聯合太平洋集團 (UNP) 2005 Q4 法說會逐字稿

Thank you for accessing the Union Pacific Corporation fourth quarter earnings conference call held at 7:45 am eastern time on January 19, 2006 in Omaha.

This presentation and the accompanying materials may contain statements about future expectations or results of the Corporation that are not statements of historical fact.

These statements are and will be forward-looking statements as defined by the federal securities laws and include, without limitation, expectations as to increased returns, revenue growth, cost savings and earnings, and similar projections.

Estimates or forecasts relating to the Corporation's business, operations or performance, expectations as to continued or increasing demand for rail transportation in excess of supply, expectations regarding operational improvements including the network management initiatives that have been or will be implemented to improve system velocity, customer service and shareholder return, expectations regarding fuel price and the time by which certain objectives will be achieved.

Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications at the times that or by which such performance or results will be achieved.

Forward-looking information is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statement.

More detailed information regarding forward-looking information and such risks and uncertainties is contained in the materials accompanying this presentation and in the filings made by the Corporation with the Securities and Exchange Commission, which are available on the Corporation's website.

Corporation assumes no duty to update any statements or information provided in this presentation or the accompanying materials.

In addition, during the course of the presentation, the Corporation will refer to certain non-GAAP measures.

Management believes these measures provide an alternate presentation of results that more accurately reflects ongoing operation.

These measures should be considered in addition to, not as a substitute for, the reported GAAP results.

Please refer to our website for reconciliation of these measures to GAAP.

Good morning, ladies and gentlemen, and thank you for holding.

Welcome to the Union Pacific fourth quarter earnings release conference call.

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

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Dick Davidson, Chairman of Union Pacific.

Thank you, Mr. Davidson.

You may begin.

Thank you, Dan.

Good morning and welcome to our fourth quarter earnings conference call.

Joining us today here in Omaha are Jim Young, our newly elected CEO and President of the Corporation;

Rob Knight, our CFO;

Jack Koraleski, Executive Vice President of Marketing and Sales; and Dennis Duffy, Executive Vice President of Operations.

Before Jim walks you through the results, I wanted to take a moment to outline our new management structure.

As of January 1st, Jim has taken over the reigns of CEO and President.

He's now in charge of the Corporation's operations and I'll be Chairman of the Board.

It's been a real privilege for me to serve as our Company's Chief Executive for the past nine years, but I know I'm leaving the Company in very capable hands with Jim and the senior management team.

In fact, I believe that one of the legacies that I will leave here at Union Pacific is a solid team with great experience and depth.

In my new role, I'll be available to the team at any time, in any way that I can be helpful.

Looking ahead, I've got great optimism for this Company.

We expect strong demand to continue for the foreseeable future, which will challenge the capacity of the entire transportation industry.

Learning to operate in this constrained environment has been a new experience for us, but our unified plan and lean management initiatives will enable us to handle that demand more efficiently and more profitably in the years ahead.

My commitment to the Company's success has never been greater and I plan to spend my remaining time here supporting that effort.

As we close the books on '05, it will certainly be one to remember, with the West Coast storm kicking off '05 and then followed by hurricanes and washouts.

After battling such adversity, it's very encouraging to see us end the year on such a high note, with strong demand and improved profitability.

So with that, I officially hand it over to Jim.

Jim?

Thanks, Dick, and good morning, everyone.

Before we jump into the results, I would like to echo Dick's comment about the year.

We were challenged in every quarter by some type of catastrophe.

But thanks to the dedicated men and women of Union Pacific, we persevered and finished strong.

I'm going to start off today with a few comments on the fourth quarter and full year.

Then I'll turn it over to Rob to provide the financial detail.

Jack will give you the customer perspective and Dennis is here for an operating update.

I'll wrap it up at the end with some thoughts on 2006.

So with that, let's look at fourth quarter.

Our earnings were $1.10 per share.

Last year's reported earnings were $0.30 per share, but that included a pretax charge of $247 million for unasserted asbestos claims.

For a more apples to apples comparison, we would add back the asbestos charge to get an adjusted earnings number of $0.88 per share a year ago versus today's $1.10 per share, a 25% increase.

As we told you in October, the Kansas washouts took about $0.05 per share out of our quarterly earnings.

The impact of that event can be seen in our fourth quarter car loads.

October loadings were down about a thousand cars compared to the prior year, but in both November and December we experienced solid growth.

And as you know from looking at our weekly metrics, those months had challenges too, with the Thanksgiving blizzard and a record cold spell.

We also had to battle another quarter of record high diesel fuel prices.

On average, we paid $2.08 per gallon, a 42% increase from last year.

Although we're doing a better job of offsetting fuel's negative impact through fuel surcharges, we still have work ahead of us to eliminate fuel as an earnings variable.

The positive in the quarter was strong demand, which resulted in record car loadings and revenue.

Just before Thanksgiving we had our highest ever weekly volume, moving more than 198,000 cars per week.

Operating revenue of 3.6 billion was also a best.

The key take-away is our conversion of revenue growth into an 18% increase in operating income.

We're continuing the positive trend started in the second quarter, operating more efficiently and improving profitability.

Now, looking back for a minute at the full year, despite a number of significant challenges, we did have some success.

At a high level, there are a few things that really define the year for us.

The first one is record revenue.

The demand for rail was strong all year and challenged our capacity.

The second is yields.

The value of a train slot on our network has increased substantially over the past 18 months.

We clearly have more work to do here, but we made a very positive step in 2005.

Third, we gained momentum operationally.

If you look at the metrics alone, it's a little hard to see, but when you consider how we recovered from the various weather issues we faced and moved record volume across our system, we did see improvement.

Finally, we were able to combine strong revenue, improve yields and better productivity into earnings per share growth.

Taken together, our 2005 results show a trend of improvement and building momentum.

Last year's weather clearly impacted us, both financially and operationally.

We know that every year we'll have some weather events, but we feel we're better positioned today to respond and recover.

With that, let's start off with Rob to take you through the financials.

Rob?

Thanks, Jim, and good morning.

I'll start off today by looking at the components of our commodity revenue growth, up nearly 13% to a record $3.5 billion.

Jack's going to walk you through the individual commodity groups, but in total our volume grew 1% for the quarter.

The majority of that growth came from our intermodal business, which is up 5%, resulting in a slightly negative mix for us overall in the quarter.

The railroad's focused efforts to improve returns netted nearly a 6% yield improvement, our strongest of the year.

And fuel cost recovery added 7% to the total growth.

As Jim mentioned, it was a great quarterly revenue performance, especially when you consider some of the missed opportunities associated with the Kansas washouts and the Powder River Basin coal challenges.

Now let's turn to operating expenses, up 12% in the quarter to just under $3.1 billion.

Before I get into the details, I need to remind you that the fourth quarter of 2004 had a 247 million pretax charge for unasserted asbestos claims recorded in the purchased services and other category.

In order to provide a better year-over-year comparison, we have excluded that charge from the 2004 numbers.

We have provided a non-GAAP reconciliation for these items on our investor relations website, which you can call up.

Similar to the third quarter, salaries and benefits is our largest expense category, accounting for about 36% of our total operating expenses.

But fuel and utilities expense is becoming a larger and larger percentage of the total, representing a full 24% of our fourth quarter expenses.

I'll take a minute now to walk you through some of the key drivers of each expense line.

