聯合太平洋集團 (UNP) 2007 Q4 法說會逐字稿

Thank you for accessing the Union Pacific Corporation fourth quarter earnings conference call held at 8:45 am Eastern Time on January 24, 2008 in Omaha, Nebraska.

This presentation and the accompanying materials contain statements about future expectations or results of the Corporation that are not statements of historical fact.

These statements are or will be forward-looking statements as defined by the Federal Securities laws and generally include, without limitation, expectations, projections, estimates, and similar statements regarding the Corporation and its operations and financial performance, customer demand and economic conditions.

Forward-looking statements should not be read as a guarantee of future performance and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements.

The Corporation assumes no duty to update those statements or information provided in this presentation or the accompanying materials.

More detailed information regarding forward-looking information and such risks and uncertainties are contained in the materials accompanying this presentation and the filings made by the Corporation with the Securities and Exchange Commission, which are available from the SEC at www.sec.gov and on the Corporation's Web site.

In addition, during the course of the presentation, the Corporation will refer to certain non-GAAP measures.

Management believes these measures provide an alternative presentation of results that more accurately reflect ongoing operations.

These measures should be considered in addition to, not as a substitute for, the reported GAAP results.

Please refer to our Web site for a reconciliation of these measures to GAAP.

Greetings, ladies and gentlemen.

And welcome to the Union Pacific fourth quarter 2007 earnings release conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

Please note that slides for this presentation are user controlled.

(OPERATOR INSTRUCTIONS) .

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr.

Jim Young, Chairman and CEO for Union Pacific.

Thank you, Mr.

Young.

You may

Good morning, everyone.

Welcome to Union Pacific's fourth quarter earnings conference call.

With me this morning are Rob Knight, our CFO, Jack Koraleski, Executive Vice President of Marketing and Sales, and Dennis Duffy, Executive Vice President of Operations.

Today, we are reporting record quarterly results despite facing some challenges in the quarter.

In the fourth quarter, Union Pacific earned $1.86 per share, a 4% increase over 2006.

Rob will provide you with the details and how record high fuel prices, the economy, and weather impacted earnings, but there were basically four major drivers to this quarter.

Rapidly rising diesel fuel price was a major challenge, especially with the two-month lag in the majority of our fuel surcharge programs.

Fourth quarter carloadings were up nearly 2.5% coming into December, but we ended the quarter roughly flat after being impacted by winter weather in December and some economic softness.

Operationally, we improved across the board.

Our service metrics, productivity measures, and customer satisfaction surveys all showed progress.

And, consistent with prior quarters, core price increases remained strong.

Looking at our full-year results, our progress can be summarized by looking at the gain in return on invested capital, up 0.5 point to 8.7%.

We achieved these milestones by focusing on the key areas of our business that drive our results.

We operated a safer railroad in 2007, improving safety for our employees, customers, and the public.

We set new financial records for our Company, including net income of $1.86 billion, up 16% versus 2006.

And we delivered better service for our customers, which they recognized by giving us our highest ratings ever on their satisfaction surveys in 2007.

The progress we made in these areas enable us to deliver a 38% total return to our shareholders through stock price appreciation, a 47% dividend increase, and $1.5 billion of share repurchases.

So with that, let me turn it over to Jack to talk about our revenue performance and our 2008 outlook.

Jack?

Thanks, Jim.

And good morning.

Despite continued softness in some markets and challenging weather in December, our fourth quarter volume edged past a year ago.

Average revenue per car improved 6% driving a similar improvement in commodity revenue which topped $4 billion.

Although volume was down a little over 1% for the full year, revenue grew to a record $15.5 billion, as our ongoing efforts to drive yield improvement resulted in average revenue per car of $1,594.

Improving service in 2007 helped create pricing opportunity even with softer market conditions as customers recognized greater value for their price dollar.

And while we're pleased with the record revenue that we posted in 2007, the best proof statement of our success is the satisfaction scores we received from our customers.

Our satisfaction index improved over 2006 every quarter and for the full year came in at 79, which is a new post-merger record.

Now, let me take you through each of our six business groups with a look at how the fourth quarter played out and what we see ahead for 2008.

Let's start with our Ag products business.

Ag products revenue grew 7% in the fourth quarter to $719 million with a slight increase in volume, combining with a 6% increase in average revenue per car.

Wheat export, especially to the PNW and the Gulf, and ethanol and DDGs led the increases.

Largely offsetting that growth were declines in three markets.

Domestic feed grain moves to Texas were soft because there was a strong local crop in the Texas area.

The cotton seed crop was smaller than a year ago because acres were shifted to corn.

And we moved fewer cars of import beer due to higher inventories and the elimination of the transload from plane to insulated box cars at Long View Texas, which reduced carloads but actually increased our efficiency and profitability.

Looking ahead to 2008 we expect continued growth in ethanol and DDGs.

Ethanol demand is also going to drive growth in corn volumes with increased shipments to our forward ethanol plants on the West Coast.

We should stay strong and the startup of our second produce unit train in February along with increased meat and poultry exports should help drive growth in our food products line.

Turning to automotive, a 7% increase in average revenue per car allowed our autos team to post a 4% increase in revenue even as volume declined 2%.

Vehicles shipments fell 6% as sales continued to soften.

That decline was partially offset by a 2% increase in parts as we saw continued success with the intermodal train service between Detroit and Mexico that we started up in conjunction with the CSX earlier in 2007.

Both vehicles and parts volumes are expected to decline in 2008 as U.S.

vehicle sales are predicted to fall somewhere in the range of 15.5 million to 15.8 million vehicles.

Our chemicals markets have been the bright spot throughout the year.

In fact, it was our only business to post volume growth in all four quarters.

For the fourth quarter, revenue grew 12%, with volume up 5% and a 7% improvement in average revenue per car.

While we saw strength pretty much across the board in the fourth quarter, our 23% increase in fertilizer led the way driven by strength in the export potash markets.

Plastics volume was up 6% with both line haul and storage and transit moves favorably impacted by contracts that we renegotiated in 2007.

Liquid and dry volumes grew 4%, aided by caustic soda production which shifted to the Gulf Coast.

We're looking for our chemical markets to remain stable throughout 2008.

Turning now to our Energy business, 4% growth in the Southern Powder River Basin coal drove an overall 2% increase in volume, more than offsetting disappointing Colorado/Utah loadings.

Revenue grew 8% as the volume growth combined with a 6% increase in average revenue per car.

Strong demand, consistent production, few weather incidents and fluid train operations all combined to produce the best-ever quarter for the SPRB trains, tons, and carloads.

Mine production and coal quality problems held Colorado/Utah volumes 12% below a year ago.

