Jim Young - Faster Freight Cleaner Air Conference - Feb. 27, 2007

Good Morning. It’s an honor to be with you this morning.

The Faster Freight Cleaner Air Conference has become a critical program for the freight industry to discuss the issues we’re facing, and to highlight the innovative solutions we’re developing and implementing.

The State of California is an extremely important part of Union Pacific’s rail network. This morning, I’d like to tell you about how freight rail benefits you as a consumer, the economy and the community.

What I hope you walk away with today is a new understanding of what Union Pacific is doing to ensure faster, safer freight and cleaner air. We want to be part of the solution to these issues.

First, let me give you a brief overview of Union Pacific and our role in the economy of California and the nation.

As most of you may remember from your grade school history class, Union Pacific was half of the original transcontinental railroad built in the 1860s. UP began building west from Omaha, while the Southern Pacific built east, from Sacramento. With the merger of UP and SP in 1996, we combined the entire Transcontinental Railroad together as one.

Fast Facts
Commodity Revenue	$14.9 B
Miles of Track	32,300 in 23 states
Employees	50,000+
Annual Payroll	$3.7 B
Customers	25,000
Locomotives	8,500
Freight Cars	104,700

Today we operate in 23 states, employ more than 50,000 people who operate more than 32,000 miles of railroad and generate total annual revenue of $15 billion. We serve all major West Coast ports and have the most efficient routes to Mexico.

In California, UP is the largest railroad, operating nearly 3,500 miles of track with nearly 6,000 employees. A third of our track and employees are in the Los Angeles service unit. This service unit feeds our busiest rail corridors, including the Sunset Route, which runs from L.A. to El Paso.

California Fast Facts
Miles of Track	3,455
Employees	5,981
2004-2006 New Hires	3,171
2006 Payroll	$422 M
LA Service Unit Fast Facts
Miles of Track	1,271
Employees	1,803

UP is providing California with job growth – jobs with excellent wages and benefits. In the past three years, we’ve hired over 3,000 people in California. That’s more than half of our current workforce in the state today. And we plan to hire an additional 600 people this year.

Our employees handled about 3.4 million loads of freight into and out of California last year. That’s about 30 percent of UP’s total business.

When you look at UP’s total business in terms of revenue for our six business groups, our portfolio is fairly well-balanced.

Many people don’t realize the vast array of products railroads carry.

Business Dimensions - 2006 Commodity Revenue $14.9 Billion

• Agricultural products – fresh and frozen fruit and vegetables; wine and beer; grain and feed for animals, and even ethanol.
• Autos – finished vehicles, as well as auto parts for assembly plants.
• Chemicals that are necessary for manufacturing, agricultural production, pharmaceuticals and clean water.
• Energy – this is primarily our coal business.
• Industrial Products – building materials such as lumber, rock, cement and other products such as steel and paper.
• And, Intermodal – which, as you know, is both Domestic and International container business.

What does this picture look like for California? While our Intermodal business accounts for about 50 percent of our revenue, Industrial Products, Agriculture and Autos combine for more than 40 percent of our business in the state.

And, we are always ready to respond to special requests from our customers and the communities in which we operate.

California Business Dimensions - 2006 Commodity Revenue $4.4 Billion

Last month, we worked with the Governor's Office to assist in the movement of propane to protect the orchards during the recent cold spell. We also haul the fertilizer used to feed those orchards.

We haul both the vehicle you drive and the ethanol you use to fuel it.

But what most people don’t realize is the extent of our local market. We handled around one million carloads for local LA-based businesses. To put that into perspective, this local LA business is about ten percent of UP’s entire business last year – and this market is growing!

When you think about the theme of this conference – Faster Freight, Cleaner Air – you should also think about the many other benefits of freight rail.

For us, faster freight means two things – moving freight more efficiently to reduce the environmental impact on the community. And, most importantly, moving it safely.

We measure safety in three ways:

• Employee Injuries
• Public Safety – in terms of crossing accidents
• And, Customer Safety, which measures derailments

If you look at these charts, you’ll see we’ve improved our safety over the past five years, but are not stopping there.

I’d like to comment on the two areas that matter most to you – Public Safety and Derailments.

When it comes to Public Safety, UP employees are actively involved in Operation Lifesaver – a non-profit organization dedicated to public education about safety at railroad crossings and around railroad property. The tragedy of crossing accidents is that they are completely preventable as the vast majority of incidents involve driver error, or drivers going around crossing gates.

To reduce derailments, Union Pacific employs state-of-the art technology to monitor our trains and track. This is in addition to good, old-fashion visual inspections by our experienced track safety experts.

