聯合太平洋集團 (UNP) 2008 Q4 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the Union Pacific fourth quarter 2008 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.

(Operator Instructions).

As a reminder, this conference is being recorded, and the slides today will be presenter controlled.

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

Jim Young, Chairman and Chief Executive Officer for Union Pacific.

Thank you, Mr.

Young, you may begin.

Good morning everyone.

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

With me today are Rob Knight, our CFO, Jack Koraleski, EVP of Marketing and Sales, and Dennis Duffy, EVP of Operations.

Union Pacific's fourth quarter earnings grew 41% year-over-year to $1.31 per share, as operating income totaled 1.1 billion, up 32%.

We are posting strong earnings for the quarter, as we completed an outstanding year for our Company.

The fourth quarter was clearly a challenge with carloadings off nearly 12%.

Our profitability was driven by improved safety, productivity, great service for our customers, positive pricing, and lower energy costs.

Falling fuel prices were a nice reversal, after paying higher diesel fuel prices over the last seven quarters.

Looking back at 2008, we achieved these results despite facing the challenges of a weak economy and record high fuel prices.

Our success stems from consistently executing our long-term strategy, although rail is already the safest form of ground freight transportation, we are committed to improve, which we did across the board in 2008.

We provided our customers with excellent service, as we offered truck competitive products in key market corridors.

Through employee innovation, technology, and hard work, we increased the efficiency of our railroad, and we made strategic capital investments that support our long-term growth, as well as drive further safety, service, and efficiency.

These efforts produced record financial results for our shareholders, increasing returns through a 2-for-1 stock split , a 23% dividend increase, and share repurchases totaling 1.5 billion.

Our 2008 results were one for the record books, providing a solid foundation for the challenges we face in 2009, obviously one of the biggest challenges we face this year is economic uncertainty.

Jack, Dennis, and Rob will all give you some perspective on 2009, but as you will see from their comments, our ability to forecast demand is very limited.

As a result, we will not affirm or provide specific financial guidance for the year.

Although our confidence in the long-term opportunities for Union Pacific is undiminished, the current environment will be very difficult.

With that, I will turn it over to Jack to talk to you about our revenue

Thank you, Jim, and good morning.

Our revenue grew 2% to a fourth quarter record $4.1 billion of price improvement and fuel surcharge tailwinds, drove a 16% improvement in average revenue per car, more than offsetting the sharp decline in volume.

The economic problems that dominated the news throughout the quarter clearly impacted volume, with the greatest declines in the groups most sensitive to the strength of the overall economy.

Each of our groups set best ever or best fourth quarter records for average revenue per car, but only energy and ag products were able to overcome the volume shortfall to post revenue gains.

It was an anti-climatic end to a year that saw revenue climb 11% to a record 17.2 billion.

Automotive was the only business group failing to set a new full year revenue mark.

All six groups set records for average revenue per car, and energy posted record car loadings as well.

So now let's take a closer look at how the fourth quarter played out for each of our businesses.

Ag products revenue grew 10%, as a 16% improvement in average revenue per car, more than offset a 5% decline in volume.

We indicated in October that we expected to see our grain volume soften from the very strong levels we saw during the previous crop year.

During the fourth quarter feed and wheat shipments declined in both the domestic and export markets, with overall whole grain volumes down 16%.

On the positive side, growth in ethanol and DDGs continued, with both up more than 20%.

Expansion of our produce rail express product with the start up of a California origin early in the quarter, drove volume growth of nearly 70% for this truck competitive refrigerated service.

I doubt there is any surprise in the weak showing of our automotive business during the fourth quarter, about the own good news was that our progress in renegotiating legacy contracts helped drive a 12% improvement in average revenue per car, partially offsetting the 26% volume decline, and holding the revenue shortfall to 17%.

For the quarter, finished vehicle volumes were down 29%, while parts declined 21%.

Our chemical revenues were down 1%, as a 14% decline in volume was nearly offset by a 15% improvement in average revenue per car.

The residual impact of the September hurricanes, and the downturn in the economy, drove weakness in the two largest segments of our chemicals business, liquid and dry, which declined 21%, and plastics which was off 18%.

Refinery issues resulting from the hurricanes, volatile crude oil prices, and economic conditions impacted petroleum products.

Fertilizer volume was down as industry sales declined, driven by tightening credit and unstable market prices, that led many farmers to delay or even skip their fall fertilizer application.

Sulfur carloads increased 26%, largely the result of some new unit train business, and a strong export market drove increased soda ash volume, even as domestic shipments declined, due to continued weakness in the housing and automotive markets.

Energy revenue grew 20% on the strength of a 22% improvement in average revenue per car.

Strong demand and continuing productivity performance, drove a 2% growth in Southern Powder River Basin tonnage, establishing fourth quarter records for cars, for tons, for trains, and tons per train, and closing out a record year for the SPRB.

Unfortunately widespread problems among the Colorado mines led to a 5% decline in Colorado/Utah tonnage, and resulted in the overall 1% decline in volume.

In industrial products, we saw a 15% fall-off in volume, partially offset by a 14% improvement in average revenue per car.

Unfortunately mix worked against us, and resulted in a 3% reduction in revenue overall for the quarter.

Our lumber volume fell 30%, as housing starts fell to their lowest level since the Census Bureau began tracking 50 years ago.

The slump in housing and commercial construction is also impacting roofing, cement and stone, and the latter two were also hit by reduced funding for highway projects.

Market softness cooled the steel and scrap markets that were running strong earlier in the year.

Industrial products saw customers across many of their markets take extended holiday shutdowns, to allow for inventory adjustments during the quarter.

On a brighter note frac, sand, and other drilling materials provided some good news with volumes up over 20%.

Intermodal revenue was down 7%, as a 16% decline in volume, offset a 10% improvement in average revenue per unit.

As we have highlighted in the past significant portions of the international intermodal business are tied to the housing and automotive industries.

The deepening contraction of the overall economy was the primary driver of a 19% decline in our international volume.

The weak economy also impacted the domestic side where volume declined 9%, despite the continued success of our EMP revitalization effort, which drove volumes with intermodal marketing companies up over 20%.

If you exclude the contract loss that we incurred early in the year, our improved service helped hold truck volume flat versus last year, which is actually pretty good performance in this economy.

We closed the year with record-setting customer satisfaction, as our customers recognized the value being delivered, given our significant service improvements.

Satisfaction came in at 85 for the fourth quarter, that is the highest quarterly score in the 22 years we have been measuring satisfaction.

For the full year we improved 4 points to 83, which is also our best ever mark.

Okay.

Look into the future.

I thought maybe a good place to start was with a recap of our legacy contract status.

Last year including contracts that expired on December 31, we renegotiated legacy contracts totaling about 8% of our revenue base.

So at this point we have now been able to reprice 82% of our business.

Unfortunately 2009 will take a little less than 1 percentage point off the table, but we will get the benefit of the price improvement from those December 31 expirations throughout the coming year, and we will also have a nice carryover price impact from the other contracts we repriced earlier in 2008.

On the right you can say the mix of business tied to our remaining legacy deals.

Half that business is still in energy, 29% is in intermodal, autos and chemicals are both 10%, and ag and industrial products shared just 1 percentage point between them.

Clearly we are going to have our work cut out for us in 2009.

On the chart we have highlighted some of the biggest hurdles that we face, as well as opportunities that will drive some strengthening as the year plays out.

Looking at the full year let me take you through how we think these and other factors are going to influence growth potential in each of our groups.

