Union Pacific 2006 Annual Report Download - page 25

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which U.S. railroads can calculate fuel surcharges on traffic regulated by the STB. Currently, we do not
believe this decision will prevent us from using fuel surcharges or adversely affect our ability to use fuel
surcharges to mitigate the impact of rising or elevated fuel prices on most or all of our traffic.
ŠCapital Plan – In 2007, we expect to make capital investments of approximately $3.2 billion, which may
include long-term leases. These investments will be used to maintain track and structures; continue capacity
expansions on our main lines in constrained corridors; remove bottlenecks; upgrade and augment
equipment, including locomotives and railcars, to better meet customer needs; build and improve facilities
and terminals; and develop and implement new technologies. We designed these investments to maintain
infrastructure for safety, enhance customer service, promote growth, and improve operational fluidity.
Major capital projects in 2007 include adding more double track on the Sunset Corridor and related line
capacity; investing in new and existing facilities and terminals in Phoenix, Tucson, the LA Basin, San
Antonio, Dallas/Fort Worth, and Houston; continuing improvements of the SPRB Joint Line; and
continuing installation of centralized track control across Iowa and Nebraska, which enables us to increase
productivity on these rail lines. We expect to fund our 2007 cash capital investments through cash generated
from operations, the sale or lease of various operating and non-operating properties, and cash on hand at
December 31, 2006. This focused capital plan is designed to help us improve network velocity and facilitate
revenue growth.
ŠFinancial Expectations – We are somewhat cautious about the economic environment; however, we
anticipate revenue growth and continued network improvement in 2007, with financial results exceeding
2006 levels. Our expectations include generating earnings growth of 10% to 15% and an operating ratio
below 80%.
RESULTS OF OPERATIONS
Operating Revenue
Millions of Dollars 2006 2005 2004
% Change
2006 v 2005
% Change
2005 v 2004
Commodity revenue ......................... $14,862 $12,957 $11,692 15% 11%
Other revenue .............................. 716 621 523 15 19
Total ...................................... $15,578 $13,578 $12,215 15% 11%
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 us. 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 and recognize expenses as
we incur them. We recognize other revenue as service is performed or contractual obligations are met. Customer
incentives, which are primarily provided for shipping a specified cumulative volume or shipping to/from specific
locations, are recorded as a reduction to revenue based on actual or projected future customer shipments.
All six commodity groups experienced double digit revenue growth during 2006, with particularly strong
growth of over 20% in agricultural commodity revenue. Price increases, fuel surcharges, and index-based contract
escalators, which are formulas in our shipping contracts that correlate price adjustments to certain economic
indices, all contributed to higher average revenue per car (ARC). Our fuel surcharge programs (excluding index-
based contract escalators that contain some provision for fuel) generated an additional $656 million in
commodity revenue compared to 2005, contributing 5% to commodity revenue growth. Volume increased 3%
during the year led by solid growth in intermodal and energy shipments, which was partially offset by lower
shipments of industrial products and chemicals. The year-over-year growth was also partially attributable to lower
volume in 2005 due to the January West Coast storm, SPRB Joint Line disruptions, Hurricane Rita, and the
Kansas washouts.
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