Union Pacific 2005 Annual Report Download - page 23

[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 revenues. Operating ratio is defined as operating expenses divided by
operating revenues.
[h] Debt to capital is determined as follows: total debt plus convertible preferred securities divided by total debt plus equity plus convertible
preferred securities.
[i] Based on average common shareholders’ 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, we analyze the net financial results of the Railroad as one segment due to the
integrated nature of the rail network. The Consolidated Financial Statements in 2003 also include discontinued
trucking operations, consisting of OTC and Motor Cargo, which were subsidiaries of Overnite, Inc., formerly an
indirect wholly owned subsidiary of UPC. In 2003, we reclassified our trucking operations as discontinued
operations.
EXECUTIVE SUMMARY
2005 Results
ŠSafety – We experienced mixed safety results during 2005. While the overall employee injury incident rate
per 200,000 man-hours decreased, the lost workday case rate increased by 1%. The number of derailments
declined 8%, and associated costs declined 12%. These improvements reflect our use of technology such as
train simulators and improved training and testing programs. In the area of public safety, we closed 400
grade crossings to reduce exposure and installed 750 video cameras in locomotives to better analyze grade
crossing incidents. The number of grade crossing incidents, however, increased 9% during the year, driven in
part by the combination of increasing highway and rail traffic.
ŠCommodity Revenue Growth – Our commodity revenues grew 11% year-over-year to $13 billion, the
highest level in our history, as continued economic growth led to unprecedented demand for our services.
We achieved record revenue levels in all of our six commodity groups, primarily driven by fuel surcharges
and better pricing. By year-end, we repriced approximately 55% of our business in the current market of
significant transportation demand. Although volume increased 1% to record levels in 2005, weather-related
disruptions limited volume growth.
ŠNetwork Improvement – We continued to address the resource shortages that led to operational challenges
throughout 2004 by aggressive hiring and training of train crews, along with the acquisition of locomotives
and freight cars through both long- and short-term leasing programs. In 2005, network operations improved
in spite of significant weather-related challenges. We handled record volumes and maintained velocity by
strengthening our operational recoverability. We began implementing the Unified Plan in 2005, streamlining
the automotive, manifest, and intermodal transportation plans by eliminating switching and work events.
Through the year we reduced our rate of train stops by 16% and achieved a 12% reduction of our car
switching rate. Productivity improved, as demonstrated by a 6% lower average terminal dwell time, a 2.5%
improvement in car utilization, and a 2.4% decrease in the fuel consumption rate. Additionally, we piloted
an operational productivity initiative called CIMS (Customer Inventory Management System). CIMS
complements the Unified Plan by reducing the number of cars in our terminals. We also expanded capacity
and continued to use industrial engineering techniques to further improve network fluidity, ease capacity
constraints, and improve asset utilization.
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