Union Pacific Corporation (UNP) Q4 2010 Earnings Report, Transcript and Summary

Robert Knight - Chief Financial Officer, Executive Vice President of Finance, Chief Financial Officer of Pacific Railroad Company and Executive Vice President of Finance of Pacific Railroad Company James Young - Chairman, Chief Executive Officer, President, Chief Operating Officer, Chairman of Union Pacific Railroad Company, Chief Executive Officer of Union Pacific Railroad Company and President of Union Pacific Railroad Lance Fritz - Executive Vice President of Operations and Executive Vice President of Operations - Union Pacific Railroad Company John Koraleski - Executive Vice President of Marketing and Sales - Union Pacific Railroad

Walter Spracklin - RBC Capital Markets, LLC William Greene - Morgan Stanley Justin Yagerman - Deutsche Bank AG Jeffrey Kauffman - Sterne Agee & Leach Inc. Garrett Chase - Barclays Capital John Larkin - Stifel, Nicolaus & Co., Inc. Ken Hoexter - BofA Merrill Lynch Thomas Wadewitz - JP Morgan Chase & Co Scott Malat - Goldman Sachs Group Inc. H. Nesvold - Jefferies & Company, Inc. Anthony Gallo - Wells Fargo Securities, LLC Christopher Ceraso - Crédit Suisse AG Jon Langenfeld - Robert W. Baird & Co. Incorporated Scott Group - Wolfe Research Matthew Troy - Citigroup Jason Seidl - Dahlman Rose & Company, LLC Scott Flower - Macquarie Research Chris Wetherbee - Citigroup Inc Cherilyn Radbourne - TD Newcrest Capital Inc.

Greetings, and welcome to the Union Pacific Fourth Quarter 2010 Earnings. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Jim Young, Chairman and CEO for Union Pacific. Thank you, Mr. Young. You may begin.

Good morning, everyone. Welcome to Union Pacific's Fourth Quarter Earnings Conference Call. Joining me today in Omaha are Jack Koraleski, Executive Vice President of Marketing and Sales; Lance Fritz, Executive Vice President of Operations; and Rob Knight, our CFO. We wrapped up a record 2010 with a strong quarterly performance, reporting earnings of $1.56 per share, a 44% increase compared to the $1.08 per share reported in the fourth quarter of 2009. Fourth quarter operating income totaled $1.3 billion. That's up 31% versus last year. This is the third consecutive quarter that UP's operating income has topped the $1 billion level. It's also the third quarter in a row we achieved volume gains in all six business groups. Quarterly carloads increased 9%, with roughly 2/3 of that growth coming from Intermodal and Industrial Products. In addition, Ag products produced its best quarterly carload level in 14 years. Another best for UP in the fourth quarter was our customer satisfaction rating, which matched our record third quarter. As density in our network increased year-over-year, we continue to provide safe, excellent service to our customers. Along with the great value proposition we offer customers, we are also improving yields as demand strengthens, better pricing, combined with improved efficiency to produce a record fourth quarter operating ratio of 70.2, 3.2 points of improvement versus 2009. UP's strong fourth quarter results are indicative of the great performance we achieved throughout 2010, setting numerous records as we report the most profitable year in our 150-year history. Now with that, we'll turn over to Jack to talk about our business team's performance. Jack?

Thanks, Jim, and good morning. Well, I thought I'd start this morning with a look at customer satisfaction. It's one of our best indicators of how customers view the Union Pacific value proposition. Our customer satisfaction remained at record levels in the fourth quarter, equaling our best-ever quarter at 90, with November and December equaling our monthly record of 91. That strong showing capped off a record year as we came in at 89, one point better than the previous record that we set, back in 2009. Our strong value proposition and an improved economy combined to drive fourth quarter volume growth in all six of our businesses, with overall volume up 9%. Core price improved about 5½% of each of the group's posted gains. Those price gains, along with increased fuel surcharge revenue and offset by a little negative mix, produced an 8% increase in average revenue per car. So with stronger volume and increased revenue per car, total freight revenue was up 18% for the quarter to $4.2 billion. So let's take a closer look now at each of our six businesses. Starting with Ag products, our Agricultural Products revenue grew 14%, as a 6% increase in volume combined with an 8% improvement in average revenue per car. Export whole grains were up 8%, driven by a 29% increase in wheat exports. Export feed grains faced a tough comp against last year's strong market but still posted a 1% gain. New business helped drive a 10% increase in soybean meal, and ethanol increased 4% as the market continued to grow. Food and refrigerated volume was up 7%. We had a late start to the tomato canning season, which pushed some volume into the fourth quarter, and that resulted in a 15% growth in canned goods. We also saw a strong demand which drove a 16% increase in import beer shipments. Working together with the CSX, our improved service schedule for our produce rail express service helped grow that volume 8%. Our Automotive revenue grew 7% as contract price increases drove a 5% improvement in average revenue per car and volume was up 3%. The volume growth rate moderated as we lapped the start of the auto industry's recovery in the latter part of 2009. Increased production as the industry ramps up for anticipated 2011 sales levels drove a 7% increase in auto parts volume, which more than offset the continued negative impact of the closing of the Toyota General Motors NUMMI plant earlier in the year. Finished vehicle shipments were down ½% compared to last year when manufacturers were pushing to build inventory levels in the wake of Cash for Clunkers. Chemicals volume was up 10%, which combined with a 4% improvement in average revenue per car to produce a 14% increase in revenue. Petroleum products volume increased 41% with strength in a wide range of products, including crude oil to St. James, lube oils, residual fuels from Mexico and asphalt. Strong seasonal demand drove fertilizer volume up 20%, with export potash accounting for most of that growth. Industrial chemical shipments grew 6%, benefiting from an increased demand and better inventory alignment. Our plastics volume was also up 6% as was soda ash, driven by a strong export demand. Energy revenues grew 16%, as a 4% increase in volume combined with an 11% improvement in average revenue per car. Southern Powder River Basin tonnage was up 8%, driven by increased electrical demand as the economy has improved and stockpiles were replenished following the fourth hottest summer on record. November stockpiles were estimated to still be 15 days below 2009 levels. Colorado/Utah tonnage declined 14% as one mine shut down its longwall to move to an entirely new reserve and as demand continued to be impacted by competition from Eastern coal sources. Our Industrial Products volume grew 23%, which combined with a 3% improvement in average revenue per car to drive a 27% increase in revenue. Demand in the Energy sector was, once again, the underlying driver of the strongest-growing segments of our Industrial Products business. Nonmetallic minerals volume was up 45% as increased drilling activity requires frac sand, barite and bentonite. Our rock shipments, which increased 23%, remained heavily tied to strong drilling activity in Louisiana and Texas. Energy-related shipments of line and drill pipe, as well as steel coils for pipe production, helped drive a 36% increase in steel and scrap, which also benefited from increased metal production. Year-over-year growth in our Short-Haul Uranium Tailings Group for the Department of Energy drove a 66% increase in hazardous waste shipments. And last, but certainly not least, Intermodal volume grew 10%, which combined with a 13% improvement in average revenue per unit to produce revenue growth of 25%. International Intermodal volume was up 15% as higher consumer demand drove increased imports on a more traditional peak season. Truck-like service in our major Intermodal lanes allowed us to convert highway business to rail and drove Domestic Intermodal up 4%. Slow delivery of new containers served to constrain what could have been an even stronger growth for us in the quarter. Our Streamline subsidiary’s door-to-door product grew 42%, with just over half of that growth coming off the highway. Domestic average revenue per unit increased 21%, reflecting the improved pricing and fuel surcharge coverage resulting from the previous renegotiation of legacy contracts, as well as new product offerings in both of our UMAX and EMP box programs. International revenue per unit was up 6%, impacted by negative mix resulting from increased revenue empties moving back to the West Coast and growth on our last remaining legacy International Intermodal contract. Solid performance by each of our six businesses wrapped up the fourth quarter and closes out 2010, a year where we strengthened our value proposition even as our volumes grew. So let me turn your attention to 2011 and start with Global Insight's most recent economic projections, which actually reflect a stronger outlook for 2011 than we saw just a few months ago. GDP is expected to post stronger growth than 2010, while industrial production will be a little softer. December’s seasonally-adjusted auto sales rate of $12.5 million was the highest non-Cash for Clunkers monthly level since September of 2008, so a projection of $13.1 million for 2011 seems pretty reasonable. A couple of dark clouds hang over the 2011 forecast. The first is housing starts, which continues to weigh heavily on the economic recovery. The other, of course, is continued high unemployment rate, because without jobs, it's hard to see anything other than a slow recovery. That being the case, here's how we see 2011 volume growth shaping up in our major markets. With the diversity of our business mix being a real franchise strength, we have a number of markets where we're expecting relatively strong growth. Right at the top of that list is Domestic Intermodal, fueled by great service and more highway conversions. Improved consumer demand should support import volumes to drive our International Intermodal business. Prospects for growth in Southern Powder River Basin coal look good, while continued recovery in the automotive industry should keep our Vehicle and Parts business growing. Metals and minerals, supported by Energy-related markets, are expected to continue to grow, and the roughly 15% expected increase in housing starts, while it's relatively a small increase, should give lumber a boost. Export grain and petroleum products also look good at this time. You can see the markets where we expect more moderate growth and those where we expect slow growth at best, led by our Colorado/Utah coal business, which will likely face some of the same hurdles that we saw in 2010. Underpinning our growth prospects for 2011 will be our strong value proposition, providing a solid foundation for business development efforts and our price plan. And as I highlighted at our conference in November, legacy contract expirations in 2011 represent about 4% of our revenue base, but they're mostly loaded in the last part of the year. Nonetheless, we expect that increases in volume will combine with price gains to drive solid revenue growth in 2011. With that, I'll turn it over to Lance.

