聯合太平洋集團 (UNP) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Union Pacific fourth quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS]

It is now my pleasure to introduce your host, Mr. Jim Young, President and CEO for Union Pacific.

Thank you.

Mr. Young, you may begin.

Good morning, everyone.

Welcome to our fourth quarter earnings conference call.

Joining me today are Rob Knight, our CFO, Jack Koraleski, Executive Vice President of marketing and sales, and Dennis Duffy, Executive Vice President of operations.

Before I turn it over to the team, let me give you some perspective on our record fourth quarter performance.

For the fourth quarter we earned $1.78 per share.

That's more than a 60% increase over fourth quarter 2005 earnings of $1.10 per share.

The primary driver of our strong earnings growth was a 52% increase in operating income to a record $810 million, as all facets of our operations improved in the fourth quarter.

Looking back at the quarter, a major achievement was a nearly 6.0 operating ratio improvement to a fourth quarter best 79.6%.

This is the lowest operating ratio we've attained in more than four years and our first sub-80 mark since the second quarter of 2003.

A couple of items drove this improvement.

We moved more coal tonnage in the fourth quarter than any ever before, hauling a combined 61 million tons out of both the Southern Powder River Basin and Colorado/Utah.

Operating revenue was a fourth-quarter best at $4 billion.

Now at the start of the quarter we were expecting stronger growth, but industrial products and domestic intermodal volumes were both softer than expected and offset some of the strength in coal and agriculture.

Operationally, we continue to make solid gains while moving record volume .

Dennis will provide more details on this in a minute, but fourth quarter velocity, terminal dwell and inventory metrics were some of the best we've seen in three years.

Overall we turned in a great fourth quarter and strong finish to a record year.

Before I turn it over to Jack, let me take a minute to make a couple of comments on full-year 2006.

We achieved several milestones in the year, breaking car load, revenue and income records.

We achieves these gains by generating more through-put across our system, improving the profitability of our business mix and increasing operational efficiency.

Specifically, our net income was our best ever of $1.6 billion, a 77% increase over 2005, and we improved our return on invested capital by 2.5 points to 8.2%.

We made solid progress last year and look forward to building on that momentum in 2007.

So with that, let me turn it over to Jack to take you through the revenue detail.

Jack?

Thanks, Jim, and good morning.

The economic softness that we saw in the third quarter continued into the fourth, and we closed the quarter with only a 1% increase in volume year over year.

And yet despite that economic softness, we did set a new fourth quarter record for volume.

That record volume, combined with an 8% improvement in average revenue per car, resulted in a 9% increase in revenue, wrapping up the quarter at $3.775 billion For the full year, our ongoing efforts to drive yield improvement, coupled with a little over a 3% increase in volume, resulted in $14.9 billion in revenue.

And as Jim set -- Jim said, we set new records for revenue, for volume and for average revenue per car, which was up a little over 11%.

Equally encouraging was the improvement in service that drove higher levels of customer satisfaction as we moved through the year.

I also want to highlight one other record.

We've talked in the past how our unparalleled access to the Mexico border crossings and strength of our franchise north of the border has allowed dramatic growth over the few two years.

Well, in 2006 we had a banner year, with our revenue on business to and from Mexico growing 23% to almost $1.4 billion, another new record.

Leading the way were automotive, ag products and intermodal, each of which posted double-digit volume increases.

So we had a great year in 2006.

We expect to see continued growth in this important market in 2007.

So now let's take a brief look at fourth quarter results for each of our six businesses.

Ag products set a new high-water mark for quarterly revenue at $670 million.

That was up 20% from the fourth quarter last year, driven by 4% growth in volume and a 15% improvement in average revenue per car.

Ethanol and DDGs were up 50% and 64% respectively.

Export feed grains increased 46%.

Our ag business to and from Mexico grew over 20%, with DDGs up over 100, import beer growing 40% and feed grains to Mexico up 31%.

Our new produce unit train that we launched in conjunction with the CFX in mid-October continued to the increase in our ag products business, as well.

It consistently met its truck-competitive five-day schedule from Washington state to New York.

Customers like the service and it's driving improved asset utilization for us, more than doubling the loads per month for each refrigerated car in that new service.

Looking ahead to 2007 we expect to see a second produce unit train come online; that should contribute to our revenue growth.

In addition, our ethanol and DDGs business will continue to expand, and continued service improvement in our domestic shuttle network should help drive growth planned growth in feed grains for us.

Next up our automotive business.

Our automotive business saw finished vehicle shipments decline 5% in the fourth quarter, but that decline was offset by growth in our parts business, holding overall volume flat.

The parts growth came largely from new Honda and tier business, as well as increased shipments for General Motors.

While automotive sales were down 3% over -- in 2006, our volume actually grew 5% and we expect to see a similar relationship in 2007.

The startup of Toyota's new San Antonio plant will be a key driver of growth for both vehicles and parts business.

We're also going to benefit from our coverage of the faster growing markets in the western United States.

Turning to chemicals, while chemicals volumes were down 1%, continued yield improvement drove a gain of 9% in revenue.

As Diane talked in our meeting in October, weather was a problem for the fall fertilizer season and resulted in a 12% decline in volume.

The slow down in construction reduced PVC demand, so our liquid and dry volume was also down to 3%.

On the positive side, movements to storage and transit yards in the Houston export market helped our plastics business to grow 5%, partially offsetting the decline in fertilizer and liquid and dry.

Now our crystal ball for 2007 says most of our chemical lines will be fairly stable, export demand should fuel growth in soda ash, and we're hoping for a more normal pattern for fertilizer, which should generate favorable year-over-year comparisons.

In addition, growth in corn production to supply the ethanol industry should actually strengthen our fertilizer demand, giving us a little cushion should the softness in the construction and housing markets persist.

With a 10% growth in volume, energy posted the largest gain in the fourth quarter and drove our overall car loading growth.

Energy's performance was driven by an all-time record tonnage out of the Southern Powder River Basin at 49.6 million tons, which was up 14% over the fourth quarter of 2005, and a 3% growth in volume out of Colorado/Utah.

The increased volume, combined with a 9% improvement in average revenue per car resulted, resulted in a 20% increase in revenue, marking the best fourth quarter ever.

For 2007, energy will continue to be a fundamental building block of our volume growth, with continued strong demand for western coal.

Capacity expansion projects in the Southern Powder River Basin should help the fluidity of the supply chain and help drive growth of 5% to 6%.

In Colorado/Utah we're hopeful most of the mine problems are behind us and we'll see a year of more normal production in that area, as well.

The softness of the construction market resulted in an 11% reduction in car loadings for our industrial products business.

Lumber led the decline, down 28%, while roofing granules and shingles dropped 13%.

Delays in expansion projects and a domino effect from housing slow down drove an 11% reduction in our southern rock business.

Now despite softness in these areas we continued our focus on shedding low profitable business.

