3rd Quarter 2026 Earnings Release - UNION PACIFIC CORP

Explicit Guidance:

• Full-Year 2026 Reported EPS: Affirmed high single-digit growth range (specifically 9% growth achieved, vs 2025 reported EPS of $11.98, which included $0.30 from a Q4 land sale).
• Full-Year 2026 Operating Ratio: Guidance remains to continue improving core operating ratio, though reported OR is challenged by higher fuel prices (expected average Q4 fuel price of ~$4.85/gallon, up from Q3's $4.21).
• Full-Year 2026 Capital Expenditure (CapEx): Updated to $3.5 billion, representing a $200 million acceleration of 2027 planned projects to invest for growth.
• Cash Flow & Dividends: Free cash flow totaled $2.4 billion in Q3; dividend increased 3% (20th consecutive annual raise).
• Cash Reserves: $3.1 billion held as of Q3 end, to be grown further in anticipation of the Norfolk Southern merger closing in H2 2027.

Business-Segment Outlook:

• Premium Intermodal: On track for third consecutive record volume year in 2026; domestic intermodal grew 13% volume in Q3.
• International Intermodal: Expected to grow double digits in Q4 2026, having fully lapped prior tariff volatility.
• Automotive: International volumes expected to continue offsetting market softness via business wins; domestic auto parts driven by OEM growth and over-the-road conversions.
• Bulk (Grain): Positioned for further growth driven by strong export demand and renewable fuels (ethanol/feedstocks); new facilities at Big 5B and Bungie in Dalhart, Texas, expected to contribute upside.
• Coal: Facing continued headwinds from lower natural gas prices and elevated inventories; pricing discipline expected to offset market declines.
• Industrial: Metals and minerals expected to maintain strength from construction projects (LA/TX) and domestic steel production; petrochemicals benefiting from commissioning of Golden Triangle Polymers plant (TX) and strong export plastic demand.
• Renewables: Continued upside expected from renewable fuels and feedstocks supported by policy certainty.

Market and Competitive Outlook:

• Volume Trends: Management anticipates volume growth to remain in upper single-digit to double-digit range; Q3 2026 saw 6% car load growth, with Q4 volume expected to maintain strong momentum.
• Pricing Strategy: Commitment to "price to value of service"; expects pricing environment to strengthen in late 2026 through early 2027 as truck capacity tightens and index-based pricing resets to reflect higher trucking rates.
• Competitive Dynamics: Relying on service quality and efficiency to capture volume from trucking and barge; expects competitors to improve efficiency due to merger pressure.
• Service Performance: Maintaining focus on Service Performance Index (SPI); targets to continually challenge the team by setting thresholds at best monthly performance levels.

Macro / Industry Outlook:

• Fuel Prices: Q4 2026 fuel prices expected to average ~$4.85/gallon (up from Q3's $4.21), adding approximately 140 basis points of drag to the operating ratio if sustained.
• Economic Environment: Management expects to outperform broader macroeconomic indicators (e.g., industrial production up 1%, housing starts below expectations) through service excellence; consumer spending remains resilient despite inflationary pressures.
• Regulatory Timeline: Surface Transportation Board (STB) procedural schedule targets first earnings report as a merged company approximately one year from now (H2 2027); STB comments period begins November 18, 2026.
• Competition: Anticipates the merger will force competitors to improve service and efficiency; notes that other railroads lack "job for life" guarantees provided to employees.

Strategic Initiatives:

• Norfolk Southern Merger: Merging with Norfolk Southern expected to close in H2 2027; merger to deliver lower transportation costs, faster service, and seamless supply chain options via end-to-end rail network.
• M&A Negotiations: Finalizing agreement with Canadian National (CN) to address St. Louis/Kansas City overlap; stated no expectation of additional concessions to other railroads as the CN deal resolves the primary overlap.
• Network Expansion: Investing in new facilities (e.g., CHS CRUSH facility in Evansville, WI; Golden Triangle Polymers plant support) and infrastructure (Twin Cities, Phoenix, Inland Empire, Kansas City modernization).
• Asset Deployment: Accelerated CapEx to include pulling forward locomotive modernization and infrastructure projects; maintaining a surge buffer of ~289 locomotives for rapid deployment.
• Workforce: Hiring ~300+ employees in training to support volume growth; maintaining 100% commitment to "job for life" for employees.

Risks and Headwinds to Outlook:

• Fuel Cost Volatility: Primary near-term risk to margins; significant impact expected in Q4 2026 due to higher average fuel prices.
• Regulatory Uncertainty: Approval of the Norfolk Southern merger remains subject to STB review; potential conditions or comments from competitors/unions (e.g., BLET, CSX, BNSF) could alter the process, though management remains 99.999% confident of approval.
• Competitive Concessions: Risk of other railroads demanding concessions or "deals" during the merger review process, though management views these as "not real" (Santa Claus) without factual basis.
• Macro Volume Softness: Specific risks in coal volume (gas prices/inventories) and automotive market softness, though expected to be offset by business wins and intermodal strength.
• Operational Execution: Need to maintain surge buffers and workforce productivity to handle potential volume spikes; reliance on technology and fundamentals to sustain efficiency.

Management Tone on the Future:

• Confidence Level: Extremely high confidence in merger approval and future execution; management expresses "perpetual dissatisfaction" with current performance levels to drive continuous improvement.
• Strategic Focus: Reaffirmed commitment to the three key levers: Volume, Pricing, and Productivity; emphasizes that railroads are inherently more fuel-efficient and cost-advantaged than trucks.
• Merger Sentiment: Viewed as a "win-win" for the U.S. supply chain and customers; management is "willing to talk" to stakeholders but refuses to make "bad deals" or offer job-for-life guarantees that don't exist in the industry.
• Financial Resilience: Expresses confidence in handling volume leverage and maintaining record productivity despite higher fuel costs; views high fuel prices as a long-term competitive advantage for rail over trucking.

Miscellaneous:

• Executive Transition: CFO Jennifer Venna announced retirement/exit early next year; she will finish her tenure covering the early stages of the merger integration.
• Employee Sentiment: Internal survey indicates high employee support for the merger, citing job security and the $160k average compensation package.
• Competitor Reaction: Management notes that the merger announcement has already prompted competitors to "up their game" and improve efficiency.