Thanks, Jack, and good morning. Safety is a foundation of UP's business, and in 2010 our safety results were very good. We achieved the best-ever employee safety, with a 6% reduction in reportable injury rate. The continued development in penetration of the peer-to-peer safety process that we call Total Safety Culture or TSC and enhanced training drove the improvement. In terms of customer safety or derailments, we improved 6% to a best-ever reportable incident rate, delivering freight more safely even as volumes increased on the network. We removed risks and created a safer environment through investments in infrastructure, technology and training. Unfortunately, increases in rail and highway traffic during the year contributed to a greater number of crossing accidents. We continue to focus on risk reduction, closing over 280 grade crossings, and eliminating or mitigating risks in local communities that include driver behavior and short-stage crossings. Turning now to Service. Coming off of our best-ever year in 2009, the operating challenge for 2010 were to move growing volumes while maintaining and further improving excellent service. In 2010, we operated a fluid reliable network even as volume increased 13% year-over-year. Average velocity of 26.2 miles per hour was the second highest in UP's history, down just slightly from the record set in 2009 when volumes were at recessionary lows. We enhanced service reliability through a variety of activities, beginning with an achievable transportation plan that we call the Unified Plan and supported by reduced slow orders, increased terminal throughput and managed inventory. Train inventory grew more slowly than volume as the train length increased, which minimized congestion. Maintaining efficient interchanges and implementing lean processes kept terminal fluid and asset utilization high. The end result was a strong and improving value proposition, supporting the corporate objectives of driving business growth with higher financial returns. Another key enabler of great service is the availability and use of our working resources. From an availability standpoint, year end 2010 furlough and asset storage numbers are up slightly from the third quarter, consistent with seasonal fourth quarter volume declines. However, year-end active train crew and locomotive resources increased 12% and 4%, respectively, versus 2009, which reflects significant volume growth through last year. We efficiently deployed incremental resources as volumes grew, reflected in the near-record gross ton miles per employee. And locomotive productivity improved, up 2% in 2010. Use of distributed power locomotives and our efforts to increase train length were key contributors. From a freight car standpoint, our rigorous approach to inventory control is evident as we matched 2009, the best-ever freight car utilization. Turning cars faster reduces short-term rents and ultimately capital, both for ourselves and for our customers. Our productivity starts with leveraging the key plan to run a volume variable operation. In 2010, we moved 13% more carloads, with only a 5% increase in total starts. The first step in handling the increased volume as the economy picked up was filling the existing train slots. Enabled in part by increased use of distributed power, we achieved all-time records for manifest, Intermodal, grain and coal train sizes. For the full year, Intermodal train size increased 8%, while manifest was up 5%. In the fourth quarter, volumes were up 9% versus 2009, with total crew starts up 7%, as we continued to increase train sizes. Even so, fourth quarter volume variability was slightly less than our 2010 run rate, as mix shifts created a 2% headwind in crew freight starts. The mix impact was driven by an increase in manifest traffic, which generates more crew starts per car load than our bulk or Intermodal networks, and by increased length of haul in grain and in coal. Moving into 2011, we expect volume leverage to be strong. One reason is the growth we expect in the SPRB coal franchise. In 2010, we set new annual SPRB record for cars per train, tons per car and tons per train. Our coal network is very efficient, and when coupled with strong volume growth, it can drive excellent productivity. There's also room to leverage volume through the manifest network, with 23 of our 114 major terminals still essentially mothballed. As we continue to drive for best-in-class safety, service and productivity, we are pursuing codependent, not competing goals. Making improvements in all three boiled down to three key tenets: predictability, consistency and repeatability. An operation that delivers excellent customer service is the most predictable and best maintained, which also makes it the safest operation. A safe, predictable operation with low variability is also the most productive. These codependent goals form the cornerstone of our business strategy to use safety, service and productivity to drive customer satisfaction and demand for Union Pacific. As these results illustrate, UP has never run a safer, more reliable, or more productive network in its history. For 2011, we expect improvement in each of the three focus areas. With safety, the goal is continuous improvement toward becoming the safest railroad in North America, an operation with no safety incident. For service, the chart on this slide illustrates the service volume equation, which I discussed at the November analyst meeting. The chart plots service results versus volume throughput each month over the last 12 years. As you can see, 2010 was a breakout year. For 2011, we're targeting new frontier points, moving that trend line up and to the right. And with productivity, we look to make gains in all areas, utilizing resources more efficiently and investing capital more productively. So with that, let me turn it over to Rob.

