聯合太平洋集團 (UNP) 2008 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Union Pacific third quarter 2008 earnings release conference call.

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

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

(OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded and the slides today will be user controlled.

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, everybody.

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

Joining me today are Rob Knight, our CFO; John Koraleski, Executive Vice President, marketing and sales; and Dennis Duffy, our Executive Vice President of operations.

Today, UP is reporting results.

Third quarter earnings grew 38% to $1.38 per share.

Solid pricing, our fuel cost recoveries and strong operating productivity all combined to produce record quarterly operating income of $1.2 billion, up 21%.

Although the economic environment has clearly weakened during the year, we have maintained our focus of running a profitable railroad and delivering strong results for both our customers and shareholders.

UP's franchise diversity provides us with a solid base load demand, as evidenced by the 1% growth in revenue ton miles during the quarter.

Our business mix was favorably impacted by the strong demand for bulk commodities, which brings with it high-density, long-haul moves.

With coal, in particular, we set a number of Southern Powder River Basin loading records in the quarter.

Capital investments in the joint lines, UP's train size initiatives and coordinated efforts with both producers and receivers all contributed to these achievements.

Third quarter car loads despite a 5% year-over-year decrease.

were still the strongest over the year.

Although most of this weakness is clearly related to the the economy, about one point of the decline can be attributed to the Gulf Coast hurricanes.

Operating revenue of $4.8 billion was a quarterly best of 16% on the strength of both price improvement and fuel cost recovery.

As we announced in September moderating fuel prices were also good news in the quarter.

Rob will walk you through the details, but for Union Pacific lower diesel fuel prices help our bottom line, since we don't recover 100% of the higher costs.

Operationally we had a very good quarter.

Despite hurricane disruptions we set quarterly operating bests and attained our highest quarterly network velocity in five years.

Better network efficiency translates directly into lower operating costs and increased customer satisfaction.

With that I'll turn it over to Jack to talk to you about our revenue results.

Thank you, Jim, and good morning.

Our strong price improvement in each of our six businesses drove a 16% increase in freight revenue to a record $4.6 billion, overcoming a 5% decline in volume resulting from continued economic softness and disruptions caused by Hurricanes Gustav and Ike.

Five of our six businesses set best-ever marks for revenue, with only automotive failing to set a new record, and at the same time we had another great year-over-year improvement in customer satisfaction.

In the third quarter we continued to grow in markets tied to the global demand for energy and food.

but two hurricanes and the weak demand in some of our key rail markets more than offset that growth leaving our volume down 5% for the quarter overall.

Economic softness continues to be most evident in the automotive and construction-related markets along with the international segment of our intermodal business.

Production cutbacks by the largest auto manufacturers led to a 25% drop in vehicle shipments and our parts volumes were down almost 22%.

Industrial products volumes drop 3% below last year.

Our steel shipments grew 23%.

and markets related to energy demand like frac sand, pipe and wind components remained strong but still it wasn't enough to overcome the softness led by a 24% decline in lumber volumes and 9% falloff in rock shipments.

While all of our business groups saw some impact from the two hurricanes the impact to the chemicals business along the Gulf Coast was most significant.

In fact, without hurricanes I think chemical business likely would have come in flat compared to a year ago.

The two groups that have been the strongest all year grew again this quarter.

Coal demand remains strong and a 38% increase in ethanol and DDG set the pace for our ag products growth.

During the quarter we began to see whole grain volumes lose a little of their strength, with shipments down about 1%.

Most notable decline was in gulf wheat exports, which were off 20% from last year's record-setting level.

Going forward we expect that world production, ocean freight spreads, the shifting value of the dollar, lower feed -- livestock numbers and global economic problems are going to cause our grain shipments to fall back from 2008's strong market, maybe even to slightly below 2007.

This morning I'd like to take a closer look at our chemical, intermodal and energy businesses.

Although chemical volumes declined 6%, a 20% increase in average revenue per car drove a 12% increase in revenue.

The two charts on the left highlight the impact the hurricanes had on the two largest segments of our chemicals business; plastics and liquid, and dry chemicals.

The falloff in September comes from not only the disruption that occurs as the storms came through, but also the aftermath as we waited for commercial power to be restored and production facilities are brought back online.

Customer recovery from these storms is still not complete and we expect to lose probably as much as 2,000 cars here in the fourth quarter, mostly in plastics where plants are not yet back in full production.

Beyond the clear impact of the hurricanes on September volumes both liquid and dry and plastics are also starting to see some softening due to their ties to housing, consumer markets and automotive business, and higher oil prices are impacting our asphalt and diesel volumes.

On a brighter note, global demand for food continues to drive growth in fertilizer with our volume up 6%.

Intermodal revenue grew 9%, with a 19% improvement in average revenue per unit more than offsetting a 9% decline in volume.

As I indicated earlier, the decline in intermodal was driven by weakness in the international segment, where a 14% drop in volume was only partially offset by the 2% growth in domestic.

Significant portions in the international intermodal markets are tied to housing and automotive and the economic conditions in those two industries, along with reduced consumer spending, have resulted in a decline throughout the year in imports from Asia.

Also influencing the comparison for international is the evolving status of our legacy contracts.

Last year favorable pricing in the remaining legacy deals in our international business actually attracted volume.

As some of those deals have now been repriced in 2008, portions of that business has shifted off Union Pacific and that's pretty much consistent with our focus on improving pricing and returns and we saw that reflected in the intermodal group's third quarter results.

On the domestic side a contract loss going into the year continues to impact our comparisons year over year.

Offsetting that loss was a 29% increase in our EMP volumes with IMC's and some share gain from the highway.

We also saw volumes improve in our domestic legacy contracts.

With continued strong demand for coal a 3% increase in energy volume combined with a 24% increase in average revenue per car to drive revenue up 28% to over $1 billion, energy is the first of our commodity businesses top that mark in the quarter.

Coal moved at a record-setting pace from the Southern Powder Fiver Basin during the quarter.

The chart on the upper level highlights the strong trains-per-day performance throughout the quarter.

Network productivity and efficiency translated into the best-ever quarter for trains for carloads and tons, with tonnage up 7% from a year ago.

Unfortunately, difficult mining conditions and poor coal quality led to a 7% decline in Colorado-Utah tonnage.

Network performance was the lone bright spot for this segment as we set best-ever tons per train.

We expect Colorado-Utah growth to be back in the plus side for the fourth quarter, a comparison that's going to benefit from last year's relatively low tonnage and we expect the full year for this segment to be up slightly from 2007.

For the Powder River Basin we still expect growth again in the fourth quarter, even against last year's record tonnage, and we still think that the full outlook for the Basin remains unchanged at 5%.

