聯合太平洋集團 (UNP) 2009 Q4 法說會逐字稿

Greetings, and welcome to the Union Pacific fourth quarter 2009 earnings.

(Operator Instructions).

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

Jim Young, Chairman and CEO for Union Pacific.

Thank you, Mr.

Young.

You may begin.

Good morning, everyone.

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

Joining me in Omaha are Rob Knight, our CFO; Jack Koraleski, Executive Vice President of Marketing and Sales; and Dennis Duffy, Vice Chairman, Operations.

For the fourth quarter, we're reporting earnings of $1.08 per share; that's off $0.23 from 2008's record quarter.

As we experienced throughout 2009, our quarterly results reflected the global recession, with total volume down 5% year-over-year.

For the full year, volumes declined 16%, producing our lowest business levels in over a decade.

We finished 2009 in an upswing, however, as fourth quarter car loadings were the highest of the year both in absolute terms and year-over-year.

Of course, the 2008 comparison period was already seeing the impact of the recession.

As you'll recall, volumes were in a virtual free fall at the end of 2008, but it does point to some stability in freight demand as we enter the new year.

Over the last several years, we've been executing our long-term strategy designed to drive Union Pacific's performance across every area of the business.

Efforts to strengthen our infrastructure, deploy new technology and engage our employees positioned us to act quickly when the economy faltered.

We idled resources, modified our operating plan and adjusted our cost structure to the new lower demand levels.

Despite the lower volumes, we achieved a number of performance milestones that demonstrate the focus and commitment of our organization.

UP's safety performance set new records in employee, customer and public safety.

Our operating team achieved best in virtually all metrics, as we increased network fluidity, improved asset turns and delivered a highly reliable service product to our customers.

The scores on our customer satisfaction surveys validated our internal data, with customers giving us their highest marks ever.

We kept commitments, expanded our service offerings and provided our customers with cost efficiencies to the benefits of rail transportation.

In addition, UP's increasing value proposition continues to support our long-term pricing objective.

We also achieved the best full-year operating ratio in the history of our Company at 76%.

Solid efficiency gains, continued pricing strength and lower year-over-year fuel prices helped us overcome negative volumes and generate better margins.

Importantly, this sets the stage for us to produce strong bottom line leverage as volume returns.

In addition, we ended the year with our balance sheet in great shape, solid free cash flow after dividends and a strong year-end cash position.

Overall, we feel satisfied by what we accomplished in 2009 given the challenges.

Our objective coming into this year was to manage through the recession the best way possible, emerging at the end as a better Company, and we believe we've attained that goal.

With that, let me turn it over to Jack to walk you through the business teams.

Jack?

Thanks, Jim, and good morning.

Well, as we close the books on 2009, we ended the year with some positive momentum which we're hoping carries forward here into 2010.

Three of our six business groups -- ag products, automotive and intermodal -- posted gains during the fourth quarter, as volume made its strongest showing of the year, but still ended the quarter down 5% against 2008.

Our pricing came in at just under 5% for the quarter, but the decrease in RCAF fuel brought our net price realized to 3.5%.

Much like in the third quarter, the timing of our legacy explorations didn't give us much of a fourth quarter boost, and our legacy intermodal contracts actually resulted in negative pricing in our intermodal business line.

We should see that situation improve over time with our new Pacer arrangements in place.

At the same time, volume growth in intermodal created negative mix for us.

All of our other businesses had positive pricing, although the economy didn't help -- especially in industrial products and ag products where tariff based pricing was more reflective of what's going on in the economy.

Taken all together, average revenue per car declined in all the groups, and many of our customers realized a net year-over-year reduction in their freight bills as a result of lower fuel surcharges.

Overall, average revenue per car was down about 9%.

With volume and average revenue per car down from 2008, revenue declined 13% to $3.5 billion.

Now let me take you through a look at each of our six businesses.

We'll start with ag.

Our ag products volume products grew 3%, but a 10% decline in average revenue per car resulted in a 7% reduction in revenue.

Soybean volume increased 68% over fourth quarter 2008's record levels, as damage to the South American soybean crop combined with a plentiful US supply to create a strong export market.

Demand was also strong for soybean meal, with the Pacific Northwest export shipments more than doubling the previous best achieved back in 2003.

With all the former (Inaudible) plants now operational and under new ownership, ethanol volumes grew 13%, and DDGs also saw continued growth -- they were up 11%.

Record unit train shipments supported the growth in whole grains and grain products throughout the quarter.

Our automotive volumes grew 1%, but revenue declined 1%, as average revenue per car fell 2%.

Although light vehicle sales declined from third quarter's Cash for Clunkers heights, they remained much stronger than the first half of the year.

With inventory replenishment and production increases, our finished vehicle shipments increased 37% from the third quarter, posting their strongest levels of the year and coming in flat versus 2008.

Parts volume grew 2% with its best showing in five quarters.

And also during the quarter, we wrapped up negotiations on our last remaining major legacy contract in our automotive business, and that new contract is set to take effect at the end of this month.

Our chemicals volume was down 2%, which combined with a 5% decline in average revenue per car and resulted in a 7% revenue decrease.

Soft economic conditions continue to impact key segments of our chemical business, with soda ash volume down 13%, sulfur down 14% and a 6% drop in petroleum products.

Fertilizer volume declined 7% with soft demand for fall purchases, driven in part by a relatively late harvest.

Our plastics business grew 9% as strong exports offset a 1% decline in domestic shipments, and our industrial chemicals were up 2%.

Stronger demand for heating fuels and propylene shipments drove a 4% growth in LPG.

In energy, high stockpiles and lower electrical demand led to a 15% drop in volume from 2008's record fourth quarter car loadings.

I think energy is a good example of how lower fuel surcharge revenues and negative mix mask our positive pricing in most of our business groups.

Solid price gains, driven by legacy renegotiations in prior periods, were completely offset by fuel surcharge declines, and negative mix drove average revenue per car down 8%.

That decline combined with the short fall in volume to lower revenue 22%.

Powder River Basin volume was down 16% as a result of softer demand, and the SPRB contracts that we lost at the beginning of 2009, which accounted for about a third of that drop in volume.

Loadings out of Colorado/Utah were down 20%, hindered by soft demand, and to a lesser degree, continued coal quality problems.

We had strong service performance, and that was reflected in a number of best fourth quarter productivity measures for both the Powder River Basin and Colorado/Utah.

Industrial products volume fell 21%, which combined with a 9% drop in average revenue per car to produce a 28% decline in revenue.

Continuation of low steel mill production translated into a 32% decline in steel shipments.

Our rock business was down 29% because of soft demand and high inventories, and the story is pretty much the same for cement, where our volume was down 37%.

Lumber volume was down 23%, as housing starts continued to track well below 2008 levels.

Hazardous waste posted significant growth, with our uranium tailings move in Utah and the Hudson River cleanup combining to add over 10,000 new units of business in our fourth quarter of 2009.

Intermodal revenue was down 3% as lower fuel surcharges from the legacy price reductions more than offset the 5% improvement in volume.

Our international volume declined 9%, even as the segment showed some surprising seasonal strength with fourth quarter volume up 3% from third quarter.

More than offsetting the softness in international was a 28% improvement in the domestic segment.

The shift of hub business provided about half of that growth, but the strength of our value proposition in the domestic intermodal market drove the rest.

Our streamlined subsidiaries door to door product grew 42% in volume, with nearly 70% of that growth coming off the highway -- and this actually marked the first quarter that our domestic revenue surpassed international in our intermodal business line.

As Jim said, 2009 was a great year for customer satisfaction.

Great service continues to underpin a strong value proposition for our customers.

