For purposes of this report, unless the context otherwise requires, all references herein to "UPC", "Corporation", "we", "us", and "our" shall mean Union Pacific Corporation and its subsidiaries, including Union Pacific Railroad Company, which we separately refer to as "UPRR" or the "Railroad".

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and applicable notes to the Condensed Consolidated Financial Statements, Item 1, and other information included in this report. Our Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal and recurring adjustments) that are, in the opinion of management, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (GAAP).

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.

Available Information

Our Internet website is www.up.com. We make available free of charge on our website (under the "Investors" caption link) our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; our current reports on Form 8-K; our proxy statements; Forms 3, 4, and 5, filed on behalf of directors and executive officers; and amendments to such reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). We also make available on our website previously filed SEC reports and exhibits via a link to EDGAR on the SEC's Internet site at www.sec.gov. Additionally, our corporate governance materials, including By-Laws, Board Committee charters, governance guidelines and policies, and codes of conduct and ethics for directors, officers, and employees are available on our website. From time to time, the corporate governance materials on our website may be updated as necessary to comply with rules issued by the SEC and the New York Stock Exchange or as desirable to promote the effective and efficient governance of our company. Any security holder wishing to receive, without charge, a copy of any of our SEC filings or corporate governance materials should send a written request to:
Secretary, Union Pacific Corporation, 1400 Douglas Street, Omaha, NE 68179.

References to our website address in this report, including references in Management's Discussion and Analysis of Financial Condition and Results of Operations, Item 2, are provided as a convenience and do not constitute, and should not be deemed, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report.

Critical Accounting Policies and Estimates

We base our discussion and analysis of our financial condition and results of operations upon our Condensed Consolidated Financial Statements. The preparation of these financial statements requires

estimation and judgment that affect the reported amounts of revenues, expenses, assets, and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If these estimates differ materially from actual results, the impact on the Condensed Consolidated Financial Statements may be material. Our critical accounting policies are available in Item 7 of our 2008 Annual Report on Form 10-K. There have not been any significant changes with respect to these policies during the first six months of 2009.

RESULTS OF OPERATIONS

Quarterly Summary

We reported earnings of $0.92 per diluted share on net income of $468 million in the second quarter of 2009 compared to earnings of $1.02 per diluted share on net income of $531 million for the second quarter of 2008. Year-to-date, net income was $830 million versus $974 million for the same period in 2008. Freight revenues (excluding fuel surcharges) declined $727 million in the second quarter compared to the same period of 2008 driven by a 22% reduction in volume levels. Economic conditions continued to impact demand for our services across most market sectors. Consistent with the first quarter, we continued Company-wide efforts to improve efficiency and reduce costs, in addition to adjusting our resources to reflect lower demand. Through June 30, 2009, we removed from service approximately 2,000 road locomotives and 60,000 freight cars. Additionally, these demand-driven resource adjustments and our productivity initiatives combined to reduce our workforce by 10% compared to the second quarter 2008. These actions coupled with improved pricing, lower fuel prices, and reduced casualty expense primarily driven by improved trends in safety performance partially offset the impact of the volume decline.

In addition, a large real estate transaction improved earnings for the second quarter and year-to-date period of 2009 compared to 2008. In June of 2009, we closed a $118 million sale of land to the Regional Transportation District (RTD) in Colorado, resulting in a $116 million pre-tax gain. The agreement with the RTD involves a 33-mile industrial lead track in Boulder, Colorado.

Operationally, we improved network fluidity versus the second quarter of 2008. As reported to the Association of American Railroads (AAR), average train speed improved 20% during the second quarter of 2009 compared to 2008. Lower volume levels, network management initiatives, and continued focus on enhancing terminal processing all contributed to the improvement.

Operating Revenues



                               Three Months Ended                Six Months Ended
                                         June 30,        %               June 30,        %
     Millions of Dollars          2009       2008   Change        2009       2008   Change
     Freight revenues      $    3,121    $ 4,349     (28)%   $  6,361    $ 8,408     (24)%
     Other revenues               182        219    (17)          357        430    (17)
     Total                 $    3,303    $ 4,568     (28)%   $  6,718    $ 8,838     (24)%

Freight revenues are revenues generated by transporting freight or other materials from our six commodity groups. Freight revenues vary with volume (carloads) and average revenue per car (ARC).