We did, however, achieve a record average tons per train out of that region at just over 11,000 tons.

Looking ahead, our Energy business looks like it's got the best growth prospects here in 2008.

Although Colorado/Utah volume is currently expected to be flat, we are beginning to see some activity in the international markets that could be favorable for this coal.

Strong demand should produce growth of about 5% for the SPRB and that growth outlook could be even a little stronger if we have fewer weather incidents and mine production problems than we experienced in 2007.

For the first time since third quarter 2006, our Industrial Products business posted revenue growth, up 1%, as a 3% improvement in average revenue per car offset a 2% volume decline.

Weak demand in the housing market continues to impact our lumber business and other construction-related businesses.

And the paper markets continue to shrink with the conversion from print to digital media.

The good news was the 7% growth in stone volumes driven by pent-up demand from projects delayed by customer production issues and bad weather that had occurred earlier in the year.

This is a group where I think it is important to note that the mix shift associated with reduced high revenue per car lumber and increased lower revenue per car stone impacted the average revenue per car in the quarter.

It is really masking the true price improvement that the Industrial Products team had been able to achieve in very difficult market conditions.

This is the business that, of course, is most sensitive to the economy and all indications are that softness in these markets is going to continue to be a challenge throughout 2008.

With a 5% improvement in average revenue per unit, Intermodal revenues grew 4% even though volume ran about 1% below last year.

Continued soft import market produced a 3% decline in international volume.

Economic softness also impacted our premium and domestic business but despite that softness, domestic volume was up 3% driven by growth in our legacy contract business.

Although we look to Intermodal to be one of the long-term drivers of future growth, the outlook for Intermodal in 2008 is somewhat modest.

While we expect to see some strengthening of the international market, our domestic volume is expected to decline a little due to business losses that we incurred in our IMC and truckload segment.

Let me wrap up.

As we went through each of the business groups, I highlighted our expectations for 2008 and here is how that shapes up in terms of our volume outlook for the year.

As I said, our growth looks strongest in Energy.

And Ag is also looking pretty good for us.

Chemicals and Intermodal will have some upside and Autos and Industrial Products will likely see some further softening.

Of course, the wildcard is the economy.

Clearly, there is a lot of concern about whether we will avoid a recessionary downturn.

Overall volume is expected to be up 1% to down 1% with the low side driven by a longer or deeper economic softness.

As in the past, we expect the diversity of our franchise will help us weather a slower economy.

With continued focus on driving every piece of business to our reinvestability threshold, including the opportunity to reprice legacy contracts for about 6% of our revenue, we expect to see revenue growth in all six of our business groups in 2008.

With that, I am going to turn it over to Dennis.

Thank you, Jack.

And good morning.

The operating team made significant improvements in 2007, concentrating on the core areas of safety, service, value, and leadership.

Starting on Slide 15 with an overview, employee, customer and public safety programs made gains during 2007 with improvement in all three categories.

Our employee incident rate was at its lowest level ever.

Focused derailment prevention initiatives also paid dividends, saving more than $11 million year-over-year, and, despite increasing highway traffic and urban expansion, crossing incidents declined 9%.

Public education programs and crossing closures during 2007 helped drive this improvement.

Jack just talked to you about improved customer satisfaction ratings which correlate directly with our service metrics.

System velocity increased nearly one-half mile per hour, while terminal dwell time improved more than two hours to 25.1 hours.

I will talk later about capital.

We are strengthening the infrastructure, debottlenecking key choke points and positioning our railroad for resiliency and growth.

In addition, we made strong productivity gains in all facets of our operations.

As shown on Slide 16, we improved freight car cycle time by 7%, the best ever levels.

This is the result of our service initiatives, such as improving our ontime spot and pull performance to our customers, lower car cycle times reflected in our income statement in the form of lower rent expense, and it also helps our customers manage their freight car expenses.

We've also increased train lengths in all of our networks.

In the Powder River Basin, we moved 1 million more tons with 1.4% fewer trains per day.

We added 10 intermodal boxes to every train, allowing us to move about the same volume with 5% fewer crew starts and, in total, first crew starts declined 4% on a 1% lower volume.

Better yet, our rate of improvement accelerated throughout the year with more to come in 2008.

And we adjusted the work force to keep our costs more volume variable.

We started the year with a train crew hiring plan of about 2,300, but adjusted it down to less than 1,400, letting attrition reduce our operating crafts by about 475 people.

Another key focus in our productivity efforts is fuel conservation, saving money as well as reducing emissions and making us even more environmentally friendly, relative to other transportation modes.

Our 2007 consumption rate improved 2%, saving nearly 21 million gallons of fuel and $43 million.

Key activities include fuel masters, which includes training, follow-up, and rewards the best engineers with personal fuel cards to fill their own vehicles, something very popular these days.

Technology improvements such as automated shutdown devices and our new hybrid switch locomotives that burn less fuel and reduce emissions.

The fuel conservation speed initiative that analyzes specific corridors and finds opportunities to adjust speed for the most efficient fuel consumption rate while protecting fluidity and good flow management principles.

Results so far are encouraging and should help us achieve another nice improvement in 2008.

Moving now to capital on Slide 18.

We significantly strengthened our physical infrastructure during 2007.

Through our maintenance programs, to reduced slow order delay, upgraded heavy haul corridors, rehabilitated yards, and improved the overall maintainability of our network.

Key capacity projects include tunnel clearances on the I-5 corridor that were completed allowing us to run double stack trains between Los Angeles and Portland.

33 miles of double track and various terminal enhancements on the Sunset Corridor.

The third main line in the Powder River Basin joint coal line was finished and work started on a portion of the fourth main line.

Although we acquired about 1,000 new freight cars in 2007, our total fleet declined nearly 12,000 cars year-over-year as we scrapped older cars and terminated freight car leases.

Finally, we acquired 300 new high horsepower units and 149 hybrid switch locomotives all helping us to lower fuel consumption, reduce emissions and improve reliability.

We are offsetting this with retirements and lease turnbacks with more to follow in 2008.

Turning to 2008, despite the fact that Mother Nature has dealt us challenges with mud slides in Oregon and severe winter weather in the midwest to start the year, we are optimistic about the operational outlook.

Our priorities remain straightforward -- achieve unprecedented levels in all areas of safety, continue productivity trends, and whether volumes pick up or slow down, become more volume variable, regardless of volumes, continue to provide a better service product to our customers, and make a strong investment in our network, further improving our infrastructure.

With that, I will pass it to Rob for the numbers.

Thanks, Dennis.

And good morning.

Fourth quarter earnings totaled $1.86 per share.

That compares to 2006 earnings of $1.78 per share, which is slightly better than we were anticipating in mid December.