The result was a 12% increase in average revenue per car, which allowed us to hold revenue flat at $744 million, just $2 million short of a new fourth quarter record.

Clearly this is the business group we're most concerned about as we head into 2007.

Our current outlook based on discussions with our customers is for a gradual recovery.

We expect volumes are going to remain below 2006 levels here in the first quarter, but then start to strengthen as we move through the year.

Now we will have easier comparisons year over year in the second half, but even at that, we're going to have to see the economy build a little steam to generate some year-over-year improvement in this group.

Our international intermodal business was solid, with volumes up 6%, allowing intermodal to post a record fourth quarter volume despite economic softness.

And the other thing working against us was an ample supply of trucks that led to declines in both the domestic and premium segments.

Year-over-year improvement in average revenue per unit of 4% was the result of on-going yield improvement, which included the mid-year renewal of a couple of our legacy contracts.

So in total, revenue was up 4% to $724 million on flat volume.

Looking ahead, we expect continued strength in the international segment in 2007.

As in industrial products we're cautious on our outlook on the domestic side.

While we expect demand to continue softer through the first quarter, we're looking for improved service and a stronger second half economy to help drive an uptick in domestic intermodal volumes.

We're pretty excited about the prospects for growth, with the improvements we're making on Blue Streak together with our partners DNS, and we think that the new train offering that we just announced -- especially when we move it to the Shreveport gateway -- will be best-in-class, with most efficient rail route between southern California and the southeast markets.

At the network grew stronger throughout the year so did our customer's confidence in Union Pacific.

Customer satisfaction scores averaged 75 in the fourth quarter.

That was up eight points from the fourth quarter of 2005, and it's building our enthusiasm for what we think we can accomplish here in 2007.

But when we flipped the calendar to 2007, it didn't take mother nature long to put us on the defensive.

Between the ice storms, massive power outages and a downed bridge or two, we're all working pretty hard to get back on plan.

Looks like January volume could fall as much as 4% to 5% below 2006, due to the weather impact on coal loadings and a slow start up by auto manufacturers after the holidays.

That being said, at this point we're still cautiously optimistic.

We expect our biggest volume growth to be in energy and intermodal, and those markets are not disappointing us today.

New products, like the produce unit train and the new service at places like Toyota's new San Antonio truck plant are combining with areas of strength in our franchise-like export soda ash, ethanol and DDGs to give us confidence that the strength of the Union Pacific franchise overall is going to help us weather through this economic softness.

Our continued focus on driving every piece of business to our reinvestability threshold to result in revenue growth in each of our six businesses.

And we expect that when all's said and done that top line growth of 6% to 7% is well within our reach.

With that I'm going to turn it over to Dennis for the operating report.

Thank you Jack, and good morning.

Let me take a minute to discuss our fourth quarter performance, as well as our plans for '07.

Starting out with safety, 2006 was a very good year on our railroad.

This chart illustrates our three-year safety trend for employees and rail equipment.

The blues bar slow the incident numbers and the yellow lines are FRA-reportable rates.

In 2006 our employee incident rate fell by 15% and our reportable rate by 9%.

In the rail equipment area, we also made significant gains.

Our incident rate fell nearly 19% and reportables declined 8%.

Going forward, our approach to safety will continue to be multifaceted, using technology, risk assessment, intense quality control, and training in all aspects of safety.

In '07 we will also continue implementing our positive training control projects and working with our partners on a better tank car design.

Now turning to the service metrics, we made strong gains in the fourth quarter, with volume setting a fourth quarter record.

Against that back drop we converted our capacity additions and network management initiatives into a more fluid network operation.

Specifically, our velocity increased by 1.5 miles per hour, or 7%, and our terminal dwell improved nearly four hours, 13%.

Industry spot-and-pull is another indicator of our improved terminal fluidity.

Throughout 2006, we steadily improved our pickup and delivery reliability, which ties directly with the customer satisfaction ratings that Jack showed a moment ago.

Overall, this slide illustrates the steady progress we made throughout 2006, while moving record volumes.

As Jack mentioned, 2007 has already started off with some challenges: Numerous winter storms raging virtually across our entire system; snow, ice, freezing temperatures, high winds from the Pacific Northwest, California, across the sunset, even Texas and on into the midwest.

But we're demonstrating great resiliency in the face of these storms, and rapidly putting the impact behind us.

This recoverability competency has been a major focus for us and will continue to be so in '07.

If you look at our productivity metrics, we translated the improved network fluidity into better asset utilization.

At the top of the chart is our freight car utilization and inventory metrics.

Utilization measures the average number of days from one originated load to the next.

We improved this measure 11% in the fourth quarter and 4% on a full-year basis.

A corollary to that improvement can be seen with our inventory.

Against the record quarterly loadings we consistently start our inventory, finishing with a 4% improvement in the fourth quarter.

The unified plan initiatives, aggressive inventory management, and lean projects offer further opportunities ahead for us.

One of the things you heard from us in Dallas was our focus on accountability and consistent execution of our transportation plan.

This work manifests itself into greater train plan compliance, demonstrating the discipline and reliability of our network and. ultimately. better customer service.

Our field consumption rate was a fourth quarter best, improving 2% versus last year ending the year at a best-ever full-year mark of 1.28 gallons per thousand gross ton mile's.

Simulator training, operating practices and technology are all driving this improvement, saving us roughly 17 million gallons in 2006.

As you heard, 2006 was a record production year for UP out of the South Powder River Basin.

As shown on this slide, we hauled more trains per day, more cars per train, and more total tons than any other year in our history.

And we ended the year on a high note, setting all time records in December for a single month car loads and tonnage.

This performance was driven by several key network initiatives, some which I highlighted for you in Dallas.

Our innovative in-train car repairs. additional main line capacity on the joint line, as well as other select capacity improvements and better maintenance planning all helped to drive the record 2006 loadings, and sets the stage for another record year in '07.

Here's a quick recap of our 2006 capacity projects and plans for '07.

We placed 56 miles of double track and service on the sunset corridor, making it a route now 50% double tracked as of the year end.

We added another 61 miles of centralized traffic control on our east-west main line across Iowa.

And to prepare for this new Toyota San Antonio plant and record Mexico business, we upgraded signals, track and terminals in south Texas.

For '07 capacity spending remains demand driven and includes: Another installation on our accelerated sunset corridor growth strategy; another 60 plus miles of double track and grading for an additional 90 miles, while at the same time upgrading terminal facilities in Los Angeles, Yuma, Tucson and El Paso; upgrading signals on the old Texas and Pacific line between El Paso and Fort Worth and into the growing Shreveport gateway; and building a new intermodal facility in San Antonio.

As for the coal business, the plans include further joint line expansion, completion of the signalling project across Iowa, and various terminal enhancements to improve cycle times.

So to summarize, we clearly made significant progress in 2006 in safety, service and overall network reliability.

