聯合太平洋集團 (UNP) 2004 Q4 法說會逐字稿

Good afternoon and welcome to the Union Pacific fourth quarter 2004 earnings release teleconference.

At this time all participants are in a listen-only mode.

If time allows the floor will be open for questions and comments following the presentation.

If at any point you wish to register your question please press star followed by one on your telephone key pad.

Please stand by.

Your conference will begin momentarily.

Good afternoon and thank you brave souls for joining us here this afternoon for our fourth quarter earnings release.

With us today are Ike Evans, our Vice Chairman, Jim Young, President, Rob Knight our CFO, and then sitting next to him is Jack Koraleski our Head Marketing Officer and then Dennis Duffy our Head of Operations.

I will open this up this afternoon with a few remarks about the quarter and then Rob will take you through the financial details.

Jim will give you a quick recap of our operations in '04 and then set the stage for a discussion about our network redesign initiatives with Jack and Dennis providing technicolor.

I will return then to make a few comments to provide you with some perspective about both our quarterly and full year outlook and then we will be ready to take your questions.

Before we get into the quarterly review I would like to say a few words about the floods and the devastation that we've experienced out west.

When the rains finally subsided on January the 12, we found that mother nature had left behind a series of washouts, mud slides, and general flooding.

The storm had affected virtually every route into and out of Los Angeles, temporarily isolating an area that normally produces about 25 percent of our volume either inbound or outbound on a daily basis.

Our rail line between Las Vegas and Salt Lake was also washed out due to the storm.

Don't forget during this same period of time we had about 20 feet of snow in the Donner pass area.

So it's been a sporting time for us without a roof on our factory.

Since that time the men and women of the Union Pacific have been working night and day rising to the challenge of rebuilding the western part of our railroad.

I'm pleased to report that as of this morning we've restored service to every location.

I would have to qualify that statement by pointing out that the railroad isn't completely up to snuff or back to their preflood capacity.

Still we've made great progress and our folks are going to stay hard after it until we do get back to 100 percent of capacity.

For the fourth quarter we are reporting $0.30 per share versus the $1.28 per share that we earned a year ago from continuing operations.

Included in these reported earnings is the impact of the $0.58 non-cash charge for unasserted asbestos claims that we announced in December.

Excluding that charge our earnings would have been $0.88 per share.

The results for the fourth quarter are consistent with what we've experienced throughout much of the year.

Record demand for our service and strong yield initiatives resulted in all time record quarterly revenues.

Total operating revenue was again over the $3 billion mark and for the first time our commodity revenue topped $3 billion as well.

Unfortunately the record high fuel prices averaged $1.46 per gallon in the fourth quarter and that's $0.57 a gallon increase over what we paid during the same period of '03 which added $90 million to our expense net of the fuel surcharge recovery.

In addition our financial results continued to be impacted by inefficient operations as we struggled to maintain our velocity against record peak season volume.

Last year's peak was elongated as volumes remained high through November, hitting an all time record seven-day carloaded total of just over 194,000 cars on November 24, the day before Thanksgiving.

Full year '04 earnings were reported at 2.30 per share versus 4.07 in '03 from continuing operations.

Again these earnings include the fourth quarter asbestos charge.

So excluding that amount our earnings would have been 2.89 a share.

As we discussed throughout 2004 higher fuel prices had a major impact on our performance, increasing costs by nearly $200 million net of the fuel surcharge recovery.

Our slower velocity and failure cost added another $200 million in expense while our incremental hiring and training tacked on another 100 million.

I should mention that because our 2004 performance was below our expectations and our capabilities bonuses will not be paid to anyone in the executive ranks.

We clearly left a lot of opportunity on the table last year and we plan to correct them this year.

The highlight for '04 and certainly the most encouraging longer term development has been the unprecedented demand that we've experienced during this past year.

Our operating revenues grew to a record 12.2 billion, a 6 percent increase over '03 and our first year ever over the $12 billion mark.

Importantly we see this growth trend continuing as demand for transportation service exceeds the available supply.

During 2004 we made substantial progress in strengthening our resource base with crew and locomotive additions.

We are moving ahead in '05 despite the challenge of the flood to make these resources more productive by improving our network management process.

Jim and his team will give you more of the details but essentially it's a full design, redesign of our operating network.

Through these efforts already underway we intend to simplify our operations, improve velocity, and better manage the volume flowing on to our railroad in the face of this continued strong demand.

We are absolutely committed to turning around our performance this year, both operationally and financially.

With that let me turn it over to Rob to talk about the financial details, Rob?

Thanks, Dick, and good morning.

Before we get started I want to make certain you refer to the cautionary statement at the end of the press release and understand that the statement applies to any forward-looking comments that we make here today.

I'd like to start today by taking a look at our revenue growth.

During the fourth quarter our commodity revenue grew 8 percent to a record $3.1 billion.

Our strongest growth of the year.

In addition our ag products, industrial products and Intermodal business groups had best ever quarters in the fourth quarter as well as having their best ever yearly revenue performance.

The automotive group had record fourth quarter and full year revenue and in chemicals the strength they demonstrated all year resulted in record fourth quarter revenue and their highest yearly revenue since 1996.

Energy was the only group that was down in the quarter but flat for the full year in terms of both revenue and tonnage.

This was pretty consistent with our full year expectation given the large hole we had to fill from the business that we lost in the beginning of the '04.

Looking at the components of our strong fourth quarter commodity revenue growth, the drivers were fuel surcharge, yield, and volume.

Fuel surcharges contributed roughly half of the growth or about $105 million.

This was our strongest fuel recovery of the year and I will talk more about that in a minute.

Our yield initiatives added another 3 points to our revenue growth as we are able to touch more of our revenue base with each passing quarter.

We are working hard to improve pricing.

And these efforts are starting to show through in the fourth quarter.

Our mix was basically flat and revenue growth added about 1 percent.

As you will hear from Jim and Jack in a minute volume is becoming a smaller piece of our growth.

This slide shows both the fourth quarter and full year look at the expense challenges that we faced.

For the quarter record high fuel prices averaging $1.46 in the quarter added 195 million to our expense line.

Failure cost added 35 million as our velocity declined throughout the quarter.

Our continued efforts to build our work force added 24 million in expense for hiring and training and the final phase of our headquarter consolidation added 5 million in move related expenses to the quarter.

While this does have a negative impact on our operating margin the move is essentially earnings neutral on a full year basis because of tax credit incentives.

I won't walk you through the full year numbers but about 764 million of expense was added to our cost structure in '04.

Some of the items such as hiring and training efforts as well as the headquarter consolidation costs will either be less or not occur at all in '05.

