Union Pacific Corporation Annual Meeting of Shareholders

While the votes are being counted, let me update you on our Company. I’ll make some “forward looking” comments today, so please refer to the cautionary information and risk factors summarized in our 2008 annual report (PDF File) .

UP’s Strategic Focus

Union Pacific produced record results in 2008. Our success stems from a consistent focus on our long-term strategy, which is to:

  • operate safely,
  • provide excellent service to our customers,
  • utilize our assets efficiently,
  • invest for growth opportunities,
  • protect our environment for future generations, and
  • generate strong and growing financial returns for our shareholders.

This strategy positions us to continually improve our Company, regardless of the economic environment.  And, that’s clearly being put to the test today.

 

Recession’s Impact on Union Pacific

Before I walk you through the 2008 results, it’s important to understand how the current economic situation is impacting us. In the Fourth Quarter of last year, we experienced a dramatic fall-off in our business levels as customers started reducing inventories in response to decreased consumer spending.

UP responded proactively to this economic change:

  • We built cash reserves by halting share repurchases and borrowed ahead of future cash needs.
  • We scaled back train operations, matching train starts with volumes. These actions resulted in employee furloughs and equipment storage.
  • All areas of our company have reduced operating costs. For example, we’ve implemented a hiring freeze across the board, eliminated executive wage increases, have accelerated new technology development and business process redesign to further improve efficiency.

While taking these steps, we’re continuing to operate safely and provide great service to our customers.

We’re also looking ahead so we can respond when the economy turns around. Our extra resources and contingency plans will enable us to quickly ramp up operations when volumes return.

 

Challenging Year, Record Results

Despite the challenge of the economy, record high diesel fuel prices and a couple of extraordinary weather events – UP delivered record results in virtually every measure.

I’ll provide more detail on 2008 in a moment, but our achievements over the past several years, position us very well to succeed in spite of this severe recession.

Let’s start with safety…

 

Record Safety Results

UP looks at three areas of safety – employee, customer and public.We utilize a multi-faceted approach that encompasses technology, risk assessment, training and employee engagement.These efforts helped us achieve “best ever” levels in each of these areas during 2008. However, we will not be satisfied until we reach our goal of zero injuries.

One major initiative driving improved employee safety is the implementation of Total Safety Culture (TSC). TSC is a peer-to-peer observation and feedback process.Preliminary results show that, on average, areas using TSC see a safety improvement over two times greater than areas without it.

 

Customers Recognize Improved Value

The excellent service provided by UP’s Operating Team is being recognized by customers.We finished 2008 with our best Customer Satisfaction Index ever, topping the previous record set in the first half of the 1990s.

Great service supports our pricing plans, driving new growth opportunities and increasing overall productivity.

 

Recognition for Job Well Done

Union Pacific is building a reputation as a quality service provider.Our employees are also being recognized for their hard work, dedication and high ethical standards.In fact, this is the first time we’ve ever received some of these awards.

We’ve also been recognized as an “Employer of Choice”. In 2008, UP received several different honors for our support of the military, UP’s HealthTrack wellness program also received recognition as an “outstanding employer program” and UP was named one of the Top 50 companies to launch a career by BusinessWeek magazine.

 

Operating Challenges

Great employees are the foundation of a great company, and UP’s employees are often asked to work under very challenging conditions.In 2008, we rebuilt a mountain in Oregon in a little more than 100 days without a single injury.We also faced historic flooding in the Midwest and two hurricanes along the Texas Gulf

We minimized network disruptions through detailed recovery plans, a strong network infrastructure and surge capacity.Driven by a strong commitment to serve our customers, there were many cases where UP was ready to run trains before our customers were ready to ship freight.

 

Investing for Growth

Our capital investments support today’s excellent service as well as tomorrow’s growth.

After investing $3.1 billion in 2008, we currently plan to spend about $2.6 billion this year.Although we are slowing some of our growth capacity projects, we are still investing for the future.

About $500 million dollars of the $2.6 billion is considered growth capital.The project to double track the Sunset Corridor continues in 2009, but at a slower pace.We are also continuing to invest for growth in our critical Central Corridor.

In addition, we’re expanding and improving our terminal capacity with the addition of the Joliet intermodal facility and terminal upgrades to support new business.