Overall satisfaction came in at 88 for the fourth quarter, equaling the record set during the third quarter, and our full year also came in at 88, which is up four points from 2008's record setting performance.

So what about 2010?

Let's start with our legacy contracts.

The pie chart on the left shows you where we were a year ago as we headed into 2009.

Legacy contracts with 2% of our revenue had been renegotiated towards the end of 2008.

About 18% remained, with about 1% still to be renewed in 2009 and about 3% lined up for 2010.

With the pull ahead of a piece of our Pacer contract and our last major automotive contract now renewed, the pie chart on the right shows that of that 18% remaining at the end of 2009, four percentage points has been renegotiated for 2010, and we expect at least another percentage point to be completed by year end.

This will leave about 13% of our revenue still moving under legacy pricing as we move into 2011 and beyond.

The bar on the bottom of the chart shows that about two thirds of that remainder falls within our energy business, just under 30% in intermodal and the remaining 4% is spread among the other four businesses.

So we're continuing to make good progress.

We're continuing to work hard to accelerate the renegotiations of legacy deals where that makes sense.

And although the benefits of the new Pacer arrangement are phased in between now and the original expiration, our legacy contract renewals are still a solid contributor to -- for our price cut -- price plan, as we remain absolutely committed to renewing those deals at market rates and helping us to reach our reinvestability objective.

Okay, from there, 2010 becomes a little less clear.

Global insight forecasts a slow recovery, with key indicators climbing from the lows of 2009, but still remaining below the 2008 levels that were already depressed.

[Either] recovery will be improved consumer confidence reflected in increased spending.

So if the economy doesn't falter, we believe that all of our business have opportunities to grow in 2010, with the greatest potential, probably in those that were hurt the most by the economic slowdown.

In ag products, ethanol and DDG should continue to grow as the renewable fuels and the California mandates kick in.

You add to that some slight improvement in animal feeding, and we could see some modest growth for the year in our ag products business.

Our automotive volumes strengthened in the second half of 2009, and improved economic conditions and increased demand will likely drive further recovery in 2010.

Expected sales are going to be someplace between 11 and 11.5 million for the year.

As downstream demand improves, so should our chemical business, and we're hoping to see an improved fertilizer market both here at home and abroad.

We're not really counting much at this point on volume growth in coal, but the recent reports indicate that the severe cold weather both here and around the world may have put more of a dent in stockpiles than what we might be expecting.

So if we see some improved industrial production and a more normal summer burn, there may even be a little opportunity out there for us in the coal business.

A modest increase in housing and construction activities should translate into modest growth in lumber, rock, cement and steel for our industrial products line.

And when the construction season rolls around, we're going to be looking to see if stimulus spending provides more of a boost in 2010 than we saw in 2009.

Hazardous waste was one of our few lines of business to post year-over-year volume gains in 2009, and we anticipate that's going to continue to grow again this year.

And of course, that leaves us with intermodal, where a stronger economy should get our international business back into the black, and we're hopefully going to keep our momentum going on the domestic side of the business.

Assuming fuel prices stay where they are, volume gains across the six businesses should combine with our pricing plan to drive revenue growth.

While the economic improvement in 2010 would be welcome, our real opportunity lies in the strength of our value proposition, providing a solid foundation for our business development efforts and our price plan.

Driving that value proposition is excellent service that results from the commitment of our employees, our strategic investments in facilities and equipments and the new and innovative solutions and offerings that we're providing to our customers.

Our customer satisfaction score says we're headed in the right direction, and we're confident in 2010 we can do even better.

With that, I'm going to turn it over to Dennis.

Thank you, Jack, and good morning.

The operating team put a solid finish on 2009, making improvements in all aspects of our operations.

Let's start with safety, Union Pacific's top priority.

So achieving record levels in all safety categories for the second straight year is a great accomplishment.

For our employees, we achieved a 12% improvement in our incident rate, as we continued deploying total safety culture, which emphasizes everybody's role in working safely together.

Customers benefit from a safer railroad through enhanced reliability and lower costs.

In 2009, the rate of equipment incidents was better by 10%.

Our improved track infrastructure, training and process improvements all contributed.

For the communities where we operate, our rate of grade crossing incidents improved by 11%.

Education, engineering work and improved technology all play a role in eliminating accidents, and that's really the goal -- achieving a zero tolerance safety performance.

From a service standpoint, '09 was also a record year across the board.

We made strong velocity gains, finishing at a record 27.3 miles per hour, an increase of nearly 2 miles per hour from our previous best in 2002.

Freight car utilization, the cycle time between loaded moves, was an all-time best at 8.6 days.

Faster asset turns lets us move more freight with fewer cars, positioning us for strong volume leverage going forward.

For example, the nearly two-day savings we've achieved from 2006 to 2009 equates to roughly a 34,000 car reduction in our active online inventory, or 340 miles less of potential rail congestion.

Terminal dwell time established an annual time at 24.8 hours.

The more efficient operations drive a better service product, establishing the new customer satisfaction records Jack discussed.

These ratings are highly correlated with our internal service delivery index, which increased nearly 8 points from 2008 and 23 points since 2006.

In 2009, we faced the operating challenge of reducing costs while improving service.

Moving into 2010, the added challenge will be performance sustainability, driving efficiency and service excellence, regardless of the volume levels.

Our formula for success is threefold.

First, run a volume variable operation.

For the full year, we were more than volume variable with our working resources, as train starts were down 20% with gross ton miles off 17%.

One way we achieved that productivity was by maintaining or even increasing train length in every major category.

Second, deliver service excellence.

Looking at the middle chart, from 2006 when volumes were growing, SDI has continued to improve.

Through our unified plan efforts, lean processes and customer inventory management systems, just to name a few, we've continued to make progress no matter what the volume.

We have seen a little reversion as a result of winter weather here lately, but that's already starting to snap back.

And third, create upside leverage.

While we took steps in 2009 to drive efficiencies and take out costs, we've also been positioning ourselves for the upside.

I mentioned train size earlier.

We believe there's still room to grow in most areas of our existing network offerings, particularly within our premium area, autos and intermodal.

Another reason for this upside leverage is the significant progress we've made with our basic track infrastructure, reducing slow orders by 30% versus 2008, driving record velocity.

Other significant capital projects include the Boone High Bridge on our Iowa East West main line that allows us to operate two trains across the bridge simultaneously at a maximum speed of 70 miles per hour, versus one train at 25 miles per hour.

Completion of Centralized Traffic Control, or CTC, signaling all the way from Wyoming to Chicago.

Increased tunnel clearances on the Donner Pass in California, opening the route to double stack intermodal containers.

This saves us 75 miles and up to three hours for our customers, making UP's route the shortest and fastest from Oakland to Chicago.

And we completed the Melrose Connection, a strategic project in Chicago constructed as part of the CREATE project, illustrating a public/private partnership that can really work for UP, the City of Chicago and the shipping community.

Turning to 2010, coming off a very solid year, we will continue to differentiate ourselves as a world class transportation provider.

Our 2010 goals are to drive toward best in class safety, enhanced service and asset utilization and stronger financial returns.

Above all, we will be ready for whatever demand comes our way, up or down.

Cyclical demand changes, seasonal variations and hopefully a strengthening in the economy, all require that we stay agile and resilient.

So with that, let me turn it over to Rob for a look at the financials.

Thanks, Dennis, and good morning.

Let me start things off with a high level earnings summary.

Fourth quarter operating revenue declined 12% to $3.8 billion as a result of the continued weakness in our business volumes and lower year-over-year fuel surcharge revenue.

Operating expenses totaled $2.8 billion in the quarter, down 12%.

Lower diesel fuel prices, along with Union Pacific's initiatives to operate in a volume variable manner, contributed to the year-over-year decline.