Strong service performance continues to translate into customer value, which in turn is leading to higher levels of customer satisfaction.

Customer satisfaction improved four points from a year ago, coming in at 83, which matches last quarter as the highest level since early back in 1995.

Now looking ahead to the rest of the year it's clear that we're not going to see any improvement in the economy.

Strong demand for energy remains one of the key drivers of our growth opportunities.

For our energy and our ag products group that means continued growth in coal and ethenol, although the pace for both may slow some from third quarter levels.

Ag's going to benefit from the recent expansion of our produce express service for perishables, a new train from California to New York which is providing the same great service customers experienced on the original Washington to New York train.

However, as I mentioned earlier, we expect grain volume's going to soften slightly from the very strong levels that we've seen so far through 2008, and with that, ag moves down into our mix demand driver's grouping.

With some softening of chemical segments that are tied to housing our chemical business plays out really depending on the expected strength of fertilizer and soda ash and how quickly customers can get back to full operations as they recover from the hurricanes.

Energy-related demand for frac sand, pipe and wind components is going to continue strong for our industrial products business, but steel has now fallen back to more normal levels, as projects and spending has slowed and weakness in housing-related markets continues.

Domestic intermodal should continue to hold its own year over year.

International intermodal will continue to run below last year and continued economic woes is going to keep our automotive volumes below year-ago levels, as well.

Put it all together and we expect overall volume in the fourth quarter to be down probably around 5% versus last year, which would put the full-year outlook at about down 3%.

Now, again, some pretty strong comps.

We expect volume to run softer than down five through October and November and then we're going to make up some ground in December where we were hit by storms last year.

As in previous quarters core price improvement, fuel surcharge are going to drive revenue growth despite the volume shortfall.

Based on what we're hearing from our customers and what the economic prognosticators tell us and recognizing that there's still a lot of uncertainty out there in the economy here's what we're currently thinking about 2009.

Right now it's pretty hard to see that much is going to change for the better in 2009.

Volumes are expected to be flat to down 2%.

Any improvement in market condition looks like it's going to be in the second half of the year, and the second half should also look stronger because comps are going to be lower, quite honestly.

Train shipments likely aren't going to match 2008's very strong demand and forecasts project vehicle sales and housing starts are going to decline slightly next year from their already low level.

In chemicals and industrial products the outlooks for commodities tied to weak construction markets are going to stay soft while those markets that have been strong are expected to continue.

Demand in all energy-related markets is going to stay strong, but we're going to face some pretty tough comparisons to 2008 in the coal business.

The costs and environmental advantages of rail are going to combine with our continued service improvement to create additional opportunities for conversion of highway traffic to rail across our business, especially in our domestic intermodal business.

The anticipated weakness in imports will result in international intermodal being slightly softer, but we still anticipate a peak season, which was a no show this year.

We think that'll reappear, at least to some extent, in 2009.

As a result of our renegotiated legacy deals and the built-in escalators we have, about 70% of our 2009 price plan will be in the market by the time the year starts on January 1st.

And with those pricing gains and improved fuel cost recovery we expect to see solid revenue growth again in 2009.

With that I'm going to turn it over to Dennis for the operating review.

Thank you, Jack, and good morning.

2008 story line for UP's operating team continues to be improvement and resiliency.

As this chart illustrates, we significantly increase network velocity year to date, despite a number of weather-related disruptions.

For the third quarter we made steady velocity gains coming out of the June floods, only to get knocked back again in September with the two Gulf Coast hurricanes.

Fortunately, our railroad did not sustain any major infrastructure damage from hurricanes.

The primary issue was the loss of commercial power needed to operate signals, crossing gates and switches.

But, as you can see, we again quickly bounced back from the storms and our network is running very well.

In fact, third quarter velocity increased more than two miles per hour over '07 to 23.7 miles per hour.

Year to date velocity is averaging more than one mile per hour faster and a 6% gain.

Beyond the velocity gains our network management initiatives, centered around the unified plan, flow control and strict inventory management, are continuing to drive further productivity and service improvements.

In the quarter terminal dwell was the best ever, 24.4 hours, and system inventory, at a little more than 300,000 cars, improved 4% in the quarter.

The last time our inventory was at this level was in March '03 when we were averaging about 171,000 seven-day car loads versus nearly 185,000 in third quarter '08.

Another key driver is our continued effort to improve train productivity.

By making our transportation plan more volume variable we continue to achieve train start savings relative to value.

For the third quarter year over year we reduce train starts by 5% and yard local starts by 4% on 3% lower gross ton miles.

These achievements are especially important considering the impact of the hurricanes.

Although terminal dwell time in both Houston yards spiked to over 90 hours coming out of hurricane Ike they were back to near normal within the week.

This demonstrates the resiliency of our network.

It's also a tribute to the coordinated planning and preparedness of the UP team in advance of the storm.

As a result, we were able to quickly restore rail service to our customers.

Better inventory dwell and speed translates to better freight car utilization, which measures the number of days between the originated loads.

Year over year our utilization improved 6% to a record 9.2 days.

Faster asset turns helps both UP and our customers lower their equipment costs and long-term capital needs.

Better performance in our terminals and across our main lines has added -- has the added benefit of driving better crew utilization.

As shown in the top right and bottom left, we improved both our recrew rate and our overall labor productivity.

A one-point reduction in the recrew rate saves us more than 100 train and engine employees.

Throughout 2008 we have reduced our hiring levels and our work -- and workforce as business levels have been somewhat below expectation and asset productivity has improved.

The overall train crew workforce will be down about 1,000 people year-end '08 versus '07.

Both our crew and locomotive resources have provide us with ample surge capacity during this year's weather events.

We are translating greater efficiency, whether it be freight cars, crews, train size, into a more reliable service product.

Jack showed you earlier that our customer satisfaction index at lower right is at record levels.

These metrics show good progress but we also have many opportunities ahead of us to further increase productivity and enhance our service.

We expect to close out the fourth quarter with the same momentum and improvement we've demonstrated to date; specifically, solid safety improvements, a network that is well resourced and resilient to delivering improvement service, our capital programs are on target and delivering the anticipated benefits, and achieving further service and productivity improvements by managing our cost structure to be more volume variable in the somewhat uncertain economy.

With that, let me turn it over to Rob for the financial review.

Thanks, Dennis, and good morning.

We'll start today with a look at our income statement.

Third quarter operating revenue totaled $4.8 billion, up 16% versus 2007.

Operating expense increased to $445 million, or 14%, primarily driven by a $349 million increase in third quarter fuel expense.

Also contributing to the higher expense was a $66 million increase in other expense.

If you recall that last year we reported a $47 million casualty expense reduction related to our semi-annual actuarial studies, so if you isolate the fuel and other lines ongoing operating expenses grew $49 million, or 2%.