In '07 we will use this solid performance as a foundation to accelerate additional improvements.

Areas of focus include safety and the dedication to a total safety culture, with zero tolerance approach.

From a service standpoint, process improvements aimed at reducing variability, shrinking cycle times and incrusing -- increasing overall asset utilization will help drive down unit cost and take out failure cost.

And finally, continue simplifying the network through the unified plan and invest our capital dollars wisely, to debottleneck constrained parts of our network.

So with that, let me turn it over to Rob.

Thanks, Dennis, and good morning.

As you've already heard today we recorded a very strong fourth quarter performance.

Let me take a few minutes to provide some additional detail behind our results, starting with our income statement.

Operating revenue grew 9% in the quarter to nearly $4 billion.

Quarterly operating expenses grew just 2%, as a result of lower fuel prices and better operating efficiency.

The net result was a 52% increase in operating income to a best-ever $810 million.

Jack's already given you come of the technicolor behind our commodity revenue, up 9% in the fourth quarter to $3.8 billion.

The key drivers of our growth were: Fourth quarter car loadings up 1%, driven primarily by all-time record energy loadings; fuel cost recovery added just two points to our quarterly revenue, as lower year-over-year fuel prices slowed the growth rate; strong quarterly price gains added six points to our revenue growth, somewhat offset by the mix effect of higher growth in our energy and internod -- intermodal volumes, which have a lower average revenue per car.

In 2007, we anticipate the solid pricing environment will continue.

Turning to the expense side, salaries and benefit expense, this line item grew roughly 6% in the quarter to just under $1.2 billion, in line with our expectation.

Inflation, a larger work force and volume growth were the primary drivers of the increased quarterly costs.

Quarterly compensation and benefit expense also increased, but this was offset with greater train crew productivity in the form of lower crew costs.

And we had about $3 million in expense in the quarter from the FAS 123 option expense requirements.

We should maintain a work force in 2007 that is roughly equal to 2006 levels, as increased productivity enables us to move growing volumes.

For the first quarter, this expense category should be up 4% to 5%, primarily driven by 3% to 4% labor inflation.

Our next expense category is fuel and utilities, down 6% in the quarter to $705 million.

Lower year-over-year fuel prices were clearly the story here, as we paid an average of $1.94 per gallon in the fourth quarter.

This was $0.14 per gallon less than we paId a year ago, and at the bottom end of our estimated range coming into the quarter.

You heard Dennis mention the improvement in our fuel consumption rate.

This also lowered quarterly costs.

For the full year, our recovery rate was 90%, A significant improvement over 2005, but still not at our 100% recovery rate target.

Looking ahead, it's hard to protect -- predict what will happen with diesel fuel prices.

For planning purposes, we're assuming fuel will average $2 per gallon for 2007.

In January, we're averaging around $1.85 per gallon, but we've seen prices as low as $1.70 per gallon for some regions, but we all know that prices can spike at any time.

Our goal to is eliminate the earnings impact of high fuel prices through our fuel surcharge programs.

Our next category, equipment and other rents, also declined year over year to $346 million, a 2% reduction.

The primary drivers of the decline were better operational fluidity related to improved car cycle times and reduced car-hirer payments.

Looking ahead to 2007, expenses in this category will see increases from higher equipment leases and volume-related costs.

We would expect some offsets, however, through improved asset utilization.

In the first quarter, we'd expect rent expense to be flat to sli -- to up slightly versus 2006.

Turning to materials and supplies expense, this line totaled $171 million in the quarter, a 20% increase year over year.

Throughout 2006, this category was pressured by higher material prices, increased locomotive overhauls, and, as we have discussed in prior quarters, the cost shift from purchased services, as a result of more locomotive maintenance being done in-house.

For 2007, we would again expect to see inflationary pressures but at a more moderate rate.

And while we're planning another strong maintenance program, we won't have the expense shift this year.

In the first quarter, this line is expected to increase 8% to 10% year over year.

Our last expense line, purchased services and other, increased 3% to $446 million.

The majority of the year-over-year increase relates to 2005's insurance settlement of about $10 million.

We also experienced higher costs in the quarter associated with increased casualty expense.

And as I explained with materials and supplies, part of the year-over-year decline relates to the expense shift between the two categories.

For 2007, we'd expect to see year-over-year increases in the 4% to 6% range.

You'll recall that we had some help in this category in 2006 from insurance reimbursements and decreased casualty expense associated with a third quarter actuarial study.

Looking ahead to the first quarter, the growth rate should be more moderate, up about 3% to 4%.

Turning to our operating ratio, as Jim mentioned, we achieved a 79.6 ratio for the fourth quarter, 5.7 points better than a year ago.

Clearly, lower fuel prices and better surcharge recovery helped us here, but it also demonstrates the improved profitability of our business mix and benefits of greater operating efficiency.

Turning to the next slide which shows our fourth quarter income statement.

You'll recall that our outlook back in October was for fourth quarter earnings in the $1.50 to $1.60 per share range.

As it turned out, we had a couple items at roughly $0.14 per share of our quarterly earnings that we didn't anticipate in October, as we went into the quarter.

One item, other income, although only up $3 million year over year, finished the year stronger-than-expected as a result of year-end real estate transactions.

And our fourth quarter tax rate also came in better than expected at just over 35%.

Tax credits and other adjustments drove this variance.

Fourth quarter net income totaled $485 million or $1.78 per share, a 62% increase over 2005 earnings of $1.10 per share; a strong finish to 2006.

Let me take a minute to summarize our full-year 2006 income statement.

Clearly, a highlight for us throughout the year was our growth in operating revenue, up 15% for the year to $15.6 billion.

Against that strong growth, operating expenses grew only 8%, resulting in a 61% increase in operating income to a record $2.9 billion.

Our 2006 operating ratio came in at 81.5%, 5.3 points of improvement.

Greater fuel surcharge coverage, better yields and improved operating efficiency all contributed to this gain.

Full-year other income was lower in 2006 by $27 million, as result of fewer real estate sales.

Interest expense also declined $27 million, related to lower overall debt level's.

Our income tax expense increased considerably in 2006, primarily driven by higher income levels.

The 2005 tax expense number shown here has been adjusted for the $118 million tax reduction recorded in the third quarter of 2005.

The tax reconciliation is available on our website.

For the full year net income increased 77% to a record $1.6 billion. 2006 earnings increased 73% to $5.91 per share.

So a very good year for us and a great starting point for 2007.

Turning to capital spending, we finished 2006 a little under our $2,8 billion capital budget, spending roughly $2.7 billion.

Cash capital totaled $2.2 billion and the remainder, nearly $500 million, is the cash equivalent of our locomotive and freight car lease programs.

As we mentioned previously, we were targeting an all-in capital plan of roughly $3.2 billion for 2007.

We have fi -- we have not yet finalized our plans yet, so the exact cash versus lease allocation hasn't been determined.