After a terrible start to the year with the West Coast storm our emphasis going forward will clearly be on reducing our failure costs.

As we walk you through the individual expense lines I'll provide some perspective on where we see opportunities as well as continued challenges for 2005.

Moving to the individual expense categories, salary and benefits expense was up 52 million, or 5 percent in the quarter.

As I just mentioned hiring and training contributed 24 million of this increase and is directly related to the 6 percent headcount increase we saw in the quarter.

Our service issues contributed about 25 million in the form of higher recrew rates and cost per crew.

Total expenses were held down somewhat in the quarter and cost per employee were actually lower as wage inflation was offset by the reduction for incentive compensation that Dick just mentioned.

During the year we hired nearly 5,500 new employees into train service.

But after attrition the average annual headcount was up a little over 1,900 or 4 percent to 48,295.

The year over year increase is almost entirely attributable to the net additions in our train and engine ranks.

As for full year 2005 headcount estimates we know that we will continue to hire train and engine men but that will predominantly be to backfill for attrition.

At this point we would estimate that our headcount could be flat to maybe up 1 percent year-over-year.

As will you hear from both Jim and Dennis one of our challenges in '05 is to quickly bring these new employees to a high level of productivity.

Another factor to consider in planning for 2005 is anticipated inflation of around 3 percent.

And we're thinking about the first quarter salaries and benefit expense could see some additional cost challenges related to the West Coast storm.

The next line item is rent expense, up 26 million in the quarter, or 9 percent.

Drivers in this category include higher rental payments associated with the 8 percent increase in Intermodal carloads as well as higher rents for our short term locomotive leases.

Looking out to 2005 increases in this category will be somewhat dependent on our network velocity.

At this point we would look for 3 to 5 percent growth coming in regularly throughout the year.

Again there could be some extra first quarter expense pressure due to holding cars on the western part of our system.

The main driver of the full year increase will be the effect of our back end loaded 2004 locomotive leases and our planned 2005 lease activity.

Depreciation expense increased 10 million in the quarter, a 4 percent gain.

Looking at 2005, we expect further increases in this category of about 5 to 6 percent as a result of our ongoing capital programs.

Turning now to fuel.

Up nearly 60 percent in the quarter or $197 million, we were able to recover a little over 105 million from our fuel surcharge recovery programs, or about 54 percent recovery rate.

For the full year 2004 our recovery rate was a little more than 50 percent.

Looking at where we see fuel for 2005 the outlook would indicate there could be continued pressure on our earnings especially in the first half of the year.

Our first quarter estimate is currently in the $1.30 to $1.35 per gallon range but prices remain volatile and have risen again in the last couple of weeks.

While that price looks good compared to -- with the almost $1.46 per gallon we paid in fourth quarter it's almost a 30 percent increase above what we paid a year ago.

The bright spot for us will be with our fuel recovery efforts.

Which continue to expand and we're likely to benefit somewhat from a lag effect of the fourth quarters high prices.

Turning back to the income statement.

Materials and supplies expense was up 19 percent in the quarter driven primarily by higher freight car material costs and increase in locomotive overhauls.

For 2005 we are looking for more moderate growth in this category although we could see continued pressure as a result of higher material costs such as steel and increased maintenance programs.

Finally we have the purchase services and other category.

This is where we recorded our 247 million pretax charge for unasserted asbestos claims.

If you set that aside the category actually increased by 83 million, or a little more than 23 percent.

The main drivers behind that increase were higher contract costs as well as higher state and local taxes including property, sales and use as well as certain fuel taxes.

Looking to 2005 we would expect increased velocity to reduce failure costs in this category apart from the West Coast storm impact.

You will remember from our asbestos release that we expect about an 8 million after tax annual reduction due to the charge.

In addition other casualty costs should be lower throughout the impact or without the impact of the Arkansas court case and San Antonio derailment that we experienced in 2004.

So if you look at the full picture of our operating expense on a GAAP basis our quarterly operating margin declined nearly 13.6 points year-over-year including the 247 million for asbestos charge.

If you exclude that our fourth quarter margin is 14 percent or a 6 point decline.

Again, service issues, higher fuel prices and our headquarter consolidation impacted margins.

To finish out the income statement, other income was 22 million in the quarter, 88 million for the full year.

That was in line with our expectations for 2004 and is about where we would expect to be again in 2005; somewhere in the 75 to $100 million range.

Interest expense was $130 million, down about 4 million for the quarter, primarily due to lower average debt levels.

For the full year we saved 47 million in interest expense reflecting the continued benefit of our debt reduction efforts in 2003 when as you may recall we retired the 1.5 billion of TIDE.

Income tax expense was down considerably in the quarter to $17 million primarily due to the effect of the asbestos charge.

Excluding the charge our effective tax rate was about 32 percent, down a percentage point from last year as we continued to see the effects of state tax credits primarily associated with our headquarter relocation as well as the benefit of a foreign tax credit adjustment.

Looking at 2005 we would expect a more normalized tax rate of around 37 to 38 percent.

The end result of the quarter was income from continuing operations of $79 million and earnings per share of $0.30 per diluted share.

This includes the after tax asbestos charge of 154 million or $0.58 per diluted share.

Turning now to capital spending and leasing.

This slide shows our 5-year trends.

The bars on the left show our capital spending as they impact our free cash flow calculations.

As you can see our spending has trended up over the last several years but not dramatically.

In 2004 we spent 1.88 billion in cash capital, about 75 million less than the 1.95 billion that we had originally planned.

This shortfall was in part due to the delay in some facility and track capacity projects.

The bars on the right show both long-term and flexible lease spending which flows through our income statement over time in the form of rent expense.

From a leasing perspective we've talked before about our long-term equipment financing.

In addition as you know we financed some of our core locomotives with flexible leases that give us the option to keep these units for shorter or longer periods of time depending on our needs.

In the yellow portion of the bars we've shown our long-term operating leases.

On top of that in blue we've estimated what our flexible financing arrangements would look like on a long-term basis to give you an all in look.

These operating leases have stayed pretty constant over the last several years with 2003 the outlier due to the advance of locomotive acquisitions in 2002.

Looking ahead to 2005 we haven't yet reviewed our capital budget with our board but given the growth opportunities we see it's probably safe to say that cash capital will be somewhat higher than in 2004.

An additional consideration is the impact of the West Coast storm and the capital requirement associated with that incident.

We are currently estimating that at around $100 million although some of this could be recovered through insurance.

We've also talked about the planned acquisition of 315 new locomotives in 2005.