As I walk through the quarterly drivers, I will point out a couple of good news items that drove the up side.

But it primarily relates to better operating productivity, with some additional benefit from other income and a small insurance settlement.

Moving now to the top of the income statement, operating revenue grew 6% in the fourth quarter to nearly $4.2 billion.

Quarterly operating expenses also increased 6%, primarily as a result of a 30% increase in fuel and utilities expense.

Through our continued focus on efficiency and returns, we overcame both fuel and weather challenges in the fourth quarter to produce record operating income of $864 million, up 7%.

Let's turn to Slide 23 and the drivers of the fourth quarter commodity revenue.

Revenue grew 6% to just over $4 billion on flat volume.

Revenue growth would have been even greater had it not been -- had we not lost an estimated 30 -- or excuse me, $20 million, or so, from the impact of the December storms on coal and grain loadings.

Average revenue per car increased 6% year-over-year, with improvements in each of our six business groups.

Continued efforts to increase core prices were the primary driver of the gain.

Moving to expenses, fourth quarter salaries and benefit expense totaled $1.1 billion, a 3% decline.

Our labor productivity continued to improve in the quarter.

Although volume was roughly flat year-over-year, we reduced our work force more than 3%.

As you just heard from Dennis, in a lighter volume environment, we drove productivity by significantly reducing train starts.

Training costs were also lower year-over-year as we aligned our work force needs with business levels.

In addition to trainmen reductions, we reduced our nonoperating work force as we continue to improve our overall organizational effectiveness.

Wage inflation did offset some of these productivity gains.

Looking ahead, we will continue to increase productivity.

Actual work force levels in 2008 will depend upon volumes.

These two variables will move together directionally but it won't be a one for one.

In other words, we will achieve greater work force productivity relative to the volume changes.

On the next slide, we show our average monthly diesel fuel prices for the last seven months of 2006 and 2007.

This illustrates the large year-over-year price spike we experienced in the fourth quarter.

Unlike 2006, when prices began declining in the fall, diesel fuel prices increased dramatically in the last two months of 2007.

Our average price per gallon started at $2.44 in October, rising to $2.66 in November, and ended the year at $2.68 in December.

In fact, we paid an average of $2.59 per gallon for diesel fuel in the fourth quarter, a 34% increase from 2006.

Because of the two-month lag in the majority of our fuel surcharge mechanisms, the increased costs associated with these rising prices could not be recovered in the fourth quarter.

Equipment and other rents was down $2 million in the fourth quarter.

We reduced car hire expense as a result of faster asset turns and lower freight car inventories.

Expenses for car and container leases were also lower in the quarter due to fewer leased units.

These gains were partially offset by higher locomotive lease expense.

Moving now to slide 27, purchased services and other expense.

This category declined 3%, or $15 million, to $431 million.

Although we had initially expected costs to increase in this category, several different factors combined to drive the year-over-year change.

Casualty expense was roughly $10 million lower in the quarter, as a result of improved safety and lower freight claims.

In addition, a small insurance settlement, increased productivity, lower volumes, and a couple of other items contributed to the decrease.

For 2008, we will have an expense head wind in our casualty line.

As you will recall, in the first and third quarters of 2007, we recorded casualty expense reductions totaling $77 million as a result of semi-annual actuarial studies.

Although we expect some ongoing benefit from our improved safety performance, we won't be able to completely offset these head winds.

The net result of a 6% increase in both operating revenue and expense is our fourth quarter operating ratio of 79.4%.

This slide illustrates the drivers of our operating ratio.

Although coming into the quarter we expected high fuel prices to be a challenge, the sharp spike in prices had a greater-than-anticipated impact.

In total, higher fuel prices added 3.6 points to our fourth quarter operating ratio.

The carloading impact of the December storms also pressured our operating ratio, adding almost 0.5 a point.

The good news is that we more than offset the challenges of fuel and weather primarily through operating revenue growth and productivity gains.

On the next slide, Slide 29, we show our fourth quarter income statement.

Fourth quarter other income totaled $40 million.

Although this is slightly higher than expected due to some December real estate transactions, it is $17 million lower than last year's fourth quarter.

Interest expense totaled $125 million, up 6% as a result of higher debt levels.

Income taxes (sic) grew 4% to $779 million.

Higher pre-tax income and a higher year-over-year effective income tax rate of 37% drove the increase.

If you step back and look at our results on a full-year basis, 2007 marked another year of solid gains.

Over the past two years, we've taken 7.5 points off of our operating ratio, more than 2 points in 2007.

Everyone in Union Pacific is committed to continuing this improvement trend as we focus on profitable top line growth and ongoing productivity gains.

Slide 31 shows our full year income statement.

Operating revenue grew 5% in the year to a best-ever $16.3 billion.

Operating expenses were up 2%, with higher diesel fuel prices accounting for much of the year-over-year increase.

Other income was down slightly in the year at $116 million.

For 2008, our current thinking is that this number will be more in the range of $50 million to $75 million.

Interest expense increased $5 million as we added $900 million of long-term debt to the books.

Income taxes grew 26% to $1.2 billion as a result of a higher effective tax rate in 2007, and increased pre-tax earnings.

And in 2008, we are expecting a tax rate of about 38%.

2007 net income was up 16% to a best-ever $1.86 billion.

Full-year earnings per share totaled $6.91 per share, a 17% increase.

Turning now to cash, we've grown cash from operations nearly $700 million, since 2005, to $3.3 billion.

This includes the impact of significantly higher cash taxes.

Between 2005 and 2007, our cash tax rate increased from about 2% to 28%, as we used up our AMTs and NOL credits from prior years.

We continue to take a balanced approach to the uses of our cash, with a combination of capital investments, dividend increases, and share repurchases.

In 2007, total capital came in around $3.1 billion, $2.5 billion of cash capital, plus another $600 million in noncash capital, primarily for equipment leasing.

We haven't finalized our 2008 capital plans yet, but our current thinking is that spending will be roughly equal to 2007 levels.

Similar to prior levels -- or prior years, the total investment will include some combination of cash capital and leasing.

We will provide more details about our capital plans in the coming months.

As we announced last November, we're also using our cash to pay higher dividends.

We increased our quarterly dividend to $0.44 per share.

This was our second dividend increase in 2007, resulting in a total increase for our shareholders of 47%.

Another use of cash is our share repurchase program.

We continued to purchase shares during the fourth quarter, buying back 2.4 million shares of UP common at a total cost of about $305 million.

Since instituting the program in January of 2007, we have repurchased 12.6 million shares.

We are committed to rewarding our shareholders as illustrated by the nearly $1.5 billion of cash that we returned through repurchases in 2007.

Turning to Slide 34, we show our total debt levels.