The net result of lower revenue and expense was a 12% decline in operating income to $1 billion.

Other income was down slightly at $23 million, and an effective tax rate for the quarter came in at 36.8%.

Altogether, these results produced fourth quarter net income of $551 million and earnings per share of $1.08.

Turning to slide 23, this slide gives some perspective about how we view the year-over-year change in earnings.

Starting at the left, we show reported 2008 earnings of $1.31 per share.

Comparing the year-over-year change in fuel prices and the resulting lag impact, 2008 benefited versus 2009 by roughly $0.22.

That brings 2008's comparable earnings, excluding the impact of fuel, to $1.09 per share.

With the two-month lag in our fuel surcharge programs, fuel price fluctuations between months or quarters can impact earnings.

And as you'll recall, the fourth quarter of 2008 benefited from the fuel surcharge lag, as fuel prices declined rapidly in that quarter.

Included in 2009 earnings are a couple of items that I'll give you more detail on later, but they essentially netted out to a zero impact in the quarterly result.

The first item was casualty related.

Although both 2008 and 2009 benefited from our reduced expenses associated with our strong safety performance, the 2009 change was larger year-over-year, adding $31 million or $0.04 per share to earnings.

Also included in our 2009 results was a previously announced one-time payment of $30 million to Pacer.

So on a more comparable basis, we see our 2008 and 2009 results being pretty flat year-over-year, demonstrating that despite the lower volumes, we generated a strong financial performance in the quarter.

Turning now to pricing.

As Jack just described for you, our pricing initiatives, legacy renewals and valued service contributed nearly 5% price growth in the quarter.

Similar to the third quarter, however, the negative drag of RCAF fuel reduced that 5% by about 1.5 points, bringing our reported core price in around 3.5%.

Full year 2009 core price came in a little over 4.5%, consistent with our view of being close to the 5% mark.

Again, negative RCAF fuel reduced our reported price by roughly a point on a full year basis.

Interestingly, as you can see from the chart on the right, UP's full year 2009 price initiatives, excluding the RCAF fuel impact, was about a half point higher than 2008's pricing.

As you'll recall, we define core price as an all-in yield number that is applied to the entire portfolio.

This differs from a same-store sales type of methodology, which only looks at that portion of the portfolio that matched year-over-year.

On that basis, our 2009 pricing numbers would probably have been somewhere over 6%.

Turning now to expenses.

Compensation and benefits totaled a little more than $1 billion in the quarter, an 8% decline.

Consistent with our actions throughout 2009, we worked aggressively to align workforce levels with demand.

In fact, with a 10% fourth quarter decline to just over 42,000 employees, every area of the business is working with fewer employees today than it did 12 months ago.

On top of these employment actions, we're working more efficiently overall and utilizing less overtime.

The combination of greater efficiency and lower volumes enabled us to offset the 4.5% wage increase given to our agreement employees last July.

In addition, quarterly costs related to post retirement benefits declined year-over-year.

Fourth quarter fuel expense fell 26% to $541 million.

Lower year-over-year diesel fuel prices, lighter volumes and improved efficiency all contributed to the $191 million decline.

On average, diesel fuel price in the quarter was $2.05 per gallon.

This compares to $2.46 per gallon in the year-ago quarter, and saved a little more than $100 million.

In addition, a 10% decline in gross ton miles reduced quarterly diesel fuel expense $73 million.

That savings, combined with greater fuel efficiency, decreased total fourth quarter fuel consumption 33 million gallons.

Slide 27 shows purchased services and material expense down $37 million or 8% to $421 million.

On the purchased services side, this category continues to see the benefits of Union Pacific's efficiency efforts, as well as the impact of less volume.

In the fourth quarter, with fewer train starts and greater crew productivity, we used less crew transportation and lodging.

In addition, our joint facility costs and other contract services declined year-over-year.

For material costs, ongoing reductions to locomotive and freight car repairs contributed to the lower quarterly expense.

Similar to what we've experienced throughout 2009, reduced volumes and fleet storage contributed to this result.

Depreciation expense increased $24 million in the fourth quarter or 7% to $377 million.

The drivers are pretty evenly split between our ongoing capital programs and the locomotive leases we restructured in the second quarter.

Although the restructuring added expenses to the depreciation line, it reduced equipment and other rents by $22 million.

Fourth quarter equipment and other rents was a total of $54 million lower in the quarter at $266 million.

In addition to the lease restructuring, lower volumes, UP's increase asset utilization and reduced use of leased equipment contributed to the cost reductions in this category.

Short-term car rents were also lower in the quarter, down $23 million as a result of reduced business volumes and better freight car utilization.

Other expense totaled $129 million in the fourth quarter, a 29% or $52 million year-over-year decline.

This expense line had a number of moving parts.

The biggest addition to the quarterly expense was the $30 million payment to Pacer in November.

This was offset, however, by $31 million of year-over-year expense reductions related to our casualty costs.

Consistent with the record safety metrics that Dennis just discussed, our semiannual actuarial study resulted in a quarterly change that lowered our casualty expense.

Beyond these items, there were several components of the other expense line that drove the year-over-year decline.

The primary contributors were better experience with the provision for bad debts and higher equity income.

In addition, we exhibited very good cost control across a wide variety of expenses.

Taken together, our cost structure has changed greatly over the past 12 months as we acted aggressively in response to the recessionary freight environment.

As shown by this chart on the left, while our business volumes declined 16% in 2009, we reduced operating expense 13%.

In this chart, we've normalized 2009 operating expenses to reflect the year-over-year change in diesel fuel prices, which illustrates that we were roughly 80% expense variable in 2009.

Of course, we still have significant fixed costs in our business, as well as the ongoing impact of inflation, but what we've accomplished in 2009 is to combine lower volumes with strong efficiency gains and cost management to drive permanent changes.

In fact, we'd estimate that about two thirds of the 2009 expense reduction was driven by lower volumes, while one third came from productivity and cost control.

We were able to achieve these savings as a result of our strategy to drive organizational efficiency, strong operating productivity and greater profitability.

In particular, we are well-positioned for the future and the opportunity to move growing volumes.

Of course, ultimately, UP's progress on improving total returns and profitability will be measured by our operating ratio.

In the fourth quarter, we made a slight improvement against a prior all-time best, producing a 73.3% operating ratio.

Greater productivity, a smaller cost structure and ongoing pricing gains offset the volume and fuel price headwinds to drive this record performance.

On a full-year basis, we reported a 76% operating ratio.

This was also a new all-time best for Union Pacific, and 1.3 points of improvement versus last year's record.

Importantly, this is Union Pacific's fifth consecutive year of annual improvements in our operating ratio.

I'll wrap up the earnings discussion with a look at the full year income statement shown on slide 33.

Operating revenue declined 21% versus 2008 to $14.1 billion.

A 16% reduction in car loadings, coupled with a $1.7 billion reduction in fuel surcharge revenue, more than offset the benefits of stronger core price.

Operating expense fell 23% in 2009 to $10.8 billion.

Although lower volumes and efficiency gains contributed to this decline, the biggest factor was lower fuel prices.

Our average diesel price of $1.75 per gallon was 44% below 2008 levels and the lowest annual price since 2004.

Other income increased $103 million year-over-year as a result of our second quarter land sale.

Excluding that one-time item, other income was $79 million or slightly lower versus 2008.

Interest expense increased 17% to $600 million.

This reflects a higher average debt level in 2009, as well as slightly higher year-over-year interest rate.

Income tax totaled $1.1 billion in 2009, a 17% reduction.

Driven by the weak economy, UP's lower earnings contributed to the decline and offset a slightly higher effective tax rate for the year.