Start with ag products, ag products is going to face some tough comps, at least until the new crops are harvested.

Increased world grain production will impact whole grain exports, and a decline in animal feed will go slow the domestic grain business.

As a result, we expect whole grain volumes to slide back closer to the levels we saw in 2007.

The soybean crush is forecasted to be down over 6% for the crop year, but we do anticipate that ethanol is going to grow, although the pace may be a bit slower as lower gasoline prices and higher corn prices squeeze margins.

Continued market softness and production cutbacks drive the automotive outlook for 2009, but it should run better than it is now.

The ramp up however is going to be lower than normal this year, as some plants shutdowns will extend all the way into March.

In chemicals the poor economy will likely lead to some further softening of plastics, and domestic soda ash will continue two mirror demand in the building and automotive markets.

However, we remain cautiously optimistic about export soda ash.

We think that liquid and dry is going to hold it's own, and fertilizer should see an uptick with the spring planting season.

Continued low crude prices could also create some opportunities for us in asphalt.

Our energy volume in 2009 is expected to decline slightly from last year's record-setting performance.

We successfully renegotiated quite a few legacy coal deals last year, but there were a few that wound up not going our way.

The good news is the continued demand for SPRB coal should allow us to offset most of that loss.

Coal quality has been an issue for Colorado/Utah, but that production is going to ramp up as the mines start to get squared away with those production issues.

With housing starts expecting to decline somewhat from their already low levels, and overall economic weakness impacting many of their markets, industrial products faces a real uphill battle.

The one bright spot is still energy related markets, which appear to maintain their strength.

Growth with IMCs driven by the EMP revitalization program and continued service improvements, is expected to spur growth in our domestic intermodal.

But the weakness of the overall economy is still going to take it's toll on the international side.

Current economic projections anticipate growth in imports by the fourth quarter, although admittedly against 2008 depressed levels.

So with the free fall in economic indicators over the past few months, and uncertainty about how quickly the new administration can get their plans in place, let alone how quickly those plans will have an impact, an honest assessment of 2009 is that at this point, we probably have more questions than we have answers.

Our volumes have started off slowly, but as I just outlined they should strengthen.

Extended shutdowns, inventory right-sizing, combined with a comparison against a relatively strong first quarter volume a year ago, makes things look weaker right now than we believe they really are.

It seems likely that an economic stimulus bill will be coming, across much of our business a successful stimulus package offers some upside to the extended focuses on rebuilding infrastructure and energy development.

Ultimately the key to strengthening demand is job creation.

The government stimulus check, more money in your pocket from low gas prices, low mortgage rates, and 0% financing for automobiles, probably isn't going to make much of a difference if you are not employed.

We still expect that our core price improvement will be in that 5 to 6% range for the year, although it appears the impact of that improvement is going to be masked by the decline in fuel surcharge, when you are looking at it from an average revenue per car perspective.

Keep in mind that from a customers point of view, that decline in fuel surcharge is going to result in lower transportation charges year-over-year.

So with that I am going to turn it over to Dennis for the operating review.

Thanks, Jack, and good morning.

Today I would like to wrap up the operating team's performance in '08, as well as talk a little bit about our plans for '09.

Let's start with safety.

We think of safety as it relates to our key constituents, employees, the public, and customers.

And over the last several years and in '08 we made significant improvement in each category.

The tools we used to improve safety, communication, technology, process improvement, engineering, and investments.

Our universal across the three areas, and all contribute to our gain.

Of course our goal with each of these categories is to reduce to zero, so we will continue our efforts in '09 to operate in an even safer railroad.

Turning to service.

As with any year we had some bumps along the way with an assortment of natural disasters, but the resiliency of our infrastructure and our network resources, allowed to us quickly recover and achieve record performance levels.

Velocity finished at 23.5 miles per hour for the year, and 25.1 in the fourth quarter.

In a declining volume environment like we have experienced the last two years, operating's role is critical in driving cost out of the business, through streamlined operations and increased asset utilization.

These objectives must be balanced however against our customer commitments.

Our 2008 service delivery index, a composite metric of all customer commitments, set all-time records for the year and the fourth quarter, 84 and 89 respectively.

The increasing levels of customer satisfaction that Jack just discussed mirrored the improvements in SDI.

Lower volumes have certainly contributed to these results, but we have significantly improved the fundamentals of our railroad, largely due to our Evergreen Unified Plan process, a continuous focus on inventory management, and technology also plays a big role.

Increased usage of distributed [power] locomotives, which currently move about 55% of our gross ton miles, allowed for a more efficient use of our locomotive improved resources, as well as saving fuel.

Finally our work to operate as a volume variable network.

Volume variable means managing our costs in-line with our demand volumes, even in a down economy.

And the results can be seen in productivity.

In the fourth quarter we reduced our total starts by 9%, compared to 9% fewer gross ton miles year-over-year.

For the full year our start reduction was more than proportional to the volume decline.

This was achieved concurrent with improving asset turns.

You can see freight car cycle time, the number of days between loads, reached record levels in 2008.

Our train size initiatives played a role, a key role in our productivity results by reducing train starts.

The manifest network was a particular challenge, where we managed to increase train size and service levels, despite the declining volumes.

The end result was leveraging lower volumes into fewer starts, and also lower fuel consumption.

For 2009 we have a menu of productivity initiatives, covering all major classes of spending and asset utilization, all managed under the umbrella of our operating productivity counsel process.

The combination of falling demand and greater efficiency has generated extra resources.

When you compare year end 2008 with '07, we have reduced our working level of critical resources significantly.

From a locomotive standpoint, we have reduced the working fleet by more than 1,500, consisting of lease turn backs, retirements and storing more than 1,200 locomotives, partially offset by 179 new deliveries in 2008.

Likewise on the freight car side, our working inventory has been reduced by more than 67,000, or 21%, including 48,000 cars in storage.

Demand for the train and engine workforce shown in the upper right, is down by nearly 3,900, including approximately 3,100 furloughs.

It is our intention to get these folks back to work in the near future, but that will be driven by volume demand and attrition.

We continue to make short term adjustments in our critical resources to reflect current economic conditions.

However, as we have discussed before, we have built some level of surge capability into our network, to handle network outages and volume spikes.

Turning to capital for a moment, our proposed '09 plan will total around 2.8 billion, nearly 80% of the spend represents replacement and renewal of existing capital assets.

This includes 125 new locomotives for nearly 290 million, current market demand does not warrant this purchase, but they conclude the third year of a three-year purchase agreement.

We will put these to good use expanding distributed power usage, and retiring older less efficient locomotives.

The engineering spend continues our commitment to hardening the core infrastructure for safety, productivity, and performance business reasons.

With soft demand we are reducing growth spending by more than 300 million in capacity and commercial facilities.

We are slowing down spending on the Sunset Route, while making strategic investments for long-term growth.

An example is the new Juliet intermodal facility, which we will continue to work on in 2009.

Emerging market opportunities such as ethanol, wind power, and drilling materials are protected in our '09 plan.

The technology portion includes strategic investments in computer aided dispatching, and positive train control systems.

Our operating plans for '09 build upon the progress made in 2008.

Specifically solid safety improvements in the employee, public and customer areas, the service records set in 2008 are now the benchmark, and we will make further gains from here.

We will remain volume variable in an uncertain environment.

And finally, we will be disciplined in our efficient use of capital.

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

Thanks, Dennis, and good morning.