Those units as well as some additional equipment will likely be financed through operating leases of some sort.

To conclude here's a look at our free cash flow and debt to cap ratios.

From a cash flow perspective we ended the year with $215 million of positive free cash flow after dividends.

This is down from last year as our service issues and fuel costs were a drain on cash.

Another factor impacting cash was an additional 76 million paid for dividends reflecting last year's 30 percent increase.

From a debt to cap perspective we ended the year pretty flat.

When you look at our balance sheet we have nearly $1 billion in cash on the books.

That's a 450 million increase year-over-year, some of which were just pre-funding of debt payments that are due in the early part of 2005.

So again we really ended the year with a pretty strong balance sheet.

And with that I will turn it over to Jim.

Thanks, Rob.

Good afternoon, everyone.

I'll take a few minutes here to look backward at 2004 but I know most of you are interested in where we are today and where we are going tomorrow.

That's why we've got Dennis and Jack up here to talk about our network redesign project.

If you look at the chart, the chart gives you our average velocity by quarter both in 2004 and 2003.

It also shows average 7-day loadings.

At the end of the day here there are three things you walk away from.

Record demand, in fact December we set our 16th consecutive record month in terms of loading.

You will also note, though, strong pricing.

You will see in fourth quarter it will be our best pricing quarter of the year.

And then probably most importantly after some pickups in velocity in third quarter we really fell off in fourth quarter.

Two things drove it.

The volume in terms of peak season and also we started to see the impact of winter weather particularly out in California in December.

If you take this one more level down and you look at our 4 operating regions in terms of velocity and also around January you can see here the impact of the storms up in the upper left quadrant you have the western region and you can see we really fell off there in terms of both acute fourth quarter and also where we are in January.

Right now we are running around 20 miles an hour in January.

The northern region you can see we fell off fourth quarter.

We held our own in January which there is a relationship here because we got our power out of synch.

It does impact all of our regions here in terms of locomotive distribution.

On the other side you can see down in the southern and the central regions we did see some improvement here.

And again we get the storm behind us we do expect our numbers to continue to improve.

At the last earnings call I talked about 3 initiatives that we have focused on, had a lot of discussion about locomotive resources.

I would say we are in very good shape here.

We have another 315 locomotives coming at us here in the first 6 months.

We are very healthy right now.

But as I'd also mention as our velocity picks up we have got a couple hundred short-term locomotives that we will turn back.

Crews are in good shape.

We have got some issues remaining with training engineers but we will have engineers come on board here over the next 6 months.

In fact, I'll tell you, we really are a recovery in what we've seen.

We are much healthier with resources in January than we were a year ago and our recovery in terms of the issues we had with the flood was much, much better than what we would have been a year ago.

The most important item on here is network management, both Jack and Dennis will talk to you about what we are focusing on here but it really is how do you operate a network in a constrained world here and I will give you a little more technicolor here in a minute.

You look at our business mix.

This probably splits it up among manifest bulk and premium.

I also note for you what the average velocity is for that business.

You can see manifest run around 19 miles an hour.

This is what we averaged for 2004.

You can see bulks around 20 and then premium is around 26 miles an hour.

What's most important about this is the network management program we have, you are going to show Dennis talk a little bit about how we reduce variability in our network.

And running a manifest business can be a little more complicated because of all the handlings you have.

On the other hand we've always believed and still believe it's a real strength of our franchise in terms of where we are going here.

Dennis will give you a little more technicolor on that here in a minute.

If you look at when we talk network management it's a two-prong approach.

We have the customer side;

Jack will give you a little more technicolor there.

But really what we are doing here and we have a lot of our customers that are working with us in terms of looking at throughput, looking at 7-day loadings, looking at how can we together be more efficient on our loadings.

It also may mean in some cases that there is certain business that we won't move on the railroads depending on what it does velocity-wise and margin.

Dennis will talk on the operations side, and again, this is a very focused effort on looking at really redesigning our network.

We spent the fourth quarter putting resources in place in terms of hiring industrial engineers putting the kind of resource you need to do this effectively.

We are calling this plan our unified plan in the operating department in terms of where we are going forward.

Next chart to give you a little technicolor here on our railroad targets we are looking at 5 to 7 percent revenue growth.

I think Rob mentioned to you that will be this year looking around 1 to 2 percent volume growth.

Now there's upside if we can get our velocity up quicker however it will be a real transition year for us.

First half of the year we will complete our network analyses, implement the unified plan, continue our progress on yield.

We have a lot of work to do there in terms of looking at the returns on our business and pricing.

And as I mentioned earlier we will graduate about 1,000 new locomotive engineers into our program by -- over the first half.

Second half I would look at in terms of where we really leverage the results.

Again you get the velocity moving up and we get back to the kinds of productivity targets we used to see before and go from there.

So with that I am going to turn it over to Jack to talk about our marketing plan.

Thanks, Jim, good afternoon.

Over the first 6 years of our yield strategy we've been able to grow revenue faster than the economy and we did it not only when demand was strong but we also did it during the lean years of the recessionary economy that we've had for the past several years.

So now we're entering into a new era.

We're entering an era where the demand for transportation service is much stronger than the supply that's available.

So what I'd like to do today is take you through how our commercial strategy is evolving so that we can continue to meet our yield strategy objectives and then I'll spend a little bit of time talking about 2005 and how we see the year shaping up.

In some ways we are where we always wanted to be with the demand for our service outstripping the supply.

And while we recognize that economic cycles are going to continue to exist all indications are that when you look out in there into the future that this shift in the supply/demand curve is going to persist over time.

So keeping that in mind and following what we've laid out in our yield strategy we really have 4 key principals that drive the way we are approaching the marketplace today.

First one is that the value of our capacity has increased.

You know, the demand for rail service has never been greater and it's creating a strong pricing environment and so our prices are in fact going up.

Secondly every carload of business that we put on our railroad has to be reinvestible.

Now in the past there always wasn't enough business to fill every train with reinvestible business.

So what we did was we took advantage of the economies of scale and covered fixed cost and took on some business that in today's environment were either pricing a lot more aggressively or in some cases were just taking it off the railroad altogether.

Thirdly we have to choose which business we will handle.

We have more demand for service than what we have space on our railroad today.

So once we meet our contractual obligations we have large segments of our business that in today's world we are having to make decisions as to which business rides on our trains and which business doesn't.

And finally, going forward new business as well as existing contracts that come up for renewal are undergoing a very careful scrutiny to ensure that the terms and conditions of those deals meet the changing environment that we are seeing today.

This is our challenge it's also our biggest opportunity.

