january 25, 20072006 aar velocity mph good avg. 7-day carloadings (000) q1 q3 187 194 21.3 aar...

Jim Young, President & CEO

January 25, 2007

2

Fourth Quarter Results

2005

$1.10

Diluted Earnings per Share Operating IncomeIn Millions

2006

$1.78$810+ 62%

+ 52%

$533

2005 2006

3

Fourth Quarter Highlights

• 6 Point Operating RatioImprovement to 79.6%

• Record Coal Tonnage

– SPRB Tonnage +14%

• Record Quarterly OperatingRevenue

• Operating Improvement

4

2006 RecapNet Income Return On Invested CapitalIn Millions

Reported2005

2006

$1,606+ 77%

2006

$1,026

$908

Adjusted*2005

8.2%

6.4%

+ 2.5 pts

* See Union Pacific web site under Investor Relations for a reconciliation to GAAP.

Reported2005

Adjusted*2005

5.7%

Fourth Quarter Earnings ReleaseFourth Quarter Earnings Release


January 25, 2007

Fourth Quarter Marketing & Sales ReviewFourth Quarter Marketing & Sales Review

January 25, 2007

Jack Koraleski, Executive VP – Marketing & Sales

7

Commodity Highlights2006 Full Year Records

• Volume, Up 3%

– Record Year in Automotive,Energy & Intermodal

• Average Revenue per Car, Up 11%

– Record Year in Every BusinessGroup Except Automotive

• Revenue, Up 15% to $14.9 Billion

– Record Year in Every BusinessGroup

1%

8%

9%

Fourth QuarterVolume (000)

4Q-2005 4Q-2006

Average Revenue Per Car

4Q-2005 4Q-2006

4Q-2005 4Q-2006

Commodity RevenueIn Millions

2,4402,419

1,547

1,428

3,775

3,455

8

Puebla

Hermosillo

Monclova

Torreón

SaltilloCuliacán

SanLuisPotosí

Querétaro

VeracruzCoatzacoalcos

SalinaC

Aguascalientes

Guadalajara

Manzanillo

LázaroCárdenas

MexicoCity

Salina Cruz

Mérida

Brownsville

Mexico

Nogales

Laredo

Eagle Pass

Calexico

El Paso

Revenue Growth

($ Millions)

$893

$974

$1,112

$1,372

2003 2004 2005 2006

23%

Tampico

Monterrey

Chihuahua

9

Agricultural Products

Fourth Quarter

• $670 MM Revenue: +20%

• Volume: +4%

• Average Revenue Per Car: +15%

Quarterly Drivers

• Demand for Ethanol, DDGS &Export Feed Grains

• Mexico Markets: Strength in FeedGrains, Import Beer, Meals andDDGS

GrainProducts

41%

WholeGrains

38%

Food/Refrig.