We will start today with a look at our fourth quarter income statement.

Quarterly operating revenue grew 2% to nearly $4.3 billion.

Fourth quarter operating expenses came in at $3.1 billion, a 6% decrease versus 2007.

The primary driver of the expense decline was lower fuel expense, which decreased 19% in the quarter.

As I will discuss more in a moment, lower fuel prices contributed to the decline, but the sharp fall-off in business volumes and our efficiency efforts, also played a major role.

Higher revenue and lower expenses resulted in fourth quarter operating income of $1.1 billion, an increase of 32%.

Fourth quarter freight revenue totaled 4.1 billion, a 2% increase from 2007.

Against a 12% drop in carloadings, our pricing gains and increased fuel surcharge recovery drove the yearly growth.

Core price increased roughly 6 points in the quarter, and although our fuel prices actually declined year-over-year, the two-month lag in our fuel cost recovery programs drove higher year-over-year recoveries.

Similar to the third quarter, our mix of business was positive.

Adding 6 points of growth to our average revenue per car.

Turning to the expense detail, slide 27 shows fourth quarter compensation and benefits expense down 2% in the quarter to $1.1 billion.

Increased productivity and a significant decrease in volume were the primary drivers of the year-over-year decline.

As Dennis described for you, increased velocity, as well as our efforts to increase the efficiency of our crews, drove savings in the form of lower crew costs.

We also continued actions taken throughout 2008 to better align our workforce with demand, reducing both operating and nonoperating personnel a total of 4%.

Offsetting some of the productivity is the ongoing wage inflation associated with the 4% increase, that became effective for our union employees on July 1.

There were also added costs in the quarter related to pension and post-retirement benefits.

For fuel expense our costs declined by 19% to $732 million, as fuel prices declined 6% in the quarter.

Our fourth quarter average diesel price per gallon was $2.46, compared to $2.62 per gallon in 2007.

This lower price saved roughly $47 million in the quarter.

Although lower prices helped drive quarterly fuel expense, the 9% decline in gross ton miles was actually a bigger contributor, saving $77 million in the fourth quarter.

A 5% improvement in our fuel consumption rate also contributed to the savings.

As we move through 2009, we should see the benefit of lower year-over-year fuel prices.

In fact, we are currently paying about 40% less than the $2.84 per gallon we paid for diesel in the first quarter of 2008.

Our customers are also seeing the benefit of lower fuel in the form of lower surcharges.

Purchased services and materials expense totaled $458 million, up only $2 million.

Although below third quarter levels, year-over-year costs were higher as a result of component price inflation.

This increase was largely offset by lower expenses related to our improved productivity and volume decline.

For example, expenses for crude transportation and lodging, as well as intermodal ramp fees declined year-over-year.

Equipment and other rents expense decreased $13 million in the fourth quarter, or 4%, lower freight volumes, particularly for finished vehicles, industrial products and intermodal shipments, resulted in less car hire expense.

Locomotive lease expense also declined year-over-year.

Fourth quarter Other expense declined 1%, or $2 million.

There were a number of pluses and minuses in this expense line during the quarter.

Adding to the quarterly expense were several unfavorable year-over-year changes, such as an increased provision for bad debts, higher state and local taxes, while equity income was lower in the quarter.

We also received an insurance settlement in 2007 that contributed to the tough year-over-year comparison.

Many of these items should be considered quarter specific, and do not indicate a change in our expense trend.

Balancing out some of these unfavorable changes was a reduction in our casualty expense.

We continue to see solid improvement in our safety performance, as well as the benefit of lower estimated settlement costs.

We also completed a review of our asbestos liability in the quarter, which demonstrated better than expected claims experience.

Together casualty costs were lower in the quarter by roughly $65 million.

Looking now at our operating ratio, the bars on the left illustrate year-over-year fourth quarter progress.

The bars on the right show our full year improvement.

As we discussed with you at our May Analyst Meeting, we are using project operating ratio to focus the entire organization on our efficiency.

These efforts enabled to us drive steady improvement culminating in a 73.4% operating ratio in the fourth quarter, a best-ever mark.

Lower fuel prices certainly contributed to our improvement, although offset somewhat by the volume decline.

Our efforts to drive greater efficiency and improve the returns on our business, enabled to us make a nearly 12 point gain since the fourth quarter of 2005.

On a full year basis we also made great strides, the 77.3% operating ratio in 2008 was the best annual mark that we have achieved, and 9.5 points better than 2005.

This performance really highlights all of the hard work that has taken place across our Company to improve profitability.

Moving on to the full income statement.

Fourth quarter Other income was $15 million lower year-over-year, primarily as a result of lower interest income.

Interest expense increased $2 million to $127 million, driven by higher average debt levels in 2008.

Fourth quarter income tax expense increased 31%, or $90 million.

Although taxes were higher year-over-year as a result of increased income, the effective tax rate was slightly lower at 36.4% in 2008, versus 37% in 2007.

Fourth quarter net income totaled $661 million, up 35%.

EPS increased 41% to $1.31 per share, reflecting both stronger earnings, and the impact of our share repurchase program.

Slide 33 shows our full year income statement.

Operating revenue grew 10% to nearly $18 billion.

Operating expense increased 8% to $13.9 billion.

Higher year-over-year fuel expense contributed nearly 90% of this increase.

Other income was $24 million lower in 2008, as a result of fuel real estate sales and less interest income.

With a tough credit market we are likely to continue in 2009, our real estate sales could be challenged in that market.

Interest expense grew 6% to $511 million.

The driver of this increase was higher average debt levels, offset somewhat by lower interest rates.

The combination of higher income and a lower effective tax rate for the year, produced 2008 income taxes of $1.3 billion, a 14% increase.

Our 2008 tax rate was 36.1%, which was 2.3 points lower year-over-year, primarily related to a change in Illinois state tax legislation in 2007.

2008 net income grew 26% to a record $2.3 billion.

Full year EPS was $4.54, a 31% increase.

From an overall financial standpoint, one of the key measures of our performance is the cash we are generating.

In 2008 cash from operations increased $793 million, a 24% gain.

As we improved our returns, increased productivity, and drove strong bottom line results, we are generating more cash.

In 2008 cash from operations was also favorably impacted by bonus depreciation, which added about $225 million.

On the flip side, we made a $200 million voluntary pension contribution at year end.

Cash generation is especially important in today's tight credit markets, as we will rely more heavily on this cash, to sustain our business going forward.

In terms of our uses of this cash, we will continue to take a balanced approach.

Obviously in this uncertain environment, we will be conservative with our cash management.

In fact, we ended 2008 with more than $1.2 billion of cash on the books, which will help us with our payment obligations in the first part of 2009.

Let's talk about some of the other uses of cash in 2008.

We closed our 2008 capital spend at roughly $3.1 billion.

The breakdown on this spend was nearly 2.8 billion in cash capital, and 350 million in non-cash capital for equipment leasing.

As Dennis just mentioned, our current plans target 2009 capital at around $2.8 billion, likely all in cash.

Looking at share repurchases, we bought back 3.4 million shares in the fourth quarter, returning nearly $200 million to shareholders.

This run rate is slightly down from previous quarters, reflecting our desire to maintain liquidity in the current environment.

On a full year basis 2008 repurchases totaled $1.5 billion, bringing the program total up to $3 billion of cash returned to shareholders since January 2007.

Although the price of UP shares are certainly attractive today, we are not currently buying back stock.