In 2007, our total debt-related obligations increased about $1.2 billion.

This drove our lease adjusted debt to cap ratio 2 points higher to 43.6%.

For 2008, we see a number of variables that will drive our results.

Jack talked about our volume outlook.

Of course, with 11 months left in the year, any number of things could happen that would change our volume expectations.

It really depends upon how long the economy stays soft, how soft it gets, and the overall demand levels for less economically sensitive goods such as coal and grain.

As Dennis discussed, we are trying to be more volume variable as an organization.

Volume growth not only drives revenue, but also productivity.

We are confident in our ability to improve our operating ratio in 2008 through better returns on our business and increased productivity.

The level of the improvement, however, is hard to gauge today, given the uncertainty with volumes and fuel prices.

We are currently forecasting 2008 diesel fuel prices will average 15% to 20% above our 2007 price of $2.24 per gallon.

But if prices differ from this estimate, it could impact our earnings for the year.

Taken together, we believe our 2008 earnings should be in the range of $7.75 to $8.25 per share.

These results would drive another year of strong ROIC growth in 2008.

This slide reflects the financial strength and flexibility of Union Pacific.

Coming off 2007, where we grew earnings 17%, we are forecasting another strong year of earnings growth in what may be a tougher economic environment.

We believe we can achieve these results because of our focus on efficiency, our dedication to returns, and the diversity of our franchise.

Looking at our first quarter outlook on Slide 36, we would expect earnings in the range of $1.50 to $1.70 per share.

The key drivers of this earnings range are volume and diesel fuel prices.

To reach the high end of the the range, we would expect to see around 2% volume growth.

We would also need fuel prices to stay around the current January average of $2.68 per gallon.

Factors that could push us to the lower end of the range would be slower volume growth or rising fuel prices.

If diesel fuel prices increase in February or March, we would not recover that incremental cost until the second quarter.

As I mentioned earlier, we do have a challenge in the first quarter from last year's casualty expense reduction which totaled $30 million.

In addition, demand for coal and intermodal carloads which have a lower average revenue per car, could impact our business mix and be a drag on earnings.

This mix effect may be magnified by less demand for higher average revenue per car moves such as lumber and finished vehicles.

Although we clearly expect our strong trend of productivity improvements to continue, those gains will likely be masked in the first quarter by increased casualty expense and higher fuel prices.

Beyond the first quarter, we would expect the pace of operating ratio improvement to accelerate.

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

Thanks, Rob.

What you've seen in our results and heard from the team today is that 2007 was a good year.

We achieved a number of financial and operational milestones in a more difficult business environment.

We expect 2008 will be another record year, even with some ongoing challenges.

As Rob walked you through our outlook for the year, he talked about the expected head winds of the economy and higher diesel fuel prices.

Another issue in 2008 is the regulatory environment in Washington.

The STB just issued another decision on Cap M last week and we expect Congress to refocus on the rails when they're back in session.

No matter how you look at it though, rails must be part of the solution to addressing America's need for increased transportation infrastructure.

These challenges are largely external factors.

Our opportunities, however, are within our control and we have initiatives underway that will drive record performance in 2008 and beyond.

So with that we have got some time here to take a few questions.

Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of William Greene with Morgan Stanley.

Please go ahead with your question.

Yes, good morning.

I'm wondering if you can talk a little bit about the operating plan and what sort of metrics we can watch for as fluidity improves, how that can sort of manifest itself in the financials, whether we want to talk about cost per carload or cost per GTM, how much improvement is there left to go?

Well, bill, we set a minimum goal here of offsetting inflation, when you think about productivity, and again, as Rob had mentioned, Dennis talked through, this business is also the function of volume.

And on the higher end of the volume, you can see some pretty decent improvements in unit costs.

If volume is soft, it will be a challenge.

But overall, a good planning tool for me is to offset inflation.

Okay.

And then if we get the investment tax credit passed by Congress, how would that affect how you think about your CapEx spend?

Well we've got a list of projects that clearly we would take a very hard look at accelerating.

And make the right decisions.

We, as Rob mentioned, are -- well, we don't have board approval on our capital, we're looking at about the same level this year, and these are strategic investments, when you look at it.

We're going to take a hard look at some of the shorter term areas like locomotives will be lower locomotives by next year freight car will be reduced, or this year, but we have some opportunities.

Just one last question.

Mix and price, how do those affect your average revenue per car in the fourth quarter?

I think overall, when you look at the fourth quarter, our average revenue per car showed you about what our core price improvement was, and I think our negative, some of the neck offset from fuel surcharge.

Thanks for your help.

Our next question comes from the line of Ed Wolfe with Bear Stearns.

Please go ahead with your question.

Hey, good morning, everybody.

Good morning, Ed.

Jim, with the guidance, it looks like for the first quarter, you're giving volume guidance of zero to two and then for the full year, minus one to positive one, a little less than, that what is it that you see that makes volume more challenging as you would go throughout the year?

I would think it gets easier and the economy improves if anything.

We were battling some major weather issues in the coal mines, so the comps are a little bit easier so far in January.

If you look at our carloads that were produced yesterday show us up about 3%, I think, overall for the month, 2 to 3%, and we're being cautious, on the rest of the year, in terms of the economy, but -- and there is a lot of winter left here in February and March.

So right now, on the surface, the volume looks a little bit -- it is a little bit stronger than we have in the plan, but I would be careful about projecting that out the full year.

Is there some makeup from the 20 million you lost in the coal and grain loadings?

Not in coal.

The coal demand right now, given -- with the coal production line, you've got plenty of demand there, and we're handling every carload we can.

There may be a little bit of carry-over in Ag that's out here but we're expecting a pretty strong -- as Jack said, still a pretty strong year for Ag overall.

Okay.

And on the -- Jack talked about some business losses on truck and domestic intermodal.

Is that in the thought process?

And what were those losses?

Can you talk about that?

I will let Jack talk about the specifics here, but I will come back to, we're not going to chase business with price, and when you look at the domestic products out there, and what is happening with truck capacity, and freight rates on the trucking side, we have lost some business out there, and again, that may continue the rest of the year, but we're staying very focused on our price and our return requirements.

Jack, you want to add any color there?

I think Jim just summed it up.

We did lose a piece of business and we couldn't get to our reinvest ability threshold on it and it won't be on the UP next year but other than that, we think the business environment is still solid for intermodal and there is plenty of opportunity for us and it won't be an issue.

What type of business?

Was it IMC or truck and when did you lose it?

It was truckload business.

And when did you lose it?

We're losing it this year.

Separately, Rob, in one of your slides, you talked about the OR impact from fuel in the fourth quarter of 3.6 points.

If my math is correct, that is 151 million, or $0.36.