Salaries and benefits expense totaled 1.1 billion in the quarter, up 5%.

The good news in the quarter came in the form of better train crew productivity and lower training costs.

Cost pressures came from labor inflation, up about 3% in the quarter.

In addition, you'll recall that in the fourth quarter of 2004, we eliminated the provision for executive incentive compensation.

Another driver of the increased expense was a 1% increase in our average fourth quarter work force.

For the full year, our average work force levels were actually up 2.9% versus the 2% we had projected in October.

During the quarter, we straightened out a minor system glitch, which had caused us to previously miss about 400 full-time equivalent train and engine employees in our calculations during the course of the year.

Of course we were paying the people and reporting expenses correctly.

The revised numbers are available on our investor website.

From a workforce standpoint, we have caught up on the backlog of hiring that we faced in 2004 and 2005.

So for 2006, we'd expect to see our workforce levels more closely linked to volume with some productivity offsets.

From a cost perspective, we're forecasting labor inflation of around 3%.

I should also mention that we'll start expensing options this year.

This should cost us about 10 to $15 million or reduce earnings by about $0.02 to $0.03 per share during the course of '06.

For '06 we're targeting an increase in this category of between 4 and 6%.

The drivers will be labor inflation, volume growth, and operating efficiencies.

Fourth quarter rent expense came in at $353 million, up 7% versus 2004.

Long-term locomotive leases, as well as other car and equipment lease expense, were higher year-over-year.

We did offset some of these increases through better car cycle times and fewer short-term locomotive leases.

Our outlook for 2006 would be for increases around 5% or so.

The drivers are primarily increased locomotive and freight car leases and other volume-related costs, offset with productivity.

Depreciation expense in the fourth quarter was up 18 million or 6%.

As you know, this line moves in step with our capital spending, so looking out to 2006, we would expect some higher cost level increasing 5 to 6%, reflecting 2005's capital program.

Quarterly fuel and utilities expense increased $220 million, or 41%, driven primarily by higher diesel fuel prices.

In the wake of the hurricanes, we paid our highest ever quarterly diesel fuel price, $2.08 per gallon in the quarter.

Although crude oil prices actually declined a few dollars in the fourth quarter, refining and transportation spreads were at historically high rates.

Our fourth quarter fuel consumption rate was a positive in the quarter, a 1% improvement, saving roughly $5 million.

Better consumption can be attributed to our fuel conservation initiatives, which Dennis will talk in more detail about in a moment.

Our outlook for 2006 assumes little change in crude prices from around the $60 per barrel range we see today.

On a per gallon basis, and with spreads at more moderate levels, we're currently paying around $1.80 per gallon for diesel.

Although we have reduced our exposure to high fuel prices through our fuel cost recovery programs, we're not at 100% yet.

Until we are, fuel will remain a wild card for us.

Materials and supplies expense grew 11% in the quarter to $143 million.

The drivers of the increase were maintenance costs associated with a larger locomotive fleet and higher material prices.

Similar to 2005, we're expecting double-digit increases this year due to continued inflationary pressures on locomotive and freight car material prices, as well as stronger maintenance programs.

In the category of purchase services and other, our cost performance was a little better than anticipated, down 2% year-over-year, to $431 million.

Cost increases for such items as joint facilities, state and local taxes and contract services, were more than offset by an insurance reimbursement and better cost performance.

In December, we received a partial imbursement on the insurance related to last January's West Coast storm, offsetting a little more than $10 million in this category for the quarter.

Our outlook for 2006 is for cost increases in the 4 to 5% range.

This is an area where there's opportunity for better performance with increased productivity.

Looking in total at how our revenue and expenses lined up, we reported just under a 1-point improvement in our reported operating ratio, as shown on the left, from 86% to 85.3%.

We're not yet satisfied with where we are, but we are pleased with the improvement.

Even in the face of weather challenges and rising fuel prices, we've made gains.

This slide also illustrates our fuel adjusted operating ratio at 80.7% for the fourth quarter.

And as you can see, we had an improving trend throughout the year.

Turning now to the full income statement, the net result of operating revenue and expenses is our operating income, which was up 18% to $533 million.

As with our operating ratio, this is a solid indicator of our improved performance.

Other income increased by $32 million in the quarter to $54 million, in line with our previous guidance.

Consistent with prior quarters, strong real estate sales were a driver.

Interest expense was down $10 million in the quarter to $120 million.

This decline was driven by lower debt levels, averaging 7.4 billion in the fourth quarter of 2005, versus 8.1 billion in 2004.

Income tax expense increased $61 million, driven primarily by higher income.

Our effective tax rate for the quarter was 36.6%.

The end result is net income of $296 million or quarterly earnings per share of $1.10.

That's a 25% increase year-over-year and a strong close to the year.

So let me give you a quick wrap up of the full year.

Strong revenue growth was a real plus for us, up 11% or $1.4 billion.

We translated that growth into a 16% increase in our operating income to $1.8 billion.

The transition to double-digit growth is especially significant when you consider that the year started with a decrease in first quarter operating income due to the West Coast storm.

As I just mentioned, we experienced strong real estate sales throughout '05, driving other income to $145 million, in line with our guidance.

For 2006, we would look to be in the 75 to $100 million range.

Interest expense improved by $23 million on a full year basis due to lower average debt levels.

For 2006 this should again improve some, although moderating.

Our full year effective tax rate was 36.8 versus 31.3% in '04.

Higher earnings and less tax credits, related to our 2004 headquarters consolidation, were the drivers of this change.

I should mention that the 2005 taxes do not include the tax reduction we reported in the third quarter.

The reconciliation for that change is also available on our website.

Going forward, we would anticipate a tax rate of between 37 and 38%.

For the full year, net income was $908 million, up 20%.

On an earnings per share basis, we increased from $2.89 per share in 2004 to $3.41 per share in 2005, a solid performance in a year filled with challenges.

It's clearly not where we should or could be, but it's a good starting point as we head into 2006.

Looking at our full year capital, we ended the year with total spending of 2.86 billion, about in the middle of the updated outlook we provided you in October.

Cash capital totaled nearly $2.17 billion and the remainder, 691 million, is the cash equivalent of our locomotive and freight car lease programs.

For 2006, we're looking at an all-in capital program of 2.7 billion or so.

We haven't yet finalized the budget with our board.

As we work through the year and firm up our plans, we will update you.

From the standpoint of free cash flow after dividends, we ended the year at $234 million, up about $20 million from 2004.

Cash from operations increased $338 million in 2005.

Much of that increase was used to fund cash capital spending and as we discussed back in October, our cash capital was higher due to the weather and Powder River Basin challenges.

Our cash tax rate also increased in 2005.

Over the past several years, we have used up our AMT and NOL credits with our earnings.

And for 2006, our cash tax rate should take an even larger step up, as our higher expected earnings are likely to be accompanied by higher taxes.

At this point, we're forecasting that cash taxes would reduce our 2006 free cash flow by an additional 450 to $500 million.

Beyond this year, we should see cash tax rates staying in this neighborhood.

So we did a bit of a one-time jump in 2006 with more normalized rates going forward.

Another factor will be cash generated from our core business.

Expectations for 2006 are that we will see strong growth in our cash from operations, driven by higher revenue and overall improved efficiencies.