ARC is driven by changes in price, traffic mix, and fuel surcharges. As a result of contractual obligations with some of our customers, we have provided incentives for meeting or exceeding specified cumulative volumes or shipping to and from specific locations, which we record as a reduction to freight revenues based on the actual or projected future shipments. We recognize freight revenues on a percentage-of-completion basis as freight moves from origin to destination. We allocate freight revenues between reporting periods based on the relative transit time in each reporting period and recognize expenses as we incur them.

Other revenues include revenues earned by our subsidiaries, revenues from our commuter rail operations, and accessorial revenues, which we earn when customers retain equipment owned or controlled by us or when we perform additional services such as switching or storage. We recognize other revenues as we perform services or meet contractual obligations.

Freight revenues and volume levels for all six commodity groups decreased during the second quarter and year-to-date period of 2009 as a result of the recessionary economy. We experienced the largest declines in automotive and industrial products. Lower fuel surcharges due to lower fuel prices also reduced freight revenues in the second quarter and year-to-date period of 2009 compared to 2008. ARC decreased 8% and 4% during the second quarter and year-to-date period driven by lower fuel cost recoveries, which were partially offset by core pricing gains. Fuel cost recoveries include fuel surcharge revenue and the impact of resetting the base fuel price for certain traffic, which is described below in more detail.

Our fuel surcharge programs (excluding index-based contract escalators that contain some provision for fuel) generated $84 million and $231 million in freight revenues in the second quarter and year-to-date period of 2009, compared to $585 million and $1.04 billion in the same periods of 2008, respectively. Declines in both fuel prices and volume levels drove the lower fuel surcharge amounts in both periods. Additionally, fuel surcharge revenue is not entirely comparable to prior periods due to implementation of new mileage-based fuel surcharge programs. In April 2007, we converted regulated traffic, which represents approximately 20% of our current revenue base, to mileage-based fuel surcharge programs. In addition, we continue to convert portions of our non-regulated traffic to mileage-based fuel surcharge programs. We also reset the base fuel price at which the new mileage-based fuel surcharges take effect. The resetting of the fuel price at which the fuel surcharge begins, in conjunction with rebasing the affected transportation rates to include a portion of what had been in the fuel surcharge, did not materially change our freight revenue as higher base rates offset lower fuel surcharge revenue.

The following tables summarize the year-over-year changes in freight revenues, revenue carloads, and ARC by commodity type:

                              Three Months Ended                 Six Months Ended
    Freight Revenues                    June 30,         %               June 30,         %
    Millions of Dollars          2009       2008    Change        2009       2008    Change
    Agricultural          $      618    $   778     (21)%    $  1,279    $ 1,534     (17)%
    Automotive                   163        352    (54)           325        715    (55)
    Chemicals                    499        654    (24)         1,012      1,257    (19)
    Energy                       715        919    (22)         1,522      1,776    (14)
    Industrial Products          531        877    (39)         1,077      1,650    (35)
    Intermodal                   595        769    (23)         1,146      1,476    (22)
    Total                 $    3,121    $ 4,349     (28)%    $  6,361    $ 8,408     (24)%

                              Three Months Ended              Six Months Ended
    Revenue Carloads                    June 30,        %             June 30,         %
    Thousands                  2009         2008   Change       2009      2008    Change
    Agricultural               203          236     (14)%       415       476     (13)%
    Automotive                  93          176    (47)         190       364    (48)
    Chemicals                  188          241    (22)         368       466    (21)
    Energy                     470          561    (16)         991     1,143    (13)
    Industrial Products        229          346    (34)         451       650    (31)
    Intermodal                 669          811    (18)       1,284     1,607    (20)
    Total                    1,852        2,371     (22)%     3,699     4,706     (21)%