Thanks, Lance, and good morning. UP's earnings continued on a record pace in the fourth quarter, helping us put a solid finish on an exceptional financial performance in 2010. Slide 22 summarizes our fourth quarter results. Operating revenue grew 17% to $4.4 billion on the strength of a 9% increase in our business volumes. Operating expense totaled $3.1 billion and increased 12% or $342 million versus the fourth quarter of 2009. We maintained solid cost control, especially when you factor in that higher diesel fuel prices added $111 million of expense to the quarter. Operating income totaled $1.3 billion, a 31% increase and a fourth quarter record. Incremental margins remained historically high, coming in at nearly 50% for the quarter. Other income totaled $9 million in the fourth quarter, $14 million less year-over-year. Quarterly interest expense declined 7% or $11 million versus the fourth quarter of 2009 to $142 million. Fourth quarter income tax expense increased to $405 million despite the impact of a lower effective tax rate. Higher pretax earnings more than offset the year-over-year tax rate reduction of 2½ points, which mostly related to changes associated with deferred taxes. Net income totaled $775 million, a fourth quarter best and a 41% increase versus 2009. Earnings per share increased 44% to $1.56, as the outstanding share balance declined 2% versus 2009 with our share repurchase activity. UP's pricing efforts continued to be an important part of our record financial results. In the fourth quarter, core pricing gains totaled 5½%. Solid demand for rail transportation, improved service and legacy contract renewals all contributed to the increase. Included in this core pricing number is about a half point of higher year-over-year RCAF fuel. Turning now to the expense side. Fourth quarter compensation and benefits totaled $1.1 billion, up 9% versus 2009. Breaking down the yearly change, roughly 1/3 of the increased expense could be attributed to wage and benefit inflation. Another third or so of the increase relates to volume growth. Fourth quarter workforce levels were 3% higher year-over-year as we staffed for more train starts. In addition, hiring and training costs were higher in the quarter as new employees were brought on to prepare for expected 2011 attrition and volume growth. Conductor and engineering training costs increased $12 million year-over-year. Offsetting some of the higher costs was strong employee productivity. As Lance just discussed, gross ton miles per employee increased 6% to the third highest quarterly measure on record. In addition, support-function staffing levels remained lower year-over-year. Going forward, we expect to deliver continued productivity gains as a result of our disciplined train plan execution, capital investments and technology. As a result, although workforce levels will generally increase with higher volumes, it will not be at a one-for-one rate. Fourth quarter fuel expense reached the highest quarterly level of the year at $687 million. The increased average diesel fuel price, which gained 20% year-over-year, was the primary driver of the quarterly change. In fact, as illustrated on Slide 25, the $2.46 per gallon of diesel fuel paid in the fourth quarter is our highest quarterly price in two years. Expenses also were up as a result of a 9% increase in gross ton miles, partially offset by a 3% improvement in our quarterly consumption rate. Slide 26 summarizes fourth quarter expenses for three separate categories. Purchased Services & Materials expense increased 9% or $39 million to $467 million. Similar to the third quarter, the biggest driver of the quarterly increase was greater use of contract services associated with higher volumes. A good example of this is increased trucking and lift costs related to our Intermodal operation. Locomotive maintenance costs were also up year-over-year as we returned stored assets to active service. Fourth quarter Equipment & Other Rents expense totaled $278 million, up 5%. Car hire expense associated with growth in Automotive, Intermodal and Industrial Products shipments was the biggest contributor to the year-over-year increase. Container lease expense was higher in the quarter as we increased our container fleet, while lease expense for locomotives and freight cars declined. Other expense came in at $173 million, up $44 million or 34% versus 2009, and in line with the outlook that we provided you in October. One of the biggest factors in the quarter was a $25 million year-over-year change related to our asbestos liability. In addition, casualty-related costs increased roughly $14 million versus 2009. Although our fourth quarter study, again, reflected positive experience from our ongoing safety gains, the level of reduction in 2010 was less than the past couple of years. Also pressuring other expense higher in the quarter were increased operating taxes, joint facility costs and other general expenses. Together, these items totaled nearly $35 million, offsetting the $30 million payment we had in the fourth quarter of 2009 related to the Pacer agreement. As we look ahead to 2011, the other expense category is expected to be around $225 million per quarter. With so many ins and outs in this line, it's not unusual to see quarterly fluctuations. But similar to the fourth quarter, we believe that positive news from actuarial studies will be a little less. We also expect higher costs from increased operating taxes and volume-related items. Bringing both the revenue and expense sides together, UP's record 2010 operating ratio illustrates the great improvements in profitability we achieved over the last several years. Although higher diesel fuel prices added nearly one point to our fourth quarter operating ratio, pushing it back over 70, we still achieved 3.2 points of improvement to a new fourth quarter best level of 70.2% in the quarter. On a full year basis, we made even greater strides, taking 5½ points off the 2009 operating ratio to report an all-time mark of 70.6% for the full year. When we launched project operating ratio back in 2007, we dedicated ourselves to attaining a low-70s operating ratio. Through our focus on moving the right business at the right price, running a safe and fluid operation and providing excellent service to our customers, we have accomplished that goal. While it's evident that the math of today's higher fuel prices can inflate the operating ratio as we just saw in the fourth quarter, we are focused on achieving our new target of 65% to 67% full year operating ratio by 2015. Slide 28 provides a wrap-up to our 2010 earnings with a full year income statement. Driven by 13% carloading growth, core pricing gains and increased fuel surcharge revenue, operating revenue increased 20% to almost $17 billion. Operating expenses increased 11% to nearly $12 million. Although we did experience higher costs associated with moving more volume, a 31% increase in average diesel fuel prices contributed nearly half of the added costs in 2010. Operating income was our best-ever at nearly $5 billion, a 47% increase. 2010 other income of $54 million declined $141 million. As you may recall, second quarter land sale in 2009 added $116 million to this line item. Income tax increased 52% versus 2009 to almost $1.7 billion as a result of higher pretax earnings and a slightly higher effective tax rate. Our 2010 tax rate was 37.3% versus 36.4% in 2009. Net income was another all-time record for UP, up 47% to $2.8 billion. Full year 2010 earnings per share was $5.53, a 48% increase compared to 2009 and our best-ever annual performance. UP's record profitability in 2010 also drove record free cash flow and returns. For the year, free cash flow after dividends more than doubled versus 2009 to $1.4 billion. Growth in net income more than offset 2010 capital spending and increased dividend payments. And as you know, bonus depreciation contributed positively to cash flows in both 2009 and 2010 and will, again, be a contributor to 2011. UP's balance sheet is in excellent condition, consistent with the goal of maintaining an investment-grade credit rating. At year end 2010, the adjusted debt-to-capital ratio was 3.6 points lower than 2009, in part because of the $400 million debt maturity that we accelerated from 2011 into 2010. We also achieved a record return on invested capital in 2010 at 10.8%, 2.6 points of improvement versus 2009. Returns must continue to move up to support the significant capital investments required to achieve our safety, service and growth initiatives. Full year 2010 capital investments totaled roughly $2.5 billion, slightly below our target investment of $2.6 billion. As we announced back at our November analysts meeting, our preliminary capital budget for 2011 is around $3.2 billion. Included in this amount is the purchase of 100 new road locomotives and select capacity projects, such as continuing the double track work on our Sunset Corridor and the Blair project. Also included in our 2011 plan is roughly $250 million for positive train control. As you'll recall, our total estimated spend for positive train control continues to be around $1.4 billion, of which a little more than $100 million has already been invested. As the profitability of Union Pacific increased through 2010, we returned more cash to our shareholders in the form of dividend increases and share repurchases. In May, we announced a 22% dividend increase, followed by a second increase of 15% in November. UP's quarterly dividend now stands at $0.38 per share, a 41% increase in 2010. Also in May, we resumed our share repurchase program, buying back nearly 17 million shares over the following eight months. The total spend on repurchases in 2010 was nearly $1.25 billion. We are committed to improving shareholder value going forward as we take a balanced approach to our allocation of cash for the long-term benefit of the company. As we turn our attention now to the year ahead, we see great opportunities to grow and improve. As Jack discussed, we are optimistic about the prospects for solid volume and pricing gains in 2011. Of course, this assumes that the economy continues to cooperate. We remain committed to achieving real pricing gains in 2011 plus continuing to realize the increased value of UP's service, strong market demand and the added benefit of competing for and repricing our legacy business. As we described at our analyst meeting, the impact of legacy pricing in 2011 will be less than we've seen over the last couple of years as the bulk of these renewals are later in the year. Our pipeline of productivity and service initiatives continues to be full as we use innovation, technology and lean management principles to drive continuous improvement. The combination of stronger revenue growth and our ongoing productivity initiatives should produce a new record operating ratio in 2011 and drive returns higher. Achieving this will not be without its challenges, however, as we face increasing cost headwinds in a number of areas. For example, after almost two years without any meaningful expense for hiring and training, we expect it to ramp up in 2011. Our current plan calls for roughly 4,000 new hires, primarily to backfill for attrition, but also to support volume growth. Of course, as the year develops, we have the ability to adjust those plans up or down. It's also important to separate hiring plans from workforce levels. Attrition is the primary driver of hiring. So while we expect our 2011 workforce to grow with volume, it will not be at a one-to-one rate. While the overall rate of increase in compensation and benefit expense for employees should be less in 2011 than it was in 2010, total costs in the category are expected to be up year-over-year. Increased hiring and training costs will be reflected in this line item, as well as the normal inflationary items such as wages and health and welfare expenses. Pension-related expenses and unemployment taxes associated with our 2009 furloughs are also pushing costs higher. Our ability to drive continued volume leverage and employee productivity in this area will be critical to minimizing the inflation impact. Depreciation cost will likely be pressed higher in 2011 as a result of increased capital spending, as well as higher depreciation associated with hauling more gross ton miles over our network. At this point, we expect the quarterly increases to be in the neighborhood of 8% to 10%. While these cost challenges are significant, let me reiterate that we consider these issues to be headwinds, not roadblocks. We expect Union Pacific to be more profitable in 2011. Turning to the first quarter in particular, we are expecting a return to more normal seasonal trends in our carload volumes, service metric and operating ratio. As you know, the first quarter operating ratio is typically higher versus the fourth quarter sequentially. On a year-over-year basis, we expect to report operating ratio improvement. We believe 2011 will be another record-setting year for our company, which will allow us to reward our shareholders with greater return. With that, let me turn it back to Jim.