Now that we have the ability to be somewhat more selective about the business that we put on our railroad we have the opportunity to match our available supply with the book of business that's going to allow us to not only optimize yield but also improve railroad velocity.

Going forward that means 3 things for us.

First of all we are going to continue to emphasize growth in our most profitable lines of business.

Secondly our pricing actions will improve the profitability of the business that today may not be reinvestible.

And thirdly that we are ensuring our price structure takes into account the full impact that each piece of business has on the velocity of our network.

While our overall objective of driving yield improvement really hasn't changed our commercial strategy does and here's what some of those changes mean.

In the past we've leveraged the economies of scale at greater volumes brought to the railroad.

But today we are going to leverage strong demand to drive yield improvement by swapping out less profitable business for higher yielding moves and then we can also help in terms of controlling the flow of business on the railroad.

We are really pumped up today about one of our pilot projects, we have an Intermodal gate reservation system on the West Coast showing some real promise for us.

Just to give you a quick example we launched it in November.

In November if you brought a box to our yard in Lathrop (ph). 40 percent of the time it would make the train.

Today 90 percent of the time when you bring the box there it gets on the train.

In November that trains was hauling about 90 containers.

Today it's 115 containers.

So greater throughput, greater reliability for our customers, greater consistency, and more volume on the train.

So it's just a win for us.

In the past we locked in large segments of business to create a stable revenue base.

Going forward we are going to continue to do some contracting but we are going to do it for strategic reasons.

We want to be able to lock in a solid return on investment.

We want to make sure that that business is reinvestible, that it has fuel escalation and a decent price escalation format for us.

And we also want to make sure that during the soft economic times we've got a consistent cash flow that we can count on.

Over the past 5 years we've talked to you about legacy contracts those big old contracts that came up for renewal, we had to use price discounts in order to protect that business.

Well, going forward we view each one of those contracts as an opportunity for price increase, the opportunity to build in fuel escalations, I'm sorry, fuel surcharges as well as decent price escalations for ourselves.

Finally the modest price increase environment of the past has really given away to a much more robust price environment as Rob indicated we really saw the fruits of that for the first time in 2004 and we expect that to continue in the foreseeable future.

Going forward you are going to see a bigger piece of our business start to move under public pricing.

Those tariffs give us maximum flexibility to bring business on or to meter it down and we can use both price and equipment placement as tools to make that happen.

Over the past several years we have been transitioning away from contract business.

For instance in our industrial products business where today 30 percent of that revenue moves under public pricing and hopefully by the end of 2005 our objective would be to convert another 10 percent.

In our energy business, we launched CIRC 111 last year for our coal moves coming out of the Powder River Basin and we have been very pleased with customers' reaction to that tool.

That flexibility, the flexibility that tariffs provide allows us to optimize traffic flows.

It actually helps us to improve velocity, throughput and yield.

And then also putting the public pricing out on the Web it gives us the opportunity to really significantly simplify the administrative burden both for ourselves and our customers because we are managing a lot fewer of those complex contracts.

As I said before we are going to use contracts going forward but on a more strategic basis.

Those contracts are going to contain terms and conditions that will give us greater pricing flexibility.

We've moved away from incenting volume with price discounts and into a world where we are going to have metering mechanisms where we can either change the price or even push business away if we exceed mutually agreed upon volumes.

Finally fuel cost recovery mechanisms, reasonable price escalations are all going to be part of how we go forward to ensure that we will be able to invest in capacity where we need to do so.

The economic outlook for 2005 calls for a strong U.S. economy and continued strength in international trade.

So that being the case we are expecting another year of strong demand for transportation services.

This is the way we see our revenue plan shaping up for 2005.

As Jim said in a particularly strong economy we are looking to hold volume growth to no more than 1 to 2 percent.

Our price plan is actually designed to meter the flow of business onto the railroad and to drive up the profitability of the business that we do handle.

We are looking for our core price improvement plus our fuel surcharge to provide 4 to 5 percent of growth.

Total revenue growth in the 5 to 7 percent range would yield improving in every 1 of our 6 businesses.

The largest revenue growth we expect to be in energy and Intermodal.

Energy is being driven by strong demand plus some new coal business that we secured a couple of years ago.

In our Intermodal world it's strong demand both in our international and domestic business.

Now energy and Intermodal are going to be actually our only 2 business lines where we expect to see total volume growth year-over-year.

In ag products we expect strong market demand will drive prices higher and we have allowed for some volume growth in the emerging markets of ethanol and DDG.

Automobile production anticipated to be slightly down or flat with 2004 levels as the auto manufacturers seek to reduce their inventories.

We expect our chemical business will be strong with our major customers producing at or near capacity because the gap between gas and natural -- or crude oil prices continues to favor North American production.

We see that shaping up well for us in 2005.

And finally, last but not least across the board in our industrial products business we continue to see very strong demand and expect that will continue throughout the year.

That's kind of the wrap up of how we see 2005 from revenue and a marketing and sales perspective.

With that I am going to turn it over to Dennis who will talk about the operating perspective.

Thank you, Jack, and good afternoon.

Before I delve into my presentation today let me start with a few words on safety.

In the midst of a very challenging and busy year we extended our trend of safety improvements in 2004.

Looking at employee safety these results is especially remarkable considering we graduated nearly 5,000 new conductors during the year.

The approach with our new hires is a multiple touch strategy and incorporates training, communication, and quality assurance.

From a public safety standpoint we struggled to maintain the improvement trend, as did the rest of the industry.

But that's not an acceptable outcome.

And in 2005 we will continue our efforts to upgrade crossings, install video cameras on locomotives, close grate crossings, and educate the public on crossing safety.

Turning to our customers '04 marks our fifth consecutive year of derailment incident reduction.

This is a continuous improvement area where the focus is on prevention.

For 2005 new safety measurements will expand the focus beyond government definition for even greater coverage of employee and public safety and including enhancements to our return to work programs.

So with that as background let me discuss the operating's role in the velocity strategy that Jim outlined.

In addition to safety our operating group is focused on three key areas to improve network velocity and drive customer satisfaction.

First network solutions.

We are developing network solutions that help us run our railroad smarter and seek to optimize the whole versus local or individual results.

Our model here is, think network, act locally.

Resource supply and productivity secondly, throughout last year and continuing in '05 we significantly increased the investment in our 5 critical resources.

Giving us more capacity, more capability on our networks than we've ever had before.

As both Jim and Rob have mentioned, though, our key current challenge is to improve the utilization and the productivity of these resources.

And thirdly quality execution and accountability; overriding all of these efforts will be our commitment to quality, plan execution, and personal accountability to get it done.