We are monitoring our cash flows as we start the year to ensure adequate liquidity, as we start to generate more cash, we look forward to making additional share repurchases.

Slide 37 illustrates UP's adjusted debt balances at year end which totaled $13.9 billion, for a 47.4% adjusted debt-to-cap ratio, consistent with how our ratio is viewed by the credit agencies.

Increased debt levels as well as higher pension and OPEB liabilities contributed to the year-over-year increase.

Throughout current credit crunch UP has maintained good access to the credit markets.

We do have a $250 million debt retirement coming up in the next couple of weeks, and we will fund that from the cash we currently have on the books.

So to wrap up 2008, it was a great year for UP in many ways, and our financial performance was no exception.

We made tremendous progress with our efficiency and returns, and significantly increased our profitability.

As we turn the discussion to 2009, we are no less optimistic about the potential for our Company.

We do however face tremendous uncertainty as Jim mentioned, we will not provide specific financial guidance for 2009.

Instead I would like to spend the next couple of minutes talking qualitatively about our approach to the year.

As Jack discussed, the demand forecast is very uncertain, and our current volume levels are weak.

In fact, we believe we may be seeing the toughest comparison for the year right now in the first quarter.

When you consider that the first half 2008 volumes were down a little more than 1%, while the second half volumes fell off 8%, we should at least see an easier comparison in the back half of the year.

Another factor to consider for 2009 is that our reported revenues could actual will be lower year-over-year, due to the combination of declining volumes and less year-over-year fuel surcharge revenue.

For example, in January 2008 our rate based surcharge was 21.5%, versus only 16.5% this January, a 5 point difference.

And as we move to February the year-over-year decline grows to 9 points.

It is important to keep in mind that although the absolute dollar amount of revenue may be lower the quality is higher, since we do not have 100% fuel surcharge recovery, lower fuel prices actually help our bottom line.

In fact, less volume and lower fuel surcharge revenue, could mask the impact of the 5 to 6% core pricing gains we still expect for 2009.

We have already priced the bulk of our legacy business for 2009, and we will see the benefit of that pricing throughout the year.

From a productivity standpoint, we know we have further opportunities ahead.

Dennis discussed with you how throughout 2008 we operated our railroad to match resources with demand.

Although it is clearly more of a challenge to increase productivity with declining volumes, we are working to operate as a volume variable railroad.

From an earnings standpoint, the key variable is the economy, which will drive volumes.

For the first quarter with volumes running well below last year's levels, it is unlikely that we will be able to reach last year's first quarter earnings of $0.85 per share.

Beyond the first quarter, if volumes improve earnings should also improve.

We are clearly in a very strong position to utilize our network resources more efficiently in a stronger demand environment.

But of course if current volume trends continue, it will obviously be a challenge for us.

We are being very cautious in our approach to the year, although we are still very confident about the positive fundamentals of our business, that optimism is clearly tempered in the near term by the economy.

We also believe that the key long-term goals that we established last May are still intact.

Our volume growth will be challenged, even if you assume some reasonable level of economic activity returns.

But a lot can happen over the next four years, and we are unwaivering in our commitment to improve.

In particular, the objective of obtaining a low 70s operating ratio by 2012 is still our goal.

With that, let me turn it over to Jim.

Thanks, Rob.

I would like to add a couple of points to the discussion of 2009.

First, although this will be a difficult year for our Company, our customers and employees, we will act carefully to avoid short term decisions that could impact the strong long-term opportunities we see ahead for Union Pacific, but we are responding aggressively to the significant shortfall in demand we see today.

Building off of our success in 2008, we will make further improvements to our safety and productivity, also providing customers with great service.

Quality of service supports our pricing plans, generates assets for our customers, and opens up new markets.

Part of that service commitment involves our capital plans.

As Dennis discussed, the majority of this investment is for ongoing track replacement and renewal, supporting safety, service, and efficiency.

In addition we will continue to make strategic investments for long-term growth.

Although we are providing specific guidance, I can assure that you we are challenging ourselves to deliver another strong year.

We set the bar higher in every category during 2008.

In 2009 and beyond, we are focused on delivering an even higher level of performance than ever before.

So with that, we will open it up to your questions.

Thank you.

Ladies and gentlemen, (Operator Instructions).

Thank you.

Our first question is coming from the line of William Greene from Morgan Stanley.

Please go ahead with your question.

Good morning, Jim.

I am wondering if you can comment a little bit on the trade-off between volume and price?

In the past you have said, hey, we would be willing to walk from business if it's going to do the right thing for returns and margins.

With volumes doing what they are doing, at some point the negative operating leverage from volume is at some point going to have to play a role in you're thinking.

Can you tell me how that is evolving?

We are still sticking with our philosophy here.

If it does not meet our minimum return we are willing to walk from the business.

We have lost some business, we have won some if you look backwards here.

When you are running down 18% on volume which is what we are running right now, we are going to take a hard look at the future here.

But our concentration right now is efficiency; getting costs out, making certain we are still very competitive.

But again I think long-term we have to be very careful here, in terms of taking a short term view at the expense of the long-term viability of our Company here.

So now does that apply as well to the cost side?

So if you are dealing with down 18 to 20% volumes now, what are you resourcing for, in terms of a volume change?

I would think not that level, because that would mean you would be taking out quite a bit more.

Listen, 18% right now through 21 days with the slow start up of the auto sector, many of our customers, autos are obvious, but we saw really across our whole customer group, there was a real slow start up going forward here.

I have said before, again you are trying to predict the future here.

I don't think 18% is realistic on where we are going to end up the year here at all, but you could end up with a smaller network, with higher quality revenues and better returns.

We are being very aggressive.

We are assuming right now that this, again, this is going to be a very tough year.

We are aggressive on the costs, but I got to tell you we have to protect for when the business does come back and it will, and as you know we heard a pretty hard lesson in 2003 and '04, where we were short resources.

So we are managing this thing to be aggressive, but be smart on when business comes back.

Just one quick question on the end, I guess two.

Stockpiles, how are they, and two, how much are your revenues locked in for 2009 and for 2010?

Jackson, you are talking about coal stockpiles I assume.

Jackson?

Stockpiles are about where they should be at this time of the year and maybe, across our broad base I would say they are about where they should be.

We have some customers that have more coal than what they wanted at the moment.

We also have some customers that would be interested in taking a little more coal.

It is kind of a balanced look.

At this point in time we think coal demand is going to be fine.

And the second question was?

Revenues that are locked in for '09?

Revenues that are locked in.

I would say at this point in time, Bill, we probably have 80% locked in, and 50%, 53% is just new legacy deals that we dealt with in 2008 that have a 2009 impact.

And then the balance of that would be either pricing decisions from the fourth quarter, or previous legacy contracts that have escalation clauses that kick in at various points and times throughout the year.

So we are probably 80 to 85% of our price in the market where it should be at this point in time.

For 2010 there isn't very much or no?

There is a little better than 2009 but it is a relatively small piece.

Thank you.

Next question is from the line of Jason Seidl with Dahlman Rose.

Good morning everybody.

A couple of quick questions here.

You mentioned you weren't entirely successful on some of the coal contract pricing.

I was wondering if you could elaborate on that a little bit?

Was that the reference to the Great Plains Energy ruling, and maybe a loss in a little bit of business to CP?

Or is that something else?

Jason, I didn't say we were unsuccessful in pricing.

What I said was that some of the contracts didn't go our way.

