosition\tas\tfollows: |  |  |  |
| Current | $409 | $478 | $419 |
| Long-term | 868 | 876 | 884 |
| Balance,\tend\tof\tperiod | $1,277 | $1,354 | $1,303 |

# Exhibit	Index

# Incorporated	by	Reference

3(b) Revised	Articles	of	Incorporation	of	UPC,	as	amended	through	April	25,	1996,	are	incorporated	herein	by	reference	to	Exhibit	3	to	the Corporation's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	March	31,	1996.

4(a) Indenture,	dated	as	of	December	20,	1996,	between	UPC	and	Citibank,	N.A.,	as	Trustee,	is	incorporated	herein	by	reference	to	Exhibit 4.1	to	UPC's	Registration	Statement	on	Form	S-3	(No.	333-18345).

4(b) Indenture,	dated	as	of	April	1,	1999,	between	UPC	and	JP	Morgan	Chase	Bank,	formerly	The	Chase	Manhattan	Bank,	as	Trustee,	is incorporated	herein	by	reference	to	Exhibit	4.2	to	UPC's	Registration	Statement	on	Form	S-3	(No.	333-75989).

4(c) Form	of	Debt	Security	is	incorporated	herein	by	reference	to	Exhibit	4.3	to	UPC's	Registration	Statement	on	Form	S-3	(No.	33-59323). Certain	instruments	evidencing	long-term	indebtedness	of	UPC	are	not	filed	as	exhibits	because	the	total	amount	of	securities	authorized under	 any	 single	 such	 instrument	 does	 not	 exceed	 10%	 of	 the	 Corporation's	 total	 consolidated	 assets.	 UPC	 agrees	 to	 furnish	 the Commission	with	a	copy	of	any	such	instrument	upon	request	by	the	Commission.

10(k) Written	Description	of	Premium	Exchange	Program	Pursuant	to	1993	Stock	Option	and	Retention	Stock	Plan	of	UPC	is	incorporated herein	by	reference	to	Exhibit	10(b)	to	the	Corporation's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	September	30,	1999.



Question: what percent of total route miles are main line in 2006?
Calculation: miles_main_line_2006 = 27318
miles_total_2006 = 51596
percent_main_line_2006 = miles_main_line_2006 / miles_total_2006
answer = percent_main_line_2006 * 100
Answer: 53%