As we firm up our plans throughout the year, we will update you.

Looking at free cash flow after dividends in 2006, you will see that we ended the year at $516 million, a significant increase over 2005.

We attained that high level of cash despite several increased outflows during the year.

We voluntarily contributed $150 million to our employee retirement plans during 2006; $50 million in the first quarter and an additional $100 million in December.

That December contribution is a pull-ahead of expected 2007 and 2008 contributions, freeing up cash in those years for other purposes.

We also had a higher cash tax rate in 2006.

Part of this is attributable to our increased earnings.

But as we told you a year ago, some of the increase is because we had used up our ANT and NOL credits.

In total, we paid about $520 million more in cash taxes during 2006 than in 2005.

And we also paid a little more than $70 million dollars more in 2006 for cash capital expenditures.

Looking to 2007, we expect strong cash generation from operations of our business.

As we've discussed previously, this cash should be sufficient to cover both our increased capital program, as well as provide opportunities to further enhance shareholder value.

Before I close out the 2006 discussion, let's look at our balance sheet position at year end.

Our lease-adjusted debt-to-cap is just over 40%, a more than 10 point improvement from 2002 levels.

In addition, our lease-adjusted debt to EBITDA has strengthened to a solid investment credit grade level.

Our earnings have grown, particularly in 2005 and 2006, as credit ratios have improved.

If you step back a minute and view our balance sheet and cash generation together, we believe that we're now in a very solid position to consider returning cash to our shareholders.

We'll be focusing on this over the next several months, as we get a better read on the economy.

We clearly see an opportunity to create additional value for our shareholders in the near term.

Turning to 2007, we see the potential for another strong year ahead.

As you heard Jack describe, there will likely be some mixed performances among our commodity teams, but overall, we were expecting volume growth of 2% to 3% and revenue growing in the 6% to 7% range.

As you've seen in our car loadings, the year is starting off a little slow.

Winter weather, soft housing market are the primary drivers.

But starting in the second quarter we expect our growth rate to pick up some.

Continued demand for coal, emerging agricultural markets and a rebound in fertilizer shipments should provide additional opportunities.

Expectations for moderating fuel prices in 2007 are part of the forecast; lower fuel prices resulting in less fuel surcharge revenue.

And, if that trend continues, our commodity revenue growth rate could be actually be reduced by lower year-over-year fuel surcharge revenue.

A solid pricing environment is expected to continue this year.

But with volume growth coming primarily from our lower average revenue per car businesses, such as energy and intermodal, our business mix could impact our ARC growth.

We would also expect continued improvement in our operating efficiency during the year.

These gains, coupled with higher revenue, should produce a full-year operating ratio that is under 80%.

Assuming other income of $75 million to $100 million in 2007 and a 38% tax rate, that puts full-year earnings growth in the neighborhood of 10% to 15%.

It will make progress toward the goal of improving returns, as we work hard to meet and then beat our cost of capital.

Looking specifically at the first quarter, a couple of factors will drive our results.

Softer demand in selected areas will likely moderate our volume growth.

As I mentioned, winter weather is impacting our operations and our business volumes, particularly coal out of the Powder River Basin and our Colorado/Utah franchise.

So for the first quarter, we expect earnings to be in the range of $1.25 to $1.35 per share.

At the high end of that range, we'd have a 17% earnings growth.

This would be a solid start to the year, especially given the typically higher first quarter operating ratios.

So with that, let me turn it back over to Jim for some closing comments.

Thanks, Rob.

Before we open it up for your questions, I'd like to say a couple words about this year.

We're optimistic about the potential for our Company.

As you heard, winter weather has been a challenge in January and we're somewhat cautious about the economy, especially as it relates to housing and autos.

But the strength of UP's franchise diversity should allow us to overcome that challenge and still see record growth in our business.

The key to success for Union Pacific in 2007 will be to build on last year's momentum.

Our goals are: To earn record revenue through both volume growth and pricing; leverage our service initiatives to increase productivity, and provide a quality transportation product for our customers; invest to increase capacity in areas of strong demand, as well as to improve operational efficiency; and further improve our shareholder returns.

So with that, let's open it up for your questions.

[OPERATOR INSTRUCTIONS] Our first comes comes from Jason Seidl with Credit Suisse.

Please state your question.

Morning, gentlemen.

Good morning, Jason.

Couple quick questions, just so we're on the same page.

In your guidance what are you using for the full year for EPS as a base for '06?

For '06 it'd be the $5,91.

You're using the $5.91.

Okay, perfect.

And you are using for comps year over year, you're comping in first Q against 115?

That's right.

Okay.

I guess I'm a little bit surprised that your EPS growth rate is a little bit higher for the full year, especially since your top end of the line will be about $1.35 in 1Q, and you admittedly said it was -- you'll probably more challenged in 1Q than you are throughout the year as your growth rate picks up.

Can you talk us through some of the headwinds that you may face through the rest of the year in terms of earnings growth?

Well, Jason, I think the real wild card is going to be when we see the economy start to recover.

We're obviously being cautious here when we look at first half.

You know, you can kind of read the tea leaves out here, and there's a pretty wide range of forecasts on economic growth.

So we're -- again, as Rob said, we're assuming a slow first half and recovery in the second half going forward.

Okay.

If I can focus a little bit here on coal in particular, you guys had a very good '06.

Looking into '07, obviously the weather in the east is not really come to fruition for winter, but how does it look in terms of some of the PRB mines?

I've been hearing some rumors people might start shuttling some production.

You guys have an outlook for that?

Well, we're not -- right now we're not seeing any softness in demand, at least with our customer base.

Again, you're trying to look out to the year.

As everybody knows we had a pretty warm fourth quarter, although it's pretty cold out here in the midwest here in January.

It's actually pretty cold here today for once. [LAUGHTER]

Okay, well, that's good.

And we're going to still see growth out here.

We think the coal for Union Pacific, coal tonnage, will be in that maybe in that maybe 5% to 6% range going forward.

So I see a good growth coming out of PRB.

Okay, well that's good to hear.

Last question and I'll turn it over to somebody else.

As we look at your book of business, how much of your book of business is left to be repriced, or that has not been repriced since, let's say 2004?

I'll let Jack take that question.

Thank you.

At the end of 2006 we had 32% of our business that we had not been able to touch since 2004, and we will probably have an opportunity to look at about 5% of that in 2007.

Okay.

Is that mostly coal intermodal?

Coal, intermodal and autos.

Does that percentage change much in '08?

Probably another, call it 6% in '08.

6% in '08.

Okay, thank you very much.

Thanks, Jason.

Our next question is from Scott Flower from Banc of America Securities.

Please proceed with your question.

Yes, good morning, all.

Morning, Scott.

Good morning.

Wonder if maybe just a couple for Jack. know Rob's comments about recovery rates, but where do you stand on actual coverage of your different contracts with fuel surcharge?