Strong revenue growth and ongoing efficiency gains combined to produce third quarter operating income of $1.2 billion, a 21% increase.

UP produced very strong quarterly results, especially when you factor in the impact of the Gulf Coast hurricanes.

Lost revenue and higher costs related to the hurricanes took roughly $0.08 per share out of our third quarter earnings.

Revenue losses coming out of the hurricanes were somewhat less than what we had anticipated, saving us about $0.02 per share versus our September guidance.

Looking at third quarter freight revenue, we reported 16% growth to $4.6 billion.

Although our car load volumes declined 5% year over year, increased fuel cost recoveries and strong pricing gains more than overcame that deficit.

Driven by record high diesel fuel prices, fuel cost recoveries were the biggest contributor to the quarterly growth.

In addition, we are improving returns on each piece of our business, as evidenced by approximately 6.5% core pricing gains in the quarter.

The mix of business was also a factor, adding about five points of growth to the average revenue per car.

Increased agricultural loadings, which carry our highest arc, coupled with fewer intermodal moves, which have our lowest arc, were the primary contributor.

Turning to slide 21, compensation and benefit expense grew 3% in the quarter to $1.1 billion.

As we discussed in our second quarter earnings call costs in this line were pressured by the 4% wage increase that became effective for our union employees on July 1st.

There were also added costs related to post-retirement benefits.

And as you may recall, last year's third quarter expense included favorable one-time adjustments associated with the structure of labor contract ratification, as well as our long-term disability plan.

Offsetting some of these headwinds are ongoing efficiency related to both field and office personnel.

Greater labor productivity is evidenced by a 1% gain in gross ton miles moved per employee.

In addition, as you heard from Dennis, fewer train starts and lower recrew rates are helping to further reduce our crew needs as volume demand stays soft.

So altogether, comp and benefit expense is usually a couple of points higher sequentially in the fourth quarter.

We expect a somewhat smaller increase this quarter.

Turning now to fuel expense, total costs increased 44% in the quarter to $1.1 billion.

The good news is that since peaking in July, prices have moderated, averaging $3.70 per gallon for the quarter.

This saved us nearly $0.10 per share from our estimated third quarter fuel price of $4 per gallon.

The bad news is we still paid $1.38 per gallon more year over year for a 59% increase in our costs per gallon.

Although we did see some catch up on our fuel recovery lag we basically broke even for the quarter when you compare the increase in fuel prices over our benchmark rate to the actual recoveries.

As we look out to the fourth quarter we're assuming an average diesel fuel price of around $2.95 per gallon or so.

If that estimate holds we would be paying $0.33 per gallon more than we did a year ago for 13% increase.

Because we do not have 100% cost recovery higher year-over-year fuel prices are a cost fertile for us.

But as a result of the two-month lag in most of our programs we could actually experience an earnings tailwind if diesel fuel prices stay at the current levels.

Purchased services and materials expense were basically flat in the quarter, up only $2 million.

Cleanup costs associated with the Gulf Coast hurricanes increased expenses $11 million in the quarter.

In addition, increased usage and prices for freight car wheel sets added $7 million of expense.

Offsetting these items were proceeds from rail scrap and reduced locomotive contract maintenance.

Equipment and other rents expense declined 5% in the quarter to $326 million.

Increased asset utilization, illustrated by record freight car utilization as well as fewer shipments of finished vehicles and intermodal containers, all contributed to the year-over-year decline.

In addition, with less volume demand and faster asset turns we have returned excess leased equipment.

As I mentioned earlier, other expense increased $66 million in the quarter, primarily as a result of the $47 million unfavorable comparison.

We also had higher costs for property damage.

state and local taxes and utility costs.

Our third quarter operating ratio of $74.9% is the lowest quarterly ratio we have recorded post merger.

Over the last three years, we have taken more than 11 points off of our operating ratio.

As we have discussed before UP is driving this improvement through both yield gains and productivity.

When we talk about yield it encompasses both our strong pricing gains, as well as the continued expansion of our fuel surcharge programs across all of our businesses.

As legacy contracts renew we have the combined opportunity of increasing prices to a market rate.

as well as adding adequate fuel cost recovery mechanisms.

On the productivity side we must first produce a safe transportation product, but beyond that the efforts of project operating ratio have focused the entire organization on increasing efficiency and eliminating waste.

Coming into the third quarter we knew we had a tough comparison against last year so making this next step of improvement gives us great conviction in our ability to drive greater profitability in the future.

Moving on to the full income statement.

Third quarter other income was $2 million lower year over year, primarily as a result of lower gains from real estate sales.

Year to date other income totals $67 million, making it likely that full-year other income will be roughly $90 million to $100 million.

Quarterly interest expense increased $6 million to $130 million, driven by higher average debt levels in 2008.

Income tax expense increased $31 million in the quarter, or 8%.

Although our taxes are higher year over year the effective tax rate is nearly five points lower.

Last year our effective tax rate was higher at 41.3% as a result of new tax legislation in the state of Illinois.

Our 2008 rate of 36.6% was slightly lower than expected as a result of federal tax audits and state tax law changes, adding $0.03 to our third quarter earnings.

For the fourth quarter we are planning on a quarterly tax rate of roughly 38%.

Net income was a quarterly best at $703 million, up 32%.

Earnings per share increased 38% to $1.38 per share.

As a result of our ongoing share repurchase program, UP's outstanding share balance declined 4% in the quarter.

This repurchase activity is allowing our earnings growth to outpace the rate of net income increases, delivering more value to our shareholders.

As we approach the end of the year I'll give you a quick update on our capital spending.

At this point we think total capital could be slightly more than $3.1 billion.

Added capital costs as a result of the Oregon mudslide and midwest flooding will likely push us over the original $3.1 billion capital plan, assuming that all the other scheduled capital work is completed as planned.

In terms of the split between cash capital and leasing, lease financing is somewhat low this year at $353 million, primarily as a result of fewer equipment acquisitions.

During the third quarter we repurchased 5.9 million shares of Union Pacific common stock, returning nearly $445 million of cash to shareholders.

Since inception in January of last year we've repurchased almost $2.8 billion worth of stock.

Although we completed the initial 40 million share authorization during the third quarter we have the new 40 million share authorization that was granted by our board in May.

Our repurchase program gives us an opportunity to take advantage of today's low share price but, of course, we'll balance this with all of the corporation's cash needs to ensure that we continue to have solid liquidity, especially in light of today's uncertain credit environment.

In fact, let me spend the next few minutes talking about UP's current debt levels and our liquidity position.

Slide 29 illustrates UP's adjusted debt balances at the end of September totaling $12.7 billion, or a 44.7% adjusted debt to capital ratio.