Our 2009 tax rate was 36.5% compared to 36.1% in 2008.

2009 net income totaled $1.9 billion, a 19% reduction versus a record 2008.

Full year earnings were $3.75 per share, which compares to 2008's best ever earnings of $4.54 per share.

Despite 2009's recession impact on our earnings, Union Pacific finished the year in a very strong position financially.

Free cash flow after dividends totaled $515 million compared to $825 million in 2008.

While we had some puts and takes to cash flows in 2009, it does emphasize our ability to produce positive results in a tough economy.

Looking at the balance sheet, although we increased our all-in debt by about $440 million versus 2008, we reduced our adjusted debt to cap to 45.9%.

Our 2009 capital investments totaled a little more than $2.5 billion, just under our budget of $2.6 billion.

The funding in 2009 was roughly 2.4 billion of cash capital and 100 million of capital leases.

For 2010, we are still finalizing the budget, but our current thinking is that our base capital investment would be around $2.3 billion.

On top of that, we will spend an additional $200 million on positive train control, bringing total capital to about $2.5 billion.

Year-over-year, by not purchasing new locomotives in 2010, we are saving roughly $300 million.

Beyond that, we remain committed to making long-term investments in our Company that support operating efficiencies, growth and returns.

We must balance that, however, against the current economic environment.

An example of this type of an investment is our new Joliet Intermodal Terminal.

This facility, which accounts for about $150 million of our 2010 budget, supports our plans to convert more business from highway to rail, driving both intermodal pricing and returns.

Looking further at the year ahead, we are not providing specific financial or price guidance.

I would like to discuss, however, some of the factors to consider as we think about 2010.

As Jack discussed, we do see the potential for volume growth in all areas of our business.

With 2009's depressed business levels, that seems like a reasonable expectation; but the actual magnitude of any growth will depend on the macro economy.

Another plus for the year is our pricing.

We are confident in our ability to achieve real price gains that cover the cost of doing business, plus the additional benefits of legacy contract renewals and excellent service offerings.

Balancing out these potential pluses for 2010 are fuel prices and inflation.

Our current spot price for diesel fuel is a little more than $2.50 per gallon.

At that price, we're paying over $0.60 per gallon more than 2009's first quarter average price of $1.51 per gallon.

And at these prices, we lose the benefit of the fuel surcharge lag experienced in the first half of 2009.

As you might remember, in both the first and second quarters of 2009, the lag added roughly $0.20 cents per share to earnings each quarter.

We also see labor inflation trending higher in 2010 versus 2009, particularly for agreement, health and welfare expenses.

Of course, against that headwind, we will work to offset at least a portion through greater productivity.

Beyond these items, we have to stay flexible and nimble as an organization to effectively and efficiently handle whatever comes our way.

In 2009, we played the hand that we were dealt and produced strong results.

In 2010, we will build on that momentum to generate greater profitability and stronger shareholder returns.

Let me turn it back over to Jim.

Thanks, Rob.

We'll wrap up here.

With 2009 behind us, we're looking forward to a new year and new opportunities.

As you heard from both Jack and Rob, the volume picture is still uncertain, although most economists are calling for some growth.

Within that environment, we'll continue to pursue the strategy we adopted several years ago to increase UP's value proposition through our investments, service offerings, technology, equipment ownership and our employees.

These efforts are bringing new business to our railroad, as well as opening the door to new markets that can benefit from the suite of services UP has to offer.

With our customer satisfaction ratings approaching 90, we've really raised the bar in the eyes of our customers.

They expect more from us today, and we're prepared to deliver.

Now, we also know that 2010 will be another active year in Washington.

As you know, Senator Rockefeller introduced his rail legislation last month.

We provided input to his staff of the Senate Commerce Committee prior to introduction, and a number of changes were made to the bill.

We're continuing to have discussions with the Senate staff today; but as we continue to study this very complex piece of legislation, our concerns have increased.

In fact, without additional changes, we cannot support the bill.

In addition, the FRA just released their final rules for positive train control, which, as Rob mentioned, adds $200 million to our capital budget this year and at least $1.4 billion in total over six years.

And that's just the capital installation costs.

It will cost us millions more annually to maintain this system.

The PTC mandate is an example of well-intended legislation with negative unintended consequences.

Union Pacific's shareholders cannot be expected to bear the financial burden of PTC.

It must be passed on to our customers to the extent the market will permit, especially those chemical customers who drive the vast majority of our installation requirement.

Our position, whether the discussion is PTC or other regulations, is that we must be allowed to earn adequate returns and attract new capital.

With PTC, for example, if we cannot be fully compensated, we will cut discretionary capital, and our ability to expand and grow with our customers will be reduced.

Although there seems to be unanimous agreement in D.C.

that more freight rail is needed for the good of our environment, our nation's transportation infrastructure and our economy, new regulations and draft legislation that are coming forth do not support that vision, and in many ways could impede it.

So stay tuned.

For our shareholders, we remain committed to achieving the target of a low 70s operating ratio by 2012 and should make further progress toward the goal this year.

We believe strongly in our ability to generate solid bottom line leverage from improving volumes, and we're focused on achieving pricing gains that reflect our strengthening value proposition.

These efforts are the underpinning of our long-term strategy to invest for the future, grow with our customers and reward our shareholders.

This is consistent with the belief that freight rail transportation has never been more important than it is today, with benefits that are undisputed.

With that, it's time to open it up for your questions.

Thank you.

(Operator Instructions).

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

Please go ahead with your question, sir.

Good morning.

Good morning, John.

I was wondering if you could give us a little more clarity on how labor cost increases will be feathered in during 2010 and what you expect the contractual obligations there to be in terms of a percentage increase?

Well, there are no more contractual obligations other than the potential of a (inaudible) sometime in the middle of the year.

I would look at it pretty even overall, and contract negotiations are underway today.

We still have a long ways to go, but I don't see any particular spike in any given quarter.

Okay.

Was there any impact associated with reduced bonus accruals that benefited the fourth quarter results at all?

Rob, you want to answer that?

A little.

Not much -- not a material amount, John.

Okay.

And then maybe a broader question regarding the opportunity to grow domestic intermodal, which has obviously been doing quite well.

I think there is a perception -- among some, at least -- that most of the opportunity for future growth lies in the East, which hasn't been quite as well penetrated as the West.

What's your view on the percentage of long-haul Western intermodal domestic opportunity that's been already converted, and how would you see that conversion continuing here over the next couple of years?

Jack, you want to take that?

John, I think there's still plenty of opportunity in the long haul.

I couldn't put my finger on an exact percentage point, but in terms of long haul West opportunities, when you look at the highway business that's moving out there today, there are still plenty of opportunities to convert business.

We've had -- our stream line subsidiary that does door to door is doing quite well.

The growth prospects and the conversion from the highway business is quite strong, so I don't view it as just an Eastern opportunity.

I think we still have plenty of room on the West to grow.

John, there's one other piece to keep in mind here.

You may recall, we walked away from quite a few markets years ago, and are now reentering those markets; and you've got to have the capability to provide that great service consistently.

So we -- we're in a very good position.

When we're putting new products in the market today, we're seeing great success.

When we open a new ramp, we're seeing great success.

So I think there's -- again, like Jack, I think there's a very good opportunity for us for growth.

The other thing, John, I think the length of haul of the move that we are able to compete in with the greater efficiencies, the service parameters we've put in place, the cost effectiveness now, double stacking -- some of the things Dennis showed in terms of like the Donner tunnel clearances and things -- really is going to allow us greater efficiency that I think we're going to probably be able to move down into the 500-mile range in terms of effective competitive standing in the marketplace, so it will help us actually have more business available to us to take a look at.

Thanks very much.

That was very helpful.