                                 Three Months Ended                Six Months Ended
                                           June 30,        %               June 30,         %
   Average Revenue per Car          2009       2008   Change        2009       2008    Change
   Agricultural              $    3,045    $ 3,301      (8)%   $  3,081    $ 3,225      (4)%
   Automotive                     1,755      2,005    (12)        1,714      1,966    (13)
   Chemicals                      2,659      2,714     (2)        2,749      2,696       2
   Energy                         1,520      1,639     (7)        1,536      1,554     (1)
   Industrial Products            2,319      2,537     (9)        2,388      2,538     (6)
   Intermodal                       889        947     (6)          893        918     (3)
   Average                   $    1,685    $ 1,835      (8)%   $  1,720    $ 1,787      (4)%

Agricultural Products - Lower volume and fuel surcharges decreased agricultural freight revenue in the second quarter and six-month period of 2009 versus 2008. Price improvements partially offset these declines. Declines in export and domestic markets of 49% and 13%, respectively, drove lower shipments of corn and feed grains. Weaker export demand in the Pacific Northwest and Gulf regions also reduced shipments of wheat and food grains in the second quarter and year-to-date period of 2009 compared to the same periods of 2008.

Automotive - A 49% and 44% decline in shipments of finished vehicles and auto parts, respectively, combined with lower fuel surcharges reduced freight revenue in the second quarter of 2009 compared to 2008. Year-to-date, shipments of finished vehicles and auto parts declined 52% and 42%, respectively, compared to 2008. Economic conditions led to poor sales and reduced vehicle production during both periods of 2009, which in turn reduced shipments of finished vehicles and parts. In addition, two major domestic automotive manufacturers declared bankruptcy in the second quarter of 2009, further affecting production levels.

Chemicals - Reduced volume levels and fuel surcharges decreased chemicals freight revenue in the second quarter and six-month period of 2009 versus the same periods of 2008. Pricing improvements partially offset these declines. Weak market conditions negatively impacted shipments of liquid and dry chemicals in the second quarter and year-to-date period of 2009 compared to 2008, driving volume levels down 23% and 26%, respectively. In addition, high inventories, production curtailments, and a reduction in advance purchases prior to the spring planting season negatively impacted fertilizer shipments in the second quarter and six-month period by 43% and 39%, respectively.

Energy - Lower volume and fuel surcharges reduced freight revenue from energy shipments in the second quarter and year-to-date period of 2009 versus the same periods of 2008. Price increases partially offset these declines. Shipments from the Southern Powder River Basin of Wyoming (SPRB) and the Colorado and Utah mines decreased 14% and 36%, respectively, in the second quarter of 2009 compared to 2008. Year-to-date, shipments from the SPRB and the Colorado and Utah mines were down 13% and 29%, respectively, compared to 2008. Higher coal inventories and continued weakness in the economy has resulted in reduced demand at our utility customers, resulting in lower volumes. Production problems at the Colorado and Utah mines and the loss of SPRB customer contracts also contributed to the volume declines.

Industrial Products - Reduced volume and fuel surcharges resulted in lower freight revenue from industrial products shipments in the second quarter and six-month period of 2009 versus the same periods of 2008. Price improvements partially offset these declines. Weak demand and inventory reductions resulting from the economic downturn drove a 64% and a 57% decline in steel shipments in the second quarter and six-month period of 2009 compared to 2008. The continued weakness in the housing market, surplus production, and overall market uncertainty resulted in lower lumber, paper, and newsprint shipments in the second quarter and year-to-date period of 2009 versus 2008. In addition, cement and stone shipments declined in both periods due to both high inventories and weak commercial and residential construction activity.

Intermodal - Decreased volumes and fuel surcharges reduced freight revenue from intermodal shipments in the second quarter and year-to-date period of 2009 versus the same periods of 2008, partially offset by pricing gains. Volume from international traffic decreased 30% in both the second quarter and six-month period of 2009 compared to 2008, reflecting the recessionary economy, continued weak imports from Asia, and diversions to non-UPRR served ports. Additionally, continued weakness in the domestic housing and automotive sectors translated into weak demand in large sectors of the international intermodal market, which also contributed to the volume declines. Conversely, domestic traffic increased 4% in the second quarter of 2009 compared to 2008. Conversions of traffic from trucks to rail reflecting improved service and competitive pricing more than offset the overall impact of economic conditions and the loss of a customer contract. Year-to-date, domestic traffic decreased 2% compared to 2009, reflecting economic conditions.