What percentage of the book of business actually has fuel surcharge coverage, and what did that increment in '06 and what might you expect in '07?

You know, Scott, we're probably to the point right now where we have fuel surcharge recovery on about 90% of our business.

Some of those -- even some of the contracts that we have that we have not been able to touch in '04 have fuel surcharge provisions that we've actually put in place.

And with the rapid run-up in fuel they actually did kick in and so they are providing some coverage there, so that's a good thing.

Haven't seen any -- we're just continue on each one of the deals that we do, as fuel surcharge is mandatory.

Anything that comes up, any new business or the renewals of any existing contracts or thinks like that fuel surcharge is on the table for us.

So will that slightly increment in '07?

We'll see a little bit increment in '07.

Okay.

And then two other questions, I guess on the revenue marketing side.

You mentioned on the domestic intermodal side -- and that would be logical -- that's where you are seeing whatever impact there is in some of the short-term supply'demand effects in truck load, in trucking, are you actually seeing yield pressure declines there?

Or are you taking the tact that this is more temporal, therefore, if customers are willing to run away for short-term trucking supply demand and balance. you'll let that happen and keep yields where you think they should be, or are you actually seeing yield pressure in that actual segment?

Because, obviously international you're getting yield increases and I understand.

Hey, Scott, this is Jim.

I will answer that one.

We need to stick with our pricing strategy here to drive the returns in the business.

As you know, we announced the $3.2 billion capital investment.

A big part of that's going into intermodal, and we've got to be very focused on the returns.

There is, obviously, some pricing pressure in the market when you have excess supply in the short term.

But we are staying very focused on not only maintain -- we've to get the returns up in the intermodal business if we're going to put the kind of capital we're looking at into that business.

So you're willing in the short run to let some of that business -- if you've got particular shippers that are more price focused let that walk away in the domestic intermodal side for the short run?

Yes.

Okay.

And then the last quick question I have -- and I'll let someone else have a shot at it -- is I know that you talked about -- and I think it was Rob talked about, obviously, pricing and then mix having some negative impact.

What did mix take away, when you just look at ARC, obviously with the shift toward a little bit more growth coal/intermodal on a per unit basis?

Rob, you want to answer that one?

Yes, Scott, in the 1.5% to 2%.

Okay, very good.

Thanks very much.

Mix effect.

Thanks again.

All right, Scott.

Thanks.

Next question is from Tom Wadewitz with JPMorgan.

Please proceed with your question.

Yes, good morning.

Morning, Tom.

Let's see, I wanted to see if you can give us some comments on operating performance.

What are you assuming that Dennis is going to contribute here in order to get into this 10% to 15% growth area?

Does that assume that velocity improves substantially?

And if you're not assuming that, do you think that makes the guidance a little bit conservative and -- especially in light of some of the momentum you had in the fourth quarter?

Dennis, you want to take that one?

Well, Tom, we plan on making a significant contribution.

But really what you want to look for in us is continuous improvement, both on velocity side, our inventory management and certainly in our dwell.

We're confident, based on what we were able to accomplish in '07 -- '06 that we have a -- we're starting the year from a position of strength in our terminals.

And we think that as soon as we manage to get all this other weather impact behind us. you're going to see it in our numbers.

And our contribution to the overall service performance is going to be a continuous improvement from the first quarter on through the fourth.

Tom, one -- keep in mind velocity is not a perfect measure here.

As Dennis was showing, the terminal dwell times on either ends are not in velocity.

The reliability of service to customers in a lot of cases may not show up, so there are a lot of measures we're looking at.

But the bottom line focus that we're looking at next year is to improve the customer service measures and turn the assets.

Okay.

When I consider Rob's comments on expense guidance in first quarter, you've got some weather issues and so forth, but it would appear that they're don't apply -- or don't imply a lot of improvement in velocity and dwell time.

I'm just wondering, does that give you some upside to the current guidance if you do see velocity and dwell and cars on-line continue to improve substantially?

Well, Tom, we -- I've still have about six weeks of winter weather out here.

Although I will tell you we are -- as Dennis mentioned here, we have taken some hits, but we recovered much more timely than we've seen historically here.

If the weather plays out the next month and a half where we don't have any major events, we've got some upside in terms of January's performance when you look at velocity, so we'll see.

Okay.

And the last one -- and I guess I should also say congratulations on the good fourth quarter results.

You put up very strong numbers.

Thank you.

On the volume assumptions, what are you really looking at for second half?

Are you assuming a much stronger economy in second half, or you're just assuming kind of a gradual bottoming and gradual improvement?

We're assuming a stronger economy in the second half.

Again, remember, you started to see the slow down in fourth quarter, so your comps -- when you think fourth quarter year over year again we started to see the weakness come in with our November loadings.

So we assume a relatively strong economy coming back here in the second half.

Okay, great.

Thank you for the time.

Okay, Tom.

Thank you.

The next question comes from Jordan Alliger with Deutsche Bank.

Please proceed with your question.

Morning.

Morning, Jordan.

Morning.

Just a follow-up question on the -- on your business and the repricing.

I know you said 32% not touched.

I'm just wondering, I assume that's on sort of longer term contractual.

I'm just wondering what's the mix of spot versus that chunk that's the 32% that still hasn't been touched?

You want to take that, Jack?

Jordan, I'm trying to understand.

In other words, just the spot or shorter term contracts relative to the longer term contracts that I assume is within that 32% that's still to be repriced?

All of the 32% is contracts.

And if you looked at our current book of business today, we have in total about 45% of our business tied up in contracts and the remainder is either in one-year deals or tariffs.

Okay, thank you.

Hey, Jordan, there's one other thing I think you need to be careful on.

When you think about the 32%, we haven't touched, that's not the only opportunity.

Even business we've touched, looking backwards where we were able to do some pricing, the market has moved in those.

The other factor, there's just no question in my mind that as we kick our service up, provide a better value product to the customer, we've more upside.

Fair enough.

So I wouldn't look at the 32% as the only opportunity we have.

There is clearly some value that we can earn in terms of improved service.

Fair enough.

Second question, on the ethanol side, give some sense how big that is for you now, either in terms of your current ag car loads or total car loads or revenue?

Jackson?

Total, if you looked at ethanol and DDGs for us, it's about a $200 million book of business.

Ethanol was up I think 50% in revenue and 64% for DDGs, and we're looking for a very healthy increase in 2007.

Any order of magnitude you could share?

North of 40%, so probably somewhere between 40% and 50% growth in revenue.

Then just a final question on -- I apologize on asking again on the EPS thing -- maybe another way to sort of ask the question is what scenario would yet get a 10% EPS growth?

That would do -- ask that again.

What scenario in the broader economy or broader anything would get you to just the low end of your 10% to 15% EPS growth?

Well, I think, again, the economy is a wild card.

Fuel price is one that we really have significantly reduced the impact there, but we we're still not recovering 100%, when you think about it.