Thanks, Rob. As we look ahead into the new year, we're encouraged by the signs of a fully strengthening economy. Economic indicators all generally point to growth in 2011. And if the jobs picture starts to improve, that could drive even greater strength through a more confident consumer base. Union Pacific is well positioned to serve the total transportation needs of our customers as we focus on becoming a more fully integrated part of their supply chain. Excellent service is a key to our future success, supporting our pricing initiatives and helping us improve asset utilization. Our capital investment strategy will be another key part of UP's success going forward. We're making investments today, building capacity for tomorrow. We believe very strongly in the opportunities for improving financial returns, and the roughly $3.2 billion in capital investment we plan for 2011 is really a down payment on our ability to keep driving returns higher in the future. Following 2010's record performance, it is clear that the bar is raised in terms of future expectations. What we achieved last year is now the floor, and we're setting our sights higher. We're confident in our ability to make continuous improvement in all facets of our business. So with that, let's open it up to your questions.

[Operator Instructions] Our first question is from the line of Tom Wadewitz with JPMorgan. Thomas Wadewitz - JP Morgan Chase & Co: Robert outlined a number of cost pressures looking at 2011, and it's helpful to run through that. He didn't quantify each of them, but I'm wondering if you can give a kind of a higher level look at the pace of growth in operating expenses that you think is kind of reasonable if you look at your budget or your plan and if you take out fuel, which is obviously tougher to forecast. Are you looking at kind of 3% increase in your OpEx x fuel? Or what's the right ballpark to be in, given some of the cost pressures you outlined?

We don't give guidance on the spending other than there are some items there that as Rob outlined are under pressure. But the key to me is that's what's so important about our productivity initiatives. And I'm confident. We committed long term to a very good improvement in our operating ratio. And we've got to offset those. So while you're seeing a little pressure in there, I'm very confident. Our efficiency, it also reinforces the need in terms of our pricing, in terms of offsetting some of these costs that we’ve got to more than offset them in terms of moving our margins in the right direction. Thomas Wadewitz - JP Morgan Chase & Co: If you think about net price then, so factoring in your pace of cost inflation maybe a little bit higher, do you think your net price changes a whole lot, or you perhaps get some cyclical benefits to your pricing, maybe a tighter truck market and some other factors that would enable you to have kind of a similar pace of net price in 2011 even if your cost pressures are a little higher?

Well, remember our commitment is real price long term. So that says we have to offset the inflation and other factors in here. Also keep in mind that many of our agreements are tied to escalators. So if you see a little pickup in inflation, you're going to recoup some of that to your escalators. So again, we've got some challenges there, but the task for our team is more than offset them. I mean, Rob...

One of the points, Tom, as you know, remember that the legacy renewals are kind of back-end loaded this year. So you can't really straight-line the pricing assumptions if you look year-over-year.

Our next question is from the line of Cherilyn Radbourne of TD Newcrest.

I noticed that you have both Domestic and International Intermodal in the strong category in terms of your volume outlook for next year. Wondering if you could just contrast one versus the other and comment on what extent the availability of containers has influenced your thinking about the growth potential in each.

Jack, do you want to take that?

Sure. Cherilyn, if you look at the International side, we saw a nice pickup year-over-year in the International because that business was down. And when you look at the Domestic comparison, it doesn't look quite as large, but last year, actually, our Domestic Intermodal business actually improved year-over-year. So if you look at the numbers, they kind of look like that. Going forward into 2011, right now, our International business is actually a little stronger than what we thought it would be. If the consumer demand stays with us and the economic activity stays in a positive framework, we think we'll see another year of continued improvement on the International Intermodal side, and that'll be good for us. On the Domestic side, box availability was an issue in 2010. It will be less of an issue in 2011. We believe we're going to add a little bit to our fleet. And we should see solid improvement. Our highway conversions are going well. Our new sales efforts with some of the customers that primarily rely on truck have been going great guns for us. So with some additional boxes available for our Intermodal fleet, we should see solid progress in 2011. We think it'll be probably one of our strongest growth avenue.

As you look at some of the regulatory pressures that seem to be coming to bear on the trucking industry in particular, do you see that as having a potential impact on your Intermodal demand and pricing in 2011? Or is that going to be more of a 2012 phenomenon, do you think?

Yes, I think the jury’s really still out on some of that. You look at CFA 2010, if you look at the impacts, what it says is -- what it's going to do is eventually drive the poor-performing drivers out of the market. Some people have estimated that could be as high as 400,000 drivers. That would be a real plus for us. One of the other issues, it does is it'll pinpoint which companies are the poorer performers, which will no doubt drive their insurance costs higher. And the other odd kind of a thing if you stop and think about it, some of the best drivers will probably be more in demand, which could mean they get paid more. So all of those things, trucking costs go up, capacity gets tighter, and all of those with our great service performance, the value proposition we have for our customers, says we should see solid growth. It's kind of hard to see when for sure it's going to hit, but it certainly does strengthen our outlook as opposed to causing concern.