This is in line with our targeted mid-40s debt-to-cap ratio and is consistent with our continued commitment to maintaining a solid BBB BAA2 investment rate credit rating.

Since the end of September we issued an additional $750 million of ten-year notes, which adds to that debt balance.

We then have $500 million in debt maturities rolling off within the next four months.

Between the proceeds from the recent issuance and the cash already on our books our liquidity remains strong.

We won't need additional equipment financing this year, as our program is already completed.

So we continue to be well positioned to meet key cash needs.

Finally, our liquidity position is enhanced by our $1.9 billion credit facility.

We have not drawn on this facility and we have no plans to draw on it, but we're glad to have it as an emergency backstop in these volatile times.

Looking out to our fourth quarter expectations it will again come down to our business volumes and diesel fuel prices.

As has been the case all year these two drivers are really the swing factors in the quarter.

As Jack discussed, our fourth quarter volume expectations are for about a 5% decline.

Quarterly volumes are currently running a little softer and we'd expect to see a continued downward bias in November against strong 2007 loadings.

But the month of December has an easier comparison as a result of last year's winter storms.

I mentioned earlier that our outlook calls for diesel fuel prices to average $2.95 per gallon for the quarter, which assumes oil at $80 or so per barrel the rest of the year.

Refining spreads are at historic highs following some of the gulf disruptions, so we are not seeing the full benefit of our diesel fuel prices from the lower crude oil.

We continue to see volatility in the crude oil market as investors speculate about the state of the global economy.

But if the downward trend we've seen over the last couple of months continues that could provide an upside opportunity for earnings.

Conversely, if fuel prices spike as they did last year it would clearly pressure the low end of our earnings estimate.

We also expect to continue the productivity momentum we have demonstrated throughout 2008.

In a challenging marketplace we have to be cost competitive and we are working daily to align our operating expenses with the business demand.

Given these expectations, fourth quarter earnings should be in the range of $1.25 to $1.35 per share, or growth of 34% to 45%.

With this we are raising our full-year 2008 expectations to $4.50 to $4.60 per share, or year-over-year growth of 30% to 33%.

Union Pacific is demonstrating substantial earnings power in the face of economic softness and high fuel prices, and we look forward to closing out a record year for our Company.

With that I'll turn it back over to Jim.

Thanks, Rob.

Before we open it up for your questions I'd lake to share our initial thoughts on 2009.

At this point it's clear that business demand will remain soft.

Our volume outlook of flat to down 2% assumes a pretty weak first half for 2009 with some strengthening in the second half.

Legacy contract renewals provide support to our core pricing plans, which remain steady at 5% to 6% for 2009.

Our productivity opportunities are ongoing.

We'll continue to balance our network resources with the business demands driving increased efficiency and service reliability.

And as Rob discussed, our liquidity and balance sheet are in good shape.

At this point, despite a tough economic environment, we expect to achieve low double-digit earnings growth in 2009.

Of course, there are a number of moving parts that will continue to play out over the next several months, but our earlier read on the year is still positive.

Our commitment to our employees, customers and shareholders is to operate a safe, efficient and profitable railroad regardless of the economic environment.

So with that let's open it up for your questions.

Thank you.

(OPERATOR INSTRUCTIONS) Thank you.

Our first question is from Tom Wadewitz with JPMorgan.

Please proceed with your question.

Yes, good morning.

Morning.

Jim or Rob, I just jumped over from the -- UPS had their call going on so I apologize if I'm going to ask you something you talked about in detail, but on the forecast you've got going forward there's a lot of resiliency in the business, despite some weakness in the economy, but what do you think the room for surprise is in that forecast?

What would be the drivers of surprise in that forecast, either to the upside or to the downside?

You think pricing can come in maybe better than you're expecting in the 5% to 6% and do you feel like the volume side maybe on the downside is conserve with that 0% to 2% or is there some risk that that might be worse than that range?

Yes, Tom, the wild card here really is the consumer and what happens in the economy.

We're, as we stated here, not assuming a real strong year.

You can -- and we'll manage accordingly.

I think we're going to be very cautious in terms of what we look at and our spending and going to be very aggressive in our operating productivity.

We've mitigated fuel here with our fuel surcharge program, but we're still not recovering 100%, so you see a continued falloff in fuel.

You might have a little bit of upside there, but it's just tough to -- we're going into the year with its pretty uncertain.

We're going to really watch our costs and be prepared if we see a little uptick to get it to the bottom line.

Your productivity trend has been very impressive, and it seems like perhaps even if you were worse than 2% volume, even if you were down 4% or so, you might be able to get into the earnings range you're talking about.

Is that -- is it fair to think that maybe you'd have some upside from productivity to offset it if volumes did come a little worse than you're expecting?

Well, Tom, again, I feel good about our productivity.

We've got -- as Dennis mentioned, we're still -- even with the quarter we had we're still recrewing over 7% of our trains.

That's good opportunity.

And again, the question will become one on if you have a more serious falloff in volume demand what does that mean for fuel prices?

They generally correlate with each other, so you could have some upside there.

We also have, I think, something that's a little bit different than we've seen in prior years, which is our attrition.

Historically when you had a sharp falloff in volume the only way you took labor costs out in a lot of cases was to do a buyout program.

Even with the slowing economy we're still to -- we'll still have good attrition, which we'll take advantage of if our volume falls.

Okay.

And the last one and I'll pass it along, You've had very strong focus on returns and I think a lot of discipline on taking rates up and you got the legacy contracts.

Are you seeing anything at all from your primary competitor that would indicate a little increased focus on getting some volume in the weakness, or do you think the competitive dynamic is still pretty similar to what it's been over the last year or two years even though the volume outlook has gotten a little more challenging?

Tom, I have to concentrate on Union Pacific here.

We're very focused on understanding where our returns are, the markets we should be playing in, and offering good service.

I -- we are going to keep the pressure on our team in terms of making certain the minimum returns are there when we look at our business.

And we could lose some.

We've lost some on and off, both in terms of business that didn't meet our return expectations, but we're going to focus on running our business and continue to increase our return on capital.

Okay, great.

Well, congratulations on the strong results.

They're very impressive.

Thanks, Tom.

Thank you.

Our next question is comes from the line of Adam Lawson of Morgan Stanley.

Please go ahead with your question.

Hi, gentlemen.

Thanks.

When I -- sorry about that, I'm getting an echo here.

When I look at the productivity trends and I understand it was a hurricane in the quarter, but outside of fuel, it looks like the unit costs performance on a GTM basis was not nearly as good as we'd seen the past few quarters here.

It looks like if you adjust for some of the one-time items it was probably a little over 4% versus flat over the previous few quarters.