So if you had a real surge it might hit you, but I think it would have to be a pretty drastic turn in the economy.

Thank you very much.

The next question comes from John Barnes with BB&T Capital Markets.

Please proceed with your question.

Good morning, guys.

Morning, John.

Jim, real quick on the CapEx budget.

How many years do you think we see something in excess of $3 billion, and was this an attempt to accelerate the number of projects, or this is going to be more of an ongoing number?

Or is it two years of this and then we get back to something in the $2.5 billion range?

Could you just give us an idea on the trend line here?

Well, Jim, part of this, as you know, is accelerating our sunset corridor expansion, which includes more than double track between L.A. and El Paso.

It includes commercial facilities.

It includes the L.A. basin.

It includes some investment beyond El Paso going into the east.

We're looking right now.

We were on about a seven to eight year time line before.

Right now we are looking in around four years or so, three to four years.

The key for me on the capital is going to be how we see our returns moving.

We've had a good improvement, but I have to tell you we're looking -- they've got to go higher here to justify that kind of investment to continue to go in, so we'll look at it every year.

There's also an operational benefit here.

One of our biggest opportunities at Union Pacific is our productivity piece, and we are seeing very clear examples; where we put that capacity in, we substantially improve our productivity.

So we're going to look at it every year.

And again, what I've said to my customers if the returns are there, we can continue move it up, we're going to put the capacity in where we can get the growth.

Okay, very good.

So I'm looking at kind of a three to four year time horizon, where we're going to see at least this levels -- this level, as long as returns justify it?

You know, it could be if the returns are there.

Okay, very good.

And then the next thing was, on the pricing strategy you talked about having a little bit more in '07.

I just want to get your take on once you kind of get all your book of business repriced, what do you view as the longer term price -- pricing power for the rails then?

Once you make up a lot of the longer-term deals that still have to be brought up to market level, does rail pricing fall back into kind of an inflationary rate, or do you still think there are some stairstep functions in price is left out there?

You know, John, we said in the -- down in Dallas we said long term we thought around 3% was a good planning assumption.

But there's a variable out here that could drive it higher.

As you know, there is a -- to me it's a transportation issue in this country. [inaudible] highway capacity, ports.

The demand.

We understand what's going on on the highway in terms of a lot of the truckers.

I think there could be some additional leverage above that 3% when you look at the overall issues we're wrestling within transportation infrastructure.

But I think a good planning assumption for us is around 3%.

Then the other thing is the value of service.

There is, again, no question in my mind, I've -- I'm in front of a lot of our customers.

They are willing to pay a premium for improving service.

All right, nice quarter.

Thank you for your time.

Thanks, John.

Thank you.

The next question comes from Randy Cousins with BMO Capital Markets.

Please proceed with your question.

Morning, guys, and congrats on just great numbers.

I guess the question that -- a couple questions.

The one I have is coming back to the coal business, and more particularly, I wonder if you guys could talk about the Colorado/Utah portion of your business?

It was a -- for lack of a better phrase a challenging 2006, and I wonder if you'd give us more color on how you expect that business to shape up in 2007, and does that create some upside potential to your guidance for your energy business?

Jackson, you want to take that one?

Yes, if you look at, Randy, our Colorado/Utah business last year was actually down and what drove that was some mine issues.

A couple of our mines were closed through the first quarter and into the second quarter because of things like roof cave-ins and gas and heat problems in the mine.

So the first half of the year was really a tough year.

Our outlook right now for 2007 says we'll grow business out of Colorado/Utah in the 6% to 8% kind of range is what we built into our plan right now.

Unfortunately, we've got one mine that's experiencing a little bit of problem right at the moment that hopefully they think will be cleared up here by mid-February, so we're kind of cautious on that.

But we're just -- just in talking to the mines, understanding what's there, the demand is strong.

If everything can go well, we think we're probably somewhere in the 6% to 8% growth.

And wouldn't it just take you back to kind of where you were?

It doesn't give you any incremental real growth.

You know, it's going to get us somewhere in the neighborhood of four to five million tons more than last year.

And we think that's probably where the mines will produce, and our capability to handle that and customer demand will bring it all together.

If we can actually get more production out of the mines, we think the demand there is that we will be able to move more coal.

Randy, I think you have -- we don't see Colorado/Utah -- obviously we see some growth going forward here.

We are talking with the producers in terms of potential more capacity expansion.

We're working in terms of our railroad with them about how we can improve efficiency, maybe a little bit larger train sizes, some things like that.

Again, when you think of the whole potential business segments on UP, I put that one in -- very much in the low growth end.

Okay, and I wonder if you guys could comment on -- or more particular, if Rob's comment on free cash flow -- just for a modeling purposes, you indicated that you've used up your NOLs.

So how should we [divie] up the tax accrual in terms of what's cash component of the tax accrual versus the deferred component of the tax accrual?

Rob?

Randy, the cash tax rate in '06 was about 23%, which as you know was a significant jump from the year earlier ,which was around 5%.

For '07, I would expect that it'd be higher yet at 25% to 30% cash tax rate.

And then for '08?

No change.

I mean, a continuation -- higher yet.

Kind of the same pattern, 25%, 30 kind of range.

Okay.

And then my last question has to do with the ARC and more particularly the mix components of it.

You know, in the fourth quarter the weakest segments in terms of ARC growth were obviously intermodal, automotive and to some -- and the energy business.

And I think you guys basically indicated that that's probably where the repricing has the greatest opportunity.

Conversely, you're cranking out double-digit growth rates in ag and chemical and industrial products.

When we think about ARC growth by mix of component, how should we be think being relative performance juxtaposed against volume again?

Well, Randy, we've said all along that some of our biggest opportunities are in the energy, intermodal and autos area.

So as you increase volume in some of those areas today, particularly coal and intermodal, you're going to get pressure in ARC.

But those are the opportunities.

Now you also had a little bit on fuel surcharge in fourth quarter that was a little bit lower.

But -- and you have to be careful, I think, about interpreting a mix as a negative.

Clearly we have pricing opportunity, but you have to think about the margin in some the business.

Again, I think the three opportunities, again, are those three groups.

Okay.

So if fuel price -- like you've modeled $2 a gallon.

But you stated, as well, that if you looked at where your spot are -- and who knows where fuel's going to be -- what does that do -- if we come in at $1.85 versus the $2 you've modeled, what does that do to your assumed growth rate in terms of revenues?

What should we think about that sensitivity?

I have -- Rob, you want to try that one?

Yes.

I mean, Randy, as you know, if you look at any particular quarter, the timing of when fuel drops and the timing of when fuel surcharges kick in can play a -- because of the lag on the surcharge recovery mechanisms, could play games with you in terms of what happens in any particular period.

But a metric that you could look at on a straight calendar 12 month basis, because we've continued to make good progress on our fuel surcharge recovery, we've been able to minimize the impact of the swings on a straight-line basis.