Cheryl, there's another factor to think about when you think about moving product on the highway. I think most folks believe diesel fuel prices will be higher next year. I mean, if you look at the curve, they are. So that brings added pressure on the cost to move it on the highway. Our discussion with many of our trucking partners indicates they have a very strong interest in improving the amount of business they move intermodaly. So again, the key for our industry and for UP in particular is to provide great service.

Our next question is coming from Chris Wetherbee of Citigroup.

I was wondering if maybe you could talk a little bit about the percent of your business when you look at 2011 that may be contracted at this point, and then maybe what the types of increases you may be seeing in that business as you look out.

Chris, at any one point in time, we have about 70% to 75% of our business under either single-year or multiyear contracts, and the escalations are set in place. We're probably not going to tell you specifically how those escalations line up in terms of pricing. But I would tell you that some of them include legacy renewals, so you'll see some pretty significant price increases. Others, more or less inflationary adjustments and things like that. But it's typically, at any point in time, about 70% to 75% of our business under contract.

Just switching gears to the fuel side. I don't know if I caught a breakout between what fuel and mix was in the quarter. We obviously got the coal price side of that. And then just the thought about, was there any lag impact of fuel in the fourth quarter, as fuel seems to be increasing sequentially as we progress through the quarter?

Chris, we didn't break out the mix to the fuel, but there was a slight lag on the earnings in the fourth quarter as a result of the rising fuel price. And of course, as you know, just the sheer math of that had a drag of about a point on our operating ratio as well.

Our next question is from the line of Matt Troy, Susquehanna Financial.

Yields looked pretty good this quarter, specifically in Intermodal, which was up, I think, 13% versus a run rate earlier in the year of high-single digits. I was wondering if you could just provide some color in terms of what was going on there, particularly in light of the fact that carloads were up of, I think, 5% more than RTMs. So some pretty good yield growth with carload growth exceeding the RTM growth and Intermodal. If you could just help me with what's going on there in the quarter?

Matt, there's no secret when you look at our Intermodal business line. It was one that had pretty substantial impact from old legacy contracts, and as we've moved forward, we've been able to really take more of the market price into those deals. So that drives one. But secondly, our service. When you look at the new products we've put in place and the Customer Satisfaction Index, it reflects value that customers are willing to pay. There's no question in that market about the equation between service, price and value to the customer. So I think again, it reflects what we've been talking about for a long time and our ability in terms of both legacy and getting service improved.

So that is not a fuel surcharge issue, that's real sticky pricing, as you've alluded to in the past?

Well, fuel surcharge clearly is part of that, but that was also part of the issue before, that we were unable to really recover changes in fuel price. So all that comes into the equation. Again, the most important thing to me is really to provide great service and new products into that market that the customers really value.

And a follow-up would be on the capital front, I think you guys ended the year a little bit north of $1 billion, with capital. Pre-meltdown, you used to run at something like $700 million of cash and investments on the balance sheet. I know your CapEx budget ex-PTC is up about $500 million. But just in thinking of returning capital to shareholders, you upped the dividend twice last year. Your payout, so your yield is in line with the industry at about a point and a half. I'm wondering in terms of returning capital to shareholders, what are your plans or what are your hurdles for 2011? Is it going to be more weighted towards share repurchases? Or do we continue to see a more balanced approach to returning capital to shareholders?

Matt, you said capital, but I think the $1 billion -- but you're talking about cash on the books?

Yes.

Rob, go ahead.

Just to clarify, our total capital spending in 2010 was just above $2.5 billion. Cash on the books as, Matt, you pointed out was over $1 billion, and our plan for capital spending in 2011 is somewhere around that $3.2 billion. So you're right, we're increasing the capital. And our approach beyond the capital spend is to continue, as we have, to have a balanced approach. We're going to seed where the returns are there, make the right investments in the business in that capital program. We like to have a continuous dividend increase, and with cash available beyond that, continue to be opportunistic as we have been on share repurchases. So no shift in our thinking in that line.

Our next question is coming from the line of Scott Flower of Macquarie Bank.

Just wondering, Jim, if you could give us some color on how you see some of the hearings playing out at the STB. Obviously, they're being a bit more active now that it seems that the legislative front is quieting down. I just wanted to get your color on how you see the sets of hearings coming up and what you think may come out of those?

Well, Scott, I think it's going to be a great opportunity for our industry to tell a very positive story. If you look at what the first hearing is, I think, looking at exemptions. The second one is also related to looking at access. To me, it's, again, a capability to look at an industry that, as the financial returns have improved, the industry has returned a significant amount of profits, put it back into new investments long term. So I'm looking forward to that discussion that's out here. I think the issue in exemptions and competition, there's just no question. There's very strong competition in this industry. Look, I'll give you an example. If you look at what's happening with all water moves around through the canal, that market share on the East Coast, I think, went from about 4% or 5%. Today, it's 20%. That's hundreds of millions of dollars of business that used to move on railroads that now moves on water. So I think the STB -- and it may be appropriate at this point in time, you're saying record returns and financial results, they have a discussion. But I will also tell you a part of this is they have to be very careful. When you bring in and you know the story, when you look at the replacement cost issue this industry has, there's very little room to get it wrong. So we're prepared. Again, I think you've got a hugely successful story to tell, and you don't see what happens.

And just a second one for Jack. I know that on two things you mentioned, inventories on coal are below nine, but where do you think they are versus normal? And then related or secondly, you mentioned the empty issue on Intermodal, is that normalizing on the International or do you expect that to continue in '11?

The Intermodal question, I think we're going to continue to see an improvement in International business in 2011. I don't think it's normalizing or flattening out. I think we'll see that.

When is normalizing versus the number of empties? Those seem to be quite high because of the box shortage as opposed to overall volume levels.

Yes. It's kind of hard to tell how the ocean carriers will view that, Scott. It really will enter into the marketplace in terms of what do they have for back haul opportunities, how tight the market is. Typically, their view of the world is if the International business coming into the United States is really tight, they'll unload right at the port into a domestic box, and then they'll shoot their boxes back without getting a backload. The other opportunity, as you know, we're seeing a lot of stuffing with things like backhauls for DDGS. And there's even some more interesting products, scrap paper, somebody even was discussing some heavier materials than that. So I think it will depend a lot on the market, but I think we'll be okay.

And then coal inventories, I know you said versus '09, but where do you think they are versus normal? Because '09 seemed like an atypically high year.

I would say they're about on target to maybe a day or two ahead, but not -- they're about where they should be on a normal range.

Our next question is coming from Bill Greene of Morgan Stanley.

Jim, if we look at the puts and takes for 2011, you talked about sort of the legacy repricing being at the end, we've got some cost pressures. Do you think it's realistic we can sustain incremental margins even at the fourth quarter level? Is that possible, do you think?

Well, Bill, I'm not going to give you a specific number, but I think the margins will continue to be very good in this industry at UP. As Lance mentioned, we still have assets out there that are not deployed at this point, so any incremental revenue del [ph] you bring in those should have nice margins. And we've said consistently, if you recall, you look back at last year when we had so many excess assets, that probably wasn't sustainable. But I feel pretty good, in fact, I feel real good where we're at in terms of margins this year.