Even with the higher taxes, we'll likely keep free cash flow after dividends in the 300 million plus range.

So let me close the books on 2005 with a quick look at our balance sheet.

We finished the year with our lease adjusted debt to cap ratio of 43.6%, a 1.5 point improvement over 2004 and the best we've seen in 20 years.

Despite some of our challenges over the last couple of years, we've maintained and strengthened our overall balance sheet.

Going forward, we would expect continued improvement driven by improved financial returns.

With that, let me turn it over to Jack to talk about our record revenue growth.

Jack?

Thanks, Rob, and good morning.

Well, our fourth quarter continued to show the strength of demand in today's transportation marketplace.

And that strength has really bridged the holidays quite well and shows no signs of letting up in 2006.

While overall volume grew just over 1%, five of our six business groups, the Ag products team, automotive, chemicals, industrial products and intermodal posted all time revenue records for any quarter.

Four of those groups accomplished those records on the strength of all time record quarters for average revenue per car.

And while our energy business didn't set an all time record, they did have their best fourth quarter ever for both revenue and average revenue per car.

This strong performance was also reflected in our business to and from Mexico, where we finished the year with revenue of a little over $1.1 billion.

That was up 15% on basically flat volume.

At the same time, customer satisfaction improved as the unified plan, our lean management projects and our business planning process brought improved fluidity to the network, even as we were handling record volumes in the wake of hurricanes and floods and blizzards.

Ag products is a great place to start for us.

Yield improvement helped us manage volume, which was down 1%, while driving revenue growth of 18% on a 19% improvement in average revenue per car.

Demand was very strong for dry feed ingredients for meals and for ethanol.

And in addition to dry feeds, we had very strong volume for beer.

It was up 66% and contributed to our increase in Mexico business.

In total, Ag took the lead in pushing Mexico revenues past the $1 billion mark, growing 31% for the year compared to 2004.

Looking ahead to 2006, our yield is going to continue to improve.

Better service will allow us to reinvigorate our express lane product for perishables and roll out our new produce train, which will allow us to ship unit trains of perishables from a single origin in the Pacific Northwest to a single destination in the east with no intermediate switching or work events.

These products will improve velocity, as well as provide costs efficiencies and that's an objective that we're pursuing across each of our businesses on the commercial side.

Other opportunities in Ag will come from the expansion and improvement of our shuttle and unit train programs, but not just in our whole grain business.

This year we'll also be implementing ethanol unit trains as well.

Our automotive business represents one of our best long-term opportunities for yield improvement.

As Legacy agreements come up for renewal, we will move those rates to levels that represent the realities of today's market.

Our fourth quarter results highlight that we're also taking advantage of opportunities to make some gains in the near-term.

Our vehicle revenues were up 11% on just 1% volume growth, helped by end of year strength and production of the Ford Fusion at Hermosillo, which started in the third quarter and ramped up during the fourth.

Lower production for some of our manufacturers led to a decline in parts volumes, but we were able to mitigate that impact with stronger yield.

Looking ahead to 2006, the industry forecast is for production to be down slightly.

However, we're expecting a relatively good year, driven by yield gains and the fact that we're well positioned with the fastest growing manufacturers.

Chrysler's Belvedere plant came back online late last year with their new crossover vehicle.

We also expect to see continued growth with Ford at Hermosillo and the startup of production at Toyota's new facility in San Antonio.

Although the chemicals market was softer this quarter than last year, yield improvement produced record revenues.

Nowhere was this more evident than in our fertilizer markets.

Our revenues grew 18%, even as softer potash exports helped produce a 12% volume decline.

We saw weaker plastics volumes, driven by a number of factors, including the hurricanes and the softer export demand.

Looking ahead, chemicals will hold its position as a key element of our franchise.

We expect to see further revenue growth in 2006 and expect also that volumes are going to be held relatively flat for the year.

Despite the repair work on the joint line, the Kansas washouts in early October, mine production issues in Colorado and Utah, and an early blast of winter that slowed operations from late November to early December, energy volumes still managed to grow 1% over last year.

Energy is another long-term yield opportunity that had some near-term success.

Average revenue per car set a fourth quarter record and drove commodity revenue for our energy business to a fourth quarter record as well.

Both of those were up 6% over 2004.

Growth in electricity demand, supply constraints for eastern coal, and Powder River Basin makeup tonnage from 2005 will increase volumes, which, along with our continued yield improvements, will drive more record-setting performances for us in 2006.

Industrial products held volume growth flat in the fourth quarter, but grew average revenue per car in revenue 19%.

Even though overall volume growth was flat, we did have growth in some individual commodity lines.

A few notable examples, for instance, are lumber, where growth in the housing market fueled demand.

Our rock business grew 12%, reflecting not only strong demand in Texas, Oklahoma and Louisiana, but also our success at increasing the train size and improving cycle times year-over-year by working with our customers.

Steel volumes also showed relatively strong growth at the end of the year.

We're off to a good start in 2006, as demand for lumber, steel, rock and construction products hasn't missed a beat.

We expect this year to be similar to 2005.

We'll be leveraging strong demand to drive our yield improvement.

Last, but not least, is intermodal, where, again, long-term yield improvement is in the offing as Legacy contracts expire.

October set a new record for loadings and continued strong demand through November and December made intermodal the real driver of our overall volume increase in the fourth quarter.

The volumes were up 5%.

At the same time, yield gains from fuel surcharges, the RCAP base contract escalators and some selective price increases produced our best ever average revenue per unit and revenue results.

Growth in international business drove both volumes and revenue gains, while our domestic volume declined slightly.

The improved domestic revenue was entirely the result of our yield improvement efforts.

We also made significant progress this year in our international east-west balance, now reaching up to about 84% with the implementation of our unified plan and the use of our new balanced surcharge.

Looking to 2006, international growth will continue to be strong.

We also expect moderate domestic growth, which, coupled with our efforts to drive our business towards reinvestable levels, will continue to increase revenues.

We're encouraged by the increasing trend in our customer satisfaction results.

This is perhaps our best indicator that customers are recognizing our efforts to improve our service, even as we handled record volumes, improved our yield under some very tough operating conditions.

We know service consistency isn't where we want it to be or our customers want it to be.

But the steady improvement in satisfaction and that jump in the second half of the year points to the success of the unified plan, along with all of our other operating initiatives and the added resources to create fluidity, as well as our continued focus on our customer relationships.

So I hit some of the highlights for 2006 as we went through the business groups.

Here's how we see the year shaping up.

Looks like the strong demand environment is going to continue.

We expect our volumes are going to grow in the 3% range with a potential for higher growth actually driven by the strength of our network.

All six of our commodity groups are going to grow their revenue, but we expect only three to see stronger car loadings, as we continue to manage volume across the railroad.

Most significant growth is going to be in our energy business.

We anticipate another year of yield improvement, as we continue our efforts to bring all of our businesses to reinvestable levels.

Pie chart on the left shows you that in 2006 we'll get a chance to touch another 13% of our business for the first time in this new demand environment.

That opportunity, combined with continued yield gains on the 55% that we've already touched and extending our fuel surcharge coverage, should result in a revenue growth of 10% or higher, with that upside, again, driven by our network fluidity and our ability to take on more profitable growth.

So with that, I'll turn it over to Dennis.

Thank you, Jack, and good morning.