In the old legacy deals that we had, we had some business that basically was a winner take all deal, that ended up in our franchise, that when you really look at the route structure and everything that goes into it, that is not our strong suit.

The fact that we lost some business was not surprising.

There were a couple of contracts that we didn't renew.

Some of it CP, others, it just kind of plays out over the life of the deal.

We will get another shot at those in a couple of years, but overall it really wasn't a surprise for us.

Jason we do even with some of that loss, it looks like we are going to be able to offset a big piece of that long-term.

Again it boils down to the return.

Some of these deals you have got some pretty big spreads on the original legacy price from where we are today, and we are going to stay disciplined on what we will expect in railroad.

Some of it is just you guys showing a willingness to walk away from some business at a certain price?

As I said earlier, we have lost some and we won some last year.

Okay.

That is good color.

If I could go back to the fuel surcharge lag.

I don't know if I missed this or not, but did you guys give the amount of lag impact for the fourth quarter?

I don't believe we did.

No, Jason, we did not.

It was a contributor clearly, but we didn't give that number specifically.

Okay.

That is fair enough.

Also in your capital spending outlook, I know you are down a little bit here from 2008.

But if you don't see volumes recover, how quickly can you cut again?

In other words, how much of this spending is going to be in the first half of the year, versus the second half of the year?

Well, you run out of time here on your ability to cut it back.

We may have a little more room that is out here, but again we have got to be careful.

It is a great time to put capital investment in the business.

Efficiency, track time availability, price of materials that we see will start coming down.

We are going to take a hard look at it here, but we will be smart about it.

Keep in mind, we have 125 locomotives, about $250 million of that spend, that as you saw from Dennis' charts, I don't need a locomotive next year and maybe the next couple of years, but we are going to take them, and try to get some value out of them.

Okay.

One more question, and I will hand it off to somebody else.

How much push back have you been getting from some of the customers on some of the price increases?

I mean obviously the environment out there is not too good, as we have all seen the numbers out of the railroads.

I am just sort of curious as sort of a real time update from you guys on pricing.

Jason, obviously and I have said this consistently, I haven't met a customer yet that said thanks for the price increase, but what we are selling is the value proposition here, in terms of our service products.

We are delivering service that our customers haven't seen in many, many years, and there is a value proposition there.

So again it is about service.

Our customers are under pressure, but we have got to continue to help them take out costs.

Jack, you want to add anything?

No, I think you have covered it pretty well as you said.

There is one other item here Jason, which is the decline of fuel prices.

At the end of the day customers, they don't separate fuel surcharge from base rate, they just see their total rates, and we had a lot of pressure when fuel hit $150 per barrel last year with the run up.

Right now they are seeing their real prices are moving down with the reduction of fuel surcharges.

Fair point.

Gentlemen, thank you so much for the time as always.

Our next question is coming from the line of Ed Wolfe of Wolfe Research.

Thanks, good morning everybody.

Can you talk a little bit about RCAF, and what percent of your contracts are RCAF right now?

Ed, if you look at our book of business, only about 10% uses RCAF as an effect later.

Most of that is in the remaining legacy deals that we haven't been able to touch.

For better or worse quite honestly, those don't include 100% of RCAF.

As it turns out RCAF is not a very big issue for me.

Is that mostly coal at this point?

Yes, pretty much coal.

If you looked at that pie I showed you, coal and intermodal are the two biggest players, and that is where you see the RCAF impact.

Okay.

When you look at at the pricing that is already complete for this year, you obviously have pretty good visibility into it based on what you said, what does the RCAF looked like both net and gross of fuel, obviously it is going to be negative gross of fuel, what does it look like net of fuel?

I am not certainly going to give an answer to that, in terms of detail here, what you know obviously RCAF is moving down in total, that is out here, there is a strong fuel component to that.

I think core inflation in the railroad is still going to be positive.

Again when you look at labor increases that have come through, some contract pricing that still has some pretty healthy price increases that are out here.

I can't give you the percent change here, but the components clearly are moving in opposite directions.

Jack?

If you just look at the first quarter RCAF, Ed, you see RCAF is down probably year-over-year in about the 3% range but [ALIF], which is RCAF without fuel, was actually up about 0.5%.

So I think that kind of points out to you the fuel differential, and says that the overall cost still had some inflationary impact for us.

To me RCAF should be a zero sum gain over time, right, you have got it linked if your inflationary costs are going up or down, you are covering, that is the theory 100%, unfortunately with some of our contracts, we don't have 100% recovery of RCAF.

I get the zero sum gain.

The reason I am asking is we have got a lot of questions since [BNE]'s call yesterday, they apparently reported, when you look at your 6% pure pricing that you talked about for the quarter, they had historically looked at that number including RCAF gross of fuel.

When you look at that number at 6%, do you have included in that the RCAF contracts, and if so is it included in, I would guess it is net of fuel, not gross of fuel?

My 5 to 6% includes the contracts that are escalated by RCAF, and that is a core price increase, that does not reflect what happens on the fuel side.

It is cosmetics, but I think it's important for people to understand the yield, so that is helpful.

In terms of the operating ratio direction, I know you haven't given earnings guidance, but if we look at first quarter directionally, I am guessing the operating ratio is going to be down year-over-year as you lose some of that headwind on the fuel?

Is that a fair assumption?

The operating ratio actually will year-over-year, if you look any time going from fourth to first, it tends to go up.

I think looking year-over-year in first over first.

So if I look at my model in first quarter '07 your OR was 81.3, I assume it is going to be higher or deteriorated from there given fuel, is that a fair assumption?

We are not providing guidance here on first quarter, but there will be some pressure.

Again when you look at what is happening on volume that is out here that will be tough to offset.

Okay.

Jack, you talked about extended plant closings over holidays, and things like that.

Can you talk about the different industries, and the timing of when you will start to see some of this stuff move, or where you have visibility that things are going to reopen, and where you don't?

Sure, we, probably the most visible at this point in time is the automotive industry, given the concern that everyone has.

Today in total we look at about 60 plants.

Today this week, we see probably 37% of that is still shut down, 63% open.

That will decline over time.

But it actually is a fairly moderate decline, and it extends all the way into early March.

We actually still believe, based on what our customers tell us, that we could have about 12 plants shut down that first week in March.

Okay.

And so by the end of March do you think all 60 are open?

By the end of March of course there is a lot of time in between this, and it depends on if people are going to start buying cars again, but the indications are that people intend to reopen those facilities, and have them operating.

So that is what we are counting on.

How about other verticals, chemicals?

The chemical plants are just starting to show some life.

We just recently got some information from some plastic guys that they are resuming production, and that is a pretty big decisions on their part, from the perspective that once you take a cracker down, you don't open it up until you are feeling pretty good about your business model.

So we take that as a positive sign.

The lumber side of the business still we are not seeing much of an interest in opening up, although you have periodic pieces of information.

At this point in time, inventory levels are so low, but the thing that offsets that, if you look at the ratio of inventory to sales, we were making some great progress all the way down into November, and then that ratio went way up again and it wasn't because inventory sparked, it is because sales disappeared.

So at the first side sign of sales I think you could actually see some inventory rebuilds start up, and things could be a little better than what everybody thinks.

Do you have any utilities that are shut?

I can't think of anybody that is shut down.

On the chemicals side, once somebody makes a decision that we are going to reopen, how long does it take to physically reopen give or take?

I don't know the specifics on that.

Ed, I think it depends on what the facility is, if it's fertilizer , if it's plastics, if it's whatever, and I don't know the technical side of how long it takes to open.