21%

Revenue Mix

10

Automotive

Fourth Quarter

• $359 MM Revenue: +2%

• Volume: Flat


Quarterly Drivers

• Finished Vehicle ShipmentsDeclined 5%

• Automobile Parts Up 10%

AutoParts20%

FinishedVehicles

80%

Revenue Mix

11

Chemicals

Fourth Quarter


• Volume: -1%


Quarterly Drivers

• Weak Fall Fertilizer Season

• Slowdown in ConstructionImpacts Chemical Feedstocks

Plastics20%

Liquid & DryChemicals

25% Soda Ash20%

Petro &Other18%

Fertilizer17%

Revenue Mix

12

Energy

Fourth Quarter

• $757 MM Revenue: +20%

• Volume: +10%


Quarterly Drivers

• SPRB Tonnage Up 14%, SettingNew All-Time Record

• CO/UT Volumes Up 3%

CO/UT24%

SPRB68%

Other8%

Revenue Mix

13

Industrial Products

Fourth Quarter

• $744 MM Revenue: Flat

• Volume: -11%


Quarterly Drivers

• Significant Downturn in Lumber &Panel Products

• Slowdown in Construction MarketAlso Impacting Stone & RoofingGranules

• Shedding Low Margin Paper &Newsprint Business

Paper15%

Lumber22%

Steel19%

ConstructionProducts

17%

Consumer/Gov’t/

Waste 12%

Non-Ferrous

15%

Revenue Mix

14

Intermodal

Fourth Quarter


• Volume: Flat

• Average Revenue Per Unit: +4%

Quarterly Drivers

• Strength in Imports

• Softer Domestic Demand

International57%

Domestic36%

Premium7%

Revenue Mix

15

Customer Satisfaction Index

2005

2006

Q1 Q2 Q3 Q4

60

70

63

69

66

74

67

75

Good

16

Key Drivers

• Volume: 2-3%

• Significant Volume Growth inOnly Intermodal and Energy

• Yield Gains

• Revenue Growth in All Groups

Commodity Outlook

Revenue($ Billions)

+6-7%

14.9

13.0

11.7

11.0

2003 2004 2005 2006 2007

Fourth Quarter Operating ReviewFourth Quarter Operating Review

Dennis Duffy, Executive VP - Operations

January 25, 2007

18

Safety - Incidents & ReportablesFull Year Ended December 31

2.68

4.57

2005 2006

4.19

Employee Rail EquipmentPer Million Train Miles

2004

4.80

2005 20062004

3.19

Per 200,000 Work Hours

3.16

1.86

1.69

1.75

13.98

19.4217.16

Incidents Reportables

Good Good

19

Network Performance Update2006

AAR VelocityMPH

GoodAvg. 7-Day Carloadings(000)

Q1 Q3

187

194

21.3

AAR Terminal DwellHours

Good

27.6

26.2

Q2

194

21.2

Good

Q1 Q3Q2

29.0

Q1 Q3Q2

21.3190

Q4-2005

29.8

20.5

Q4

192

Q4

22.0

Q4

25.9

Industry Spot/PullPercentage

8788

Good

Q1 Q3Q2

89

82

90

Q4

20

Freight Car UtilizationDays

11.0

Fuel Consumption RateGallons per Thousand GTMs Good

1.31

1.27

Good

10.5

Q1 Q3Q2

Q1 Q3Q2

11.2

10.4

1.30

1.26

Q4-2005

Q4

10.0

1.27

Q4

AAR Inventory(000)

328

320

Good

Q1 Q3Q2

325 326

Q4

314

Train Plan CompliancePercentage Good

92 93

Q1 Q3Q2

95

90

Q4

97

AAR Inventory(000)

AAR Inventory(000)

Productivity Update2006

21

2006 Record ProductionSouthern Powder River Basin Coal

Coal TonnageIn Millions

Trains Per Day

Cars Per Train

Q1 Q2 Q3 Q42005

32.8

35.535.0 35.0

35.6

Q1 Q2 Q3 Q42005

127.3 127.3

127.9 127.9128.3

Q1 Q2 Q3 Q42005

44.8

47.8 48.048.6

49.6

22

2007 Capital SpendingKey Infrastructure Investments

2007 Highlights

• Sunset Corridor

– Double Track

– Terminals

– Texas & Pacific Route toSoutheast

– San Antonio IntermodalTerminal

• Central Corridor

– Joint Line

– Complete Iowa Signaling

KansasCity

Yuma

North Platte

Los AngelesFt.Worth

Tucson

SanAntonio

El Paso

Chicago

Salt LakeCity

TerminalImprovements

CorridorImprovements

Denver

Angleton

Shreveport

2006 Progress

• Sunset Double Track

• Iowa Signal Project

• Joint Line 3rd MainTrack

• San Antonio

St. Louis

23

2007 Operating Areas Of Focus

• Safety

– Employee, Customer, Public

• Continued Service Improvements

• Resource Productivity

– Unit Costs

– Failure Cost Reduction

– Train Size

• Network Throughput

– Unified Plan & CIMS

– Inventory Management

– Capital Effectiveness

• Customer Service

• Asset Utilization

• FinancialPerformance

Fourth Quarter Financial ReviewFourth Quarter Financial Review

Rob Knight, CFO

January 25, 2007

25

Income Statement SummaryFourth Quarter – In Millions

Operating Revenues $3,962 $3,621 + 9%

Operating ExpensesSalaries and Benefits 1,169 1,108 + 6Fuel and Utilities 705 753 - 6Equipment and Other Rents 346 353 - 2Depreciation 315 300 + 5Materials and Supplies 171 143 +20Purchased Services and Other 446 431 + 3