Mexico Business - Each of our commodity groups include revenue from shipments to and from Mexico. Revenue from Mexico business decreased 32% in the second quarter of 2009 versus 2008 to $284 million. Volume declined in five of our six commodity groups, down 29% in aggregate during the second quarter of 2009, with substantial declines in automotive and industrial products shipments. Year-to-date, revenue decreased 31% versus 2008 to $557 million, driven by volume declines of 29% versus 2008.

Operating Expenses



                                               Three Months Ended                Six Months Ended
                                                         June 30,        %               June 30,         %
Millions of Dollars                               2009       2008   Change        2009       2008    Change
Compensation and benefits                  $      976    $ 1,101     (11)%   $  2,046    $ 2,233      (8)%
Purchased services and materials                  391        494    (21)          790        963    (18)
Fuel                                              370      1,159    (68)          756      2,116    (64)
Depreciation                                      355        346      3           700        686       2
Equipment and other rents                         307        338     (9)          624        680     (8)
Other                                             153        199    (23)          379        441    (14)
Total                                      $    2,552    $ 3,637     (30)%   $  5,295    $ 7,119     (26)%

Operating expenses decreased $1.1 billion and $1.8 billion in the second quarter and six-month period of 2009 versus the comparable periods in 2008. Our fuel price per gallon declined 56% and 52% during the second quarter and year-to-date period, decreasing operating expenses by $466 million and $801 million, compared to 2008. Cost savings from lower volume, productivity improvements, better resource utilization, and reduced casualty costs also decreased operating expenses in both periods. Conversely, wage and benefit inflation partially offset these reductions.

Compensation and Benefits - Compensation and benefits include wages, payroll taxes, health and welfare costs, pension costs, other postretirement benefits, and incentive costs. Lower volume and productivity initiatives in numerous areas of our operations led to 10% and 9% declines in our workforce in the second quarter and year-to-date period of 2009 compared to 2008, saving $150 million and $256 million, respectively. Conversely, general wage and benefit inflation increased expenses in the second quarter and year-to-date period, partially offsetting these reductions.

Purchased Services and Materials - Purchased services and materials expense includes the costs of services purchased from outside contractors; materials used to maintain the Railroad's lines, structures, and equipment; costs of operating facilities jointly used by UPRR and other railroads; transportation and lodging for train crew employees; trucking and contracting costs for intermodal containers; leased automobile maintenance expenses; and tools and supplies. Lower volume levels drove cost reductions of $51 million, $19 million and $12 million in contract services expense (including equipment maintenance), transportation and lodging costs, and expenses associated with operating jointly owned facilities, respectively, in the second quarter of 2009 versus 2008. Year-to-date, contract services expense (including equipment maintenance), transportation and lodging costs, and expenses associated with operating jointly owned facilities decreased $99 million, $33 million and $18 million, respectively, versus the same period of 2008. In addition, we performed fewer locomotive repairs, which reduced locomotive materials expenses by $19 million and $26 million during the second quarter and year-to-date period of 2009 versus 2008. Clean-up and restoration expenses related to the January 2008 Cascade mudslide and June 2008 Midwest flooding also increased expenses in the six-month period of 2008, creating a favorable year-over-year comparison.

Fuel - Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy equipment. Lower diesel fuel prices, which averaged $1.57 and $1.53 per gallon (including taxes and transportation costs) in the second quarter and six-month period of 2009 compared to $3.60 and $3.21 per gallon in the same periods in 2008, reduced expenses by $466 million and $801 million. Volume, as measured by gross ton-miles, decreased 22% and 21% in the second quarter and six-month period versus

2008, lowering expenses by $234 million and $412 million, respectively, compared to 2008. A 6% improvement in our fuel consumption rate in both the second quarter and six-month period resulted in $65 million and $111 million of cost savings versus 2008. Newer, more fuel efficient locomotives; our fuel conservation programs; improved network operations; and a shift in commodity mix, primarily due to fewer premium (automotive and intermodal) shipments, drove the improvement.

