Union Pacific 2006 Annual Report Download - page 23

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
2006 Results
ŠSafety – 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.
ŠFinancial 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.
ŠCommodity 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.
ŠNetwork 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.
ŠFuel 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
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