Today I'd like to spend a few minutes going over our fourth quarter and our '05 operating performance and talk about our key capital projects in '06 and our operating initiatives for the year.

Let me first start with velocity.

This chart shows monthly velocity in 2005.

As Jim and Rob have already said, we had several weather events hit us during the year.

I don't want to dwell on the past, but looking back at the year, it was truly a challenge from January all the way through to December.

But there are a few takeaways.

Despite these unprecedented operating challenges, we managed to handle record volumes and at least maintain velocity.

In fact, during much of the year, we actually ran at improved velocities over 2004.

We did this by strengthening our operational recoverability.

Although our network was clearly strained by these events, it didn't break.

Our employees worked tirelessly to restore service, clear off the backlogs and minimize the impact felt by our customers.

This highlights both the strength of our franchise and also the capacity we can unlock with velocity improvements.

Since about mid-December we have seen good improvement in our velocity.

Yesterday we reported a seven-day average speed of 21.7 miles per hour.

Our coal operations were similarly impacted by external events in the fourth quarter of '05, particularly in the Powder River Basin.

We had some challenges at the start of the quarter with the Kansas storm, but as we put that event behind us, we increased November production by three trains per day.

December started slow, with the weather Jack mentioned, but we strengthened in the second half of December to a 35 per day train rate.

Through the first two weeks of January, we've had good winter operating conditions, but our loadings had been impacted by a conversion BNSF made to a new dispatching system.

BNSF has temporarily restored the prior dispatching system and operations have returned to a more normal state.

In fact, loading performance has improved the past few days, so absent any other significant issues, the daily average should increase through the balance of the month.

Looking ahead to 2006, we have another strong hiring and training program planned.

As Rob mentioned, much of this year is to backfill the ongoing attrition that we have in our work force.

As we discussed with you back in May, the attrition rate within our train and engine personnel has been around 7 to 10% and that's expected to continue.

In terms of locomotives and freight cars, we have planned for a smaller program in 2006.

Our emphasis is to improve the overall productivity of these acquisitions and existing assets.

With the significant resource investment, it's critical we stay focused on productivity.

The principals listed here are really a summary of the lessons we've learned over the past couple of years regarding our ability to increase productivity.

This flag gives a couple of proof statements on our '05 progress.

Freight car utilization, which measures the load/unload cycle time, had a 3% improvement.

That might seem small, but it equates to 8000 fewer cars on our network, or 100 miles of additional capacity.

Fuel conservation has always been important to us, but with the record high diesel fuel prices, it's critical.

Last year we consumed 1.35 billion gallons of diesel.

So there is tremendous leverage on the bottom-line.

Our improved consumption rate in 2005 saved more than 35 million gallons of fuel, or roughly $40 million plus.

We will continue with our education efforts and use of technology to improve our efficiencies further in '06.

The principle of design for achievability is epitomized by the unified plan that we began rolling out in the second quarter.

The goal of the unified plan is to increase velocity and improve customer service by reducing the work load on the network.

We achieved that by reducing 16% of the in-route work events and 12% of the connections cars made at intermediate terminals.

That ties directly to the gains we saw throughout 2005, with our dwell, inventory, and car cycle time improvements.

The unified plan implementation really laid the foundational steps for continuous improvement in our network operations.

It is an evergreen process that we will leverage in 2006 and beyond to ensure that we are managing our network more efficiently.

Another operational productivity initiative is our customer inventory management system, or CIMS.

CIMS combines three factors.

First the inventory pipeline for individual customers, second, the local switching capability, and, third, the customer load/unload behaviors.

The objective is to reduce inventory and create capacity in major industrial areas.

CIMS was piloted in Phoenix and subsequently rolled out to the locations shown in white, representing 40% of daily industry switching.

The results in those terminals fully cutover has been very encouraging.

A 25 to 40% decrease in inventory, 12 times improved by 20 to 25% and our customer switching performance improved by 35 to 50%.

In 2006 we will expand CIMS to cover 75% of our industry switching.

Here's a look at some of our major '06 capital projects.

As noted on the map, our capital dollars are focused on the areas where we have experienced some of our greatest volume growth and operational challenges over the past few years.

At the end of 2005 we had about 42% of the Sunset corridor double tracked.

Our plan for 2006 is to add about 50 more miles, as well as improve or expand some of our terminal infrastructure on the corridor.

In addition to increasing the Sunset capacity, we will also be adding siding capacity along our south central corridor from Los Angeles to Salt Lake City.

This work facilitates the bidirectional running and provides further surge capacity for the Sunset.

Along our southern tier, we are also improving our terminal infrastructure in San Antonio, Dallas-Fort Worth and Houston.

In the central corridor, across the Midwest, we will continue to invest for coal growth and improved cycle times.

The UP/BNSF joint line is being expanded again in 2006.

We're adding processing capacity at North Platte and through the Kansas City/St Louis corridor into southern Illinois.

We will also add another 60 miles of centralized traffic control across Iowa.

Finally, we're adding facilities to accommodate the fast-growing ethanol business in Iowa, Minnesota and Nebraska.

So let me wrap things up with the four key drivers that our operating team is focused on for 2006.

One, we must operate a safe railroad.

This benefits our employees, our customers and the public.

Although railroading is one of the safest industries in America, we take a zero tolerance approach to safety and believe that every incident can be prevented.

Two, continue to simplify our operations and drive absolute plan compliance.

Three, create capacity through productivity and move more volume with our existing assets.

And four, invest our capital dollars wisely to de-bottleneck constrained parts of the network.

Together this will translate into better customer service, increased asset utilization and improved financial returns.

With that, let me turn it back to Jim.

Thanks, Dennis.

Now, let me take a minute to give you a little perspective on 2006.

As we look ahead this year, there are several factors to consider.

One driver is the economy and we're assuming continued strength.

We expect demand will continue to be strong, particularly in areas such as intermodal and coal.

We moved a record 179 million tons of coal last year out of the southern Powder River Basin.

For 2006, we know our customer's demand is for double-digit growth.

The challenge will be for every member of the supply chain to meet their commitments and maximize loadings.

We have a solid plan to do our part and we're focused on executing it.

We also expect good yield improvement, as we have an opportunity to reprice 13% of our revenue this year and improve our financial returns.

Operational efficiency is at the core of our overall performance.

We have substantial opportunity for improving our efficiency.

Bottom-line, we will focus on providing better service to our customers, improving the efficiency of our network, and increasing the financial returns on our business.

With that in mind, our first quarter expectations include commodity revenue to grow 15% or more in the first quarter.

About 3% of the growth should be from volume gains and the balance from yield improvements and fuel surcharge recovery.

Last year at this time we were working to restore service in California and Nevada following the West Coast storm.

So our comparison in the quarter is easier.

That storm subtracted roughly 55 million in operating income or $0.13 per share from the quarter.

Our operating ratio should also improve at least 3 points.

Again, we have the storm comparison, but we would also expect better core operating efficiency.

This combination of revenue growth and operating ratio improvement should result in first quarter earnings in the range of $0.80 to $0.90 per share, which is nearly double what we earned in the first quarter of 2005 following the West Coast storm.

Now, if you adjust for the storm, it's really more in the order of a 30 to 45% increase, very strong.

This year weather has been cooperative so far, but we know there could still be challenges ahead.

We have the majority of the first quarter ahead of us, but we are getting off to a strong start.