Is this more of an anomaly or is it -- how do we think about that?

Is productivity -- are the productivity gains becoming harder to obtain?

As you lose volume, Adam, you're not going to match 100% in terms of unit costs.

I assume you're taking fuel out of that equation --

Right,

-- that's in here.

I would also take a look at what's happened with unit costs on a revenue ton mile basis.

Your actual revenue ton miles were up 1% in there, so you get a little bit better look out there.

Again, in our business if you have a sharp falloff in volume you're going to have a little pressure in unit costs.

I would, though -- keep this in mind, though, we still see good productivity opportunities going forward next year and we will manage our costs accordingly as we see volume.

It's just tough to get them out quickly when you see a sharp falloff.

All right, fair enough.

In terms of the mix impact it seemed like it was pretty big in the quarter and I know some of that is just the commodity mix, but it seemed like there was some ton mile, whether it was length of haul or tons per car, that really were a big benefit, too.

Can you give us any sense of whether that's just because of the hurricane or can some of that continue going forward?

I'll let Jack answer that one.

I think when you look at it overall you'll see that with our intermodal businesses being soft, when you see the bulk businesses increasing, when you see what the export business and things like that you can see that shift kind of manifesting itself into a very favorable mix in the quarter.

I think the fourth quarter our grain business is going to be a little softer here because of the shifts in some of our wheat and things like that across the country, but coal's going to continue to be strong.

Steel's kind of softening up a little bit, so you may see that mix impact decline a little bit.

You won't see quite as pronounced as what we saw in the third quarter.

Okay, great.

And then one just last one then I'll pass it on here.

In terms of CapEx for 2009 it seems like -- I mean, clearly everybody's worried about volume trends and I think, Jim, you sort of hinted at it.

Is there any thought about, hey, maybe we pull back some of the growth CapEx here.

We've had permitting issues anyway, but things like double tracking the Sunset Corridor, does that make sense in this kind of environment?

Adam, we're going to take a hard look at our capital.

What we need to make certain we do here is not lose sight of the long-term opportunities, which I absolutely believe are there, but we'll take -- we're taking a hard look at it.

Where we see maybe the slope of the line on growth isn't as strong here in the next several years we will take a hard look at it, but it's -- I do have a minimum commitment here on locomotives.

I've got the last year of a three-year program so I've got a one-year commitment on locomotives, 125 locomotives that, quite honestly, right now I don't need.

But part of that's our velocity that we're generating here.

But we're going to take a hard look at capital for '09.

Okay, great.

Thanks a lot.

Nice quarter, guys.

Thanks.

Thank you.

Our next question is coming from Edward Wolfe with Wolfe Research.

Please go ahead with your question, sir.

Thanks, good morning.

Morning, Ed.

Can you talk a little bit about the visibility into the legacy contracts?

I know you talked about what's coming up in '09.

Is there some visibility or some that you just have pretty -- you're pretty far apart and you have confidence that are going to go away that have a profitability standpoint it helps but that's in your volume?

Or from what you see pretty much there's nothing that's obviously not going to be resigned in '09 as it comes up?

Jack?

Ed, most of our legacy deals of '09 are done and we have probably no more than 2% coming up in the year itself before year end and the majority of that is going to be coal business.

We have lost some business, and the reason we've lost it is because in the old deals that we've done we did winner take all and we ended up with some business that, quite honestly, doesn't fit our franchise very well.

So we've lost some of that, but we're fine with the legacy deals that we've renegotiated.

They're locked in place, we got solid pricing, we've got fuel recovery, we got good escalations and we're feeling quite positive about our legacy deals.

Thank you.

And if I'm repeating something -- again, like Tom said, I was on UPS a little bit, I apologize.

Can you talk about coal expectations?

I saw what you talked about Colorado and Utah, but can you talk about the PRB and your sense of demand for coal going into '09, as well as your sense for the little amount of export coal that you're doing?

Sure.

I'll start with PRB.

Right now we see demand still continuing to be quite strong.

We're encouraged by some inquiries and some test moves going to the east.

We're also very excited.

We had the head of our coal team out in Prague at the Coaltrans Conference and the developing world looking for opportunities for Powder River Basin coal in places like Japan, where they don't want to be totally tied to Australia and some of those other places Indonesian coal has the same kind of burn characteristics so those are other markets.

So we're pretty pumped about the export side of the business.

Domestically right now our customer base is about where they want to be in terms of where they are for the year.

They're not really over supply.

We have a couple that probably have too much coal, we also have a couple very large ones that'll take all of the coal we can get them.

So in terms of the overall, our knowledge of stock piles and working with customers we're in pretty good stead there and we think it's going to play itself into the 2009, as well.

As I said, we did have a couple of losses from this year just in terms of the fact that our franchise isn't probably as good as the other folks are, but that'll play itself out.

We'll be fine.

The disappointment for us was Colorado-Utah.

We went into the year thinking that Colorado-Utah would be a plus 4% or 5% kind of an idea as the export demand heated up, but they've run into some really tough mining conditions and they're working really hard to solve that.

So I think we'll probably be more in the 2% or 2.5% kind of world for that export business out of Colorado-Utah.

That's also, though, a very strong demand.

That's that 11,000, 12,000 btu coal that Japanese steelmakers and things like that would be happy to have as a source, so we're working with the mines and doing everything we can to help support them in terms of delivering that coal to market.

So, think the outlook for coal is very strong.

We think it's going to continue next year, as well.

And then in the zero to negative two to total volumes, what's the total coal prognosis?

I'm guessing it's above that.

We think coal's going to be relatively flat year over year.

Can you talk a little bit about -- I think it was, Jim, in your general comment where's you talked about you expect for '09 that there'll be some strengthening in the second half.

When's that based on?

Is that just hope more than anything at this point?

(LAUGHTER) You always have hope, I guess, but at the end of the day here -- we're not expecting a real strong recovery.

This isn't going to be a sharp jump.

We just believe you get towards that latter part of the year we'll probably see a little bit of an uptick.

So don't read into that that that is a strong recovery.

You also have cycle and comps.

I'm not certain how much lower our lumber and construction business can get.

It's down almost, I think, from the peak probably 60%.

You look at your autos -- finished vehicle business we're down 25% this quarter.

You're running a -- annual vehicle sales rate I think is around 11 or 12 million that's out here.

So again, don't think of it as a sharp uptick, we're just simply looking at probably some uptick.

Fair enough.

Does the buyback slow down in your mind at some point if the credit market uncertainties continue or are you pretty comfortable with the pace you're on?

I'm very comfortable with where we're at here.

Again, our liquidity position's in good shape.

We had access to the capital markets, a little bit higher cost than what we wanted in terms of what we're paying, but the business is generating good cash.