Okay, John.

Thank you.

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

Please go ahead with your question, sir.

Thank you very much.

Good morning, everyone.

Good morning, Walter.

Just on the operating efficiency, I found it interesting you noted that two thirds due to volume decline, one third due to efficiencies.

Is that a good way to look at now what the productivity efficiencies that you can hold on to regardless of where volumes come back?

Well, it's not a linear relationship as volume goes back.

These are all kind of step variable, but I think that's not an unreasonable way to look at it long-term.

We may -- first -- again, you think about the first jump in volume, we're going to lever significantly -- I've got 1600 locomotives sitting in storage that we're depreciating.

So you think about some of these costs that we will -- we've got a long way to run here on volume before you see a substantial jump in costs.

Okay.

Next question, my second one here is on the rail bill; and Jim, you mentioned that after further review, you have a few concerns on it that suggest that you can't support it.

Can you give us some color on what you've -- what you looked at that you really don't like in this bill that's causing you to take this stand?

Well, it's a very complex bill, and it covers a whole range of areas.

The ability to earn adequate revenues, there's no language on antitrust when you look at it.

And again, what we are trying to do here is just step back and look at how do we maybe bring some certainty to our industry where they've been talking about new regulations ever since we were partially deregulated 20-some years ago that's out here.

And my number one concern is the ability in this business to earn returns.

There's no discussion of replacement costs in this bill -- that's a huge issue for us as we go forward.

But we've worked with Chairman Rockefeller.

I'm -- he's a believer in rail.

When he's -- when I've met with him personally, he is a -- he really is a -- advocates more business movement on the freight railroads.

So I hope common sense prevails here and that we are incented to grow this business and not go the other way.

Okay.

That's great color.

Thanks very much, guys.

Our next question is from Matt Troy with Citigroup.

Please go ahead with your questions.

Yes, thanks.

Rob, I was just wondering if you could comment on the balance sheet.

Per your own comments, obviously ended the year in a very strong position -- more cash than UNP has ever ended the year with.

Historically, you ran with about half the level of cash and investments you have on the balance sheet today.

I was wondering if that level is a good run rate to bogey in terms of what you need to run the business quarter to quarter.

And as we think about avenues for capital deployment relative to the cash you ended with, what are the hurdle rates or assumptions you use and priorities you have for redeploying that cash as the economy feels a little bit better in 2010?

Matt, I mean, you are exactly right.

We ended the year with $1.8 billion on the books.

Of course, we've had payments that have brought that down to about closer to 1.5ish today.

That is -- you're right, that is a higher level than sort of a historical level.

But our priorities remain the same, and that is, we'll look at capital investments where the returns are there.

We'll continue to fund our dividend, of course, but we look forward to the day when we can get back in, if you will, to the game of consistent dividend and consistent share buyback.

But what we're waiting on there is just more clarity in the markets, more clarity in the economic environment and we'll see that in consistent business levels; and when we see that, we'll feel more comfortable moving forward, deploying that in -- perhaps in the form of share buybacks.

Okay.

And is it fair to assume that levels -- let's call it between 500 million to a billion -- is a more reasonable level of cash balance for the balance sheet directionally if things -- assuming things do stabilize?

Yes.

Yes.

I mean, that's probably -- we'd like to see it on the lower end of that number that you just gave, but we'll have to see how the economy plays out.

Matt, to me -- this is Jim.

It's really a function of what you see happening here in the economy.

Obviously, we've been conservative.

It's the right decision.

There's still uncertainty when you think about where the economy is going this year.

We're in good -- we're in a great position.

Eventually we have to deploy that cash and -- but I want to wait until we see some strength here in terms of where the economy is going.

All right.

Thanks.

The last question I have relates -- and perhaps I'll ask it of Jack.

On the coal front, obviously coal is a significant energy source for US power generation, so no one believes it's going away any time soon, but obviously 2010 looks to be a challenge here, at least early on.

I was just curious, are you seeing any of your customers come to you seeking to renegotiate or -- on take or pay contracts, break the floor or just think about being a little bit more aggressive in negotiations given the intermediate term weakness?

And how should we think about the recovery into the year?

Are we really just waiting for more extreme weather?

What gets us to the other side of this little blip in coal?

Thanks.

Matt, I don't -- I wouldn't be able to tell you that we've seen a significant change in behavior from customers.

I think we've had a couple of customers that would be interested -- particularly as the chart showed, about two thirds of my remaining legacy business is in the energy business, and I think some of those customers are kind of testing the waters to see if an early renewal of those would be beneficial to them and us.

So we're kind of working through those deals.

But I don't really think the behavior -- I don't think the view of this has changed a heck of a lot.

I think basically, as we sit right now, we're looking at Powder River Basin -- our served customer base probably on average has 75 days of stockpiles sitting out there.

They'd feel more comfortable being at about 60.

But within that average, we have some fairly large customers who said they'll take every train we can get them, and we have some that are trying to figure out ways to kind of slow the flow, and so we're working with everybody to try to meet the objectives and still deliver the coal.

I do think from what we've been able to see -- and you read all of the Genscapes and EIA and all of these kinds of things in terms of potential impact that the cold weather is having; and I think it's the cold weather prospects here in the US, but also in Europe and China that says, "You know, there actually may be a little more upside out here than what we were thinking when we first got into this year." So I'm the eternal optimist in the crowd here, but I'm not willing to throw in the towel.

I think if we see continued improvement in the economy, I think a more normal weather pattern, I think we should be okay.

All right.

Thanks for the time.

Thanks, Matt.

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

Please go ahead with your question, sir.

Yes, good morning.

Good morning, Tom.

Let's see.

I wanted to ask you a couple of questions on pricing, and I guess in specific the impact of legacy repricing.

So you gave us the charts on slide 24 that were pretty helpful.

If you looked at the numbers in 2009, I guess 5.5 include -- excuse me, excluding RCAF fuel, can you tell us how much of that 5.5 was due to legacy contracts?

Tom, we've said -- and it's been pretty consistent -- about two points is what you look at, and that roughly is how it's playing out.

Okay.

So of that "X" the legacy, it would have been about 3.5?

It looks like you've --

(Inaudible).

I'm sorry, go ahead.

Go ahead.

So it looks like you've got potentially a bit bigger impact from legacy contracts in 2010.

I guess you've got the Pacer late in 2009, so full year impact in 2010 you've got the GM and you've got some other things.

I guess it appears that there's a little more legacy impact in 2010.

Would we assume that that's maybe another percentage point, maybe you'd get a 3% impact?

Or how would we view that?

No, I think -- Tom, you kind of stick around that 2 points.

You have to also keep in mind, we still have legacy contracts that have negatives, and have a negative impact on pricing when you look at it long term, so I wouldn't go that far.

Okay.

What about -- and if you take out legacy, would you expect much of a change in the repricing of the other part of your book that's really not legacy contracts?

Well, you've got some areas, we know -- all this when you thing about 2010 is where is the economy going?

We do have some areas that are softer, like we've said -- the intermodal area, maybe ag a little bit -- but given the -- what's happened here with demand in the economy, I feel pretty good about what we've been able to accomplish on our core pricing, and I will tell you, we are committed here.

We've got to get the returns up in this business if we're going to justify the capital we're putting into it, and that means the pricing line has to be strong.

Okay.

And then one -- I guess one more question on -- I guess this is probably for Rob.

In terms of the other operating expense, you helped us out with some of the reasons -- some of the noise in that line.

It sounded like Pacer and the casualty offset each other, but that 129 million in the quarter was still a very low number, and I'm just wondering, should we run rate the other operating expenses at a low -- a number around that in 2010, or is that kind of materially lower than what you would think is a reasonable run rate?