Now let's take a closer look at each of these areas.

The transportation plan, our key plan as we refer to it is the playback for our -- playbook for our train operations.

The record volumes you've heard described have provided an opportunity to completely redesign U.P. scheduled network and working with multi-modal company we are doing just that under the banner as Jim mentioned, the unified plan.

The objective of the redesign is to reduce the total workload on the network thus increasing velocity, decreasing dwell and improving plan achievability, a very important point.

The top chart you see here shows the number of trains that perform working routes from origin to destination.

Today only about one-third of our regularly scheduled trains have no work events along the way.

About 12 percent of our trains stop and work 3 or more times.

This work is potentially a major source of congestion and the answer here is to design more trains that go straight to destination without work events.

The bottom chart then addresses the complexity and expense issue Jim discussed regarding our scheduled network.

This shows the number of times manifest cars get switched at an intermediate turn off before arriving at destination.

The average is just under 3 handlings.

Every one of them expensive and time-consuming.

The big opportunity here is to work on the tail.

Those cars that get to handle 4, 5, and 6 and more times in their journey.

So we are connecting back to the lean initiatives that I'll cover in a moment to focus these efforts in the areas where we most need to improve the throughput and the intent is to run to plan.

Before implementation of the unified plan we expect to reduce our car handlings by at least 3 to 6 percent and work events by 10 to 20 percent.

The one example, a subset of the unified plan is an initiative we've been working on in Chicago in our Chicago terminal strategy.

By dedicating specific Intermodal terminals to a single line of business we can greatly simplify our network, improve equipment utilization, increase single destination trains by 88 percent and reduce the associated work events by 45 percent in Chicago area on a daily basis; a very key perspective from improving the fluidity in Chicago.

The key here is the work that Jack's team is doing working with our customers to make this happen and we are targeting full implementation of the unified plan and the Chicago terminal strategy in 2Q '05.

At the same time that we are redesigning the key plan we are also working as I mentioned on our most constrained facilities to find better ways to deliver more throughput.

Applying the lean principles and borrowing from the manufacturing world we are identifying bottlenecks that limit productivity and velocity.

At the left of the chart is a sample diagram of a hump yards workflow.

The lean process starts by measuring production rates of each sub-component and clearly finding the point of greatest constraint.

Because the basic tenant is this-- the overall facility will only produce at the rate of its worse bottleneck.

So we focus our action and attention on this first bottleneck, drive up its production rate and then move on to the next bottleneck.

Working with McKenzie and Company we have applied this concept at all of our Chicago Intermodal ramps where we have seen up to a 20 percent improvement in processing time.

We have completed the hump yard in Centennial, Fort Worth, and we are currently working in the Houston, Englewood yard as well as along the Sunset Corridor in the Tucson and El Paso yards.

Our plan is to look at all of our major locomotive shops and hump yards in '05.

Another principle of lean is uniform workflows to prevent keeling or bunching in a terminal or corridor.

This is particularly important when you consider accommodating swings in demand either day-to-day or season-to-season.

As an example is the work we've done in North Little Rock.

Before we took the action daily surges above capacity caused trains to be held out, velocity to decline, and dwell to increase.

An inter-rail network there's always that ripple effect that connectivity effect like we are experience to a certain expect from the West Coast storm.

After adjusting the T plan and applying new flow management principles Little Rock now operates win capacity limits with much less variability.

We have eliminated trains queuing outside the terminal and achieved a 10 percent improvement in car connections and dwell time.

It's all about controlling the launches, managing the end routes, and working with the receiving terminals to prevent bunching.

We also currently have a team applying these same principles on our critical Sunset Corridor.

Their objectives are the same, increase velocity, deliver consistent throughput and improve crew utilization.

Project Sunrise as we are calling it is scheduled for full implementation by the end of February, early March.

We've talked in the past about the significance of our gateways and that 40 percent of our business involves an interchange partner, the same concepts that apply to network solutions apply to our gateways.

We started with the Canadian Pacific working to improve throughput at our Eastport Gateway in Idaho.

At the beginning of 2004 we were only interchanging 4 to 5 trains a day despite seeing significantly more demand.

Applying the lean principles we achieved a 53 percent reduction in dwell, nearly double our daily training camp and reduced 3 crews by 36 percent between Hinkell and Eastport Idaho.

Now, we're currently working on similar initiative in New Orleans and we'll continue to replicate this process at all of our other key interchange gateways.

Everyone has talked today about the resources that have been added into our network and we think we've got the bases covered for 2005 and beyond.

What I would like to reinforce is that we have not lost our focus on productivity.

In fact that commitment has grown.

Through the network initiatives that I just mentioned improvements will be made.

In addition we have an individual productivity programs associated with all of our critical assets that will further generate efficiency gains.

All the analyses and planning we do is meaningless if there's not an absolute commitment to execute the changes and personal accountability for results.

For 2005 we have very clear goals that must be achieved.

For example, each of our operating groups has plans to deal with their top two various to velocity.

In every case we have developed a bridge chart like the one shown on the slide that displays the variation elements to take them from where they were in 2004 to where they need to be in 2005.

Behind that is what's called a one-pager that summarizes the critical factors and implementation plans as well as identifies the major risk to execution.

This is the framework that we are using for our operating team to keep focused on the goal, establish the milestones to check progress, and assign personal accountability for the results.

In addition to the crews, locomotive, and freight cars that we've added to our system let me talk to you about where we plan to target our infrastructure dollars in 2005.

Importantly these are also the areas where we -- where you have seen some of our greatest growth over the last several years.

On the Sunset we plan to add another 50 miles of double track as well as complete terminal enhancements in Phoenix, Tucson, and El Paso.

On our central Corridor from L.A. to Chicago we are going to extend sidings along the South Central to compliment our Sunset operations.

We will also add sidings on the Can Am route to support the growth that we just talked about to the Eastport Gateway.

In North Platte yard we're adding a third main line to facilitate run through trains off the east side and we're in our second year of a three year signal upgrade program across Iowa.

On our north-south route we're doing terminal work in San Antonio to upgrade the yard, support Intermodal expansion and to support the new Toyota plant opening in 2006.

We're also building a new Intermodal facility in Dallas.

Additional improvements in Kansas City and along the coal route to the Ohio River will support new increased business levels there.

These are just a few of the projects in an aggressive capital plan to help eliminate bottlenecks, improve velocity, and facilitate growth.

So I just walked you through the key focused areas for the operating department.

When you step back though and you think about it for just a moment the difference makers that will take us from where we are today to where we need to be are these, a more robust business planning process that Jack talked about is being coordinated between marketing and operations to manage an efficient level of profitable business.