Could that really be the impact of the timing of the fuel surcharges in the quarter?

It is an easier comp, Ed.

When you look at it year-over-year, that is roughly the right math but you got to look at what happened last year, which was basically the complete opposite.

But I think you would see a large part of that invert as now you -- the surcharges catch up in the first quarter.

That should be a pretty good positive.

Am I thinking of that correctly?

The way it works we are getting a stronger level of fuel surcharge but you don't see it at the bottom line until fuel prices drop because while fuel surcharges higher as a result of the fourth quarter price, the fuel price itself is also higher.

Continues to be high.

So you don't see the net benefit flow to the bottom line until such time as fuel prices drop.

And Ed, keep in mind, we're not recovering 100% with our legacy contracts and the things that we have out here.

We made good progress, but we're still not at 100% fuel recovery.

What percentage are you at?

We're running probably 85 to 90% range.

You can give an update on the sunset and the timing right now, where it looks like you will be complete with the nova track there?

As I said, we completed about 33 miles but we made major improvements also on our terminal, and if you remember, part of the original plan was to balance the double tracking along with our terminal improvements in our infrastructure.

So in '07, we made good improvement in west Colton, Yuma, Tucson, El Paso, along with the 33 miles.

Now we're still stick sticking to the time frame 2010, 2011, first part, we are going to do a substantial piece of grading this year so we can look at the pace of construction, and we will be responsive accordingly.

But right now, we're still sticking to our original plan.

All right.

One last one, I will let someone else have it, it looks like your head count is down, you guys had a much better year than most of the other rails, everyone seems to not be getting bonuses, what was your bonus comp like?

It seemed like you earned some this year relative to last year?

Well, we are still waiting for our board to approve our performance next week.

So we will wait to see how they see our results.

But in terms of what was accrued in the fourth quarter, is incentive comp , up, down

It is up a little bit to a year ago.

Thanks a lot, guys.

Our next question comes from the line of Ken Hoexter with Merrill Lynch.

Please go ahead with your question.

Great.

Good morning.

On your preannouncement, I guess, just maybe a month ago, on December 19, it looked like you lowered the range to $1.70 and $1.80 and here you are posting above.

I just want to understand what happened in the last kind of two weeks that surprised you on the upside, just given that volume seemed to have continued to come in weaker in those last few weeks, thanks.

Rob mentioned the overall productivity, and costs came in better.

We had done better in real estate, a small insurance settlement.

But I tell you, we were sitting, as I mentioned, in the end of November, with our volume up 2.5%, and quite honestly we were feeling very good about our guidance and within about a two-week time line, that thing turned from turned turned from volume up to just about flat.

When you look at the numbers here, the real driver was fuel.

We had enough, I think potential to deal with winter weather.

You have winter every year.

And we had enough I think momentum to deal with the weather issues, but fuel really caught us.

So I don't -- I understand we're only two weeks out, but to just give you some perspective on the volatility in this business, on a two or three-week time line.

Rob?

That's exactly right.

A penny here, a penny there, but the big driver in terms of the Delta that finished strong for us in the quarter was on the cost side.

Productivity came in strong.

And as Jim mentioned, there were one or two items that came in a little earlier than we anticipated, minor insurance settlement, a minor real estate transaction came in a couple of weeks earlier than planned and you add it all up it pushed us above that revised guidance.

Great.

And if I can just delve into, Rob, on some of the commodities, if we look at auto, chemicals, intermodal, yields were stronger than some of the other commodity bases.

Were there more contract renewals or anything else we can highlight as to what would be driving that pricing a bit stronger than some of the others?

And then while we're talking about that, to stick on the coal side, did I catch that you said you're going to either start exporting more PRB coal out of the West Coast, or have you ever started to see that demand hit?

I'm -- it seems like that is a newer potential growth area for you.

Jack, why don't you take that.

Ken, we did have a couple of legacy contracts on the intermodal and autos world that renewed last year that provided a little additional upside there for us, and actually chemicals as well.

So I think, some of the legacy stuff gave us a leg-up on some of those areas.

We are looking at West Coast exports, we're looking at moving some coal right now, out of Utah, moving it over to Long Beach, and testing that, and see how it works out.

Right now, it is not a big issue for us.

It is not a huge opportunity.

But would he have to be very careful and -- but we have to be very careful and watch how the international markets play themselves out and how well that works for us.

Of the 6% that renewed this year, is there any particular commodity group that you should see it?

We have some coal business.

We've got some autos business.

We've got some intermodal business.

Those are really kind of the top three.

And I think if you will recall from some of our earlier presentations, those are the places where we have the greatest opportunity in terms of legacy contracts.

One last I guess technical question for Rob but on the other income I think you threw out a 50 to $75 million number and I'm just wondering why you would look that to be down from the 100 plus million dollar run rate you've had the last three or four years.

It is just the real estate transactions we see in front of us as opportunities.

All right.

Thanks for the time.

Our next question comes from the line of Thomas Wadewitz with JPMorgan Chase.

Please go ahead with your question.

Good morning.

Let's see.

I wanted to see if you could give a few thoughts on the kind of peer price or effective price that you would expect to get in 2008.

I think Jack's comment implies you got about 6%.

That would have been effective price in the fourth quarter.

And I'm wondering if that kind of pace is reasonable to expect in '08, and also what kind of visibility you have in terms of carry-through from '07, or contracts you've already signed up, how much visibility do you already have to pricing in '08.

Tom, when you look out next year, core price, that excludes fuel, we're looking in that 5 to 6% range.

There are two primary drivers there.

One, our legacy contracts, as we've talked about, two, our service metrics continue to improve, which brings some value, we're seeing some direct connection there in terms of our ability to get some price for the value of the service.

The wildcard obviously could be volume an the economy, where you could see a little bit of softness in some areas, and overall, Jack, our, right now, when you look at probably what is locked in, I think we're in that probably -- a little less than half, 40, 50%, is what we've already really have on the books so far.

Jack did we miss anything here?

Sounds good to me.

And I guess a subtlety within the way you're looking at price, are you including -- are you rebasing the fuel surcharge level, moving that up, in your contracts, that you resign, and if are you doing, that are you included this that in the peer price?

It is kind of a technical thing but just wondering what you're doing with that and how you're viewing that.

The re-basing of the fuel surcharge is not included in what we target ourselves for a core price improvement.

Are you doing that though?

Are you taking the baseline level from, 25 a barrel to 50 a barrel or something like that?

I know do you it in highway diesel, but the equivalent?

It is pretty situational.

For the most part, that is the direction we're going, Tom.

But we work with customers, and we work on each individual contract, and the competitive situations to determine how we lay out the fuel surcharge.