And how do you think about the labor line? I mean, can headcount stay below volume growth, given that volume growth inevitably will be lower, I think, in 2011? I guess you've also got some incentive comp pressures, too, I would think, picking up?

Well, to me, the productivity piece is the most important focus here, and I do expect that. And Rob actually had said that, that as our employee count grows, we should be able to lever that and see our productivity continue to improve.

On inventory levels, in the Industrial Products side, do you have a sense for where those are, Jack? Can you just give us a little bit of help? Do we have an inventory restock to come, or are we pretty much at normal?

Bill, I think we're still below what would be historically considered normal. If you look at the retail to inventory ratios, we're still tracking below what would have been the historical levels prior to the 2008 meltdown. So I think we still have some inventory replenishment upside. I think customers are being very careful before taking on a load of inventory. They want to make sure that they see that the economic recovery is sustainable and improving, but I still think we do have upside.

Our next question is from the line of Ken Hoexter of Bank of America Merrill Lynch.

I just want to follow up, Jim, on the hearings, just on the pricing. I guess if your ROI is over 10½%, where do you need to get to on a replacement cost basis? I just want to understand how their thinking might be in terms of replacement or added revenue adequacy versus the need to get replacement costs covered?

Ken, you can do the math, and Rob and his team would cut it a lot of different ways on replacement costs. But even on a depreciated new kind of methodology says that if you take our returns today at about half, you take that 10.8 and cut in half. So again, we continue to try to educate Washington on the replacement cost issue. I also like to think about cash flow returns. I think in this industry, with the capital intensity, you've got to look at cash flows, so we'll reiterate that story. But the fact of the matter is we've got a $3.2 billion capital investment this year which will be a record investment for us. We will reduce -- I will cut that budget if we see our ability to grow these returns from where we are today in terms of regulations. You just can't justify that spend on where you're at today with return on capital. We're making an investment for where we think the returns can be out here two, three, four, five years from now.

If I can just shift over to Jack, on the coal opportunity, I just want to think about what's going on with the multiple storms we've seen, with the flooding in Australia. I guess maybe the eastern guys may be a bit focused on moving some met coal. Have you seen any increased demand to get any coal moving east? Or can you give us an update on that, knowing that inventories right now are about normal in your region?

Ken, we've seen an increase in discussion. I haven't actually seen an increase in the movement of coal yet. We're watching it pretty carefully. Still a lot of discussion and activity about port capacity on the west that would allow us, actually, to potentially move some coal off the West Coast. But we really not have seen a lot of activities in the form of real orders yet to significantly increase western coal into the east.

Our next question is coming from the line of John Larkin with Stifel, Nicolaus. John Larkin - Stifel, Nicolaus & Co., Inc.: In the past, I think you've stated that the current network has something on the order of maybe 10% to 15% of excess capacity that could be filled up over time as the economy improves and you gain market share, without making dramatic incremental capital expenditures and incremental capacity. Is that range still holding at this point? Has that changed, moved around, have you eaten up some of that capacity?

Lance, do you want to take that?

Yes, we do have excess capacity remaining. You recall, if you look backwards, we've handled in the neighborhood of 195,000 to 200,070 carloads for a relatively extended period. But the real important thing to note is the service levels that we're performing at now and that the business plan is predicated on are very different from the service levels that we had back in that time frame. So yes, there is more capacity to handle incremental volume, but equally, yes, we do have to continue to invest carefully and effectively and also improve our throughput through lean manufacturing initiatives, for instance, in order to maintain high service levels as volume comes back.

And John, as we talked about, we're making investments, so we're trying to look at it two, three, four years from now. We've got a project here in Nebraska called the Blair project, which is replacing some bridges, expanding some double track. There's a long lead time there. That's a two-, three-year type of project. And the bottom line there, you reduce miles, you improve service. We've got a project we're looking at -- the bridge at the Mississippi River, Clinton, Iowa. That's a four-year kind of project. Now there's not much money in this year, but again, what we are -- because the lead times, unfortunately, when you think about capacity expansion, are a lot of cases a couple of years at a minimum. John Larkin - Stifel, Nicolaus & Co., Inc.: Maybe as a follow-on, I've read quite a few articles about the project to upgrade the line between St. Louis and Chicago to accommodate either high-speed or higher-speed passenger service. Can you talk a little bit about how the economics of that kind of project work for the UP in terms of the capital investment, the ongoing maintenance to maintain the track to accommodate a higher-speed operation? And then who gets priority on the line and whether that impacts your operation adversely at all?

Well, when you think about -- let's talk about the priorities in place here. Our position has been from day one, if you're going to mix high-speed passenger -- now keep in mind, we're talking about a 110 mile an hour Class 6 kind of railroad when you talk about high-speed, that you've got to serve both. We've got to protect freight. You've got to protect the passenger operation. That's been a tenet of the planning from day one. In terms of investment and maintenance, the cost of running the operations can be borne by the user, which, in this case, is the federal government and the state government, both in the initial investment and long term. John Larkin - Stifel, Nicolaus & Co., Inc.: So long term, does that actually help you net-net in terms of being able to provide maybe a higher level of service on the freight side?

No. John, at the end of the day, I would prefer not to mix passenger and freight. I think when you think about where the philosophy in this country of how we deal with infrastructure problems, how you move more business from highway to rail long term. But we've got a project. There’s been very good negotiations, and at the end of the day, I don't think I'm confident we can make it work.

Our next question is from the line of Scott Group with Wolfe Trahan.

I was wondering if you could give a little bit more color on the hiring plans. I think you said 4,000 new hires. What's the timing for that throughout the year? And then what are you budgeting for in terms of attrition? Just trying to get a sense of net new hiring.

Scott, what we said is around, and it's an estimate at this point in time, around 4,000 mostly for attrition and some assumption for volume growth. And the attrition is pretty much throughout the year, I mean there's no particular time frame when all that occurs. It's pretty steady throughout the year. And that's an attrition rate of 7%, 8%-ish, in terms of what our historical run rate has been on attrition, and we'll see if that plays out. That's our assumption at this point in time. And as I pointed out, the piece that’s related to volume growth, we do expect as volume returns that headcount will increase, but not at the same rate. So we'll have productivity in there as volume comes back.

Scott, I think keep in mind there's no assurance that the economy's going to grow and continue on the positive, although again, our view of the economy is slow growth. But if this thing turns down, we take advantage of the attritions. I think if you look backwards from where we were, when you're treading 3,000 to 4,000 people a year, you can manage your force counts much better.

And an attrition rate of about 7½%, that's a little over 3,000 people? So 1,000 net increase? Does that sound about right?

Yes. When you look out to over the next three, four years, let's assume the economy stays in a positive line, we're going to be hiring anywhere between 3,500 and 4,500 employees a year.

But just to reiterate, whether or not our total workforce count number is higher in 2011, will be dependent on volumes.

Rob, I think I heard you say that other expense should be about $225 million a quarter? That's up 25% versus 2010. What's going on there? Can you give a little bit more color? And is that specific to you guys, or is that related to some industry-wide cost pressures?