So a metric would be for every $5 movement in a gallon price, it has an EPS impact to us -- excuse me, on a $5 per barrel movement is about $0.01 or $0.02 EPS, but on a full-year basis straight line.

But again, the thing to be aware of is the swings that can occur in any one period.

Okay, great.

Thanks a lot.

Thanks, Randy.

Thank you.

The next question is from Ed Wolfe with Bear, Stearns.

Please proceed with your question.

-- have revenue growth of 6% to 7%.

You're coming off a pricing and mix that you said is up 6%, and you talked about volumes across the board being up, so I'm guessing you're expecting yield basically to be down a bit.

Your $2 fuel assumption is give or take slightly down from $2.06 in '06, but can you take us through what you thinking of yields in the mix for revenue growth?

I don't -- you know, Ed, you really need to separate out fuel here.

I don't see any fall-off in our core price strategy going forward here in 2007.

If you just look at the tariff business -- forget about all the stuff that's going to reprice -- what are you seeing for tariff business pricing and what's your expectation there?

Jackson, you want to take that one?

I think overall if you looked at our tariff business you'd probably be looking somewhere in the neighborhood of averaging 8%.

And what did it average in '06?

Probably in that same range, 8% to 9%.

Okay.

And I don't know if you have this handy but just directionally your intermodal yield's up 4.2 are better than the other rails that have reported.

You don't break out domestic and international.

I'm guessing the international feel's a little firmer than the domestic right now.

What would that break out look like directionally, do you know that?

Sure.

If you looked at our fourth quarter, our international average revenue per unit was up 8% on the domestic side.

And if you looked at our overall -- if you just looked at our tariffs out there in the domestic world, you'd see we took a 4% price increase in May, a 6% price increase in September, and the mix effect basically brought us to a fourth quarter that was flat in terms of average revenue per unit.

And when you say mix effect, can you discuss what that means?

As we took our prices up, we started to see some market -- there was an ample supply of trucks because of the softer economy.

There were a lot of shifts occurring because of the shift from transloading international containers into domestics.

And then the third thing that impacted us was the new Wal-Mart distribution centers that opened in Houston, in particular, but then also Chicago.

All of those kinds of things worked against us in terms of volume.

And the business that we tended to lose as we took our prices up -- we were high man out on the -- in the market and the business that we tended to lose turned out to be the truck load long-haul business.

We retained a lot of our containerized business, the double-stack business that's most efficient to handle, but we lost some of the higher revenue per unit trailer business in those markets.

And in terms of the move back towards a little bit of transloading, how do you see that playing out over '07?

I don't see that changing significantly from what happened in '06.

It will depend to some extent on what happens with the overall economic situation.

But I think right now with some of the structural things that took place -- particularly some of those big million square-foot distribution centers shifted business off the west coast into Houston and elsewhere -- I don't really see that changing a heck of a lot.

I think it's going to favor international growth and to some extent penalize a little bit of the domestic growth.

Okay, and just switching gears for a second.

The coal embargo, when do you envision that being over and taking on new coal customers?

Well, right now, Ed, we're -- we've got full demand with current customers here and we've got to meet that first.

And I think getting the capacity and some of the initiatives we have here should give us some opportunity, but right now I'm going to satisfy my current customers first.

So nothing in the next couple of quarters on the visibility list for going beyond that?

That's a high class problem, obviously.

I don't see anything here in the near term.

Just also an update in terms of timing on the unions.

When do you think we'll start to see this really get down to the wire and start to hear some news about it?

Well, negotiations are on going.

So we will --

In an '07 or an '08 event this year?

No, we're talking right now.

Okay.

Just kind of bigger picture.

You've spoken a couple times, and the results bear you out about recoverability.

Could you just talk a little bit about some of the measures that are different in a railroad today versus just a couple years ago about why you're able to go through these storms and recover and you couldn't do that a little while ago?

Dennis?

Well, that's a great question, Ed.

It's a core competency we've been focusing on.

Obviously, the additional capacity that we've added the last few years has helped us tremendously.

But we focus a lot on the process improvement side, too.

We've developed standards of response times.

We've resourced those standards of response time.

We measure ourselves and hold ourselves accountable for those measures of response time.

And then our network simplification initiatives that we started two years ago through the unified plan.

Taking out work events, taking out car handlings, making sure that we have more origin to destination trains.

So it's a multifaceted approach, but it's one that we -- we really focused on at the local level to make darn sure that we have those plans and resources built into shortening that response time.

And is it fair to say it's more about resource allocation than just spending money and building capacity?

Well, the building the capacity is the last thing we do.

We actually make them work them through a quality process, and capital on the ground or iron in the ground is the last thing we allow anybody to do before we work our way up through that hierarchy.

Thanks guys for the time.

Thanks, Ed.

Thank you.

Our next question is from Ken Hoexter with Merrill Lynch.

Please state your question.

Great, good morning.

If I can just come back to the intermodal for a second.

Rob, during your presentation -- I don't think I caught it if you did it -- but did you break out what your international and domestic volumes were for the quarter, on the volume side not the yield side?

No, we did not.

Jack, you've got those.

My international volume was up 6%.

My domestic volume was down 7%.

I'm just trying to -- wondered, because there's a bit of a disconnect with intermodal.

I guess overall volumes, I guess you just kind of gave the break out.

But with the west coast ports seeming to be up 7% to 11%, it doesn't seem like the stuff that's coming in the ports is moving.

Are the trucks on the international side also getting more competitive for that business?

I don't know.

In terms of your question with respect to competitive. all the business is competitive.

We were able to renew a couple of our legacy intermodal international customers last year, and we're moving with the growth rate of our customers.

Ken, and I think you have to separate how much of that business coming in was local.

You do have some -- as Jack said, some transload issues going on, so it's a little bit -- I think there are mix issues there.

But demand was strong for us.

I think the other thing to recognize is we had a -- it's been fluid out in the ports here all year, which has been, I think, a real success for the railroads this year.

Okay, great.

And then follow-up on the-- on Dennis with the operating plan and the unified plan.

With such great improvement this year, we saw the 500 basis point improvement in the operating ratio.

It seems like you're being conservative with targeting 150 basis points with your 80 OR target.

Do you feel that way, just based on the level of improvement you were reviewing before, Dennis?

I'll answer that, Ken. [LAUGHTER[ You know, we -- I have said here consistently that for us to get where we need to be in our returns and operating ratio, the productivity piece is our biggest opportunities here.

And the metrics look very strong in fourth quarter.

We're struggling with the weather right now, but again, I see the resiliency there and we're going to make a nice improvement here in '07.

Got it.

And last question.

Rob, did you talk -- did you break out what you're -- within the outlook what you're pure pricing targets are?

Do you expect it to stay in this 5% to 6% range going into '07?

Or do you think we've seen the best of it and we start to decelerate on that?