Okay.

On head count, you have had some very good traction in the third quarter and fourth quarter, and head count reductions, and I'm wondering how you look at that in '08, should we expect another two quarters of, call it 2.5, 3% reduction in average head count?

And then maybe that slows down in the second half?

Or how would you look at the head count in '08?

Tom, we expect increasing productivity per employee this year.

Rob had mentioned our nonoperating forest levels were lower.

We have under way an initiative called -- or looking at organizational effectiveness, we continue to make some good progress this year, really working through really our overall cost base.

Again, part of this will be a function of volume next year.

We should be able to absorb volume with the current force count that is out here, but again, you will see increased productivity.

I'm not going to give you a projection here right now.

We've got a lot of opportunity.

And I think you will be pleased to see the results.

How much was the nonoperating change and when did that take place?

It was about 300?

About 250, 300, nonoperating head count jobs, and as Jim mentioned, something we're very focused on, as you would expect, very focused on ensuring organizational efficiency and effectiveness, and we touched about 250 to 300 nonoperating jobs as part of that process and will continue that effort.

Was that impact primarily starting in the third quarter or was it earlier than that?

Second half.

Second half?

It is about 3% of our nonoperating force levels.

I think today we have to be careful on -- we can count head counts.

This business, we know it is pretty easy to go out and cut jobs.

What we got to do is make certain we maintain enough surge capacity when business does come back strong that we can handle it efficiently and you take it out at the right places so we're working very hard at taking a look at really every position in the company and ask ourselves the questions what is the value, and can we do it better, and can we basically eliminate the work in a lot of cases, so it is a -- we've been working on this over a year, on the organizational effectiveness piece, and I'm real excited about some of the things that we see on the table for this year.

Okay.

Just one last one.

I will turn it over to someone else.

You talk about the IMC or I guess it was truckload business in intermodal where there is a contract that you lost.

It was unclear to me whether that was a loss to your primary rail competitor or whether it was just loss that was converted back to truck.

And , if it was a loss to a rail competitor, does that indicate any change in discipline on the margin or is that, really just a small thing that is

Overall, Tom, we lost the business.

I'm not exactly sure where the customer will decide to put that business.

Overall, it doesn't change my outlook on the opportunities that we have for pricing in the intermodal world or for any of my other businesses.

But it is not an example of your competitor, losing a little discipline or anything?

I have no idea.

You will have to -- I don't know how to answer that question.

Okay.

All I know is we lost it.

I don't know where --

But if you don't know if it is truck or rail.

That's great.

I appreciate it.

Thank you for your time.

Our next question comes from the line of John Larkin with Stifel Nicolaus & Company.

Please go ahead with your request he.

Good morning, gentlemen.

Thanks for taking my questions.

The lag on the fuel surcharge, which you said in many cases is as much as two months, is there anything that can be done to bring contract renewals or perhaps that side of the contract renewals perhaps to short continue up?

It seems like an extraordinarily long adjustment period given the current volatility in fuel prices.

We work with our customers in terms of their ability to process changes in the rate structures.

Some contracts do a little bit better job.

Others are longer.

I would keep in mind though, it also works the same way when prices go down.

And while we took the pressure in the fourth quarter and the hit in the fourth quarter, as prices move, now, if you have -- if prices are continually on an upward trend here for the foreseeable future, then we're going to lag behind in the quarters, but we look at right away and work with our customers, and you know, do what is best both for -- for both parties.

Thank you.

One question on the construction up in the PRB.

You've indicated, I think Dennis did, that the fourth main line is under way now that the third main line is completed.

Can you give us a little indication as to how long that project will take and the impact it might have on operational efficiency up in the PRB?

Dennis, you want to take that?

Yes.

John, principally what we're addressing is the great territory with the load, so I can just tell you this, that the Powder River Basin, the efficiencies up there will not be impaired, nor will our loading capabilities as a result of the construction.

And it is going to be a phased approach that we're working with the VNSF on to time out, but rest assured, it will not, and we've seen that this year, even with construction of a third main line, will it impact our ability to load out the trains on a daily basis.

Is that line going to extend the entire length of the joint line ultimately?

Hopefully the demand will take us to that point, what we will need to do that, but right now, we're just adjusting the first areas of critical need.

It will probably follow the path of what we did with the third main line, coming up Logan hill, with the loads, to accommodate the great territories, and make sure we have adequate ingress and egress capabilities to the south end of the mines there, so that's where we're starting first and then we will go from there.

Thank you.

And just one final question before I turn it over to somebody else, regarding the labor contracts, are there any that are under negotiation or that expire here near term that we need to be at all concerned about?

Well, the major contract that is yet to be finalized is the UTU, which are about a third of the employees in the industry.

Negotiations are currently under way.

I'm hopeful that we can get a deal done pretty quickly.

So sometime in the next quarter or two, you will have to hammer that out?

We will see.

They are talking right now.

Thank you very much.

Our next question comes from the line of David Feinberg with Goldman Sachs.

Please go ahead with your question.

Good morning.

Good morning, David.

One housekeeping question.

In the first quarter, you talked about the casualty expense reduction leading to a $30 million head wind.

Can you just remind us the third quarter number as we model out '08?

Rob?

Third quarter was 47.

Thank you very much.

And then with regard to your '08 volume outlook, the plus one to the negative 1% range that you've outlined, I want to understand what the sensitivity is there.

You talked about the six businesses that you serve, and two of them being challenging, autos and industrials, I'm just trying to understand the difference between negative 1% and plus 1%, is that just a difference in those challenging businesses being more or less challenging or is it across the whole broad spectrum?

Maybe a little bit more color about where the sensitivities are to the economy or to your outlook by business.

Well, as Jack had on his one slide, energy and ag are not highly impacted by the economy here.

So we think the demand there will be pretty strong going forward.

In the middle where it is a little more of a toss-up, we had chemicals and intermodal.

And that one clearly, you're not assuming a significant falloff in the economy.

We're assuming on the bottom ends a pretty slow economy, but not a major falloff there.

And then on the other side, where it is a real question mark, is the timing of the industrial products and autos.

It is not as much a science as it might appear to be.

We obviously can do better with a little bit stronger economy.

Obviously if the economy really turns down, it is going to be worse than the minus 1%.

Okay.

Thank you.

Okay, David.

Our next question comes from the line of John Carsonas with Citigroup.

Please go ahead with your question.

Good morning.

I want to talk a little bit about intermodal and obviously, your international customer, line of companies are also feeling the high effect of fuel prices on the cost side.

Do you get the feeling that it is getting tougher and tougher to renegotiate these contracts given there is more push from them?

