Union Pacific 2007 Annual Report Download - page 25

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• Fuel Prices – Crude oil prices increased at a steady rate in 2007, rising from a low of $56.58 per barrel in
January to close at nearly $96.00 per barrel at the end of December. Our 2007 average fuel price increased
by 9% and added $242 million of operating expenses compared to 2006. Our fuel surcharge programs are
designed to help offset the impact of higher fuel prices. In addition, our fuel conservation efforts allowed
us to improve our consumption rate by 2%. Locomotive simulator training, operating practices, and
technology all contributed to this improvement, saving approximately 21 million gallons of fuel in 2007.
• Free Cash Flow – Cash generated by operating activities totaled a record $3.3 billion, yielding free cash
flow of $487 million in 2007. 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 2007 2006 2005
Cash provided by operating activities ................................................. $ 3,277 $ 2,880 $ 2,595
Cash used in investing activities .......................................................... (2,426) (2,042) (2,047)
Dividends paid...................................................................................... (364) (322) (314)
Free cash flow........................................................................................ $ 487 $ 516 $ 234
2008 Outlook
• 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, utilizing technology, risk assessment,
quality control, and training for, and engaging with our employees. We plan to implement Total Safety
Culture (TSC) throughout our operations. TSC, an employee-focused initiative that has helped improve
safety, is a process designed to establish, maintain, and promote safety among co-workers. With respect to
public safety, we will continue our efforts to maintain, 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.
• Commodity Revenue – Despite uncertainty regarding the U.S. economy, we expect record revenue in
2008 based on current economic indicators, forecasted demand, improved customer service, and
additional opportunities to reprice certain of our business. Yield increases and fuel surcharges will be the
primary drivers of commodity revenue growth in 2008. We expect that overall volume will fall within a
range of 1% higher to 1% lower than 2007, with continued softness in some market sectors.
• Transportation Plan – In 2008, we will continue to evaluate traffic flows and network logistic patterns to
identify additional opportunities to simplify operations and improve network efficiency and asset
utilization. We plan to maintain adequate manpower and locomotives, improve productivity using
industrial engineering techniques, and improve our operating margins.
• Fuel Prices – Fuel prices should remain volatile, with crude oil prices and conversion and regional spreads
fluctuating throughout the year. On average, we expect fuel prices to increase 15% to 20% above the
average price in 2007. 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.