But the one experience we had, it was about three weeks from the time they told us, until the time things started

Very helpful directionally.

Can you talk a little bit about the timing Dennis of the Sunset line completion, now that that has been pushed out a little bit?

As you remember Ed, we were looking to target that somewhere in the 2011 timeframe.

What we have slowed down is the double tracking of that, so we will do just 11 miles, finish off the 11 miles that we had started from '08 in '09.

That leaves us at about 300 miles left to do, 60% done, and obviously we will take a good hard look at that.

We will be graded ahead about 80 miles, so that we can if we see business come back, go back out there and lay some more additional double track.

We probably pushed out at least two to three years, I would say Ed right now, but we are still going to be working on some of the terminal aspects of it, particularly some of the run through facilities that we see are current bottlenecks.

Last question, total FTEs down about 4% year-over-year, what should that look like as you continue to right-size towards volumes?

Is that a fair number going forward, or is it going to be even lower when we look at first quarter?

I think the first quarter number is probably going to be in that 4 or 5%, again, Dennis was showing you, we have got over 3,000 employees furloughed, the numbers probably going higher where we are at.

That is out here.

Again, what you are trying to predict here, is when you think there is going to be some turnaround.

I am not real optimistic this year, so we are being pretty conservative on our assumption about a return.

But again you have to be prepared for when this thing comes back.

You don't just automatically turn it on and off.

You will see first quarter probably 4 or 5% down.

I said that was my last one, one real last one, Jack, you talked about losing some coal business because you are sticking to pricing, the legacy stuff, which is part of the plan.

But can you talk about the timing and the magnitude, where we might see that in the model of when those contracts you actually walked away from?

It started January 1.

January 1 of last year.

January 1 of 2009.

Oh, that is when you are starting to see contracts that you are walking away from?

So going forward.

No, no.

Wait a minute, I am sorry, I misunderstood your question.

I thought you were asking about the contracts that I lost, when was the impact of that in terms of our volume, and we lost those contracts effective January 1.

Okay.

So we will see that starting now going forward.

It is in your numbers.

Ed, in fact if you look at coal right now, you are running about 2% to a year ago, a lot of factors in there, but that is where we are at.

Okay, that is in the numbers.

Thanks guys.

Thank you, our next question is coming from the line of Walter Spracklin of RBC.

Thanks very much, good morning, guys.

Just one clarification, you mentioned about 80 to 85% of your 2009 book is contracted or is priced in.

Ballpark what percentage of your total book is contracted, and balance that off against the remainder of that as tariff?

If you look at our mix of business we have between 40 and 45% that is under a long-term multi-year contract.

We have about, okay, I am going to start guessing here, about 20 to 25%.

It is probably closer to 20%, that is one-year contract kind of letter quotes and things.

And then the balance, 30-some percent would probably be in the tariff.

That is good.

Next question is just on some of the modal shift that you might be seeing regarding truck.

Fuel prices coming down significantly, you mentioned that it is going to be a lower topline cost to your customer, and clearly the truck reductions because of the higher fuel consumption, on that mode is probably going to be even more pronounced.

To the extent that you might have seen some traffic flow over to truck when we saw 1.40 oil are you seeing any of that traffic going back to truck, now that fuel costs have come down so significantly?

We have bought some business to truck here recently, and it is interesting, it is for two reasons, one of which is, the lower fuel prices has actually breathed some life into some small trucks, that had been on the verge of going away.

So they now have new hope.

So they have got some pretty sharp rates in the marketplace.

We have seen that particularly up and down the I-5 corridor, and some of those locations.

That is one factor that has impacted us.

And the rest of the business is holding pretty solid.

We are all kind of watching to see what happens here, in terms of the registrations.

They have to get a new license for their tractors at about $4,000 a copy, so we will see the staying power that we have there.

Overall the other factor that we have seen that is probably been interesting for us is some business that shifted to truck, and when we pushed back on the customer to determine the reason they basically said, well, we can put 4 truckloads in one railcar, but in today's financial markets, I don't really want to carry the inventory from 4 truckloads, so I will just buy it a truckload at a time until things improve.

We have seen both of those, we lost some business but we are watching it pretty carefully.

That is good color.

Now moving sort of to the intrarail competition, you had mentioned that one of the contracts didn't go your way.

Is there any sense of risk here, that we are seeing increased price competition between the railroads, based on what you have seen out there today?

We are not going to get into a lot of details on the specific pricing here.

Clearly there are some markets that it is softer.

As Jack said, the domestic intermodal you have got some pressure there that is out here.

But we are staying firm on what we require.

While we had a great year in 2008, you start looking at the capital needs, you look at replacement costs of assets here, these returns need to go up.

And we are going to be smart about understanding where our sweet spots are in our network and our margins here, but so far we are not seeing a lot, there are pockets that are out here, but we are sticking to our outlook here.

Okay, that is good to hear that, I applaud that.

On the [inaudible, technical difficulties]

We just lost the feed.

Gentlemen, you may continue.

Okay.

Walt, we lost you about two words into your last question.

Are you with us still?

Next question is coming from the line of Matt Troy with Citigroup.

Please go ahead with your question.

Actually related to the pension plan, you started the year underfunded like a lot of folks with the heavy equity allocation, I think you were close to 70%.

Can you give us an update on the status of the pension and expected funding in '09, when you need to start thinking about that, and positioning for it?

It still is early but rough estimates would point at a significant contribution needed to top off the plan.

Any thoughts or update there?

Matt, as I mentioned to you at the year end '08 we put a voluntary payment cash and contribution of 200 million, in '09 we will work through that during the year.

Likely there will be at contribution, but we haven't determined how much and exactly when.

Is it fair to say that it will be higher than what we saw in 2008?

Probably not but I can't give a precise number on that.

Matt, we have been putting some cash in pretty consistently the last three, four, five years here.

Again I think everyone is in the same boat with the equity market being what it is, just looking for an update.

Keep in mind though our pension applies, again, the number much people it is a pretty small proportion, I think it applies to about 10%, or 9% of our total workforce here.

Non-agreement workforce.

Second piece of the question, was the debt raise you did late last year was the largest I believe of the Class 1s at 7.9%, rated a little higher than what we have seen from you guys in the past.

Does that debt raise cover what you have got expiring in 2009?

Are you going to need to swap up that debt when it's due, or are you covered now given the size of the raise late last year?

As I mentioned we have a $250 million payment due in the next two to three weeks.

And we are covered with that.

Beyond that, we will look at it and determine what the market is at the point in time that the further debt is due.

All right, thanks.

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

Great, just a follow up on that last question.

Do you have anything else due in '09, or is it just the 250?

We do have additional debt due during later in the year, about 600 million or so.

Okay.

And when is that?

In total.

In total, so different issues through the year?

Correct.

Okay.

You kind of talked about the 3,000 employees you are going to furlough, or have furloughed.

What is the process there?

How long do you keep them in furlough?

Is there a contractual agreement that you have to keep them in the furlough for a certain amount of time, before you can reduce your staff overall?

Just wondering what kind of ongoing costs furloughed employees have, relative to your on book employees?

It varies by group.

I will have Dennis talk because the majority of those folks right now are train and engine crew.

On the TE&Y side, which is the preponderance of that number they come off the direct costs obviously right away, and we don't incur anything there.

Now there is some continuation of benefits out there for several weeks, that it would be somewhere close to probably $1,000 a month, something like that, per employee.