On a full-year basis, we would expect revenue to grow at least 10%.

As I just mentioned, this growth is closely tied to our coal operation, but also anticipates solid yield improvement.

Our full year operating ratio should improve by 2.5 to 3 points through a combination of yield growth, more efficient operations, improved fuel surcharge recovery, and hopefully more normal weather.

On an earnings basis, this should translate into a range of 4.60 to 4.80 per share.

At this point, we're targeting the top end of the range, which would be about a 40% increase over 2005.

With only 18 days of 2006 under our belt, we need to consider that a lot could happen over the course of the year.

Although we haven't reviewed our capital plan or full year budget with the board of directors yet, we're currently looking at a total capital spend, including lease equivalent, around 2.7 billion.

The bottom-line on capital is that it must be supported by higher returns.

Finally, we look for a minimum free cash flow after dividends of 300-plus million.

As Rob just told you, our cash flow is being impacted by higher cash tax rates.

The key here is we're absorbing 400 to $500 million of cash tax increase and still growing our free cash flow after dividends.

To summarize, we're looking forward to very profitable 2006, with strong demand, more efficient operations, higher yields and improving returns for our shareholders.

With that, let me open it up for your questions.

Ladies and gentlemen, at this time, we will be conducting a question and answer session. [OPERATOR INSTRUCTIONS] Our first question is coming from John Barnes of BB&T Capital Markets.

Please proceed with your question.

Hi, Jim, good morning.

How are you?

Good.

Thank you.

On the capital spend, could you break it down for me just a little bit in terms of the buckets?

I just want to get a feel for how much you're allocating towards tracking infrastructure and then how much to rolling stock.

And then the question I have along with that is giving all the difficulties you had during the '05, is the '06 budget being inflated some as catch up on some of that CapEx in '05 of repairing infrastructure and that type of thing?

Or is the 2.7 kind of a consistent number we should be looking at going forward?

Well, John, if you think of 2.7 billion, I always kind of start with what do you think is kind of maintenance capital, kind of the core spend.

This would include where you have a locomotive that's worn out that we replace.

Of that 2.7, you've got about 1.7 to 1.8 falls into what I would call maintenance capital.

So the rest goes in the categories of technology improvement, productivity initiatives, our locomotive acquisitions above replacement for growth, and then capacity into the railroad.

Overall, the capacity piece in track and infrastructure is going to probably be in that 300-plus range when you look at it next year.

But we still have a long ways to go.

The other part of your question, looking backwards, there really isn't any catch-up here from our issues last year.

We spent over $100 million in '05 for issues with the weather.

But right now that's -- we're in pretty good shape there.

Okay, and then as I'm looking at fuel, the surcharge seems to be working.

You're recouping some of that, but fuel is still up I guess, what, 40 something percent year-over-year.

As you're looking at kind of a $60 a barrel range in your forecast going forward through '06, outside of the fuel recovery mechanisms, are you looking at anything else to try to mitigate?

I know you talked a little bit about your fuel conservation plan, but are you looking at anything else to mitigate the impact of fuel?

Are you re-evaluating hedging from here?

What are you doing just on in terms of trying to get a grasp on fuel from here?

Well, the key is, Dennis talked about, is our fuel conservation program.

That really covers training.

It's new investment in terms of your locomotives.

We said a long time ago that major upgrade of our fleet, looking backward today, I'm very happy we did that.

Those locomotives we replaced at a minimum had a 10 to 15% fuel efficiency compared to what we retired.

So training.

Track structure, having good, solid base for track is important and then technology.

There's no magic here, solution in terms of solving the challenges all of us have with energy.

But we feel pretty good about the programs we have going.

In terms of hedging, our view here is we've got to continue to focus on our fuel surcharge program, getting it -- getting up to 100% over time here.

If things dip significantly, we might take a shot at it here in terms of fuel, but right now the fuel surcharges are key.

Okay.

All right, very good.

Guys, nice quarter and thanks for your time.

Thanks, John.

Our next question is coming from James Valentine at Morgan Stanley.

Please proceed with your question.

Great, thanks.

Congrats on an impressive quarter here.

Thanks, Jim.

Can you give us some color on the types of revenue that are in that 13% of the long-term contracts you expect to reopen in '06?

What I'm trying to understand is that coal, because it's dense, heavy weight, by not getting a fuel surcharge there, that's going to have more impact then not getting it in lighter commodities like merchandise or intermodal.

Can you give us some feel for what that mix of 13% looks like?

I'll let Jack take than one.

Jim, it actually is pretty dispersed across the commodity lines.

It has some greater emphasis in intermodal.

We have some Ag contracts.

There is a little bit of everything in there and not very heavily weighted towards any one issue.

Okay.

That's helpful to know that probably won't change, the mix won't change much in '06.

Then the second part of the question on that is for the 55% of the revenue that has been repriced, historically railroads didn't do a real good job of putting escalators in contracts.

I know you and others have said you're doing a better job of that.

Going forward, '06, potentially even '07, should we look for the standard rate escalator in those contracts to be something better than we've seen in the past, mainly nothing.

Could we see something as high as 2 or even 3% across the overall mix of the 55% of the business?

I think, again, Jim, there are some, like for instance business that renews in circa 1/11 has a very specific escalator that is actually a fixed percentage over the life of the contract.

So those things are pretty well defined.

We're moving a lot more towards an escalation factor for contracts that is -- it's the RCAP excluding fuel and then using the full fuel surcharge.

So it would be a full 100% cost escalation kind of a process going forward.

We are not discounting -- in some of our contracts we would in the past do discounts of RCAPs and things like that.

We are no longer doing any of those things.

We are looking for fuel at complete fuel cost recovery and equally on our other escalating components as well.

And that's really all baked into our 10% plus for next year.

Jim, when you think about yield going forward here, I think it's important long-term we think two pieces.

We know where the market is for the service we provide today.

We've got a lot of upside there when you look at the contracts, but there's another component here that I think is very important.

As our customer service improves, we know there's more price in the market.

Again, that I think we've got very good upside.

So you got two components, price for the market that the service you're providing today, which we know have upside.

And then price opportunity for better service.

And that's when we think long-term here, next three or four years, we think we've got upside in both areas.

Okay, great.

If I could ask one last question of Jim.

The one that I get most often from investors is when we get to the end of 2006 and we look back, what do you think we'll see as the biggest changes as a result of you becoming the CEO?

Well, we're going to continue to focus on the plan that we put in place couple years ago, Dick, myself, the team here.

We knew we were in a new world.

We challenged everything we're doing and we've had a plan we've focused on that -- what I'm real excited about is I think 2006 is going to really show the results of that plan.

It was masked this year with all the challenges we had.

I'm really excited about it, but every year we're rethinking where we need to go.

What was good this year, what do we have to do different next year.

So we've got a great team here and I'm really looking forward to this year.

Okay, great.

Thanks, guys.

Appreciate it.

Thank you.

Our next question is coming from Tom Wadewitz of JP Morgan.

Please proceed with your question.

Yes, good morning.

Good morning, Tom.

I have two questions for you.

A little further follow-up on the pricing.

You've got the buckets listed, I guess 13% in '06 and then 32% in '07. '07 and beyond, is there a specific number for how much comes up in '07?

Yes, there is.

I think the number is somewhere in the neighborhood of like 7% in '07.

