Union Pacific 2012 Annual Report Download - page 22

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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 business 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.
EXECUTIVE SUMMARY
2012 Results
 Safety – Our employee safety results continued to improve in 2012. The employee injury incident rate
per 200,000 employee hours declined 9% from 2011, to a new record low. These results reflect
employee training, the move to standard work, and extensive efforts to identify and eliminate risk. Our
use of technologies such as laser, ultrasound, and acoustic vibration monitoring, which help identify
potential rail, wheel and axle failures before they occur contributed to the reduction of our equipment
incident rate to 9.38 per million train miles, another best ever result. With respect to public safety, we
closed 237 grade crossings in 2012 to reduce our exposure to incidents and continued use of video
cameras on our locomotives to analyze public safety incidents. We now have camera-equipped
locomotives in the lead position on over 97% of our through-freight trains. Despite our efforts during
2012, the rate of grade crossing incidents per million train miles increased 13% from 2011. Overall,
our 2012 safety results reflect our structured approach to reduce risk and eliminate incidents for our
employees, our customers and the public.
 Financial Performance – We produced another record-setting year in 2012, generating operating
income of $6.7 billion, an 18% increase over 2011. Despite flat volume, core pricing gains of 4.5%
and higher fuel surcharge recoveries more than offset inflation and higher depreciation expense to
drive the increase. Our operating ratio for 2012 of 67.8% was an all-time best, improving from last
year’s operating ratio of 70.7%. Net income of $3.9 billion surpassed our previous milestone set in
2011, translating into earnings of $8.27 per diluted share for 2012.
 Freight Revenues – Our freight revenues grew 6% year-over-year to $19.7 billion. Freight revenues
for four of the six commodity groups increased despite flat volume. Volume declines in Coal and
Agricultural Products offset double digit volume increases in Automotive and Chemicals. Core pricing
gains and higher fuel surcharges drove the growth in freight revenue in 2012 compared to 2011. Fuel
surcharges increased due to higher fuel prices, the lag effect of our programs (surcharges trail
fluctuations in fuel price by approximately two months) and new fuel surcharge provisions in
renegotiated contracts.
 Network Operations – In 2012, our business mix changed significantly both geographically and by
commodity. Nevertheless, by adjusting resources to match market and network requirements, we
continued operating an efficient and fluid network. As reported to the Association of American
Railroads (AAR), average train speed increased 4% in 2012 compared to 2011, reflecting more
efficient operations and relatively mild weather conditions compared to 2011, which included severe
winter weather, flooding, and extreme heat and drought that affected various parts of our network
during the year. Average terminal dwell time remained flat despite a shift in business mix to more
manifest traffic, which requires more switching, resulting in more terminal dwell time. Average rail car
inventory decreased slightly, reflecting productivity improvements and ongoing initiatives designed to
reduce the number of cars in our fleet. These operational improvements resulted in a record customer
satisfaction index in 2012.
 Fuel Prices – Despite consistent average crude oil barrel prices in 2011 and 2012, our price per
gallon of diesel fuel consumed increased 3% due to higher crude oil to diesel conversion spreads.
The higher spreads increased operating expenses by $105 million (excluding any impact from year-
over-year volume). A 2% decline in gross-ton miles partially offset the higher expenses. Our fuel
consumption rate did not change in 2012 from the rate in 2011.