This technology includes:

• Electronic monitoring devices along the track to check rail cars for potential issues.
• Track inspection cars that travel our system each day using lasers and ultrasound technology to ensure the track is in good condition.
• And event recorders – black boxes – on the locomotives to monitor crew performance and train handling.

Union Pacific, along with the other freight railroads, works closely with the Department of Homeland Security. At the borders, the rail industry is using the latest technology to detect people or hidden devices on railcars.

Training of personnel is also a large part of our increased efforts in the area of security. All railroad employees have security training and our locomotive simulators have security scenarios built into the program to help conductors and engineers stay alert.

We also provide training to our Community partners. In the past 20 years, UP has trained more than 160,000 local fire and law enforcement personnel, by providing hands-on practice with simulated train derailments.

Turning to a topic very familiar to you here in Southern California – another benefit of rail is our help in relieving traffic congestion. It’s hard to imagine what it would be like without railroads to help take some of the freight load off the highways.

View larger Congested Highways, 2000

Transportation capacity, whether it’s highways, rail or ports, is a critical issue for our nation’s entire transportation system.

This slide is a bit of an eye chart, so don’t bother trying to read the key.

Just look at the colors on the map, which indicate congestion on U.S. highways in the year 2000. Green is considered moderate congestion, and red is severe congestion.

This was a snapshot from seven years ago. You can see the red areas are mainly centered around large metropolitan areas.

View larger Potential Congested Highways, 2020

Now, let’s fast forward just 13 years from now. . .

Our highways become far more congested. The yellow and red areas have grown significantly, with the most congested areas between the major metropolitan areas. And many major highways in California are solid red.

For the transportation industry, this means truckers are going to struggle to keep up with increased demand for shipping. Highway capacity will continue to be a major challenge for our nation.

And that means more truck traffic will shift to rail, creating capacity issues that we’ll need to address as we work to meet the nation’s transportation needs.

Highway congestion comes at a cost. Drivers spend two billion hours a year caught on crowded roads.

This costs tens of billions of dollars in lost wages and wasted fuel…not to mention the emissions impact of idling cars and trucks.

The good news for those of you who commute on LA’s crowded highways is that every single UP intermodal train you see has taken almost 300 trucks off your highways.

We can further benefit traffic congestion by improving the velocity of our system. The quicker we can move our trains through your towns, the less impact we’ll have on congestion by alleviating blocked crossings.

Investing in California
2006 UP California Spending
Commercial Facilities	$16 M
Capacity & Infrastructure Renewal	$197 M
2007 Projected UP California Spending
Commercial Facilities	$55 M
Capacity & Infrastructure Renewal	$222 M

Improving the velocity on our system means two things. Building additional track capacity and maintaining our railroad to keep our trains moving safely.

Keeping what amounts to a privately owned highway in top condition, as well as creating capacity to serve local economic development is an expensive proposition. You can see on the slide how our capital investment breaks out in California.

Since the UP/SP merger in 1996, we have invested over $2 billion in California. But, the future is our focus. And much of our near-term future investment will be in the part of our system that serves the California market.

Railroading is Capital Intensive - Avg. Capital Spending as a Percent of Revenue

UP is embarking on a plan to double-track our Sunset Route, which runs from LA to El Paso. This is a huge project – hundreds of millions of dollars – that will not only upgrade the track capacity but also the terminal – or yard – capacity needed to serve California’s growing economy.

This investment creates not only railroad jobs, but it also has a multiplier effect in terms of supplier and customer investment and jobs.

I mentioned that building capacity is anything but cheap! Railroading is already a highly capital intensive industry. And railroads have struggled over the years to earn our cost of capital.

Earning adequate financial returns is absolutely critical in order to support our expansion. Operating what amounts to a 32,000-mile factory without a roof is an expensive proposition and our capital costs are higher, by order of magnitude, than virtually every other industry in our country.

Capital Spending - in Millions. Track, ties, terminals, locomotives and technology

We are really building and maintaining our own Interstate highway system.

We wear out more than three miles of track every day, at a cost of $700,000 per mile for replacement. And it costs $2.5 million per mile to build new railroad.

Last year, our capital spending program was $2.8 billion and we estimate spending $3.2 billion in 2007 – an increase of 14%.

Our goal with our capital spend is to ensure we provide the nation with efficient, economic – and safe – freight shipping that supports our customers growth.

And this provides a benefit to you as a consumer.

Union Pacific – and other freight railroads – offer cost-competitive transportation to U.S. businesses. This helps keep down the ultimate price you pay for consumer goods.