Then we also have a temporary work arrangement that we put some of these under, what we call [AWATS], alternative work in training, that we pay them 8 days a month plus their benefits, so that we always have a ready reserve, and we tie that to the anticipated attrition rate for the next six months, is what we are working through there.

So that if things do change, we do have that ready reserve that we can put them right back in play immediately, and we make adjustments to that on a monthly basis.

Ken, we chose to do the AWATS, that was not a requirement in the agreements.

And again as Dennis said it's an attempt to try to bridge the time that we furlough and get them back to work.

Now we also have our attrition, while it has slowed down a little bit, we are still going to probably see 5 to 6% this year.

So again we said before with an aging workforce as you have, and attrition rates kicking up, we hope we can get literally have stopped hiring other than a couple of specialized areas here, if we can we get people back to work as quickly as we can.

I am just wondering if you are really seeing some increased costs from some of your competitors, is this an increasing amount of pricing competition you are seeing, you noted on the coal side?

Why not start calling out some of these I guess losses to whoever is being the more aggressive, so investors can understand who is starting to see, or lead the pricing competition within the group?

Well, Ken, it is against the law here.

I know you don't literally mean call out what we are seeing here.

We are very careful in terms of what we do internally here.

Again, I don't see any dramatic change.

I want to be careful here.

You are seeing pockets we compete.

At the end of the day again we lost some, but we have won some.

But I don't see a huge change right now in terms of price pressure at this point, and again volumes in the railroad industry have been weak for three years, if you look at it.

The recession started quite some time ago.

We are going to be smart about where we go here, in terms of our returns long-term.

All right.

I appreciate the time, thanks.

Thank you.

Our next question is coming from the line of Tom Wadewitz from JPMorgan.

Please go ahead with your question.

Yes, good morning.

And Jim, I think it certain is we are saying congratulations to you on the strong 2008, and you executed quite well in the year, so congratulations on that.

Thank you.

A question in terms of productivity going forward, you have already had a very good trend in headcount reduction.

Your fourth quarter train starts down 9% that is a pretty impressive number, and you are not quite keeping up with the decline in volumes, but you are not that far away.

Is there risk that you are not able to keep up the pace of productivity, and you have already kind of, you are getting a little to the end of some of the momentum on that?

Or do you think that there is really continued ability to have the productivity momentum in 2009 that you had in 2008?

Well, Tom, reduced volumes are going to put pressure on the business.

I mean there is just no question about it.

And running 18% down year-over-year on volume is going to put pressure on productivity.

We are focusing on a lot of things.

You recall we have got a product OR, operating ratio initiative that we are looking at, and that has been in place for several years now.

We are putting a lot of pressure there to take a look at our costs.

That has great success there that is out here.

We have technology deployment that we are continuing to push on.

Dennis showed $150 million technology investment this year, part of that is pointed at productivity.

Our process initiatives, we have as you know really, we call it Lean management, industrial engineering, that really continues to show us opportunities for productivity.

I will tell you, headcount reductions match with volume, we have to continued to do.

But long-term our target here is we want to be handling more volume with fewer resources.

But you are going to slow, this whole industry, if the pace of fall off continues, we are not going to be able to keep up with it.

We are going to be very aggressive on it, and we are going to prepare ourselves for when this thing turns back, that we are not going to wake up some day and realize, we don't have enough people to move trains.

We are going to keep at it.

Is there a way that you can think about the kind of ratio between the two?

I know part of it is how well you can actually forecast the volumes, so you can set the resources accordingly.

If volumes end up down 10% on a full year basis, would you expect headcount in let's say train starts to be off at half that level, or can you be closer to volume down 10, train starts down 8 or 9?

Our rule of thumb is probably I think on variable costs maybe 30 to 50% when you think about it.

Again, fuel is going to be highly variable, highly correlated to volume.

Our other costs will be lower, so a rule of thumb is 30 to 50%.

I will tell you one of the things we are seeing right now.

Not only capital investment, the productivity [route] crew rates, cycle time, you are generating assets here that is out here.

And we are just going to keep very, very aggressive on our costs would be smart about it.

You think there is maybe upside, you said maybe in first quarter headcount down 5% but if you are down 10% volumes for full year, do you think you could be down further than that in headcount?

I think we are down 10%.

We are going to be down more than 4 or 5% on headcount.

Right.

Okay.

If you look at the '09 you have got I guess some obvious unfavorables but a few favorables, so you are going to get the 5 to 6% price, you have got undercovered on fuel surcharge, so you should get some net benefit from lower fuel.

And then you have the operating leverage at lower volumes.

Is there a volume lever are level where you would say, if we are in this range we think those positives and negatives offset, and we can have kind of flattish earnings?

Is there away you can think about that that if it's kind of down 5%, maybe you can get flat on earnings, if it's down 10 then that becomes a lot harder?

Tom, I said I wasn't going to provide financial guidance here, but I would just ask you to think about the positive.

You just listed them that are out here.

Pricing, productivity, energy costs.

I mean don't forget you not only have diesel costs, but we have got a lot of other energy costs in the business that are coming down.

How that plays against volume it is a tough call.

We are going to do everything we can to have relatively speaking a very good year for us financially.

Okay.

Great.

All right.

Thanks for the time.

All right, Tom.

Thank you.

Our next question is coming from the line of David Feinberg of Goldman Sachs.

Please go ahead with your question.

Good morning.

Good morning, David.

Most of my questions were asked, so just a few housekeeping questions.

On the locomotive purchases in '09, can you just run through those numbers?

I saw the $400 million in locomotive and equipment, but I missed the number of locomotives and the dollars spent on those standalone?

It is 125 locomotives, figure a price tag of about 2.1 or so, 2.2.

Got you.

Then had you talked about some of the modal shift you were experiencing in intermodal losses to truck.

Can you talk about, is that pure price?

In other words, traditionally we have thought about railroads being priced at some discount, and we have heard ranges anywhere call it from the 15 to 40% relative to truck.

The modal shifts that you are experiencing, is that purely based on price?

In other words, are the trucks coming down to the traditional rail rates and then losing it, or is there a service element there as well?

Jackson, do you want to take the price question there?

David, for the most part as I said to the earlier question, some of it is price, some of it they just don't want the inventory carrying costs associated with a much larger shipment.

The one thing we have going for us is our service, and the service improvement that we have seen.

So if you are looking at discounts to market if you look at some of like over the Sunset Corridor, LA to Dallas and things like that, our discount truck is probably in the 10, Chicago to Laredo, our discount to truck is probably 15%, something like that.

LA to Chicago more like 20% today, so we are watching the marketplace very carefully.

And I think that our service improvement plays very strongly in our favor.

There is no question on the service piece when you look at we are putting new products into the market.

But also keep in mind with customers, you have got to prove it over time.

You have got to be consistent in terms of your service delivery, and I will tell you it's making a big difference, in terms of how our customers are viewing the rail products that are out here in the industry.

Great.

And then one last question, you talked about the percentage of your business to roughly 20% that are on one-year contracts.

When we think about 2010 when will you start talking to those customers about the 2010 pricing on that 20% of your book of business?

It goes all throughout the year.

I can't tell you that it's any one quarter dominates.

I would say a lot of it probably comes most closely to the year end, but I without say it's any more than 30 to 40% of that amount.

Is it safe to assume that that piece of your overall book of business, those discussions would be more vigorous, in term of repricing, I think you mentioned earlier you never met a customer who didn't like a price increase, but are those the toughest conversations, is that where you get the most pushback, or is it pretty consistent across your book of business?