Depreciation - The majority of depreciation relates to road property, including rail, ties, ballast, and other track material. A higher depreciable asset base, reflecting higher capital spending in recent years, increased depreciation expense in the second quarter and year-to-date period of 2009. Lower depreciation rates for rail and other track material offset most of the increase. The lower rates, which became effective January 1, 2009, after review and approval by the Surface Transportation Board of the U.S. Department of Transportation, resulted from longer asset lives and reduced track usage (based on lower gross ton-miles). Costs also increased $5 million in the second quarter of 2009 due to the restructuring of equipment leases (see further discussion in this Item 2 under Liquidity and Capital Resources - Financing Activities).

Equipment and Other Rents - Equipment and other rents expense primarily includes rental expense that the Railroad pays for freight cars owned by other railroads or private companies; freight car, intermodal, and locomotive leases; other specialty equipment leases; and office and other rentals. Fewer shipments of industrial products and intermodal containers primarily contributed to the $25 million and $48 million reductions in our short-term freight car rental expense in the second quarter and six-month period of 2009 versus 2008. Lower lease expense for freight cars, intermodal containers, locomotives, and fleet vehicles also decreased costs in both periods. In addition, the restructuring of equipment leases reduced locomotive lease expense by $8 million in the second quarter of 2009 (see further discussion in this Item 2 under Liquidity and Capital Resources - Financing Activities).

Other - Other expenses include personal injury, freight and property damage, insurance, environmental, bad debt, state and local taxes, utilities, telephone and cellular, employee travel, computer software, and other general expenses. Other costs were lower in the second quarter and six-month period of 2009 compared to 2008, primarily driven by a decrease in personal injury expense. We completed actuarial studies in both the second quarter of 2009 and 2008, which resulted in a net reduction of $38 million in personal injury expense in the second quarter of 2009 versus 2008, reflecting improvements in our safety experience and lower estimated costs to resolve claims. Expenses for employee travel and utilities also decreased in the second quarter and six-month period of 2009 compared to 2008. Expenses for freight and property damages declined in the year-to-date period versus 2008 due to lower volume levels. Conversely, higher property taxes and an increase in bad debt expense related to uncollectible receivables due to the recessionary economy partially offset these lower costs in the second quarter and year-to-date period of 2009 versus 2008.

Non-Operating Items



                               Three Months Ended                Six Months Ended
                                         June 30,        %               June 30,        %
     Millions of Dollars         2009        2008   Change         2009      2008   Change
     Other income          $     135     $    19      F      $     158    $   44      F
     Interest expense           (150)       (128)    17           (291)     (254)    15
     Income taxes               (268)       (291)     (8)%        (460)     (535)   (14)%

Other Income - Other income increased in the second quarter and six-month period of 2009 compared to 2008 due to higher gains from real estate sales (including the $116 million pre-tax gain from the RTD transaction) and lower interest expense on our sale of receivables program resulting from lower interest rates and a lower outstanding balance. Lower returns on cash investments, reflecting lower interest rates, and reduced rental and licensing income in both periods partially offset these increases.

Interest Expense - Interest expense increased in the second quarter and year-to-date period of 2009 versus 2008 due to higher weighted-average debt levels. In the second quarter, the weighted-average debt level was $9.6 billion (including the restructuring of equipment leases in May of 2009), compared to $8.2 billion in 2008. Year-to-date, the weighted-average debt level was $9.3 billion compared to $8.0 billion in 2008. A lower effective interest rate of 6.2% in both the second quarter and year-to-date period of 2009 compared to 6.3% in both the second quarter and year-to-date period of 2008 partially offset the higher weighted-average debt levels in both periods.

Income Taxes - Income taxes were lower in the second quarter and year-to-date . . .