Because it was -- even with the clarification, it seems like that was a very good performance.

I'm just trying to understand whether that's sustainable or not on that line item.

Yes, Tom, there were some puts and takes in there.

I think from a modeling standpoint, you're probably better off looking at 2008 level as more of a run rate, which would be a little higher.

That's -- so back -- okay.

Back up like to the 180 million level?

Somewhere around there, yes.

That's probably a safer run rate for your modeling purposes.

Okay.

All right.

Well, nice quarter.

Thank you for the time.

Thanks, Tom.

The next question is from Gary Chase with Barclays Capital.

Please go ahead with your question, sir.

Good morning, guys.

Good morning, Gary.

Wanted to ask, Jack, you mentioned that -- I think somewhere in the prepared remarks -- that tariffs were more reflective of what was going on in the overall economy.

Can you give us a sense of what was changing in those tariff rates during 2009 if there's a way to generalize, and what you think the outlook is for 2010?

Gary, I think if you just kind of look at what's happening in the overall economy, what's happening in the tariff rates, we saw the increases we were taking in our tariff business somewhat less than what we had seen in the -- say, the last two, three, four years.

And that's indicative of market conditions, competition, a lot of the truck side of things.

And while we're not chasing business, and we're making right decisions in terms of reinvestability, there are some of those issues that when we have the business at a profitable level, it's reinvestable, and going forward, we are working with customers to reflect market conditions.

So I mean, it's just kind of a way of saying instead of getting some of the 4 and 5% increases we were getting in various places, the 1, 2% kinds of increases.

And is there any sign that that's starting to show some traction?

It's really market-specific.

In some places, we've been able to see some turn around in the economy.

We watch very carefully the price increases that our customers are taking in their markets, and so in selected places, we've had opportunities to be a little more aggressive because we've started to see some improvement in business, and in other places, we're still just kind of working with our customers to understand the market dynamics.

And is there a way, Jack, to give us just a qualitative feel on how Pacer phases in?

Is it -- a bulk of it's front loaded, back loaded?

Is it relatively even?

Gary, I can just tell you that -- what I said in my remarks, which is that basically it's phased in between now and the original expiration, and not really give much detail beyond that.

Okay, guys.

Thanks very much.

Okay.

Our next question is coming from Randy Cousins with BMO Capital Markets.

Please go ahead with your question, sir.

Morning.

Morning, Randy.

I guess, Jack, for you, first question.

CSX yesterday was kind of bearish or very bearish on the outlook for coal.

You seem to be taking somewhat of a contrarian point.

Obviously gas substitution is a bigger issue for them.

How much of your coal ends up in the eastern half of the country where gas substitution is a big issue, or do you just think that at some level that maybe they're just being a little overly bearish?

No, I actually do believe that less of our served customers have the opportunity to do much of a gas shift.

I think if you look at some of the statistics that I've seen -- the plants in the Northeast and Southeast, which would be their serve territory, have greater capability to make that shift than the customers in the Midwest and the Southwest where we play more heavily.

So I think they probably do have somewhat of a difference from that perspective.

And then I -- our sourcing from Colorado, Utah and Powder River Basin -- even when you look at national statistics, our overhang in terms of the number of days stockpiled doesn't appear to be quite as onerous as Appalachian coal and some of those kind of sources.

Randy, I think one thing to keep in mind here, the ability to ship pretty quickly has happened.

I mean, that happened when gas was at $3 here a while back.

So you've already had -- whenever you have a capability shift in our system, that's pretty much been done.

Now, when new plants are built, you've got to look longer term there.

But I would also argue, while Jack might sound a little bit more bullish, this is a -- we averaged about 30 trains a day out of the Powder River Basin in the fourth quarter, and you go back about two years ago, we were running 38.

So we have a pretty substantial fall off here.

That's why you look at this thing and you have to ask, "How bad could it really get?" So we just need a little bit of economic activity.

You've got gas prices, I see this morning, are moving up.

I think there's some potential there.

And at current shipping rates, are we actually drawing down on the inventories?

Yes.

Current shipping rates, with the weather conditions being what they are right now, the inventories are drawing down.

Okay.

And then to Dennis, his slide number 17, you've got freight car utilization for the year, and previously you've given them from the quarter.

I was wondering if you can give us some indication of sort of how Q4 operating practices or network velocity performance was?

But more particularly, the other thing I really want to get at is, once upon a time you guys used to move 200,000 carloads a week, then it was 180,000 carloads a week, I think at the low it was 140.

You got back up to 160.

Let's assume we go back to 180,000 carloads a week, can you maintain the same kind of network velocity, the same kind of cycle time statistic and is the head count that we're looking at today the kind of head count that we would have with 180,000 carloads a week?

How should we think about this, sort of again in real hard terms, the cost take out?

Randy, your first question first.

On the quarterly numbers, every one of them, the same suite of numbers that I showed you, velocity, freight car utilization was all improved significantly.

Specifically on freight car utilization, a year ago, 4Q was 9, we're 8.4 this year.

So terminal [dwell], service delivery index, all of them were up at least 10, 15% over -- Q over Q, 4Q versus 4Q.

If we got into the 180, we've always said that -- as I talked to you about on the train length side, we've got at least 10 to 15% on average across the board in every major category of train service that we offer.

If we're running 160 and we get to 176, 180, we see marginal, very low marginal increases and possibly some train starts, but it might be some recalls possibly out of the [A-watts] boards, but it would be minimal.

We think we can handle that level in the foreseeable future with principally train length improvement.

Hey Randy, keep in mind -- and you've heard us say this before -- our core infrastructure right now is set to handle about 190,000 200,000 cars a week.

So we do have a lot of leverage moving up here on volume in our capital and I -- honestly, I hope we get to the point where we're out hiring and -- that means we're growing that side [our business].

As Dennis said, at 180,000 cars right now, we are a better railroad today -- or tomorrow when we're at 180,000 cars than we were the last time we were at 180.

And the last point to your question is, absolutely you would expect the performance numbers to stay the same if not improve continuously, and that's what -- the reason for that chart when I showed you volumes versus SDI, and they are on a continuous trend, and we expect that to continue no matter what the volume.

Excellent.

Outstanding.

Thank you very much.

Thank you.

The next question is from Bill Greene with Morgan Stanley.

Please go ahead with your question.

Yes, sorry, just one quick follow-up on the coal issue.

Did you actually say what the days outstanding are in terms of stockpiles in your region?

Bill, it's about 75 days on average.

And where would you --

And again, that 75 days, I've got guys that are probably at 100 days and I've got some that are at 50 and maybe even a little below that.

And historically, 50ish is about normal for you?

I -- customers probably average in the 50 to 60 range.

Okay.

And then, Rob, do I remember correctly, you guys didn't really cut incentive comp all that much in '09, mainly because your metrics weren't purely financial related, but also service related.

So would that suggest we should have less of a headwind, at least on that metric looking into 2010?

Bill, that's exactly right.

I mean we -- it is down in '09 versus '08, but not significant.

Again, we don't have some of the equity programs that required mark-to-market like some comparisons I know you've looked at.

So that's exactly right.

You will not have a headwind in 2010.

Okay.

And then just quickly, as we think about train length, I know you ran that very long train, I know that was a bit of a test run as well.

But how much ability would you say or how -- I don't know exactly how to measure this, but how much latent capacity is there just by increasing train lengths do you think in the system?

Do you want to handle that one, Duff?

Well, there's not as much as you saw on that mega train, believe me.

But overall, Bill, what we say is 10 to 15%.

We can handle the next 10 to 15% on average across all of our major train categories.

And is that implying that there's only variable costs on the cars that you add to those trains?

The first place you would see it would be in fuel and equipment costs -- yes, that's it.