Total Operating Expenses 3,152 3,088 + 2

Operating Income $ 810 $ 533 +52

2006 2005 Pct Chg

26

Commodity Revenue GrowthFourth Quarter - In Millions

2005 2006

$3,455+1%

$3,775+6%

Volume Price/MixFuelRecovery

+2% +9%

27

Salaries & BenefitsFourth Quarter – In Millions

$1,108

2005 2006

$1,169+ $61

Change

• Wage Inflation

• Larger Workforce

• Volume Costs

• 2007 Outlook

– Workforce Level Flat with 2006

– Productivity

– Wage Inflation

28

Fuel & UtilitiesFourth Quarter

Fourth Quarter Fuel PriceDollars Per Gallon

20062005

$1.94

$2.08• Moderating Fuel Prices

• Full Year Recovery = 90%

• 2007 Outlook

– Full Year Planning Assumption =$2.00/gallon

– January Average $1.85/gallon

– Continue Recovery Improvement

~~

29

Equipment & Other RentsFourth Quarter – In Millions

$353

2005 2006

$346

- $7

Change

• Improved Car Cycle Times

• Lower Car Hire Payments

30

Materials & SuppliesFourth Quarter – In Millions

$143

2005 2006

$171+ $28

Change

• Inflation

• Increased ProgramMaintenance

• Category Shift fromPurchased Services & Other

31

Purchased Services & OtherFourth Quarter – In Millions

$431

2005 2006

$446+ $15

Change

• 2005 West Coast StormSettlement

• Increased CasualtyExpense

• Expense Shift to Materials& Supplies

32

Operating Ratio Improvement

Q1 Q2

90.1%

Q3

2005

2006

Q4

83.7%

86.0%

81.7%

86.1%

81.1%

85.3%

79.6%

33

Income StatementFourth Quarter – In Millions

($ Millions Except EPS)

Operating Revenues $ 3,962 $ 3,621 + 9%

Operating Expenses 3,152 3,088 + 2

Operating Income 810 533 +52

Other Income – Net 57 54 + 6

Interest Expense (118 ) (120) - 2

Income Before Income Taxes 749 467 +60

Income Tax Expense (264 ) (171) +54

Net Income $ 485 $ 296 +64

Diluted EPS $ 1.78 $ 1.10 +62

2006 2005 Pct Chg

34

Income StatementFull Year – In Millions

($ Millions Except EPS)

Operating Revenues $ 15,578 $13,578 + 15%

Operating Expenses 12,694 11,783 + 8

Operating Income 2,884 1,795 +61

Other Income – Net 118 145 - 19

Interest Expense (477) (504) - 5

Income Before Income Taxes 2,525 1,436 +76

Income Tax Expense (919) (528) U

Net Income $ 1,606 $ 908 +77

Diluted EPS $ 5.91 $ 3.41 +73

2006 2005 Pct Chg

U = Unfavorable

Adjusted*


35

Capital SpendingIn Millions

2005 2006 2007

Long-Term & Flexible Operating Leases

Cash Capital & Capital Leases

$2,169 $2,242

$2,863$2,729

$3,200 +/-

36

Free Cash Flow*After Dividends – In Millions

2005 2006


2006 Recap

• $150M Voluntary PensionContributions

• Increased Cash Taxes

• Cash Capital

2007 Outlook

• Growing Cash from Operations

$234

$516

37

Increasing ReturnsBalance Sheet Strength

2006

40.3


2005200420032002

43.6

45.144.8

51.7

Lease Adjusted Debt to Cap*Percentage

Lease Adjusted Debt / EBITDA*

20062005200420032002

3.1x2.9x

3.6x3.1x

2.3x

38

2007 Outlook

Full Year

• Revenue Growth = 6 to 7%

• Operating Ratio below 80

• EPS Growth = 10 to 15%

• ROIC Improvement

1st Quarter 2007 Outlook:

• EPS = $1.25 to $1.35

Fourth Quarter Earnings ReleaseFourth Quarter Earnings Release


January 25, 2007

Cautionary InformationThis press release and related materials contain statements about the Corporation’s future that are not statements of historical fact, includingstatements regarding future operational and financial improvements and views regarding economic indicators and the Corporation’s outlookregarding future performance and financial results. These statements are, or will be, forward-looking statements as defined by the SecuritiesAct of 1933 and the Securities Exchange Act of 1934. Forward-looking statements also include, without limitation, information or statementsregarding: expectations as to continued or increasing demand for rail transportation services; expectations regarding operationalimprovements, including the effectiveness of network management initiatives that have been or will be implemented to improve operations,customer service, and shareholder returns; expectations as to increased returns, cost savings, revenue growth, and earnings; expectationsregarding fuel price and our ability to mitigate fuel costs; the time by which certain objectives will be achieved, including expectedimprovements in operations and implementation of network management initiatives; estimates of costs relating to environmental remediationand restoration; proposed new products and services; expectations that claims, lawsuits, environmental costs, commitments, contingentliabilities, labor negotiations or agreements, or other matters will not have a material adverse effect on our consolidated financial position,results of operations, or liquidity; statements concerning projections, predictions, expectations, estimates or forecasts as to the Corporation’sand its subsidiaries’ business, financial, and operational results, and future economic performance; and statements of management’s beliefs,expectations, goals, and objectives and other similar expressions concerning matters that are not historical facts.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurateindications of the times that, or by which, such performance or results will be achieved. Forward-looking information, including expectationsregarding operational and financial improvements and the Corporation’s future performance or results are subject to risks and uncertaintiesthat could cause actual performance or results to differ materially from those expressed in the statement.

Important factors that could affect the Corporation’s and its subsidiaries’ future results and could cause those results or other outcomes todiffer materially from those expressed or implied in the forward-looking statements include, but are not limited to: whether the Corporation andits subsidiaries are fully successful in implementing their financial and operational initiatives, including those plans and management initiativesto improve system velocity and network performance or otherwise improve operations; the outcome of claims and litigation, environmentalcontamination, personal injuries, and occupational illnesses arising from hearing loss, repetitive motion and exposure to asbestos and dieselfumes; the impact of a rail accident involving the release of hazardous materials, which we are required to transport under federal law;legislative and regulatory developments, including possible enactment of initiatives to re-regulate the rail industry; changes in labor costs,labor stoppages, and the availability of qualified personnel required for our operations; the impact of ongoing track maintenance, upgrades,and restoration work being performed in the Southern Powder River Basin of Wyoming; natural events such as severe weather, fire, floods,hurricanes and earthquakes; changes in fuel prices or changes to our ability to recover fuel costs, including any changes resulting fromregulatory or legislative activities; adverse economic conditions affecting customer demand and the industries and geographic areas thatproduce and consume the commodities we carry; industry competition, conditions, performance and consolidation; legislative, regulatory andlegal developments involving taxation, including enactment of new federal or state income tax rates, revisions of controlling authority and theoutcome of tax claims and litigation; changes in securities and capital markets; the effects of adverse general economic conditions, bothwithin the United States and globally; any adverse economic or operational repercussions from terrorist activities and any governmentalresponse thereto; and war or risk of war. More information regarding risk factors and other cautionary information are available in theCorporation’s Annual Report on Form 10-K for 2005, which was filed with the SEC on February 24, 2006. The Corporation updatesinformation regarding risk factors if circumstances require such updates in its periodic reports on Form 10-Q and its subsequent AnnualReports on Form 10-K (or such other reports that may be filed with the SEC).

Forward-looking statements speak only as of, and are based only upon information available on, the date the statements were made. TheCorporation assumes no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in otherfactors affecting forward-looking information. If the Corporation does update one or more forward-looking statements, no inference should bedrawn that the Corporation will make additional updates with respect thereto or with respect to other forward-looking statements. Referencesto our Web site are provided for convenience and, therefore, information on or available through the website is not, and should not bedeemed to be, incorporated by reference herein.

january 25, 20072006 aar velocity mph good avg. 7-day carloadings (000) q1 q3 187 194 21.3 aar...

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