Union Pacific 2005 Annual Report Download - page 26

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non-operating properties, and cash on hand at December 31, 2005. This focused capital plan will help us
improve network velocity and facilitate revenue growth.
ŠFinancial Expectations – We anticipate revenue growth and continued network improvement in 2006, and
financial results should exceed 2005 levels. Our expectations include generating diluted earnings per share in
the range of $4.60 to $4.80 and improving our operating ratio by 2.5 to 3.0 percentage points compared to
2005. Free cash flow for the year should exceed $300 million. Our free cash flow target reflects approximately
$450 to $500 million of higher cash tax payments resulting from the impact of higher cash tax rates and
higher expected earnings.
RESULTS OF OPERATIONS
Operating Revenue
Millions of Dollars 2005 2004 2003
% Change
2005 v 2004
% Change
2004 v 2003
Commodity revenue ........................ $12,957 $11,692 $11,041 11% 6%
Other revenue ............................. 621 523 510 19 3
Total .................................... $13,578 $12,215 $11,551 11% 6%
Operating revenue includes commodity revenue and other revenue. Other revenue consists primarily of revenue
earned by our subsidiaries, revenue from our commuter rail operations, and accessorial revenue, which we earn
when customers retain equipment owned or controlled by the Railroad. We recognize commodity revenue on a
percentage-of-completion basis as freight moves from origin to destination. We allocate commodity revenue
between reporting periods based on the relative transit time in each reporting period with expenses recognized as
incurred. We recognize other revenue as service is performed or contractual obligations are met.
Commodity revenue improved in all six business groups during 2005, with double-digit growth in the
agricultural, industrial products, and intermodal commodity groups. Fuel surcharges, price increases, and index-
based contract escalators, which are formulas in our shipping contracts that correlate price adjustments to certain
economic indexes, all contributed to higher average revenue per car (ARC). In 2005, our fuel surcharge programs
generated $1 billion in commodity revenue, which represents approximately 74% of the additional expense
incurred above the base fuel price for our fuel surcharge programs (currently, $0.75 per gallon). Although volume
grew 1% for the year, the severe weather and maintenance and restoration on the SPRB Joint Line constrained
volume growth.
The commodity revenue increase in 2004 was driven by growth in the industrial products, intermodal and
chemical groups. Fuel surcharges, price increases, and index-based contract escalators contributed to the increase
in ARC. In 2004, our fuel surcharge programs generated $330 million in commodity revenue, which represented
52% of the additional expense incurred above the base fuel price of $0.75 per gallon. ARC improved 3% to $1,236,
while revenue carloads increased 2%.
Subsidiary and accessorial revenue increased other revenue in 2005, mainly driven by higher volumes. In
addition, we generated higher subsidiary revenue due to the acquisition of our joint venture partner’s interest in
Bay Pacific Financial L.L.C. (Bay Pacific), an intermodal equipment leasing entity. Passenger and subsidiary
revenue increased other revenue in 2004, although accessorial revenue declined.
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