Inflation-Adjusted Rail Rates Declined - (Selected Commodities 1990 - 2005)

To put this in perspective, this chart shows how – when adjusted for inflation – rail rates have stayed low. Dropped, in fact, for the most part.

These low rates reflect substantial productivity improvement that we’ve realized in the last couple of decades, which have been passed through to our customers.

Now to the real heart of my presentation – the "Cleaner Air" portion.

I’ve been with the railroad for almost thirty years. And, over that period, I have seen a great deal of change. But the clear headline for our industry, and our company, has been the progress we’ve made in helping to improve the environment.

I think some of these facts will surprise you. For example, trains are already three times more fuel-efficient than over-the-road trucks. We can move one ton of freight more than 750 miles per gallon of fuel.

• Since 1980, railroads have improved fuel efficiency by 72 percent, which reduced emissions significantly.
• Since 1995, UP has achieved more than a 12 percent improvement in fuel efficiency, which also translates to a reduction in greenhouse gases and other pollutants.
• Through improved locomotive technology and a program that teaches engineers to operate locomotives in a manner that saves fuel, we have reduced overall fuel consumption by 50 million gallons in the past two years.
• And, since 2000, we’ve upgraded our locomotive performance such that average NOx emissions have been reduced by 60 percent. And, average particulate matter emissions have been reduced by 40 percent.

Green Locomotive Technology Tour

Just this week, UP, in cooperation with GE, ran a special train through California called "The Green Locomotive Technology Tour." This tour demonstrated some of the latest locomotive technology we are using, and testing, to reduce emissions.

This unique train is now parked at our Intermodal Facility just a few miles from here. And, you may be aware that we are offering tours to Conference participants. If you haven’t already done so, I recommend you register for this opportunity to see the very latest in environmental technology. This is the first time all of these locomotives have been on display together.

You’ll also have the chance to speak with top engineers from UP and GE who are working to develop solutions to further improve the environment.

Let me give you some detail on the locomotives on display:

While we are clearly the environmental leader in terms of long-haul freight carriers, at UP, we constantly strive to become "cleaner and greener."

We already have North America’s cleanest "over the road" locomotive fleet, through our purchase of hundreds of new "Tier 2" locomotives, which cut emissions by 60 percent compared to "Tier O" locomotives. But, that is not enough.

Beyond the more than $5 billion we’ve spent to purchase environmentally friendly locomotives, we are investing millions more in various programs designed to reduce emissions in our older locomotives.

Smart Start

For example, we’ve equipped more than 2,900 (34 percent) of our locomotives with Automatic Engine Stop-Start (AESS) technology that reduces emissions by reducing idling time.

This technology can save between 15 and 24 gallons of fuel, per locomotive, per day.

Genset Yard Locomotives

We’ve made a concerted effort to lower emissions from yard locomotives. The technology that is particularly promising is called the "Genset" switcher.

Each Genset locomotive is projected to reduce emissions by up to 80 percent, while using as much as 16 percent less fuel compared to current switch locomotives. By mid-year, we will have 60 Genset switchers at work in Southern California.

Green Goats - Hybrid Locomotives

Along with the Gensets, are the "Green Goats" – a hybrid whose counterpart in the auto industry would be the Toyota Prius.

These new yard locomotives are estimated to reduce fuel consumption by 40 percent while reducing emissions up to 80 percent.

Currently, we are evaluating the performance of 21 of these new locomotive hybrids in Texas and California.

Just two months ago, we announced a year-long test in our Oakland rail yard to evaluate the performance of an experimental after-market exhaust system filter, which reduces diesel engine emissions in older railroad locomotives. During initial testing, this diesel particulate filter reduced emissions by about 80 percent.

Oxidation Catalyst Devices

And our latest technology – the Oxicat locomotive. This locomotive is equipped with a set of oxidation catalyst devices. These devices work like the catalytic converter on your car. This technology has the potential to reduce:

• particulate emissions by about 50 percent,
• hydrocarbons by 38 percent, and
• carbon monoxide by 82 percent.

Union Pacific’s commitment to the environment is something I am extremely proud of. We recognize our role as a corporate citizen here in California and the rest of the nation. And we take that role seriously.

As I said to you at the start of this presentation, Union Pacific is committed to being part of the solution for the critical issues we all face. We are investing in our business to support our customers’ growth, safety, a healthy economy, and a better environment.

No matter how you look at it, rail is the most environmentally friendly mode of transportation. And, I commit to you that your future growth in moving the critical goods that drive our nation’s economy, will be accomplished not only with faster freight, but more importantly, with cleaner air, because Union Pacific will be part of that solution.

Thank you.