Well, there is no -- no customer is ever going to thank you for a price increase and they are tough, tough negotiator, particularly the intermodal guys who can offer pretty big book of business out here, and my view, though, is when you look at the returns on that business, we've got to make significant progress, and we, as Jack mentioned, we've lost some business in intermodal.

If I can't get the returns, we're going to have some challenges.

But I think when you really look at, if the service is there, it is the best value and the best option they have long-term.

So you think that we're not here in a shape where(inaudible) Do you think that is is a longer-term issue or just because fuel prices are higher today?

I think overall, John, when you look at the eastern port situation, just kind of step back and you look at 2007, an the West Coast imports were down about 3.5%.

The East Coast imports were up about 7%.

That was a very unusual occurrence for us.

I think part of that might be attributable, and this is speculation to some extent on my part, but also some indication from customers is 2008 is an ILWU negotiation year and remember the last time that, 2002, I think it was, that that contract got negotiated, there was a lot of port disruption on the West Coast, a lost customers were very concerned, so I think they took 2007 as an opportunity to redistribute some of their business overall and prepare themselves so they're not got all of their eggs in one basket as they look in 2008.

I do think overall the market international in 2007 was only up about 2%.

Our forecast for 2008 thinks the overall market is probably going to be more like 4 to 5% this year.

So we will see a little bit of a stronger market.

And hopefully, if the ILWU contract negotiations go a lot smoother than the last time, we will see some strength in that business this year.

That's all I had.

Thanks.

Thank you.

Our next question comes from the line of Randy Cousins with BMO Capital Markets.

Please go ahead with your question.

Morning.

Morning, Randy.

Jack, I wonder if you could talk about Blue Streak, how it is developing, what the prospects are for '08, and then as well, you know, one of the big issues for the container companies, repositioning empties, I saw the L.A.

statistic, the export numbers are going up quite dramatically.

What opportunity is that creating for you and how do you see a better balance in terms of in versus out evolving and affecting your business?

First of all, Randy, Blue Streak, and in particular, our Shreveport Train with the NS is doing quite well.

The customer receptivity is good.

Operations has done an outstanding job of keeping that train on time and running and so we think there is some really nice growth opportunity for us in that market segment.

In terms of the positioning and the empty containers and those kinds of things, actually, as we have renegotiated our legacy contracts on the international side, we have put provisions in there that require balance.

And that has helped a lot in terms of the operating department and train operations and how we move equipment back and forth across the network.

So we're seeing our balance improve considerably, certainly the fact that the import dollar, that the U.S.

dollar is low right at the moment, is kind of inspiring more, or facilitating a lot more export business for us, that improves that balance as well, it gives us greater efficiency and greater profitability.

So it is kind of a win-win all the way around.

Okay.

Second question has to do with your chemical business.

I think you guys mentioned it, it is a one franchise that has volume growth all through the year, and obviously, you've got it in your sort of neutral category, it would seem to me that fertilizers and potash and that kind of stuff would still be an area of fairly significant growth.

Any reason for your cautiousness that are sort of company specific or facility specific or is it just the economy that you're worried about in terms of that chemical business.

It is entirely economy.

In fact, we have a couple of new facilities coming online that should provide us some growth.

If the economy stays with it, and the anomaly for us has been, that our plastics business, and liquid and dry have stayed relatively strong, and they have tended to follow historically more of the pattern of the automobile business and the construction, and they're bucking that trend.

And again, part of that, I think, is the lower dollar, part of it is that our chemical industry is more depend on natural gas and their competition in the world markets are dependent on oil and you see the humongous run-up in the oil prices but natural gas has been relatively stable so it has given them somewhat of a competitive basis and it is hard to guess if that were to turn and particularly if the economy were to nose dive from where it is today so that's where my caution is there, is entirely on the economics.

The last question just with reference to productivity, if we used GTM's per employee as the metric, I guess Jim, you kind of indicated that productivity would sort of match with unit cost growth, so does that imply a sort of a 3% increase in GTM's per employee, and then I guess what I want to get is some sense of leverage so if the volumes start to come back, does that mean we're looking at 5% GTM's per employee?

How should we think about this?

Well, Randy, I think -- I hope we do see good volumes coming back here, and we will see very nice leverage on the business.

There are two things you look at.

The simple measure is gross to miles per employee, and the other measure you look at is our operating improvement and also our overall unit cost that we can drive.

So, Dennis had mentioned earlier that we have put a strong focus, and he mentioned on building train size.

That not only improves your productivity, but it significantly improves the productivity of the assets locomotives.

So we have upside on productivity if the volume moves up.

But in terms of sort of GTM's per employee, obviously if we have flat volumes and we have unit costs up, should we still be thinking about 2 to 3% GTM per employee growth?

And then if the volumes come back, even more leverage?

I don't think that is unreasonable.

Okay.

Great.

Thank you.

Our next question comes from the line of Jason Seidl with Credit Suisse.

Please go ahead with your question.

A couple of quick questions.

First you mentioned a small insurance settlement.

How much did you benefit from that in the quarter?

That was a couple of cents.

Like 7 or $8 million.

Okay.

Thank you.

And as we -- as we're in 2008 here, what percentage of your businesses already have pricing locked in.

I said a little bit earlier Jason, right now the visibility, we have a little less than half, 40, 45%, something like that.

40 to 45%.

And then you have an additional 6% rolling over from legacy?

Well, that would include the legacy, some of the legacy contracts we've already negotiated.

Okay.

And that's good.

If I can get back to your carloading growth assumptions, now obviously you said the first quarter you explained yourself a little bit, but I would assume based on one of the other analyst questions, that 4Q should actually be easier come through with what the weather did toward the end.

Is your outlook for the full year just conservative based on the economy?

It is.

The economy, and although you had mentioned first quarter, I think also, keep in mind, February, you get the most snow in February, in the U.S., but we're being cautious in the economy.

It is hard to see visibility right now.

We've had a heck of a swing even from four or five weeks ago until today, and while some of it was weather, we did see production shut down.

We saw plants that extended their holidays.

And so we are being cautious here.

Okay.

And in relation to Washington, any chance that the stimulus package could have a rail tax credit moved into it?

Well, we've got -- we're working on the proposal as you know, and we will have to see how it works.

My biggest concern though is when you think about investment, is we need long-term solutions.

But we will see.

I think the discussion is good.

It is pretty -- we have not seen really any disagreement from any member when it comes to the need for expanded investment and transportation infrastructure.

And we can -- these are good jobs, they're local in the communities, and so we will see what happens.

Okay.

Sounds good.

Appreciate it, Jim.

Our next question comes from the line of John Barnes with BB&T Capital Markets.

Please go ahead with your question.

Good morning.