We've got flexibility in terms of our capital spend next year, but with the stock sitting at $57 a share we're going to continue to buy stock.

The good news is it's opening higher than that.

The Rail Safety Act, now that we know what the beast looks like, have you had a chance to look at between positive (inaudible) control, reduced limbo training, where do you think are the areas that are going to impact you and is there offsets in products?

How do you think about these costs going forward?

Dennis, you want to take that one?

Yes.

Ed, we don't think there's going to be a major impact to us on the Rail Safety Bill.

Obviously there's some things.

We're going to have to adjust our operations accordingly.

The limbo time issue is one that we'll have to continue to work with the organizations on, maybe possibly restructure some of our crew districts.

We'll take a look at that.

That's not going to be a major impact to us.

Obviously, the PTC thing is going to be a challenge to us.

The funding on that is going to be critical.

We'll take a very measured approach to that in terms of priority.

We have our two pilots already in place that we'll be running to fruition in '09.

One of them is up in the coal field across Nebraska and Iowa and the other one's up in Washington in dark territory, so that's going to help us really get a good gauge on the benefits here.

We think there's benefits to be derived.

From the fuel standpoint additional capacity and certainly safety and we'll look at the labor situation sometime in the future and that obviously will be negotiated.

Bottom line on rail safety, we're going to have to learn the interpretations for sure.

We're all about doing that right as we speak, but we don't see a major impact at this point.

Thanks a lot for the time, everybody.

That's helpful.

Thank you.

Our next question is coming from the line of [John Zaris] of Boston Company.

Please go ahead with your question.

Good morning, gentlemen.

Good morning, John.

Have a question for you on fuel consumption.

You guys have made impressive moves there, with volumes down 5%, fuel consumption down nearly 10%.

I was wondering if you could tell us about what's going on there and what's driving that?

Well, we have a multifaceted approach.

We talked a lot about fuel and it's been a big deal for us and it's not just a new phenomena.

It's one we've been working on for several years.

First off, we'll start off with -- we have an employee recognition program called Fuel Masters, which our professional engineers gauge themselves against basically a golden run and are recognized commensurately.

We call it a gas for gas program and it's been very successful and our engineers have really internalized the challenge of fuel consumption and have really helped us realize some of those savings.

We have a fuel conservation speed that we put in.

It's the optimum speed that we allow our trains to run at and we take advantage of gravity where we can.

But there again, operating practices and the engineers have been very significant in that.

We put a maximum speed out there, 50 miles an hour.

Our distributive processing, our technology has been very influential and we think there's about 4% to 6% on a DPU train of fuel consumption savings and we then -- raising the percent of our ton miles from about 30% up to over 55% now that our handle with DPU and we're going to continue that trend into '09.

And then obviously our shutdown policies.

That's system wide, all crafts, and we've been successful in driving it there.

So I would just say a good use of technology, our new locomotives, the age of our fleet and the operating practices of our engineers have been the key drivers in the fuel conservation.

That's great, keep up the good work.

John, if I could just add one other comment to that and that is the mix affect in the third quarter certainly benefited us as well.

Great, thank you.

Thank you.

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

Please go ahead with your question.

Great, good morning.

Can you quantify at all the fuel surcharge lag benefit in the third quarter?

Rob?

Because we're not recovering 100% of fuel higher fuel prices still are a negative on us, but it's -- there was a slight -- basically if you look quarter over quarter we recovered -- the lag effect helped us out where it was about a push.

The cost versus the recoveries in the quarter alone were about a push.

Okay.

You mentioned that 70% of your pricing is locked and then I think Jack threw in that all of the contracts were pretty much locked in for '09, so just wanted to dig into -- I presume then the 30% that's left is the stuff that renews annually, like grain.

What would be your expectation for the remaining portion?

Do you think you see pressure if we get a little on the volume side?

Go ahead, Jack.

Ken, the market's going to determine how effective we can be on the price side.

We're going to have some of those markets that we will do very well in pricing.

We'll have some other places, like in the lumber world and places like that, where it'll be a little bit tougher, but we're still thinking overall it's going to average out into that 5% to 6% range.

Okay.

And then on the grain, the ag market, looking at the articles we've seen obviously hitting the papers the last couple days about how some farmers are really pulling back on some plantings.

Just wanted to get your outlook for the market there from what you're hearing from your customers.

Well, we're in a position right now where if you look at our fourth quarter year over year the big difference is going to be export wheat.

We had a great program last year and the United States wheat crop was excellent and others were soft.

This year the Baltics, Eastern European, Australia all had solid wheat programs.

Harvests were good, so that's going to get softer for us.

The other thing that we're seeing right now in our grain markets is because of the high feed prices there's been a reduction in the headcount -- or the headcount -- in the animal count for things like poultry and cattle and that is impacting to some extent, as well.

I think it's still early to say what the total market outlook for next year.

We're thinking we could be down a little bit from our record-setting pace here in 2008, but we don't expect it to be a heck of a lot.

There's always the upside that crop conditions around the world, what happens with the value of the dollar, those kinds of things could turn that around and actually turn it into a positive for us.

So we're just watching very carefully and we're going to have the capability to move it, and we think ethanol's going to continue to do well for us.

We had a couple more plants come online, we think that'll be some upside for us.

So I think it'll be okay.

Great.

And then, Rob, I take it from the shift of guidance for the near term there's nothing you're changing on your 2012 targets at this point, is there?

That is correct.

Okay, great.

Thanks for the time.

Thank you.

Our next question will be coming from the line of Dave Feinberg of Goldman Sachs.

Please go ahead with your question.

Good morning.

Morning, Dave.

I just wanted to confirm, I think you addressed this earlier, a quick question in terms of your legacy contracts.

One of your previous slides from the previous quarter.

It's 3% of your legacy contracts that are yet to repri -- that are set to reprice in '09, is that correct?

Dave, where I am right now I still have 2% to go in '09.

Okay.

And then trying to understand the $750 million debt issuance from a few weeks ago.

Was the goal of that to take care of your '09 financing needs?

It just struck us a little interesting that you were in the market during such a tumultuous time.

No, it was just part of our liquidity plan.

It wasn't to take care of our '09 needs.

And at this point, though, I'm having -- based on the slides that we saw it looks like you -- as you highlighted, you have substantial liquidity on hand even excluding the revolv -- or the credit facility to feed all of your your upcoming debt issu -- or your debt maturities for -- pretty much through '09, correct?

Yes, assuming we meet our plan.

One of the thing that we do have is about a $250 million term on debt due early -- like February timeframe so we're well positioned for that at this point in time.

We're in good shape, Dave.

And then maybe just one last question following up on -- I think it's Ed's question, on share repurchase.