I think all of my pricing discussions are vigorous with lots of pushbacks, so I don't see it very different.

They are not a heck of a lot different than negotiating a multi-year contract or a tariff increase.

David, the key on the discussion, again keep in mind some of these, is where is the value, not only the service product, but what other products, what does it mean to the customer.

When you are turning assets in many of these corridors like we are today, you have customers who may own rail assets, and step back and look at it where they can take millions of dollars out of their logistics costs.

So all that comes into play and as Jack said, none of them are ever easy on the discussions, but we have got some great products that we have out there today that really do provide value.

Great, thank you very much.

All right.

Thank you.

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

Good morning.

A couple of questions for Rob.

The tax rate this year was around 36%.

Can you give us some sense as to 2009?

And then you mentioned about the $250 million, of roughly that number that you got is sort of accelerated depreciation.

How should we think about the deferred taxes for 2009?

Randy from a tax, cash tax rate going forward I would use similar to what we had experienced in 2008.

From a bonus depreciation, what I mentioned on the benefit we got from bonus depreciation 2008, I think that is what you are referring to, is about $225 million.

Looking forward, we haven't given that number.

But do you see, like if for modeling purposes, when we think about sort of what we should put into the deferred tax line, can you give us some help, in terms of of should we go back to what we used in 2007, or should we assume that the ratio of deferred to the total accrual stays the same?

Randy, I can't give you any specifics so I can't suggest a change.

I mean it is kind of a same as you look forward.

Okay.

Congratulations on the safety performance.

You guys made tremendous strides over the last few years on safety.

In looking to 2009 is there some opportunity to again reduce the accruals for safety?

Or for the whole sort of accrual process that you have got for employee injuries, et cetera?

Randy, there is, again, we have got to continue to focus on our performance, Dennis has set some aggressive goals.

We have got good programs in place.

Our total safety culture is one that we have introduced.

And we are hoping we can, we should see good trends.

Jim, can you give us a scale in terms of potential reduction?

Randy, I am going to stay away from that, in terms of order of magnitude.

I would just tell you though you still have within our Company, a pretty substantial cost item related to safety failures, whether you are talking about employees, whether you are talking about derailments, whether you are talking about public safety.

And we have had great progress, we are going to continue at it.

Jack, one question for you, there is a lot of skepticism about railroad industry's ability to get 5 to 6% baseline price increases.

When you think about your 5 to 6, how much of that 5 to 6 would be repricing of legacy contracts from last year, in terms of the year-over-year comp issue?

And I guess the other thing I was looking for was some sense of granularity in terms of the 5 to 6.

So for example, do you still see getting 5 to 6% in intermodal or do you make more in some category, and less in others?

As we look at it, Randy, we said before in our conference call with security analysts last year, that we expected to get 3 to 4%, plus a 2% pick up from legacies, and so in total that is kind of the way we look at it.

Our 5 to 6% right now, about 55% of that comes from new legacy renewals that we did in 2008, and that is their impact in 2009.

So it is about 55% of my 5 to 6% for this year.

And then also in there you would have other legacies that were done before 2008 that have escalation, and plus tariff pricing and our other pricing.

In terms of the individual groups it is pretty difficult to say, it is really market by market lane by lane, in some pricing corridors we are able get more than 5 to 6, and others we are taking less, and we are just watching the market carefully and working with our customers.

Last question, I think God was short your stock last year, in terms of floods, landslides and hurricanes.

You guys mentioned getting insurance recoveries as a benefit for previous years.

Looking to 2009 are you in disputes with any of your insurance companies, and do you see a situation where you are going to get an insurance settlement in 2009?

Randy, we always work through that.

There are no disputes to share here.

But we are working through all of those challenging insurance processes.

Again, can you give us a scale or in terms of potential contribution?

No, no.

It is not going to be material.

It wouldn't be material.

At the end of the day, we don't have anything like that in our plan.

So nothing material.

Okay.

And then I am going to squeeze one more in.

Bonus accruals.

Way there any change in bonus accrual in the fourth quarter?

Did you reduce it, was it up year-over-year, can you give any sense as to what happened?

I still have my Board meeting in a couple of weeks, but at the end of the day we had a great year, one of the best years in the history of the Company.

We are going to reward the management team for that performance.

2009 is a different situation.

In terms of how you look.

There were no changes in bonus accruals for fourth quarter.

And we are taking a hard look at, we are making some tough decisions right now in 2009.

Thank you very much.

Our next question is from the line of Chris Ceraso with Credit Suisse.

Please go ahead with your question.

Hey, thanks, just a couple of quick ones left.

First what do you expect the increase in pension expense on a book basis will be '09 versus '08?

Rob?

I would expect that the pension expense would be probably similar the what we experienced in 2008, which is around 35 million or so.

Okay.

And then can you give us a feel on an average basis maybe like-for-like in terms of routes and products on a year to year basis, what you are seeing right now in tariff pricing?

I really couldn't.

It varies all over the place.

I think again it depends on the market, it depends on the commodity.

It depend on the competition.

It just depends on so many things it is pretty hard to give you an average.

There is no consistent theme there.

No.

Okay.

Thank you.

Thank you.

Our last question is coming from the line of Gary Chase of Barclays Capital.

Hello everybody.

Just a quick clean up for maybe Rob or Dennis.

When you talk about the folks on furlough, I assume the folks in the AWATS program are immediately available, that is the whole point of it.

For folks that aren't, how long does it take to get them back into active service?

Do they have to go through a full training regimen again?

Gary, it depends on how long they have been off but I would say a maximum of 30 days.

We usually try to get them back, and get them back into the fold.

That is why we try to peg the immediacy of the AWATS to the anticipated attrition rate, so we can have them readily available, as you said, and the rest would probably be about a 30-day lag.

Two for Jack if I could, just want to do clarify, you said earlier, I think it was Ed Wolfe asked you about whether or not RCAF, let's see if I can phrase this rate the impact of fuel on RCAF is included in your 5 to 6% core price increase.

And I think I heard you say no.

So that means whatever fuel does to RCAF positive or negative, that is not going to affect what you report to us as your core price gain.

Is that accurate?

Yes, we try to exclude fuel and try as best we can to come up with a core price calculation.

But again RCAF is not a very big factor in our book of business.

Okay.

And then, so good segue into the last question.

When you think about the business that is not RCAF, can you give us any color for what that is, is it RCAF ex fuel plus a surcharge?

Does it have nothing to do with RCAF?

What is in there, when you think about contracts that are not rolling, that are progressing year to year, how do we think about what the escalation clauses in there are?

There is an RCAF component that is about 10%.

You have got an ALIF plus fuel surcharge component, and then you have fixed price increases that we have negotiated with customers, in terms of just how over the length of a contract we would escalate the pricing of the deal.

Any, any sense of what ALIF plus fuel surcharge is, is that a significant percentage of the non-RCAF?

My guess is ALIF plus fuel surcharge is probably in the neighborhood of 10%, 10 to 15% of our base.

Okay, so 10 for straight RCAF, 10 to 15 for that, and then the rest is other escalation clauses you have negotiated over time?

Yes.

Okay.

Thanks very much.

Thank you.

There are no further questions at this time.

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

Jim Young for closing comments.

I would like to thank everybody for joining us in the call, and we will talk to you again in about three months.

Thanks.

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

You may disconnect your lines at this time.

Thank you for your participation.