Union Pacific

[jeaton]

Ed

With regard to Frailey's sentence that you quoted, it seems to me that you WERE left to wonder.

Forgiving the loans made to senior managers to purchase UP stock was not accounting hocus pocus. There was nothing illegal or shady about that action. It had to have Director approval and as the article noted it was reported in the company prospectus. This is just another type of bonus and the kind of thing that is often offered to senior corporate managers as an incentive to meet specified goals.

That is not to say that it was necessarily a wise move on the part of the directors or top management. Clearly the railroad got screwed up pretty badly and service went in the tank. I think there was a forum topic or topics about UP's problems earlier this year. My own view was that no excuse for the labor shortage could have any merit, and had I been the Board of Directors, I may have been using Donald Trump's favorite phrase. Of course, I am not the Union Pacific Corporation Board of Directors and I don't have any direct ownership of UP stock, so I don't think I have any rights in that area.

So why didn't the UP Directors make some management changes. Here is my guess. The deal was set up. Bring in EPS at $5.00 or more and as a bonus we will forgive $31,000,000 worth of the loans. PERIOD. I am willing to bet that there were no provisions of the deal that said any service standards had to be met, or that there couldn't be a meltdown, or that only X number of customer complaints would be acceptable. Davidson went out and did what he committed to do. What then would be the basis for the board to fire him? You did what we asked you to do, but we just don't like how you did it, so we are going to fire you anyway?

In spite of all the problems the UP had the numbers haven't come out so bad. Here are the earnings per share from 1999 to 2003. $3.22, 3.34, 3.77, 5.07 (2002, the bonus year) and $5.02 for 2003. The unaudited results for 2004 through 3 quarters is $2.00 per share and Wall Street estimates $2.80 for the year. It would be impossible to do an accurate what if and come with a different set of numbers, but if the hiring had gone at a schedule to meet needs, 2002 EPS would certainly have been lower, 2003 may also have been lower and it is fair to say that 2004 would have come out better. Just how much better is impossible to say. Don't forget that the UP also has had to deal with the capacity problems, brought on in part by the extremely poor condition of the SP, and that may be just as much a constraint on earnings as anything else.

It is also not possible to say for certain, but the UP shareholders haven't faired so badly. 1999-2002 dividends per share were 80 cents and in 2003 the dividend paid was raised to 92 cents. Share prices? Closed at 65.80 today. The five year high was in late 2003 at just under $70. From 5 years ago UP is up 68% while the S&P 500 is down 12%. The three year change is UP up 15%, S&P 500 up 5%. I have seen much worse happen.

I happen to admire Frailey's work and I think he did as good as anybody could to explain just how the crew shortgage problem came about.

Jay

(I also know that Frailey gets some good help writting his stories).

[MP173]

I really enjoy reading anything that Fred Frailey writes. He is a very talented writer. Any article that he pens is in depth and very informative. I must take exception with the article Rising Phoenix on a winged shield in this month's Trains. Not so much for the content, but for one line. BTW, I have not finished reading the article, but should tonight.

Frailey states "In the end, you are left to wonder how a company run by so many smart, savvy, experienced people could screw up so thoroughly."

Mr. Frailey....this is the THIRD TIME in less than 10 years that the "smart, savvy, experience people" dropped the ball.

How could he have included that line in that article about that company?

Other than that, this excellent article is his usual good stuff.

I am appalled by the accounting hocus pocus, razzle dazzle which went on during fiscal 2002 which enabled the company to "forgive and knock off the books a collective $31 million of the $47 million loaned" the excecutives for purchasing stock in the company. Further, the $5.05 mark was only reached by a 75 cent per share "extraordinary adjustments" that was made.

This story points out that there appears to be something very rotten in Omaha, and other points in the winged empire.

For management to completely disregard the future for current results is something we have learned to live with. But, when that total disregard is laced with 31 million personal reasons to do so, it borders on if not criminal, then at least a lack of fidicuary responsibilty to the shareholders.

Will someone please explain to me how *** Davidson has survived? Is the board of directors so weak to allow him to remain? Is the corporate culture so inbred that there is no one to stand up and disagree? Is his power in the company so concentrated that he is insulated?

Most telling, do the financial markets have such a low opinion of the railroad industry that they allow 3 massive meltdowns?

We have enjoyed very open discussion of the Canadian National situation. Yet, the UP's dilemma is considerable more critical than the CN's? Even on this board, Davidson enjoys a protective shield.


What gives?

Ed