A unified plan strategy that will reduce work events, eliminate car handlings, and increase velocity.

A solid resource plan that includes adequate operating managers and productivity initiatives, a capital strategy that includes investments at key bottleneck locations that provide incremental capacity and enhanced industrial engineering capability for improved throughput and efficiency.

And most importantly, a renewed quality commitment supported by a sense of urgency to get it done.

With that let me turn it over to Dick to wrap things up.

Thank you, Dennis.

The operating initiatives just described coupled with our renewed quality focus are critical to producing superior customer service and financial results.

Before I give you our 2005 outlook let me briefly summarize what the team has laid out as Union Pacific's challenges and opportunities.

Every challenge on this list is truly an opportunity as well.

At the top of the list is service.

It's essential as we make operational improvements and run a quality railroad.

Jim and his team outlined the scope of our network management initiatives and we believe the benefits of these can be exponential.

The demand for rail service continues to exceed supply, creating an opportunity to improve our business mix and improve our yields.

But the challenge will be as it was in '04 to reach a point of equilibrium on our railroad by controlling the volume that comes onto the system.

Finally fuel prices will remain a wildcard.

Although crude oil prices have fallen a little bit from the $55 per barrel high we saw last October they remain historically high and are more than $15 above where we started out in '04.

We will continue to expand our fuel surcharge coverage but rising prices can still create a risk.

Conversely if prices were to fall we'd clearly reap a benefit.

Looking more closely at the first quarter the impact and aftermath of the recent storm out west has made our forecasting efforts even more complex than normal.

As we mentioned earlier we are quite pleased to have the last routes, the post line and the Caliente sub open again as of this morning.

However it will take some time before we get these lines back up to full speed.

They are limited at this point.

However it's still very difficult to predict what impact the disruptions have had or may continue to have for a little while on the overall network.

With all of that in mind our best guess at revenue growth for the quarter would be in the 4 to 6 percent range.

A lot of that will depend on how much business we lost because of weather issues and how much was simply deferred.

As I mentioned fuel price is also a wildcard.

We are currently projecting that fuel price will be about $0.30 to $0.35 higher than the $1.02 per gallon we paid in the first quarter of '04, a big increase.

As for the impact of the storm disaster itself we are still trying to sort through things as you can well imagine but based on what we know today our best estimate is that it could approach or exceed $200 million in total; about $100 million of that would be for capital and the remainder would hit operating income in the form of lost revenue and higher costs that could equate to $0.25 to $0.30 a share.

Now we do have insurance coverage.

With a $50 million deductible.

But we know it will take some time before we can work all this out with our insurance carriers.

So these estimates don't yet include any insurance recovery.

Taking all of this together and also factoring in the broader impacts of the flood disruptions on our railroad we are currently estimating that first quarter earnings could be around $0.30 a share give or take a nickel.

Now looking at all the moving parts here there is clearly a great deal of uncertainty in these estimates but it's the best guess we've got as of today.

As the quarter develops, if these estimates change significantly, we will give you an update.

Clearly this is less than we had hoped it would be and less than the $0.63 we reported in the first quarter of 2004.

So we are obviously off to a difficult start for the year.

Looking ahead there is no doubt we've got our share of challenges and opportunities in front of us for '05.

As both Jim and Jack have already laid out we do feel optimistic about our revenue growth prospects.

Our current expectation is for full year revenue growth in the 5 to 7 percent range.

Of course that will depend somewhat on the ultimate impact of the floods.

On the other hand we also could have some upside here if demand remains strong and our operations show good improvement.

As for fuel we are estimating that crude oil will average between 40 and $45 for the year, which translates into $1.20 to $1.30 per gallon of diesel.

That compares with an average of $1.22 in 2004.

Prices are a little higher than that today but we are still expecting them to moderate somewhat.

Under that scenario fuel cost would put pressure on the year-over-year comparisons in the first half and then could ease somewhat later in the year.

With all of the uncertainty surrounding the flood impacts and the timing of our overall recovery efforts there are still too many unknowns to be able to provide you with a reliable full year earnings targets as of today.

With that said I want to reemphasize that our team is doing yeomen's work to put the impact of the flooding issues behind us.

On top of that and more importantly for the long-term we are greatly encouraged by the potential of our network redesign.

As these initiatives gain momentum we expect to see our financial performance improve.

To round out our expectations for the full year Rob has already talked about our broad targets for the '05 capital budget.

We will be reviewing this with our Board of Directors shortly.

But the bottom line on capital spending is that it must be supported by returns that would allow us to raise the overall level of our return on invested capital.

Assuming our cash capital is about 2 billion we would expect to have positive free cash flow after dividends again this year.

As with our earnings outlook the exact amount of free cash will be largely dependent on our operational improvement and the reduction of failure cost in the network.

In addition we will need to factor in the ultimate cost and recovery associated with the recent storm.

We will update this guidance as the year progresses and our financial picture firms up.

As we close the books on 2004 and begin implementing the redesign of our network we are looking forward to the potential of the New Year.

We realize there's a lot of hard work ahead to increase our velocity and improve our returns but we are focused on that task as we work to better our Company for the benefit of all of our stakeholders.

With that we would be happy to take your questions.

Yes, sir.

It's Tom Wadewitz from Bear Stearns.

I have got two different questions for you.

The first one is in terms of infrastructure you talked about both plans for operational improvement and also increased infrastructure spending.

I'm wondering how much -- how long do you think the infrastructure investment needs to last, is this a multistage process where you spend more like $2.5 billion in CapEx including the leases for several years or do you think you can address some of the let's say terminal and track capacity issues in 2005 and then have CapEx come down beyond that?

That's a great question our infrastructure spending has got several components.

As you know we've had a stepped up maintenance efforts here as well and I'm happy to say that we had a great year again in '04 where we put in close to 4.5 million ties, I guess, and just a little under 1,000 miles of rail and that's been an increased program we've had for about 3 years and that's going to go on a few more years.

We also have had some incremental spending for capacity expansion which Dennis pretty much reviewed the areas where the significant dollars have gone, in the Omaha to Chicago area, the north-south line particularly in southern Missouri and then the Sunset route.

This year we will have some incremental spending around San Antonio as well to support the new Toyota plant and some improvements there.

If you go through all that the one substantial thing that we are really looking at is the Sunset route.

And the track we are on today, it's a multi-year program of about 50 miles a year.

And as you know it costs $2.5 million a mile to build an additional track.

And I think the timing of that is going to depend on our returns and the demand, as our returns increase and the demands there we probably could accelerate that spending but we also have the flexibility of going forward on an incremental basis as well.