Do you have a -- is there a stated plan in terms of how much free cash flow or how much of the operations you plan to return to shareholders through a combination of the dividend and share repurchase program, or is it more based on quarter-by-quarter assessment of where the stock price is?

David, we're opportunistic and we haven't given a number on that so we take advantage of opportunities.

Thank you very much.

Thank you.

Our next question is coming from the line of [Arturo Vernon] with [McClarey].

Please go ahead with your question.

Good morning.

How's your pension funding doing?

Rob?

Our pension -- we do not have a requirement to fund our pension plans so we're in good shape there, but of course like all other pensions we felt the impact of the market.

So we'll take a look at it at year end and if there's a need to put additional cash into the fund we'll take a look at that.

Do you have any sense whether that would be a significant requirement?

No, no significant requirements.

It's down -- running down about 15% right now so we'll take a look at -- maybe that's $100 million or so, but we'll take a look at what the needs are at the end of the quarter.

We've been putting cash in over the last several years and it's pretty healthy.

It's pretty healthy.

Fantastic.

Regarding domestic intermodal it has shown amazing resiliency, whet's driving that?

A lot of that it is our great service.

I think our intermodal customers are looking at the performance of our key intermodal lanes and in particular, some of the lanes like our new partnership with the NS over the Shreveport Gateway.

They're seeing the service improvement, they're seeing trucking service deteriorate because of highway congestion, they're seeing our EMP box fleet is being a real opportunity for us and we're working very hard to win their confidence and business and it's going quite well.

Okay.

I would expect that as the economy weakens domestic intermodal might be going down.

On the other hand, you might be winning business from trucking.

Do you have a sense for the pitfalls of one being stronger than the other?

I think it's good service and winning business from the highway that's going to carry the day for us.

So you would expect that intermodal domestics would still be coming ahead in spite of a weakening economy?

I do.

And lastly, for the coal you mentioned that you were expecting a flat year, is that flat growth for '09 on coal or was that the fourth quarter?

I think it's -- I think there's a chance it's going to be flat growth for '09 and we will completely offset any volume loss that we had from those legacy deal conversions that I talked about earlier.

All right.

Okay, those were the questions.

Thank you very much.

Thank you.

Thank you.

Our next question will be coming from the line of Randy Cousins with BMO Capital Markets.

Please proceed with your question.

Good morning.

Morning, Randy.

In terms of your guidance for car loading for the fifth -- or for the fourth quarter, you obviously talked about car loadings and I think to some extent Jack kind of answered the question, but I wonder if you could give us a sense, if car loadings are going to be down 5% what's your actual thinking in terms of RTM's, because it looks like your length -- your car length -- your length of haul has actually increased over the course of the year.

If we're down 5% in car loads whar are we going to be down in RTM's, or could we have flat RTM's?

Randy, quite honestly I'm not -- I think the relationship you saw in third quarter it will not hold, where you had 5% reduction in car loads and 1% increase in revenue and ton miles.

I think it'll still be there to some extent so I don't expect revenue ton miles to be down at the same level as car loads.

Again, your automotive business is not going to recover.

Intermodal business will be weak.

On the other side our coal business still should continue to be strong.

Ag may be a little bit weaker.

So they won't be one for one, but you'll still have -- revenue ton miles will not be off the same effect as car loads.

Okay, and then a somewhat related question.

The GTM's were down three but the RTM's were actually up and I -- again, what's going on there?

Are you getting more back haul business?

What exactly is happening there that the total work goes down but the revenue work goes up?

Randy, I think it's mix when you look at it.

Okay.

Could you guys comment on -- you've got a strong Mexican franchise, what's happening with your Mexican business?

Is it growing, is it shrinking?

What's happening there?

Go ahead, Jack.

Mexico in the third quarter was down a little bit in volume, 5% to 7%, and revenues were up around 16%, 17%, and it kind of follows the path of the rest of our business.

Certainly our automotive franchise is our largest franchise in Mexico and, of course, with the automotive companies suffering that's the primary reason for the downturn.

Still had fairly substantial and solid grain movements to and from Mexico.

We think that'll continue and that's how it's going to play out.

Last question, there's been a run up on the US dollar on a relative basis.

Do you guys see the change in exchange rack -- exchange rate impacting your business in any way, shape, or form?

And particularly I'm thinking of the chemical business.

Well, I think long term it will have an impact.

I would say our exports in second quarter were up about 4% or 5% and exports this quarter were down I think 5% or 6%, 7%, something like that.

I don't think the short-term fluctuation will show up, but long term obviously it will have some impact.

Thanks a lot.

That's it.

Okay, Randy.

Thank you.

Our next question will be coming from the line of Gary Chase with Barclays.

Please proceed with your question, sir.

Good morning.

This is actually Brandon Oglenski.

I'll keep this brief, but could you give us any idea of how much mix really impacted the fuel consumption, because on the GTM basis it looked like you got significant gains in fuel efficiency?

Yes, Brandon, I don't -- it's not quite clear to me.

Again, what you have look at, the trend has been pretty consistent for several quarters.

This wasn't a one quarter aberration when you look at the improvement that's out here.

And a lot of the things Dennis mentioned on technology, the incentives, are driving it, including new locomotives.

Again, when you look at a new locomotive today, compared to what we retire, there's a substantial improvement in fuel consumption.

Does this have anything to do with maybe the mix of a lot less intermodal and somehow that coal business is more fuel efficient on a GTM basis?

Sure, absolutely, there's no question about it that it comes in.

I just -- I'm not -- it's not clear to me.

I think it's not a huge impact on the mix -- or the mix impact just doesn't have a huge impact on the consumption rate, but it's clearly there.

Okay.

And then looking at your 4Q guidance, I know you mentioned that the lag impact was essentially flat for 3Q, but with fuel sitting here today at about 67, 68 we're modeling a pretty significant gain just from the lag impact.

Any way you guys could give us an idea what that could be in fourth quarter?

Rob?

Again, if fuel goes down, that lag would certainly benefit us.

If it spikes back up like we saw last year it could hurt us.

If -- I gave the guidance of $2.95 for the quarter, If fuel stayed where it is today that might give us a positive of, I'll say $0,05, that gives you some relative spread on that.

Okay.

And I'm sorry if you guys have already mentioned this, but do you have -- have you given us an idea of how much business is actually rolling over in 2009?

We haven't.

I'm not quite certain.

Exactly what does that mean, rolling over?

How much business are you recontracting in '09?

Again, s I look at my contract base we got about 45%, 50% of our business tied up in long-term contracts, about 25% or so in one-year deals and the re -- and the 30% in tariff.

So the long-term contracts are fairly much done for the year, for 2009.

Those will take effect January 1st for the most part and those are all completed.

