Union Pacific 2011 Annual Report Download - page 7

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goods, lumber and other miscellaneous products. In 2011, this group generated 17% of Union Pacific’s
total freight revenue. Commercial and highway construction drives shipments of steel and construction
products, consisting of rock, cement and roofing materials. Industrial manufacturing plants receive
nonferrous metals and industrial minerals. Paper and consumer goods, including furniture and
appliances, move to major metropolitan areas for consumers. Lumber shipments originate primarily in the
pacific northwest and Canada and move throughout the U.S. for use in new home construction and repair
and remodeling.
Intermodal – Our Intermodal business includes two shipment categories: international and domestic.
International business consists of imported and exported container traffic that mainly passes through
West Coast ports served by UP’s extensive terminal network. Domestic business includes container and
trailer traffic picked up and delivered within North America for intermodal marketing companies (primarily
shipper agents and logistics companies), as well as truckload carriers. Less-than-truckload and package
carriers with time-sensitive business requirements are also an important part of these domestic
shipments. Together, international and domestic business generated 20% of UP’s 2011 freight revenue.
Seasonality – Some of the commodities we carry have peak shipping seasons, reflecting either or both
the nature of the commodity, such as certain agricultural and food products that have specific growing
and harvesting seasons, and the demand cycle for the commodity, such as intermodal traffic, which
generally has a peak shipping season during the third quarter to meet holiday-related demand for
consumer goods during the fourth quarter. The peak shipping seasons for these commodities can vary
considerably from year to year depending upon various factors, including the strength of domestic and
international economies and currencies and the strength of harvests and market prices for agricultural
products. In response to an annual request delivered by the Surface Transportation Board (STB) of the
U.S. Department of Transportation (DOT) to all of the Class I railroads operating in the U.S., we issue a
publicly available letter during the third quarter detailing our plans for handling traffic during the third and
fourth quarters and providing other information requested by the STB.
Working Capital – At December 31, 2011 and 2010, we had a working capital surplus. This reflects a
strong cash position, which provides enhanced liquidity in an uncertain economic environment. In
addition, we believe we have adequate access to capital markets to meet cash requirements, and we
have sufficient financial capacity to satisfy our current liabilities.
Competition – We are subject to competition from other railroads, motor carriers, ship and barge
operators, and pipelines. Our main rail competitor is Burlington Northern Santa Fe Corporation. Its rail
subsidiary, BNSF Railway Company (BNSF), operates parallel routes in many of our main traffic
corridors. In addition, we operate in corridors served by other railroads and motor carriers. Motor carrier
competition exists for five of our six commodity groups (excluding energy). Because of the proximity of
our routes to major inland and Gulf Coast waterways, barges can be particularly competitive, especially
for grain and bulk commodities. In addition to price competition, we face competition with respect to
transit times and quality and reliability of service. While we must build or acquire and maintain our rail
system, trucks and barges are able to use public rights-of-way maintained by public entities. Any future
improvements or expenditures materially increasing the quality or reducing the costs of these alternative
modes of transportation, or legislation releasing motor carriers from their size or weight limitations, could
have a material adverse effect on our business.
Key Suppliers – We depend on two key domestic suppliers of high horsepower locomotives. Due to the
capital intensive nature of the locomotive manufacturing business and sophistication of this equipment,
potential new suppliers face high barriers to entry in this industry. Therefore, if one of these domestic
suppliers discontinues manufacturing locomotives for any reason, including insolvency or bankruptcy, we
could experience a significant cost increase and risk reduced availability of the locomotives that are
necessary to our operations. Additionally, for a high percentage of our rail purchases, we utilize two
suppliers (one domestic and one international) that meet our specifications. Rail is critical for both
maintenance of our network and replacement and improvement or expansion of our network and facilities.
Rail manufacturing also has high barriers to entry, and, if one of those suppliers discontinues operations
for any reason, including insolvency or bankruptcy, we could experience cost increases and difficulty
obtaining rail.
Employees – Approximately 86% of our 44,861 full-time-equivalent employees are represented by 14
major rail unions. In January 2010, the nation’s largest freight railroads began the current round of
negotiations with the labor unions. Generally, contract negotiations with the various unions take place