A little bit of both, but I'm not speaking to the other rails, but we've got -- there's lots of ins and outs in that category. And as I mentioned, our casualty line item, while we continue to make progress on our safety, for example, and we will, we have had great progress, and as Lance pointed out, that's a focus, clearly, we'll continue to focus on. But given the way the actuarial study adjustments work, we would expect that in 2011, the good news coming from those studies will be less than the good news that we've seen over the last couple of years, as an example. And I pointed out operating taxes. We fully expect those to go up, and the reason for that is generally speaking, the way operating taxes work within our territory is based on five years of earnings. And because we're earning more, if you lop off an earlier period when we were earning less, and now we're adding a year where you're earning more, so that drives our operating taxes higher. Volume, of course, is also in that category, volume-related expenses, and those we fully anticipate and hope will be on the positive side.

Our next question is from the line of Jon Langenfeld with Robert W. Baird. Jon Langenfeld - Robert W. Baird & Co. Incorporated: On the pricing side, I know we repriced the Intermodal, some of those Intermodal contracts in late '09, early '10, but was that more of an event, or is that more of a process by which those rates come up to market through the end of this year? So is there some legacy tailwind still associated with those?

It's more of a process, Jon. Jon Langenfeld - Robert W. Baird & Co. Incorporated: And then on the 4%, that’s this year, can you give us some visibility on which commodity groups those fall in? I know Intermodal is a piece of it. Is there anything else in there?

Intermodal is a piece of it and Energy. Those are really the two largest components. Jon Langenfeld - Robert W. Baird & Co. Incorporated: Rob, for you, can you give us some idea of the magnitude of the bonus depreciation in the last couple of years and then how that relates? Would it be similar in 2011?

In 2010, the benefit from bonus depreciation was around $100 million. 2011 might be a little stronger because A, a higher capital spend, and B, we got 100% depreciation for 2011. So we expect that to be stronger in 2011.

Our next question is from the line of Chris Ceraso with Credit Suisse Group. Christopher Ceraso - Crédit Suisse AG: I noticed that the revenue per car in Industrial Products and Chemicals was quite a bit lower than some of the other categories even though fuel was up. Is this weaker pricing, or was it mix issues within the category?

A lot of it was mix and in particular, in the Industrial Products side. Chris, that Moab short-haul 35 mile uranium tailings move that we had was up 66%. And so that does tend to take a couple of percentage points off of the average revenue per unit. Christopher Ceraso - Crédit Suisse AG: And then is there any chance that with the administration talking more about possibly dialing back on regulations that are hurting business, any chance that PTC gets reviewed or changed or canceled? Do you have any view on that?

That's a great question, Chris. In fact, next week, we've got a meeting at the White House, the CEOs in our industry, and on the agenda will be how we see regulations that are impacting growth and investment, and positive train control, I think, is poster child. And as you know, the math, the FRA alone did their own cost benefit and said, "For every $22 we spend, we get $1 worth of benefits. That makes no sense." So we are looking forward to the discussion in terms of the impact of regulations on our industry. Christopher Ceraso - Crédit Suisse AG: If I could sneak in just one housekeeping item, what do we expect for the tax rate in 2011? You've had a little bit of a dip here in the recent quarter.

This is Rob. I would assume around 38%.

Our next question is from the line of Peter Nesvold of Jefferies & Company. H. Nesvold - Jefferies & Company, Inc.: Just on nonmetallic minerals, how long do you expect that to sustain at kind of 40% to 50% type growth levels?

It's tied so much to the drilling activity in the different shale formations and things like that. So we're expecting another great year. Of course, to say that you can keep up a 40% rate as your base gets larger is a pretty tall order, but it’ll still be solid growth. H. Nesvold - Jefferies & Company, Inc.: Only other question was on velocity. It looked like 4Q was very strong. Has that carried over into January? We’ve had a lot of bad weather across the country this month.

We have had a few headwinds to velocity at the start of the year in 2011. We've shown signs of being able to meet or exceed the kind of velocity we exited last year at, and we anticipate that this year is going to be another solid year of service as reflected in velocity. H. Nesvold - Jefferies & Company, Inc.: So January is looking pretty similar to 4Q?

Yes.

Our next question is from Walter Spracklin of RBC Capital Markets.

Just looking, you guys are doing a great job here, free cash flow rising, you did raise your CapEx, but still sort of paying down debt, increasing dividends and doing your share buyback. Just want to -- interesting in your outlook, you mentioned how you wanted to become more of a fully integrated part of your customers’ supply chain and so on. Is there any thought toward allocating capital outside of sort of your core rail network, perhaps into the logistics, into trucking, into that sort of last mile aspect? And how would you do that? Do you think you could grow that organically if that is indeed an option? Or would you look to acquire to get there?

Well, Walter, we're not going to buy a truck company. But we do focus some of our capital in terms of the full logistics chain. Examples would be technology development that's out here. Other examples could be where you look at the acquisition even of equipment, where you think about being a full-service provider for our customer. You've probably seen the ads we've been running. And if you look backwards, we did a lot of market research before we ran those ads, and it wouldn't surprise you that talking with potential customers or folks that would use rail, we had a lot of perspective that -- I'll give you an example. In many cases, logistics managers had a thought that if they didn't have a rail outside their warehouse, they couldn't use railroads, and we clearly -- that reinforced for us our push on trying to be a full-service provider. Our subsidiary called EP Distribution Services can provide the full-service to a customer where they want to do rail, they want to do intermodal, they want to do trucking, they want to do warehousing. So it's not a huge investment, capitalwise, that's out here, but it's clearly something we're focused on and are having some very good success.

So that focus is built into your current capital plan?

That's correct.

This is sort of a follow-on on sort of your capital allocation and dividend and buyback. Obviously, there's an increasing focus on yield and the importance of that. And again, your free cash flow is rising. You did a great job through the recession. Rob, what's your view -- if you think about a payout ratio for this business on a longer-term basis, what is that payout ratio even if it's not this year or next year? What kind of target payout ratio do you consider?

You know, Walter, we haven't established a set payout ratio. We want it to be competitive. High-30s in the industry is kind of on the high-end, and -- high-20s, excuse me, nearly 30. And we want to have a consistent dividend increase, and we have a competitive dividend, and as I mentioned earlier, continue to be opportunistic with other cash that we generate for the business in terms of share buyback.

I've heard the competitive answer before, but that's really just saying we're going to see what everybody else does and set it accordingly. But isn’t it something you kind of look at and say this is the type of business that we've learned a lot from the recession, we've got a lot of free cash flow coming in, wouldn’t you drive it based on your own kind of capital allocation needs and so on and sort of drive it that way as opposed to competitive? Just throwing it out there, just curious as to how you look at it.

Those are all factors that we consider, but we don't have a set target that we're going to play out there.

Walter, I think what we're focused on internally is generating the cash. I mean, making certain we're putting the right investment balance for growth, and it's a disciplined process in terms of our capital, the way we look at it. Generate the cash, and then that gives us that flexibility in terms of listening to our shareholders how that balance works. I mean, where we -- clearly, in talking with shareholders, given what's happened the last two, three years, some of the perspectives are changing. And again, my goal here and the goal of this team is to generate that cash and put us in that position that we've got to make those decisions.

Our next question is from Anthony Gallo of Wells Fargo.

My question is around Intermodal. If I heard correctly, I thought I heard you say there were positive developments around the Customer Direct business and Streamline. So I guess I want to understand the mix between Customer Direct and the use of intermediaries, and then how that naturally drifts over time?

Our Streamline business is through intermediaries. It is not a direct Union Pacific relationship with customers. So what the Streamline product does, though, is it offers the intermediaries the capability to offer a door-to-door product provided by a railroad. So we are not going direct. We are not retailing through the subsidiary, the Streamline subsidiary, but simply offering a different kind of a rail product to the third parties.