Many of the one-year deals are actually completed at this point because they were in third and fourth quarter kinds of negotiations here.

My contractual business is pretty well locked in place for '09 right now.

Again, I have about 2% of legacy that will expire between January 1st and December 31st of '09, most of that at the end of the year.

Okay.

And then on the business that isn't rolling over, so the contracts that are staying in place from '08 to '09, what types of escalation factors can we expect or are built into those contracts right now?

It's everything from the RCAF to the RCAF without fuel, with fuel surcharge on the ones that we have renegotiated with the new ones, and then a variety of them have fixed percentages.

Okay.

Thanks a lot, gentlemen.

Thanks.

Thank you.

Our next question is coming from the line of John Larkin with Stifel Nicolaus.

Please proceed with your question.

Good morning, gentlemen.

Morning, John.

Had a question about the EMP program in your domestic intermodal operation.

Looks like that really grew pretty dramatically during the quarter, I think you said up 29%.

What is the state of that fleet?

Are you upgrading it, expanding it, reducing it?

It's quite interesting.

You have a fairly different strategy than brand X has with regard to your own container equipment.

Our EMP fleet we consider that to be a real opportunity working with the IMC community, particularly the nonasset owners.

That's where we're targeting that market.

You look at our fleet today I think going into the year we had like 19,000 containers, hopefully by the end year we'll probably exited around 21,000, 21,500, something like that with a few retirements in and out.

It's a great product offering.

Particularly now with the domestic service that our operating team has provided it's catching on a lot in terms of people taking a look at it and comparing that with truck and other options that they have and we continue to think it's going to be a great market opportunity for us.

So you're actually adding, what, 2,000 boxes to the fleet over what time period?

This year, I think what we did is we probably added 3,500 and took out 1,500 retirements, I think, is how -- I think we ended up buying 53 footers and retired some 48 footers.

Okay.

Do you own the chassises, as well?

Yes, we do.

Okay.

And then the IMC is responsible for arranging the (inaudible), is that correct?

We can work both ways with them.

We can offer to take that on and provide door-to-door service and they become just the sales agent or we'll just do ramp to ramp and allow them to do however they like to deal with direct door-to-door, ramp-to-door kinds of performance.

Okay.

The growth in that business didn't seem to have much of a negative impact -- excuse me -- on the so-called legacy domestic intermodal business?

That doesn't seem to grow, also?

Our legacy intermodal business, domestic intermodal business also grow as well.

Interesting.

Okay.

the extent there's still an efficiency gap between what I'll call the old SP and the old union Pacific, how many more years of capital expenditure and hard work will it take before that gap is completely closed to where you'd like to see it?

We've made a good progress in terms of getting that property in better shape.

There's still a few years left out here when you look at some of the areas, but again, you can improve your velocity, as we have seen, in the overall network without having all of your properties starting to move up.

And we still have some opportunities, we're looking at looking at them.

Again, in our long-term guidance we said in a low 70s operating ratio and the kind of financials that'll be part of that long term.

If it takes, say, another two or three years that gap completely closed the way you'd like to see it ultimately does that imply that at the conclusion of that process that perhaps your CapEx may drop down a little bit relative to, say, revenue?

It would when you look at it.

Again, there's a certain amount of catch up that's in here.

I don't see it as being substantial when you look at it.

Part of it -- again, you have to separate maintenance -- property that wasn't maintain to expansion, and a good example is double tracking the Sunset Corridor.

Obviously we would have liked to have that double tracked several years ago, but that's and on-going project.

In theory there might be some small amount of incremental free cash flow to apply to share repurchases and increased dividends and that sort of thing?

I agree.

And then one last question regarding the grain business.

There's been a big drop in the dry bulk rates here over the last couple of months, has that shifted any traffic from the PNW down to the gulf and has that had an impact on your traffic flows and/or revenue outlook?

Probably the most has been the bean harvest and so we're been moving a lot of soy beans from the current harvest down to the gulf and that's been to our benefit.

That's probably the place where we've seen it the most.

Okay.

But there's still a fair amount moving to the PNW, as well?

We are not a big player in the PNW, so we will follow -- wherever the grain wants to move we will take advantage of the PNW but right now it's the gulf business that's kind of on a solid, steady foot for us.

How about grain to the river?

Increase or decrease in that business?

No, it's been about flat.

It's kind of hard to tell with all of the disruptions we've had with hurricanes and things like that as to how much of that plays out, but it's not growing substantially.

Okay, thank you very much.

That's very helpful.

Thanks, John.

Thank you.

Our last question will be coming from Jason Seidl of Dahlman Rose.

Please proceed with your question.

Hey, guys.

Morning, Jason.

Couple quick things here.

One of your Eastern counterparts yesterday in their conference call talked about they were getting more positive about pushing through that 25% expansionary tax credits.

I was wondering if you guys could give your thoughts on that?

Well, Jason, it -- where we're getting more positive is the perspective on the next round of stimulus coming out of the hill and infrastructure strikes a cord with every member of Congress.

If you believe we have a -- I'd call it a crisis in transportation infrastructure in the US when you look out the next five, ten years, I think it's a good opportunity here.

We'll see what happens.

What I remind members is capital flows in terms of returns and if this helps maybe increase returns we may accelerate capital.

I wouldn't take it to the bank yet when you think about it.

Bottom line, no, it's great jobs, it's investment in America when you think about where you're putting your money, and we're prepared if it happens to probably do some things but we'll see.

Okay.

Jim, on the outlook for '09 you mentioned potentially going down to about negative two on the volume side.

Is that assuming a little bit of economic slippage from here or is that assuming a steady state and what we're seeing in the economy now?

We look at first half next year.

You're going to see negative industrial production, negative GDP I'm not -- we kind of look at it right now, it's probably about the run rate you're at right now going forward, and then again some pickup towards the end.

But we're prepared to manage our business in a very tough economy next year.

Okay.

My last one here on coal.

You touched a little bit on maybe export demand for some of the western coal.

What are the ports that are moving out of?

Today it's Vancouver.

I guess it's called St.

Roberts.

We've also moved some off of Richmond and we''ve also moved some off of Long Beach.

Are there any other potential options for you on the West Coast?

We're looking for options.

We are talking to all the ports and looking for some potential to see what would make most sense, but at least at this point in time, those are kind of the three front-runners.

Okay.

Guys I appreciate the time as always.

Thanks.

Thank you.

I would now like to turn the floor back over to Mr.

Jim Young for closing comments.

Well, thank you for attending the call here.

As we indicated we're looking at a pretty tough economy going forward here but I'm confident that we can run our business in a tough economy and deliver for our shareholders.

So again, we will talk to you again in about three month.

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

You may disconnect your lines at this time.

Thank you for your participation.