The labor would be very minimal if any.

Bill, don't read that 18,000 ton train as where we're heading.

That was -- we were doing some testing on technology and train dynamics and fuel efficiency, but you're not going to see us running 18,000-ton trains consistently.

All right.

Thanks for the time.

Thank you.

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

Please proceed with your question, sir.

Great.

Good morning.

Good morning, Ken.

Rob, just want to follow on the employee question there, the cost per employee.

Just looked like if we go back -- if the contract kicked in mid-year last year, the last few quarters look like cost per employee -- average salary and benefit per employee was down about 2% -- I'm sorry, 1%.

In this quarter it jumped up about 3%, so I'm just wondering what the costs per employee kick-ins were just as we look forward into 2010, where -- because you talk about no headwinds, but wondering why that jumped up this quarter?

This quarter actually was more reflective of what we would have expected given the 4.5% wage increase to the agreement workforce, so I think that's a pretty fairly -- that answers the fourth quarter question.

The point I was making in my preferred remarks, Ken, in terms of 2010, is that is a category where we will see some cost pressure from the health and welfare component of the cost per employee on that line item.

Now, overall, our inflation is within sort of historical levels.

But that particular line item, we will have some cost pressures on the health and welfare line of labor.

Wonderful.

And then, Jack, you mentioned earlier that the -- about the Powder River Basin coal contract that was lost early last year.

Are we now grandfathered past that?

Yes.

We rolled January 1.

Okay.

And then you mentioned that -- when you talked about pricing, you mentioned some legacy pricing could actually push pricing down.

Does that mean you're renewing some contracts at lower rates, or what are you trying to suggest there?

I think you were talking about the intermodal at that point.

I have existing legacy contracts that have pricing provisions that in the third and fourth quarter resulted in negative price.

Some of those will persist into 2010.

So inside the legacy contract it had some reductions?

It's not that you're repricing old legacy contracts at lower prices?

That's right.

Okay.

I just wanted to clarify that, thank you.

And then just to wrap up, Jim, I wanted to clarify on the legislation, you mentioned three things as to why all of a sudden you cannot support the legislation now after having some time to study.

You mentioned that it doesn't mention that there's ability to earn adequate returns.

It actually mentions that four separate times, that it's focused on there, and you said it doesn't mention replacement costs.

It actually mandates the STB to review six months after passage, to review replacement costs.

And then you said there's no language on antitrust, so I'm wondering, since there is no language, why would that be a concern?

Is it a concern because something might get stuck in before passage?

That's right, Ken.

And remember, the language includes a study.

Yes.

So you can study things a long time and get no place.

Okay.

So -- and then back -- that's an important differentiation.

Thank you.

And then so on the overall legislation, it has to do with, I guess, just what has changed?

Or is it just looking at it now and saying, "Hey, there are -- on a quick look, it looked like it was a big, broad brush, but the more we get into it -- "?

What was it that triggered that?

These are very complicated, in many cases it relies on judgment from the STB in terms of when you look at it.

And as we had more time to look at specific language, we were more concerned.

But, listen, we're going to -- our objective here, and we've said this to Chairman Rockefeller's staff, is we want to continue to work with him.

I said that earlier.

The first time I met him, he said to me, "We've got to figure out how we move more business on the freight railroads." So he understands the value -- energy efficiency, emissions, safety, competitiveness.

The US, as you know, freight system is unique in the world.

So I -- we still have a long ways to go here, but our commitment is to work with the staff.

And then similarly on the PTC, is anything going on with the FRA to maybe to lower the cost pressure to the railroads?

Maybe slimming down what is required?

What just came out certainly wasn't an objective here in lowering costs, but you're in a comment period.

What came out, the final rules, I think we've got 50 or 60 days to provide comments.

We clearly will take a hard look at it.

But I'm concerned about that one.

It is a pretty substantial -- even their latest report raised the cost benefit ratio.

I think the original report was about 10 or 11 to -- or 15 to 1, now it's 22 to 1.

So even the FRA has, in their own analysis, have pointed out this thing is very tough, to where you can see there's little financial return in it.

Great job on the cost controls.

Thanks for the time.

Thanks, Ken.

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

Please proceed with your question.

Thanks, good morning.

Good morning, Chris.

Just a quick follow-up.

I know a couple of people have asked about the comp inflation, but just so we're clear, between the comp and the health and welfare, what do you think in percentage terms you see as an increase in 2010?

Is it 4.5%, is it --

Chris, it's Rob.

For 2010, a rough number is 4.5 plus-ish, in that range, is probably not a bad number.

Okay.

Hey, Chris, but keep in mind, it's another reason why we have to stay absolutely focused on efficiency and productivity.

Don't -- you've got to -- yes, there will be some inflation in here, but that just raises the bar in terms of our productivity focus.

So then your comment about achieving, quote, real price gains, is the reference to real a reference to inflation, so can we kind of bracket your price gains to something around that 4.5% range or better?

Well, I know what the economists' definition of real is, and that's the way I think about it in terms of we've got to do better than that.

Chris, it's Rob, just one clarification, though.

Our overall inflation should be 3.5-ish.

Just that one line item will have a little bit of additional cost pressure, but as Jim said, we're focused as always on productivity and rightsizing and getting our cost structure down and cost management.

But overall, inflation is probably in that 3.5-ish range, which is a historically more normal level.

Okay.

So that's the hurdle that you're thinking about vis-a-vis price?

Yes.

Okay.

And then just lastly, there's been a recent surge in export activity out of the Cest coast.

Can you just talk to -- for a minute about how that's impacting your business, what commodities are you seeing, what kind of activity on your network there?

Jackson?

Yes, the greatest strength that we're seeing is probably soybeans, meal and grain products right at the moment.

That's been -- that's been quite strong for us.

Okay.

Thank you very much.

Thank you.

Our next question is from the line of Edward Wolfe with Wolfe Research.

Please proceed with your question, sir.

Hi, good morning, guys.

Good morning, Ed.

Why was -- I thought I heard Jack say that the Pacer was negative to intermodal yields in fourth quarter, but you expect it to become positive for yields.

Can you explain that?

I really didn't say that.

What I said was I had legacy contracts that were negative in the fourth quarter, and that with our Pacer arrangements in place, some of that will improve going forward.

So am I interpreting it right that Pacer is the driver of that improving?

Pacer is not my only legacy contract.

So there's some others that are going to improve as well?

There are some others that will have to run through the negotiations and let the contract play its course.

Okay.

Can you also give a little clarification, the slide that shows 3% of legacy business, is that 3% has already been negotiated for 2010 and there's 1% that's yet to be negotiated in 2010?

Yes.

The 3%, Ed, was the prior year's slide, so the slide you want to focus on now is the one that's on the right side that says as we stand here today, we've got -- with the Pacer and the automotive contract behind us, we've got 4 percentage points that are renewed for 2010, and we've got about another 1% to go over the course of the year.

Okay.

And the 4% -- as I understand it, the Pacer is already in effect and the auto goes into effect February 1?

Yes.

The 1% that's still left out, is that end of the year or through the year or --

It's through the year.

Okay.

Can you talk a little bit about what you're seeing in Colorado/Utah production and what your expectations are for '10?

Colorado/Utah production has improved from where we were a year ago.

They've gotten a lot of the mining issues and some of the coal quality issues.

Although they're still having some spot outages for one reason or another, it's not as severe as it was the beginning of the year.

A lot of it is going to depend on demand; and right now, as we said, the demand isn't looking real strong for 2010, although hopefully that's going to change and we might see a little bit of upside opportunity.

But I think that for the most part -- I think one of the big Colorado coal customers is TVA.