Jim, do you see it.

No, I think that's right, Dick.

The wildcard will be the Sunset Corridor and we will look at the returns.

We have seen our pricing in fourth quarter was as strong as it's been in a long time.

And we can go as fast or as slow as we choose depending on how we see the economics.

Okay.

And then the second question is on pricing.

Obviously the good news from all this is the capacity side pricing is very strong.

I wonder if you can tell me roughly how much of your portfolio turns over in 2005 that you would be able to significantly reprice up and if that will be enough to offset perhaps the cost side pressure and perhaps the earnings be up year-over-year, any sense on that?

Jack, would you like to take that?

Yes, Tom, we have 44 percent of our business that's covered under one year letter quotes and tariffs so all of that business will come up and then we have 56 percent that's tied up under contracts and roughly 25 percent of that will probably come up for a re-bid sometime during the course of this year.

That doesn't say we're not going to get price increase on the remainder of that business because they have escalation clauses and things like that that will kick in on a contract-by-contract basis.

But that's pretty much the way it lays out.

Does that get your question Tom?

Yes.

Any thoughts on the earning side whether they could be up or down year-over-year?

Well, I think that's a -- Rob, do you want to?

Well, I think the key there, Tom, is focusing on getting our network velocity recovering as quickly as we can because obviously that's where the expense pressure that you reference comes in along with the improving returns that Jack alludes to through the contracts that come up and I think it just really ties to our ability to get our velocity up as quickly as we can and our network running as fluid as we can.

And then we will go from there.

I think the answer is yes.

(Inaudible question -- microphone inaccessible) A question for you, where you saw the Washington outlook this year, sort of two-fold, one is do you have any fears that some of the papers attacks on the industry in general and you in particular about safety may lead to some problems coming out of, new regulation or some form out of the FRA. and on the other hand if you see the opportunity with the new transportation bill assuming we ever get one for more money for the Chicago project, the create project to go forward or other things like that, where you see the good or the bad shaping up this year?

It's really hard to predict with any accuracy what's going to happen politically.

But as far as our focus on safety and compliance, it's always been strong and the fact, you know that we have -- I don't want to take off on newspapers here but the New York Times is an unusual publication to say the least.

It's like the plaintiff attorneys are writing the articles.

But put that aside that doesn't govern how we conduct ourselves.

We try to run an absolutely safe railroad, comply with the rules and regulations of the law.

And focus on continuous improvement.

I think what Dennis showed you a moment ago shows that and we are achieving that.

And the second part of your question.

The upside potential? (Inaudible question -- microphone inaccessible)

I have no idea what's going to happen with the transportation bill but I do think there is -- and I would ask others to give this input too, I do think that the need for smoothing out transportation through Chicago is very high on everybody's radar and I think there's a real potential that there could be a public private partnership there to make that go forward.

I don't quite know what the timing of it's going to be but it's such a compelling project where it's a win win for everybody, I have got to believe that it will succeed at some point.

Scott?

Yes, a couple of questions, I understand the unified plan, just help me understand a little bit how this is positioned differently than NDI or Network Design and Integration where several years ago there was an effort to have a looking at ops versus marketing and trying to get the balance right, how is this different, how is this a reformulation?

Help me understand the nuances of why this is different and what it's going to do to your operations.

It sounds very complex.

I know you looked at this for a long time but how quickly can we expect how much results and how is it different than NDI.

I think the results should start to become evident in the second quarter and then really take off in the second half.

Dennis, do you want to take that?

I think the one major difference is, Scott, is that this is a holistic look of the entire network.

Before we would take a look at a maybe a corridor or a particular terminal but as we talked about, the volumes have provided us an opportunity now to completely take a look at this thing and redesign it from stem to stern.

That includes our terminals, our corridors, our assets, the flows, the balance, working with Jacks guys, getting -- looking for balanced opportunities, working with our customers to do that.

Redefining the role of our terminals like we are doing in the Intermodal with the potential Intermodal growth that's out there right now.

So this is really more from a holistic perspective and not an incremental basis.

We think there's great opportunity here; not only for -- to take outwork events but to simplify our network and improve the plan achievability.

I think this whole lean industrial engineering approach is back when we had NDI something that we really hadn't focused on but it's just making a huge difference in the way we look at things and sizing things around recognizing where is the bottleneck, what's the next move after we remove that bottleneck and what is the potential here.

And we've just seen it pay off in spades.

You've heard us talk about it before in the Intermodal operations in Chicago and now that's started to spread itself to our electronic classification yards and we are seeing some nice, nice, nice results from it.

Then if I could just a couple of quick ones.

On fuel could you help us with how much of your targeted pricing next year is fuel recovery and upticking the amount of fuel recovery you're getting and then also what your hedge is?

What percent?

I know it's low.

Hedge is easy, but Jack or Rob, do you--?

It's 0.

Nothing hedged for 2005.

And we would expect in terms of fuel recovery as reported earlier today, '04 we recovered over 50 percent of that delta above and the way we measured it as you all know is above that $0.75 sort of normalized price range.

We recovered in excess of 50 percent of that delta in '04.

We would expect that rate in '05 to be up, upward of -- our run rate coming out of '04 was more like 60, 65 percent.

So we would expect depending on what happens with fuel prices in '05 because you can find yourself chasing the tail given the lag that our recovery rate should be in the 60 plus kind of range, 60, 65 kind of range.

Thanks.

Jennifer Ritter from Lehman Brothers.

You guys, you are talking about kind of containing volume growth to 1 or 2 percent and I understand why that's necessary in the near term but I'm assuming that if demand continues to grow as it is your plan is to allow volume to grow at a faster pace.

Is that correct?

And at what time frame could we think about volume growing faster than the 1 to 2 percent?

I will give you my perspective on that which may differ from these others somewhat.

If we get our network flowing properly and start to get our lottery up -- our focus initially will be on instead of immediately taking in additional volume is to get failure cost down.

We have incurred substantial failure cost as you've seen associated with congestion and lower velocity.

So we want to improve velocity, get failure cost out and then meter business in where it makes sense.

So I don't have an exact time frame for that but we are going to work diligently, get velocity out and get failure cost out because we just, it kills me, we can't stand to get that built into our system.

We have got to get it out.

Jim, do you--?

Yes, Jennifer, and keep in mind the network design process is one that creates capacity.

You've heard us talk about the last decision is putting that dowel on the ground but this is really redesigning your process and creating capacity.

And I said earlier when we said 1 to 2 percent, that's what we'e targeting this year there could be upside, again depending on how fast our velocity goes.