Jim, as you talk about investment tax credit, or bonus depreciation, or something like that, given your outlook for capital spending this year is flat with '07, if some of that legislation got passed, what kind of magnitude of change would you be looking at in your CapEx budget?

John, overall, the industry has said it could be maybe 15% plus.

But again, you have to look at the location of the products, your ability to get the projects mobilized that are out here, and the returns.

When you sit down and look at, it I've got a long list of capital projects that exceed what we spend, but what we will do is work backwards to make certain, what does it do to the return, and our assessment on the performance, so, overall, it could be up to 15%.

Okay.

And a lot of discussion about head count, but if I go back and look at the downturn in '00 and '01, the whole rail sector got a little, a little over zealous in terms of head count reduction, and a lot of the rails came out of that downturn and when volumes spiked they really didn't have the man power for at least a couple of quarters.

How are you guarding against getting too aggressive on the head count?

Are you -- I can't remember, did you guys actually in '00 and '01, quit hiring people, or completely, in this time, it is a matter of continuing to train people but let attrition work its way out a little bit more?

How are you balancing that make sure you don't get short-handed should volume -- you don't get caught short-handed should volumes materialized.

We didn't hire but we were offering buyouts and those days are over.

As you know with UP, we learned a pretty hard lesson and we remind ourselves of that every time we start talking about resources here.

I think the problem is potentially greater because of the acceleration of attrition in our industry.

We lost last year, through attrition, almost 4,000 employees.

We project again this year another 4,000 employees that will be leaving the industry.

We are being very disciplined in terms of how we look at our surge capacity.

And quite honestly, as I said earlier, you can cut a lot of jobs, this industry, and they're famous for it over the years, but we have clear guidelines, analysis, where we are keeping that surge capacity.

Okay.

And if I look at head count, and with the assumption that volumes are pretty flat in '08 with '07 levels, and therefore, head count is -- head count on the operations side, let's assume is flat or maybe slightly down, even if it is flat, are we going to see labor savings as a result of, 4,000 employees, going through the attrition process?

I would assume, or longer standing more expensive employees, being backfilled with -- I guess what I'm asked is, could you see flat head count and still see labor savings, without a necessary big jump in volumes and the productivity gains?

Can it just be pure cost reduction as a result of lower cost labor and those type of things?

You need to factor inflation into your numbers in terms of what you look at on here, but we will see -- again, I think we've got a very good opportunity in '08 in terms of continuing to show productivity.

Beyond the operating areas.

And -- but again, we want to be smart about it.

But you will see good productivity.

Okay.

And then lastly, just as you look at, you made some comments on the regulatory and legislative agenda that is out there, and talking about when they may get back to focusing on the rails, and are you concerned at all about '08 as being a big year for rail re-regulation, or legislation, or is the likelihood of the elections, it takes it off the table in '08 and it makes it more of an '09, 2010 issue?

I am going to take it very seriously whether theres is an election or not going on.

We are going to be basically in Washington telling our story about the need.

I think the Cap M example that came out of the SGB is a good example where the SGB listened to both parties and quite honestly they listened to the railroad industry in terms of some of the calculations.

So we're going to continue to be active.

You can't take your eye off this thing, because of the potential.

When you get to the second half of the year, and people are looking at the elections, you may see a little bit less focus, but we're going to continue to be in front of them for a long time.

And how quickly do you think the rail industry makes a proposal on, the replacement value discussion, I think they put that on hold until you guys came back with a firmer kind of proposal, how quickly do you think you present the -- the industry presents something to the STB on that?

I think right now, maybe first half, sometime, of '08.

We want to -- it is very complicated.

There are a lot of different approaches out there.

We want to make sure we understand the long and short-term implications.

But it clearly is -- this industry, do the math, replacement costs on our capital investments are significant.

So we're going to make certain we think true it in detail.

Very good.

Thanks for your time.

Nice year.

Thank you.

Our last question comes from the line of Gary Chase with Lehman Brothers.

Please go ahead with your question.

Good morning, everybody.

Good morning, Gary.

Just a couple of quick ones for Rob, and then one for Jack.

The first one is, I presume that the 20 million weather impact from the fourth quarter is predominantly lost revenue.

Is there an assumption that you will be able to recapture some of that moving into the first quarter?

You're right, the bulk of that is lost revenue.

And as Jim indicated earlier, maybe a little bit in grain business.

But not a significant portion of that.

A majority of it was in our energy business, coal.

And then if our calculations are accurate, it looks like based on where we are right now in the energy markets, you would have a modest amount of tail wind from the timing lag on the surcharges in the first quarter.

Is that -- are we looking at that the right way?

About $0.10 versus a $0.20, $0.25 head wind in the fourth quarter?

Right now, I would say no.

We're paying -- we're paying around the 2.68ish-level still, so with that kind of price, there is no tail wind.

We have to see prices moderate here, and rather quickly, to get the benefit in the first quarter.

The surcharges are pretty close in those areas to recovering the cost.

Although keep in mind we don't recover 100% of fuel.

Right.

And then for Jack, actually on that topic, of the 6% of these contracts, the legacy contracts that are rolling during the course of '08, can you give aus little bit of flavor for how many of those have fuel recovery mechanisms embedded within them?

So in other words, on the 6%, how much of that do we need to bring up not just for core pricing, which is obviously changed a lot, but also for fuel recovery, versus just core pricing?

Okay, Gary, that is a real test.

One for sure had a fuel surcharge mechanism in it.

And I'm just trying to think.

The other ones, I don't -- well there is another one that did have some fuel recovery.

Some of them had [RCAF] kinds of increases which really isn't a fuel surcharge recovery but I think you're probably looking at 30 or 40% of it had some form of fuel surcharge in them already and 60% of them did not.

That's just kind of off the top of my head guess.

Okay.

That's clearly going to make a big difference.

And just lastly, for you, Jack, you said there was a lot of mix impact in the industrial business.

And that masked some of the true pricing progress that you had made.

Just curious, for some flavor, on what that true progress actually was.

I think the industrial products world came a lot closer to my average price increase for the business than what their actual results would reflect, because of the mix impact.

Lumber versus stone.

Yes.

That would be a good example.

The average per unit on a lumber move is much higher, again length of hauls can be part of the issue, and on stone move, it is is much lower.

And we should think of that as core, right?

I mean not, you know, in other words, you said six was about your core price change.

That's right.

Okay.

Thank you very much, guys.

Okay.

I would like to hand it back over to management for some closing comments.

Well, thank you, everyone, for attending our call this morning.

We, as I said, have some challenges this year, but we're feeling confident about our ability to continue to make progress and record another record year for Union Pacific.

So thank you.

And we will see you in three months.

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

You may disconnect your lines at this time.

Thank you for your participation.