Okay, and can you give us any thoughts in terms of the progression, the magnitude of price increases that you're getting?

It seems that the rail pricing environment really picked up at the beginning of 2004, but there's been a further acceleration in '04-'05.

Do you think that you are now getting about the most that you're going to get or is there room for that to further increase?

And can you give us any kind of broad sense of what kind of rate increases you can get as you reprice some of these pieces of business you haven't touched for a while?

Tom, this is Jim.

Again, I think when you think of pricing, there's a wide range that we see.

Part of it is a function of where the return is today and what we have to do to get those returns to what we believe is the minimum return level.

Sometimes they can be pretty substantial.

Even areas where you may have felt comfortable a year ago at pricing, the market has run away quite a bit in terms of demand.

There's smaller upside there, but still price opportunity.

I think the key for us is sorting through, as we have done, all of the different businesses we have, looking at what the required returns are, and continue to make certain we are in a return on capital going forward.

So do you think it's possible that the pace of yield growth we see in '06 and '07 looks reasonably similar than to what we've seen in '05?

Tom, I think we've got the best upside in the industry for pricing.

And part of it is when you look, again, at our mix of business that's under contract, a lot of it depends on the strength of the economy, what's happening in the truck sector, what's happening in the energy market.

All of those are variables.

I think we've got very, very good opportunity on pricing for return and pricing for improved service.

If I can move to a question on capacity.

When you look at your Sunset line, are you able to -- you're making some investments in capacity.

Is that giving you a meaningful increase, I mean in terms of peak trains per day are you moving from 50 to 55 trains a day, that type of thing?

Or given that there's still a pretty significant stretch that is single track, is it really pretty marginal the increase in total capacity there?

And then I was wondering if you can give a comment on the central corridor as well.

Are you close to being tapped out on capacity on the central corridor or is there room for pretty meaningful growth in the trains running across that corridor?

I'm going have Dennis take that one on.

Well, Tom, on the Sunset, first of all, we are making incremental improvements on our trains per day through there.

It is marginal at this point, but capacity is that way until you reach a step level when you get the preponderance of it.

We'll have over 50% of it double tracked at the end of this year and we're evaluating it every year.

In fact, every month we look at do we need to accelerate that and we have a plan to do so, providing the returns are there.

So we are making incremental step-- incremental improvements in some trains per day.

On the central corridor, obviously with the coal growth up there, but we're continuing to make investments to stay with that, with that demand and we expect to be able to handle that demand coming through there.

But the big thing that we're doing, too, along with the incremental capacity, is take out failure costs.

And we think we have a huge opportunity on both those corridors to drive that to the bottom-line through failure cost reduction.

So right with the investments in terms of growth, accommodating growth, we're looking for a significant contribution to the returns from failure cost reductions.

Tom, I think when -- this is Jim -- when you think long-term here, for you Union Pacific how fast we go on the double track is a real key strategic question.

You can -- we're running 50,60 miles a year.

You do the math, that's a seven, eight-year kind of program to complete it.

We know the demand today, in terms of trains we can run, exceeds the capability.

What we're taking a hard look at here is our confidence and our ability to continue to improve the returns.

And I think, again, strategically, some of the decisions we have to make is should we accelerate that?

Right now we're kind of on the seven, eight-year plan.

We're seeing returns improve in that business.

But it to me is one of the biggest capacity strategic questions we have facing us here next couple of years.

Our next question is coming from Jordan Alliger of Deutsche Bank.

Please proceed with your question.

Given the level of coal demand that is expected by the customers in part because inventories are continue to be well below normal, I guess my question is sort of that double-digit customer demand, given what you know about your network and how much progress you've made, is there any way to sort of translate that to what type of incremental coal demand or how much of that growth will translate to your network?

Jordan, if you look at last year the joint line produced 325 million tons.

It's substantial growth when you look historically from where we started.

Customer demand out there, I think, is a minimum 40 to 50 million tons next year, between both UP and BN.

We have made progress in terms of throughput on the joint line investment in our properties.

You have really-- when you think about it, you have the core electricity demand that will drive it.

You have makeup capability from this year that we have to look at.

You have conversion from eastern coal that's moved out.

We're well positioned.

We expect double-digit growth.

My concern, again, is the whole logistics change from the mine, railroad, utility on the capability there to deliver.

You missed a slot today, you don't make it up, for whatever reason.

And we're working very hard with all three of the parties there to make certain we get everything done.

But it's going to be a very, very strong year.

So sort of translates to sort of 12 to 15% customer demand growth.

I know a lot of it depends on the supply chain.

But all things equal, we could see coal volumes -- I mean could it even track as high as that or would that be asking for too much?

Well, that's the demand.

The growth key will be if the whole chain executes perfectly, that's the potential.

Thank you.

Our next question is coming from Jason Seidl of Credit Suisse.

Please proceed with your question.

Good morning, gentlemen.

If I could stay on the Powder River Basin a little bit.

We've heard some news that one of your competitors is having a little bit of trouble here early in January.

It seems like you guys actually are improving some of the operations.

Can you sort of give us an outlook in terms of 2006 for where you expect trains to be other than just the first part of January?

Well, to, as we've said, to get double-digit growth in tonnage coming out for UP, we need to execute and we're off to a good start this year.

Weather's been kind, but we still have a lot of winter left.

We're healthier with resources in terms of crews, particularly you think of locomotive engineers come out of training locomotives.

We completed capacity work from a year ago.

When you think about our central corridor, business move to Chicago, or business moving to St. Louis.

So we're feeling better about our capability to deliver a nice increase in tonnage and so far we're performing.

But there's a lot of year left.

I'm confident that we've got the right tools in place.

And you mentioned that there's a demand for double-digit tonnage out of the PRB.

You also before that some of this, however, is going to be makeup from some of the construction work in '05.

If you stripped out the makeup, what do you think the demand, the core demand is?

Jack, do you want to take that one?

I think that the core demand is probably in the 8, 9, 10% range.

Okay.

That's helpful, gentlemen.

If we also look in terms of pricing, the comment I believe was made on the call that as you improve service, it should be easier to get pricing.

How linked do you think your ability to price is to your service level?

Well, we look at every -- again, what's important here is understanding your customers' markets and then also your competitive position in the route you're looking at.

We know clearly in the intermodal area there is very good upside in terms of service.

And that's the way they sell on cycle times.

What we have to do is look at these markets in terms of what makes most sense in terms of our capabilities.

Intermodal, the industrial products area, again, look at cycles there, how much business might be moving highway that might move on the railroad given consistent service.

It's really a case by case basis in the markets.

But being in front of customers quite a bit the last year, it's clearly there.

Okay.

Thank you for the time, gentlemen.

Nice quarter.

Thank you.

Our next question is coming from Edward Wolfe of Bear Stearns.

Please proceed with your question.

Thanks, good morning.

And, guys, sorry, I'm just looking for a little more clarifications on some of the questions.

You gave guidance volume around 3%.

What are you expecting for coal in that 3% of total volume growth, give or take?

Well, Ed, we said coal is going to be double-digit.

I know that's a wide range, but it's-- it will be our strongest growth.

Okay.

I had heard you say that was demand.

I didn't realize that's what you were projecting to produce.

Right.

And in the PRB, do you expect that to be a double-digit as well?

Yes.