Our next question is from the line of Scott Malat of Goldman Sachs.

Just a follow-up on the employees, the comp for employees that won't be up as much as 2010. Can you help us just think through the puts and takes to the outlook there?

Yes, Scott, the challenges that we have on the comp and benefit line, as I pointed out, we don't expect it to be as great as in 2010, but we do have some pressures. For example, in addition to the normal wage and health and welfare, and I'd characterize those as being normal inflationary pressures, we have, as you pointed out, we have pension expense and unemployment tax hurdles that will hit that line item. And that's why we think there'll be pressure on that line item.

And then you talked a little bit about the export coal from the PRB. But just longer term, and I know at the analyst day, you talked about potentially hitting 5 million tons in five years. It seemed like we've seen some activity in investments in the ports. And Arch Coal came out and said they think they can do 5 million tons of export coal at a long view by 2012. I heard some similar things out of Peabody. Does this kind of investment, and I don't think any of us expected this earlier, but does it pull up some of the benefit you were expecting over the next five years, and can you help frame the opportunity?

Yes, I actually do think if they're successful – it’s like two steps forward and three steps back in some respects because they got the investment through, and now we've got the environmentalists that are trying to protest shipping Powder River Basin coal to Asia. So that's now going to delay that probably into 2012 as opposed to accelerate it for us. But all of those investments, the way it's playing itself out, are an opportunity for us, and should they accelerate those development projects, that would be good news for us, and it would bring forward some of those opportunities. We could look at the possibility of 1 million tons of export coal this year being 2, 2½ or something like that, if we got some traction on some of those projects.

Our next question is from the line of Jeff Kauffman of Sterne Agee. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Just a quick one on Intermodal. You were talking earlier about the CSA and the trucking. Who knows what's going to happen, but let's pretend for a second that there is a real capacity reduction in the trucking market, and you have a lot of folks coming to you who have not traditionally been customers, maybe through the IMCs that are saying, "Can you help us out? Can we get on the railroad?" What would be the bottleneck? How much excess capacity could you throw at that if the volume came? And would the benefit to you be mostly a volume benefit this year, with the chance to get pricing next year? Or would you be able to up price as the volume came online?

I would say the immediate bottleneck, if it comes in a big way, would be the number of containers. Container capacity is pretty much sold out. Right now, we've got an order in place, but it was tight last year, and if it surged, it could be tight this year as well. And in terms of the opportunity for us, it would be both the volume side, but also the price side.

And also, Jeff, that bottleneck question has to do with where the volume shows up, what quarter it's in.

Our next question is from Justin Yagerman of Deutsche Bank.

Stripping out legacy, guys, when you think about the way that Intermodal pricing should trend this year, there's a lot of exuberance, I think, in the truckload market. How much of that do you think can flow through when you think about the Intermodal opportunity and the pricing side and your over-the-road conversions in the Intermodal business?

Well, how big is that?

Well, depending on who you talk to, it's anywhere from 5% to 30%, right?

We would be in a position with a significant improvement, a significant opportunity on the price side to take advantage of that. Even though we have a legacy tail that we're working through, we still have plenty of upside opportunity if the market got incredibly hot, and we have a lot more customers knocking on our door. And I think the key, though, in this is really to reinforce how important it is to keep your service metrics, net value proposition there. I think again, you provide great service, there’s a value equation there. And then again, if it's accelerated with tight trucking capacity, we should have good upside.

Along those lines, I guess, then, when you think about train speed, you guys commented that things are looking good in January relative to the fourth quarter. How do you think about that, and I guess how should we think about that as volumes return to the network? Is the current speed sustainable as we move throughout the year on average? And then I guess when I think about that, is there a speed that you think of as being in the green zone in terms of kind of a variance that we could look at? And then if we saw speeds really dipping, where’s that threshold where you guys start getting worried about network fluidity?

The first answer, Justin, is that we are comfortable with our velocity right now. The second part of the answer is there are many impacts to velocity when we run on an outdoor network like we do, one of which is volume. We've demonstrated, if you look backwards in 2010, the ability to handle substantial increases in volume with really minor impacts on velocity, and only one of those impacts in 2010 was a volume increase. And then if you look a little further ahead, I won't answer specifically whether or not we have a threshold that gets us concerned, but we are very confident in our ability to handle the kind of volumes we anticipate in 2011 and then beyond, given both the capacity that we currently have, our plan for improving throughput through management activity and the capital budget that we've got for this year and anticipate for future years.

And I think the other thing to keep in mind here is we obviously learned what happens if you're not prepared when you look back at 2003 or '04. But we learned a lot from that. That's why we -- the importance of understanding your surge capacity that's out here, why hiring in advance and training, while that may seem obvious to you. You're hiring people today, that it takes a minimum six months to get an employee on the ground, so we've got to keep ahead of that. The other thing is we've never been in a better position, I think, to control our volume and the impact in the network, a lot of the technology tools we have, the contracts we have, so I feel -- I won't say we won't have some challenges if you get a surge, but we're nowhere near it when you think about where it would really be detrimental to the network.

Our next question is coming from Jason Seidl of Dahlman Rose. Jason Seidl - Dahlman Rose & Company, LLC: You gave the guidance for PTC for 2010. Assuming there was no changes on the governmental side in PTC plans, would that have to be going up for 2011, just directionally? Or could that kind of maintain that $250 million run rate?

Well, again, we spent -- if you look at 2010, we spent about $90 million. We're at $250 million this year. So there's a substantial increase. We've got a very programmed approach in terms of how we make these investments by corridor. It would likely kick up a little bit next year going forward here, but there's a lot of ground that needs to be covered here in terms of the effectiveness of technology, the footprint that comes into play and how you think about what corridor. So let's use $250 million this year with some upside next year on PTC.

Our final question today is coming from the line of Gary Chase with Barclays Capital.

Lance, when you were going through your prepared remarks, I guess one of the things that caught me a little bit by surprise was that you noted the potential for leverage in the coal business first. And typically, we think of that being much more of a factor in kind of the manifest networks than the bulk networks. So I wondered if you could just elaborate on what you're seeing there and how you're seeing that upside.

Sure. I think what I was speaking to is that compared to the average in the network, as coal grows, it has wonderful leverage on productivity because it's such an efficient network on its own. There are incremental opportunities within the coal network, but in comparison on average, it is a highly efficient network. The other thing to note is that we do have plenty of upside opportunity on productivity and leverage in Intermodal, which Jack mentioned. He expects to see some pretty strong growth in 2011. And clearly, in the manifest network, we've still got plenty of opportunity as well.

Gary, the other thing when you think about leverage here, think about this. We have capacity investments up into the Powder River Basin that's set between UP and [indiscernible] to handle over 400 million tons a year, 425 million tons a year. And if you look at what -- UP handled about 250 million tons this year, which is far below where we were at the peak, which I think was around 270 million, 275 million. So you've got not only -- when you think about the operational opportunity, we've got a huge investment that we're depreciating on the books today that we're levered as we add volume.

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Mr. Jim Young for closing comments.

Well, thanks for joining us today. We look forward to our call here three months out, and I hope you heard we're feeling pretty good about this year. Again, I think the economy is showing some positive signs for us, and we're prepared to handle it and perform for our shareholders. So again, thank you for joining us.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.