 

Creating Customer Value

UP’s unparalleled franchise, great service performance and strong capital investments are enabling us to compete in many new markets.Let me give you a few examples:

  • Produce Railexpress is a truck-competitive refrigerated boxcar service, providing 4 day transit from California and Washington to New York.We run this service 99.9 percent on-time and the California train is the only rail car service faster than single driver trucks.
  • UP is expanding its role in the used car market, which is roughly 3 times larger than the new car market in the U.S. and moves mostly by truck.Through our Insight Network Logistics subsidiary, we’re introducing a state-of-the-art Web site, www.ShipCarsNow.com that enables businesses to access rail for used car shipments. 
  • Our Streamline subsidiary extends our network reach, providing one-stop shopping for domestic intermodal customers. First Quarter Streamline volumes more than doubled, with about a third of the new business coming from truck conversions.

 

2008 Financial Records

UP’s strong performance in safety, service and operations produced record financial results in 2008.This slide highlights a few of the key areas where we’ve made strong progress.For example, UP’s Operating Ratio was a “best ever” 77.3 percent and our Return on Invested Capital gained 1.5 points from 2007 to 10.2 percent.

 

Rewarding our Shareholders

We’ve used our growing cash and improving financial returns to reward shareholders.Since 2006, we increased the quarterly dividend 80 percent, growing from $0.15 per share to $0.27 per share.

We also initiated a share repurchase program, returning $1.5 billion to shareholders in both 2007 and 2008.Although we are not buying back shares today (because of the lower business levels and economic weakness), we are authorized to repurchase an additional 32.6 million shares.

After paying the dividend and buying back stock, we still ended 2008 with $1.25 billion of cash on the books, a strong balance sheet and a solid investment grade credit rating.

 

Stock Price Comparison

UP’s improving financial performance over the last several years is reflected in the stock price.Since 2005, on a total return basis, UP has outpaced the other U.S. Class I rails, the Dow Transportation Index and the S&P 500.

Clearly, what happened last fall in the stock market, and its impact on UP’s stock price, was disappointing to all of us.We have, however, started to see a little bit of a turn. In fact, UP’s stock is up nearly 50 percent from our March low.

 

A View on 2009

Today, we are dealing with the toughest economic environment we’ve ever seen.Rails are considered to be a good barometer of the economy, so weekly volume data is being closely watched for signs of change.

In our First Quarter 2009 earnings report, we demonstrated continued pricing and efficiency gains, which produced a record First Quarter Operating Ratio. However, sharply lower business volumes drove earnings per share down 15 percent versus 2008.

Year-to-date, carloadings are running down about 22 percent. These declines are very broad-based with virtually no segment of our business unaffected. In fact, if we look at what’s happening in the business today, we see the potential for bulk commodity demand to remain relatively soft in areas such as export grain and coal until later in the year.

For Autos, although annual sales estimates have stabilized around 9.5 million vehicles, that’s still nearly a 30 percent reduction from 2008 levels. In addition, lower auto production means fewer shipments of steel, plastics and other automotive related materials.

This outlook is consistent with the most recent forecast from Global Insight that predicts GDP won’t bottom out until the second half of 2009.

One bright spot is that UP’s great service offerings are attracting interest in the market, driving truckload conversions to our domestic Intermodal product.

 

Benefits of a Strong Rail System

Although it’s difficult to look past these short-term economic realities, the long-term Company perspective is much more positive. We believe there’s a bright future ahead for Union Pacific… particularly when you consider all of the great things we have to offer:

  • Rail is the safest form of ground freight transportation and has a better employee safety record than most industries.
  • Rail transportation is at least 4 times more fuel efficient than trucks, making us good for the environment.Moving freight by rail reduces the carbon footprint by two-thirds or more.
  • Rail’s fuel efficiency, as well as our role in shipping goods associated with alternative energy, helps reduce the nation’s dependence on foreign oil. 
  • Railroads pay for our own infrastructure, and every $1 billion dollars of rail infrastructure investment creates $3 billion dollars of economic output.
  • The industry also provides good paying jobs.Average compensation and benefits for rail employees is roughly $95,000, about 60 percent above the average for all U.S. employees.

The benefits of rail make us very optimistic about tomorrow, despite today’s challenges. Our goal is to produce the best results possible given the economy, and emerge as a stronger, more profitable Company in the years ahead.