If you step back and look at the groups, as Jack had mentioned, you have coal will be your strongest growth.

Intermodal will have good growth.

Key for intermodal -- again, what you have to do here, we know we could grow faster if you had the capacity, if our service is there.

But we've got to be very careful that we do what's best for our network.

You look at our industrial products group, we see -- I think you could grow faster than what we have in our plan here.

But we've got to make certain that we manage our network effectively, that we handle that revenue and have good operations and convert it to the bottom-line.

What's the timing for the finish-up of the heavy maintenance on the joint line and how long does that take?

Dennis, do you want to take that one?

Well, what's going to happen here is that we will finalize the maintenance plan with the BNSF here later this month, but I think you can expect maintenance to go on continuously through the year here.

The question's going to be is how effectively we and the BNSF manage the maintenance and still continue to get the loadings.

That's the challenge and that's the objective and that's what we intend to do this year, is do the maintenance and still meet our demand in terms of moving the tonnage out of the basin.

I was under the impression, though, there's some heavier than normal kind of maintenance, maybe another four to six weeks, something like that, that's left.

Is that incorrect?

Well, there is some heavy maintenance left, but it's going to be done -- almost all of it where there is triple track in existence today.

And that that isn't in the triple track territory, as I mentioned, there's going to be about 20 more miles of triple track added up there.

That maintenance for that particular territory will be performed when the triple track is finished.

Okay.

So pretty consistent through the year.

It's not going to be greater in one part of the year or the other as you see it?

That's the objective.

Okay.

Just switching gears for a second, you talked about the amount of revenue being repriced, that's about 13% in '06, and I think in Tom's question you said 7% in '07.

What was the percentage, give or take, in '05 that was repriced?

Jack?

It was about 8%.

Okay.

And when you look at pricing, the pricing you said in one of your slides was up about 5.9% in the quarter.

If you had to guess, and I know there's a lot of variabilities and certainly no one's going to hold you to it, but if you had to look out a year from now and you looked at underlying price, do you think it's greater than 5.9, less than 5.9, flat with 5.9?

Directionally, where do you see that going?

I would say my core yield is probably in that 5% range.

Okay.

For '06.

And then just one last final question, property gains for the year.

I think your guidance was something like 75 to 100 million.

Is that correct?

Ed, in other income, 75 to 100 range, yes.

Anything for the first quarter in terms of guidance?

No, it's ratable generally.

Okay.

Thanks a lot, guys, for the time.

Our next question is coming from John Larkin of Stifel Nicolaus.

Please proceed with your question.

Good morning, everyone.

Good morning, John.

Just wanted to bore in a little bit on the agricultural and industrial products area, both of which had terrific revenue per car performance, up 19% each, I think, really extraordinary.

Is that because those contracts come up for renewal more frequently or is there some sort of change in mix going on within those segments?

Jack?

The majority of the business in those two commodity groups, John, are in either one-year letter quotes or tariffs.

Those are two of the areas where we do not have a high preponderance of long-term contracts.

We've moved a lot of that into a public pricing environment.

So we have greater flexibility there.

And it also happens to be places that when you look at the marketplace, that's what market pricing is like in those two areas.

Would you characterize any of that pricing as what I would refer to as kind of volume management or de-marketing?

We actually did manage volumes down.

If you looked at it in both of those two areas, the preponderance of the revenue growth that we had there was yield improvement.

And we were very careful as to how much business we added to the railroad, given the amount of work that we were performing.

And a question on the fuel surcharge, you may have already mentioned this and I may have missed it.

But did you mention what percentage of the business is currently on a fuel surcharge?

Rob, do you want to take that?

We did not mention that, John.

But it's about 90% of our revenue base has some sort of a fuel recovery component or another.

Okay.

What would you expect that to be, let's say, at the end of '06?

It continues to grow.

We're not going to be satisfied till is gets to 100% coverage, which won't happen at the end of '06.

So we'd make some improvement as Jack reprices that business that he talked about.

Some of that has a component already, some of it doesn't, so it should walk up.

And then just one final coal question.

We understand that there's a lot of demand in the east for PRB coal.

I would be interested in knowing what percentage of the growth that you see in '06 and perhaps beyond is going to be due to increased demand in the east.

Our first challenge right now is to serve our existing customers.

We've got substantial demand out here and that's our primary target right now.

The eastern market is a great opportunity for us.

I don't recall, Jack, unless you do, what that split is at this point.

We could do more in the east.

There's clearly more demand than we have in our plan for eastern coal.

But our primary focus right now, the majority is going to be serving existing customers.

Yes, the majority of 2006 will go to all existing customers and we are really at this point in time not taking on additional test burns and things like that.

We want to take care of the business that we have contractually committed right now.

That's our first priority.

So the customer demand that you quoted, which I think was up in the 12, 13, 14% range, that really doesn't include any of this activity in the east?

Only to the extent that we have existing customers in the east.

Thank you very much.

Our next question is coming from Scott Flower of Citigroup.

Please proceed with your question.

Yes, good morning, all.

Good morning, Scott.

Just a couple of questions to different folks.

I know that, and these are rough numbers that you talked about, 3% volume growth and 10% plus revenue growth, which obviously implies the 7% RPU type of gain.

Given that you expect fuel to more or less stay in the area it is, I would presume then most of that ARC improvement then is core price.

Obviously there's somewhat further penetration, but it doesn't sound like there's huge further penetration relative to the fuel surcharge versus what coverage you currently got.

Am I thinking about that correctly or am I missing something in the math?

Scott, the majority of that increase is going to be in your core price.

Right, right.

So I mean that would sort of argue that Jack's 5% number may be conservative when you talked about core price earlier.

I said in the 5% range.

And then a couple other things.

I know that you had talked earlier about a question just to get a little more color about escalations and doing better on that.

Order of magnitude, I'm not trying to get a precise number, but what is the range of what escalators are doing?

Is it just totally RCAP based ex-fuel and then you lay a surcharge on it?

Is that a reasonable number when I think about the book of business that isn't being repriced or are there some other nuance to that when I am thinking about a range of what -- what is the escalator actually giving you on your core business that isn't necessarily rolling over?

That is very situational for us, Scott.

It depends on the competitive marketplace, it depends on the business, the reinvestability of the existing business as we roll those contracts.

And even to some extent, our decision as to whether we want to keep that business under a contract basis or move it to public pricing.

So, again, as I said earlier, we're kind of focused on the RCAP index for a lot of our standard kind of contracts where we basically cut the fuel out and use a full fuel surcharge in addition to the non-fuel components of RCAP.

So then you're getting a fairly substantial escalator on your normal book of business?

We're getting a better escalator than what we've ever gotten in the past.

And then one last quick one on the revenue side.

How is the recovery going in the Gulf Coast terms of some of the chemical plants shutdowns and maintenance and et cetera from Katrina, Rita?

Jack.

We're really in good shape there.

At one point in time we had over 100 customers that were impacted by the hurricane.

But we are, for all intents and purposes, got everybody back up and running now.

Okay, and then just a couple other quick questions.

I know that Rob had mentioned that there was some slight insurance recovery in this quarter.

Do you anticipate, as we look through '06, that there's some further substantive recovery in the insurance side and if so, could you give us some order of magnitude, understanding the vagaries of dealing with an insurance company.

But is there some order of magnitude of insurance recovery that's built into your thoughts as you look at '06?