Thanks.

Just a quick follow up on that then, are you talking about being at capacity right now is that why that 1 percent kind of limitation?

Or could you take on more?

Capacity is not a finite thing.

It is by certain corridors.

Like the Sunset Corridor.

We're at capacity on the Sunset Corridor.

We are pressing capacity on the South Central between Los Angeles and Salt Lake City.

There's other areas we are not at capacity.

So, you know, it's not, it's a little more complicated answer than probably you would like to hear but some areas the railroad we're bumping capacity other areas we are still in pretty good shape.

Okay.

Now and part of that is designing the kind of products and targeting the markets where you do have capacity.

It's very important the way we are approaching these today.

Now at the end of the day it's all inter-related.

We know the Sunset Corridor today, I talked about that earlier the velocity there impacts what's going on in the northern region but really taking a very hard look at where you have capacity, how you introduce products, and then how do you control that flow.

If you think about variability in a process we have an industrial engineer we hired from outside the industry, this is his career designing efficient manufacturing processes.

He looked at the variability and said no business can earn a rate of return to reach the cost of capital with that kind of variability.

Because if you have variability you have to have excess capacity to handle it so that really is our goal.

Did I hear right, Jack, in fact, did you hire multi-modal you said for redesigning this network plan and is there a path that you've laid out as far as each different phase of the network or is there one giant cut over date you are doing the entire thing, I mean, looking at CSX they kind of when they did this they walked through a different phased roll-out, can you talk a little bit about the planned phase roll-out?

That's exactly what we are doing is that same thing is we are looking at corridors and specific terminals and the way we'll be cut in will be that way but we wanted to look at it first so we didn't paint ourselves into a box and design something in one particular corridor that has the connectivity impacts and I think CSX did it the same way and yes, they have worked with us on a phased approach.

And that's what we're defining right as we speak.

Just one last quick follow up if I could for Rob, I just want to make sure I got this right when you talked about your CapEx of 1.8, 1.9 billion, plus another 450 million of leases that you are going to add on, two years ago you said you had virtually no leases and it was all in the 1.9 capital budget, so it's more like a 2.3, 2.4 billion type of CapEx number if we look at that in a combined method?

I think the number you are referring to 2, 3 years ago we had the leases, the flexible leases in the 2, 3 year ago time frame.

But--

(Inaudible question -- microphone inaccessible)

Yes, in some of those earlier years, Ken, we had some locomotive leases in those cash capital bars that I showed on the chart.

Okay, I'm not sure--.

We are trying to normalize things is what we have tried to do here.

So on a normalized basis if you were to add what you are going to add on leases and what you are going to cash CapEx it's something like 2.3, 2.4 billion, if I were to take the 350 million of leases you're going to do in locomotives plus the 1.8, 1.9 of CapEx.

And some other leasing activity that we've be looking at, we have other equipment leases for '05 that we'll be looking at but we haven't finalized our leasing plans for '05 plans at this point yet.

Thank you.

Jordan?

Hi.

Jordan Alliger, Deutsche Bank.

A couple of things, one, given the plan and the roll-out of the plan, give some sense for how would you metric velocity improvements during the course of the year, is there stages that you would look for as giving concrete evidence of it taking whole?

Well, Duff, correctionally there is but I don't know that there are specific milestones.

We have a pretty good feel for what we are going to get out of it in terms of work events and then we have an idea what that means to us in delay.

And we certainly would expect that we would see continuous improvement from the point that we start to cut over.

In fact even short of the cut over we expect continuous improvement.

We expect continuous improvement; we expect continuous improvement as soon as we get this winter storm behind us quite honestly.

But then as we begin to cut over and take out the work events and simplify our terminal plan as well as the take out the work events we would think that we will see some momentum build behind our loss initiatives.

Duff you have some inside information, you said as soon as we get this winter storm behind us, it's not even February yet.

Put my mind at rest here.

I'm not counting on any more and certainly not what we've had so far year-to-date.

It's longer term sort of in that 22, 23 miles per hour or more type of range is that we're higher.

I think historically we've been there before Jordan and I don't think there's any reason to think that we won't be there again.

Secondly in terms of the yield increase for '05 I think you had mentioned about 4 to 5 percent between price and fuel surcharge, what would you say the fuel surcharge component is and could that yield number wind up being conservative or a service to some degree a limiting factor on some of the price because it would seem like with the surcharge recovery going up maybe that could be a little conservative.

If you look at the, if you look at the 5 to 7 percent, if you look at our price capture component of that of the 4 to 5 it's about one-third fuel surcharge at the 40 to $45 barrel and two-thirds core price, and there could be some upside to that and in terms of the service situation I mean you need to step back and look at what happens in the marketplace what we see coming at us from the economy and those kinds of things and the current economy, current demand we don't really see that pricing being at risk.

Thank you.

We obviously would prefer though that we were giving great service and our customers were walking in volunteering price increases.

It's not as happy a scenario as we would like it to be.

You need an Amen on that.

Jason Seidl, Avondale Partners.

Jim, you mentioned that you were going to get about 100 short term locos out there that should be rolling over probably in the second half of this year.

How much more expensive is a short term locomotive versus what new ones you guys are going to be taking on, the lease?

It's significant.

Not only from just the pure lease cost of leasing a short time but when you think about fuel efficiency, you think about maintenance costs, it's not unusual, it could be 40, 50 percent higher than the cost on a monthly rate for a new locomotive.

And the reliability factor is a huge difference and as you know when you have a locomotive failure out there on the main line it's painful.

A bigger picture question, Duff, maybe you can tackle this one, if I'm looking out and your service is recovered and you still have 40, $45 a barrel oil can Union Pacific get back to the 80 OR range is that achievable?

Absolutely.

In fact, you may think I'm getting old and senile here but I have never seen opportunities as good as they are today.

With the business demands that the railroad has and finally the opportunity to get the kind of rates that we've deserved for a long time but haven't been able to put in effect, the opportunities today are better, honestly, I think than any time since deregulation.

It's, we just have got to get this thing all pulled together now and get our railroad running correctly, get the velocity up, capture the business that we want and the business that is less than reinvestible, get it up to where it's at reinvestible levels, it's honest to goodness I would say the most optimistic period I've ever seen.

Okay.

Well, thank you for braving the snow and turning out today.

We will look, we probably won't see you at the first quarter earnings release but we will certainly be there and talk with you.

We will probably update you, too, between now and that earnings release to let you know how things are developing coming out of this winter period we've been through.

Ladies and gentlemen, thank for your patience, and for your participation today.

You may disconnect your lines at this time and have a wonderful day.