We did not give specific guidance on price, Ken, but we did say -- and Jack has said it a couple times here that there's no letting up on the price.

We still see a strong pricing environment in '07.

And it was 6% pure pricing in the current quarter?

That's correct.

Okay, great.

Thanks for your time, guys.

Thanks.

Thank you.

The next question comes from [Sal Vetalli] with Calyon Securities Please proceed with quare question.

Good morning.

My question has been answered.

Thank you.

Thank you.

The next question is from Laura Starr with Equinox Capital Management.

Please state your question.

I'm sorry, my=y question's already been answered.

Thank you very much.

Thank you.

The next question is from John Marcon with Stifel Nicolaus.

Please state your question.

Good morning, everyone.

Morning, John.

Question on your ROIC, nice job in the year.

How much higher would that have to go in order to -- for you to achieve your cost of capital?

Well, I think one of the things we look at, obviously it's got to be at a double-digit level.

But I will tell you one of my concerns, again, is when you look at the replacement cost of assets that need to go into the ground going forward here.

So while we can look at a -- my goal here, we aren't setting a cap that says when I get there I'm done because of the pressure when you think about, again, replacement costs of assets coming in here.

We made a nice move in '06, but I think we've got a long ways to go here.

Okay.

I had a question also on the tax rate.

I noticed that in the fourth quarter it dropped off to about 35.2% for the year.

It was maybe 120 basis points higher than that.

Anything in particular going on there and what should we use for the effective tax rate in '07?

Rob?

There were some adjustments and credits that come through on the fourth quarter.

Looking forward, you should assume a 38% tax rate.

38%, okay.

Then I also noticed that other income was roughly about half the year's total in the fourth quarter.

Anything particular of note going on there?

Just some real estate transactions that came in in the fourth quarter.

Just timing.

That's all real estate?

Primarily.

Someone mentioned the Norfolk Southern partnership providing the best route from the west coast into the southeast.

Do you have any particular service metrics we could play with that would give us a sense for how much better your transit time might be from L.A. to Atlanta versus brand X?

Well, we know the -- if you just look at miles, it's anywheres from 150 to -- up towards 300 miles, eventually, when you go through Shreveport, which is -- that's a pretty decent reduction in miles here.

You know, I think it'll be the best service to the southeast, when you look at -- combined with our sunset corridor and our franchise piece there, it should be the best service.

Given all the attention on that market by the big four U.S. railroads, is that a market you expect to grow faster than the rest of the intermodal markets?

It's one of our strongest growth areas.

Okay.

Noticed that ag prices were just incredibly strong.

I gather a little bit of that is probably fuel surcharge, a fair amount of it is pure price.

What kind of a mix change do we have going on there, as well?

I would guess that some your DDG and ethanol business might have a higher margin associated with it than some of your traditional agricultural business?

Yes, to some extent that is long haul business for us and it is in terms of the mix effect a positive impact on us.

Okay.

Lastly, maybe just a big picture question for Jim.

With the shift in congressional power from one party to the other, is there anything on the horizon legislatively that could help you or hurt you over the next few years?

Well, there is more discussion about rereg.

I mean that was going up before there was any change in power.

The key to me, though -- and we're in front of these folks often -- is we've got to get the returns up.

We've got to put capacity to the industry and I will tell you every one of my customers, when I'm with them, nobody likes a price increase, but the discussion always ends on what are you going to do to help my growth in terms of capacity investment?

So we'll see how the discussions go.

I haven't heard a solution on the other side in terms of where they think capacity will be funded if they head down the road on some kind of rereg.

Okay, thank you very much.

Excellent quarter.

Thank you.

Due to time restraints our last question will be from Gary Chase with Lehman Brothers.

Please state your question.

Good morning, guys.

Morning, Gary.

Jack, could I ask you to elaborate on something?

I just want to make sure I heard you right.

I thought you said that ARC in the tariff businesses was growing 8% to 9%, that that's where it was in '06 and you expected a similar number in '07.

If I heard that right are there mixed issues driving that?

That would seem like a big core number, given than you have pretty consistent access to that business from a repricing perspective.

You know, Gary, it is -- there is some mixed effect on that, but there has also been a situation overall where the demand for transportation services has been quite high and the capacity has been quite tight.

So we have had the opportunity to take some of those rates up.

Certainly the service improvements, all of those things help.

We work very diligently with customers.

A lot of that business, even though it was in tariffs, was business that was below market rates and we are taking it up on a rational and gradual basis and we're going to keep moving that that way.

It sounds like from a pricing perspective you're getting as much there as you're getting on the rollovers.

Is that a fair read of what's going on?

When you say rollovers, are you referring to the --

As the legacy contracts rollover, they're probably going up more than 8%, but there's not as much of that business that turns every year as the tariff business.

That's right.

But when you think of overall contribution to pricing, it sounds like the tariff businesses are doing quite well, even though you've been able to get at those?

The tariff businesses and the one-year letter quotes are doing quite well, and the renewed contracts are doing well for us, as well.

Gary, there's another piece, though, on the tariff businesses and a lot of this falls into what we would call our manifest, single car load kind of business.

Not only getting the returns up pricing but getting those assets turning.

It is, as you know, a very intense business.

Lots of car handlings.

Slower cycle times.

So our focus here is to make certain we're working with our customers in terms of, one, getting the returns up so we can reinvest.

But also, secondly, turning that asset and providing that service.

Manifest is one of the areas to me that we have some of the, I think, strongest potential on service value for a customer, which, again, gives us more opportunity on pricing.

Okay.

Just -- Rob, can I ask you two quick questions relative to the guidance.

The first is you said you had a $2 planning assumption for fuel for all of '07.

Do you have a fuel contribution assumed at all in the first quarter, given that we are at $1.85 at this stage?

There is some positive fuel contribution that bakes into that $1.25 to $1.35 for the first quarter?

Yes.

And the fact that we're currently pay being $1.85 per gallon, and that for January is assumed in that guidance.

Okay, so that may explain that while you are saying the core business faces some tougher comps in the first quarter, that's why you think maybe the earnings comp is better in the beginning, in the first quarter?

That helps a little bit, yes.

Then the second thing is, as you look at '07 I know you've talked about getting failure cost down, does the '07 guidance contemplate the 10% to 15% growth?

Does that contemplate a significant contribution from reduced failure costs in productivity this year?

Or is that upside to the forecast?

We will see a nice improvement in productivity as we go forward here.

We're being a little cautious when you look at some of the volume numbers here in second half.

While we've put some capacity in the railroad or improving processes, we'll still be a little bit challenged here in terms of handling all that volume.

But you'll see, again, another improvement in productivity.

Thanks a lot, guys.

All right, thank you.

Thank you.

I would now like to turn it back over to management for closing comments.

Well, thank you, everyone, for attending the call today and we'll look forward to seeing you here in another three months.

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

You may disconnect your lines at this time.

Thank you for your participation.