Do you want to take that one, Rob?

Yes, Scott, you're right.

We will continue to work with the insurance carriers to recover the balance of the January '05 storm issue.

Order of magnitude, probably comparable to what we saw this year in the $0.03 range kind of number on an earnings basis.

Okay, and then just the last quick question that I had, and I know that Dennis gave us a lot of focus and detail on the different parts of the operating plan, but maybe stepping back, when we think about the unified plan, what fine tunings or additional things are you working on in terms of major conceptual changes in how you're running the network today?

Or is it basically more or less in place and it's really trying to work through the implementation and fine tune it?

Dennis will answer part of this here, but I just want to start out with unified plan.

The key for us is starting with the overall forecast for demand and you work that from top to bottom here in terms of your detailed plans.

So we're spending a lot of time every year here looking at what markets fit best, what products do you put into the market, what are the customer demands.

You start with that, then, when you look at your network and, Duff, you can talk about the individual operating initiatives that are in there.

I think the thing that you can see here, expect to see going forward, Scott, is more of what I showed you, and that is simplifying our network.

We have a complex network and the key to us is to do what we have been doing.

Do more of origin and destination trains, take out intermediate work events, take out intermediate switches and we're going to continue to do more of that.

One other area that we are focusing on in the next, what we'll call, phase of the unified plan is the to and from industry piece.

That CIMS chart that I showed you offers us an opportunity to totally redo the way we do industry switching.

As you know, we have the largest industrial base in the industrial products and chemicals and Ag products of anybody and we want it to be a core competency in operational excellence.

CIMS offers us that opportunity.

So we are totally relooking at the way we do to and from industry piece and CIMS is the way we're going to go.

By controlling in route inventory, on hand inventory, customer inventory, matching their capabilities to our capabilities and then increasing our dwell in our operational performance there.

So we're very encouraged about it.

I think you'll see more of those aspects going forward.

Scott, I think there's one piece there, and this may seem overly simplified when you think about the network, but we are working with many of our customers where our customers recognize this is a new world.

And just the concept of loading/unloading seven days a week or 24 hours a day, we've got a lot of our industry that it's Monday through Friday and so all of a sudden you're sitting there with capacity that's not used.

And we've got some great examples with our customers where we sit down together, work through how do we get more throughput with existing assets and had some great success.

I think fundamentally for us, for UP, when you think about our manifest network, that's a substantial piece of progress we can make going forward.

Thank you.

Our next question is coming from Ken Hoexter of Merrill Lynch.

Please proceed with your question.

Good morning, it's Chris Weatherby in for Ken.

Hi, Chris.

Just wanted to touch on intermodal for a second.

You had mentioned that could be the driver of volume increases next year and with 5% volumes in the quarter.

Just wanted to get an idea of fluidity of the network and where you see any bottlenecks potentially occurring.

I know you're making some capital improvements on the Sunset corridor, but can you maybe comment a little bit on port fluidity and see how that is tracking?

Well, let me start with kind of the overall demand.

As I said earlier, volume was up 5% in the fourth quarter.

In fact, I think it was an all time record for us in our volumes when you look at it.

You've got substantial demand if you just step back and look at the customer base and what they like to move.

What we have to do, though, in my mind is what business makes sense, what business generates the financial return.

This isn't to me a volume game here.

It's a return game.

We have sorted through what customers will get us where we need to go on the return piece and fit our network best.

Dennis can cover, as he talked about some of the capacity investments that we're looking at on that map.

That shows you some of the areas, but, Duff, is there any more you want -- ?

I think the map is representative, Chris, on where we see those challenges and where we're putting our money, on the Sunset, the central corridor and our terminal infrastructure down in the south.

And you mentioned 84% east-west balance and how that's improved.

Do you have any -- can you give any clarity on where you see that going?

Is there substantial improvement to that or do you think you've gotten a lot already?

We really want to keep moving that forward to -- on a continuous improvement track.

We would like to see it get to 100%.

Okay.

And then switching gears a little bit, if you could-- I missed a little bit of the discussion earlier on the cash tax details, but if you could run through a little bit of what we should be expecting for '06 again.

Rob?

Yes, what I mentioned there, Chris, is that '06, we've run through the AMTs and NOLs that we've had for the last several years and our cash tax rate we would anticipate being up about 450 to $500 million in '06 over '05.

And that puts us at a cash tax rate of around 25%-ish and that's what we would expect a more normalized rate going forward.

That's a go-forward rate?

Yes.

And then just finally you had mentioned the substantial growth in Mexican opportunity you have from beer going north.

Just wanted to see if you could elaborate a little bit further on what we can expect as far as growth there on a revenue perspective for 2006.

I think it's substantial.

The key for us, though, is sorting through the business, what business generates the return that we need, working with the partners in Mexico, both Ferromex and the TFM, and making certain that the growth fits our network.

I don't think you'll see another 66%, though, year-over-year.

It will be far, far lower than that.

But we will still have good growth, as Jim said.

Okay, great.

Thank you very much, gentlemen.

Due to time constraints, our last question today is coming from Randy Cousins of BMO Nesbitt Burns.

Please proceed with your question.

Rob, I think you mentioned that you gave guidance for salary and benefits of 4 to 6%.

I guess what I'm trying to understand here is salary and benefits still the largest cost component that you've got?

I think you suggested that headcount would kind of match volume.

I would have thought with the productivity initiatives, the benefits of the unified plan that we would be looking at fairly significant labor productivity gains so that you would see a situation where conceivably headcount could come down.

The headcount will be tied more directly to volume.

And with the strong volume plan of 3%-ish, we'll see -- we will have productivity, clearly, but we'll see how it plays out.

I would anticipate that it will be flat to slightly up rather than down, based on the strong volume for '06.

Randy, there is-- as I said earlier, for us to get to where we need to be, the productivity piece is really a big part of the equation.

We know what we can do on the market with yields.

We know the demand is there in terms of volume.

And for our railroad efficiency is the key to really substantially growing our yield here.

You'll see productivity when it comes to '06 when we look at labor.

I will also tell you, though, there's a balance we look at when you look at resources in our Company.

We don't want to be short here.

We learned a lesson where you get behind on your manpower resources, it takes you so long to get caught up, the failure costs of that shortage is substantial.

So we're being a little cautious there.

I think that there's great opportunities going forward, but together, when you look at all the resources we have between manpower, locomotives, our terminal capacity, freight cars, that's your least costly investment in terms of when you think about failure costs out here.

We'll see a good year in '06.

Okay, and then final thing, this is a big year for labor negotiations.

Do you guys see a resolution to the negotiations of this year and how much is the negotiation process going to be a factor in terms of your ability to drive productivity growth on the labor front?

Well, as you know, we're in negotiations right now.

We've-- with the BLE coalition we've asked for release from negotiations.

That's still pending at this point.

We're still talking with UTU.

I hope we get it resolved this year.

That's our goal.

We aren't -- in our plan here, we don't have a substantial change in our agreements in terms of looking at our financials going forward.

But negotiations, this is an important year.

Okay, thank you.

Okay.

At this time, I would like to turn the floor back over to management for any further comments.

Well, thank you for attending the call this morning.

I hope you see we're feeling good about the year and we all know we have great opportunity here and we look forward to seeing you here with our first quarter release.

Thanks.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.