TVA just recently announced they were having some record burns right at the moment, so that would say that that would be good news for Colorado/Utah coal, and we'll just have to kind of watch and see how the weather unfolds and how stockpile situations play out.

But I think they've got a better handle on some of the coal quality issues and gas problems and geology issues that they were dealing with in the first part of 2009.

So is it fair to say that based on lower stockpiles there and better handles on some of those issues, if you had to guess relative to PRB, probably better coal volume on Utah/Colorado this year?

I think it's about a push.

Okay.

Ed, you got to think about summer burn.

There's a lot of variables that can come in play here.

Okay Ed, one more, I want to make sure -- we're getting short on time here.

Sure.

No, I understand.

Of the 31 million casualty expense in fourth quarter, Rob, is any of that what you would consider ongoing -- assuming safety -- the improvement you have doesn't slip at this point?

We're going to continue to aggressively go after improvements in our safety, so we hope -- there's two studies a year, as you know, and we'll see the results when we do the second quarter study, but we're going to keep at improving our safety record.

Okay.

Thanks a lot for your time.

I appreciate it.

Thanks, Ed.

Our next question is from the line of Jon Langenfeld with Robert W.

Baird.

Please go ahead with your question, sir.

Good morning, Jim.

Good morning, Jon.

I wanted to just clarify a comment you made at the end of your prepared remarks.

Were you basically implying that you thought March OR could be better in 2010 than 2009 given kind of the back drop you laid out?

Did you say -- say that again.

Did you imply that the OR could be better -- you made the comment we're going to work towards it.

No, I did.

Okay, all right.

But again, keep in mind, I said I'm still confident when we look out at2012 we're going to be in the low 70s.

That means we have to make progress every year.

Fabulous.

Okay.

Then there was also a comment made during the prepared remarks about other potential contracts out there that you may be able to pull forward.

What are the variables you look at on -- somewhat generically on some of these other contracts that allow you to pull them forward?

And is that a material part of the remaining 14% or only a small part?

Jon, I don't want to get into details here on -- there are a lot of factors that come in play -- length of contract, obviously; the partnership in terms of how they think about doing business with UP long term; all of those come into play.

If it makes sense for UP and our customer, we'll pull them ahead.

And we've had some success; others, they've chosen to let them ride right to the end, and -- so let's just leave it at that.

Okay.

And then lastly on the pricing side, how much of your pricing is locked in now for 2010?

Jack?

Jon, of, I've got 30% of my business in tariffs, so those prices can change on a 20-day notice.

I've got 70% that are tied up in single and multi-year contracts, and the majority of those are pretty much done for the year.

So that 30% is what would respond if freight pricing in general, truck load pricing, moves higher?

A big portion of that might be able to respond quickly, the rest of it would respond with contract renewals?

For the most part, I would say that's true.

Okay.

Great.

Thank you.

Our next question is from the line of Justin Yagerman with Deutsche Bank.

Please go ahead with your question.

Hey, good morning, guys.

This is Rob [Samon] on for Justin.

Hi, Rob.

Can you give us an update on your DPU initiatives?

I believe in the last conference calls, you guys had mentioned that roughly two thirds of the ton miles were using DPU.

Where are we at the end of Q4, and what are your goals on it with regard to that initiative looking out to 2010?

Duff?

Yes, we ended the year around 65% -- right around the two thirds portion -- and our goal is to take it up to about 70% plus in 2010.

So we're working with OEMs.

We think we can do that with the existing fleet, by just some better utilization, and we're also looking at some ways with the OEMs on some retrofits.

So we expect to continuously improve our ratio of DPU.

And should we still be thinking about that as 4 to 6% fuel savings versus conventional power?

It is, Rob, on those trains that are using them -- 4 to 6% is a reasonable range on DPU.

Thanks.

That's helpful.

And one of the things on the expense lines that you guys have highlighted in prior calls and alluded to on this call is the operating leverage benefit that you guys would gain as you move more with the parked equipment that is currently depreciating on your P&L into service.

Could you give us a sense of the headwind that you guys were facing during Q4 as a result of this?

I'm not quite sure that I understand your question.

I mean, we have billions of dollars of assets sitting idle that we're depreciating.

It's a pretty substantial number when you look at it.

You notice our depreciation line was up 7 -- 6 or 7%, although part of that is shifting some leases, But it's a pretty substantial cost that's fallen through to the P&L without generating dollar of revenue.

That was our overall sense.

I was just curious if you guys had quantified what that expense is that's been running through your P&L without the offsetting revenue.

The numbers -- listen, I can talk about locomotives, but think about the infrastructure investment that's in the ground.

We've got a substantial amount of capacity that we're depreciating that's not generating a dollar of revenue.

So again, locomotives are obvious -- maybe not so obvious.

In a lot of cases, it's basic track and facility infrastructure.

All right.

Appreciate the clarity, guys.

Thank you for the time.

Great.

Thanks, Rob.

Our next question is from the line of Donald Broughton with Avondale partners.

Please proceed with your question, sir.

Good morning, everybody.

Good morning, Don.

You highlighted the casualty cost benefit of $0.04 a share.

Was that a reserve adjustment, or are you just highlighting the ongoing outstanding reduction in the frequency and severity and what that's saving you?

John, this is Rob.

That was a reserve adjustment as a result of the actuarial study, which was a result of the great work we made on our safety improvement.

Perfect.

Perfect.

I'm excited about the spending on the completion of the Joliet terminal, as I'm sure you guys are.

Have you guys applied for or do you expect to be able to take advantage of any of the TIGER grants to drive your -- to assist you in your drive to improve their domestic service offering?

And, if so, where geographically are you going to use those funds?

Dennis?

Well, Don, we haven't applied for any for -- obviously for the Joliet facility, but we have applied for them across our system in conjunction with some of the states.

There are 55 down in Texas; some at Iowa, Chicago, some in the West Coast, in California.

Nevada -- we also have some in Nevada, out there.

So we work with virtually most of the states in which we run through on some portion, either the high speed rail portion or the TIGER portion.

So you expect to really actually be able to benefit from that program?

Well, yes.

Well, we're hopeful.

We'll see when they come out with the allocations here.

A small amount, anyway.

There's a combination of three Ps there -- the public private partnership, and our portion and the public's benefits are a combination of the total costs.

Sure, sure.

Timing of spending on PTC?

You've highlighted 200 million this year.

Is that going to be rather smooth across the next six years or do you expect it to be more front end weighted or back end weighted or -- ?

No, I think it will be a little more back end weighted; but again, over five, six years, 1.4 billion.

But what -- we've got the 200 million for this year.

Actually some of that is pull ahead of some signal upgrades and things that are going to be necessary to make this thing work.

But it will pick up with a little more back ended load.

Okay.

We've all talked about coal -- it seems like everybody's asked at least one question about coal and the potential for improvement in volume.

Like you guys, I'm actually optimistic about future coal volumes.

So help me turn this question on its head.

What, if anything, do you guys see out there that could lead to markedly lower coal volumes in the short to intermediate term?

Or is it more realistic so simply say this is a bottom, how we improve from here is an open debate, but there's not really anything that can lead to markedly lower?

Don, I think in that world, you'd have to see a pretty significant fall off in economic activity.

I think a lot of folks were pretty shocked when you saw the -- what the slowdown in the economy did to power consumption.

Sure.

And I think that's a scenario there.

Now, you can -- listen, you can look at weather, but weather -- you had a relatively mild cooling season last year.

You can get some pretty big swings on weather; at least the last year or two it's been pretty mild.

We're off to an extreme the other way, with one of the coldest winters in a long time.

Sure, sure.

Great.

Thank you, gentlemen.

Okay.

Our next question is from Jeff Kauffman with Sterne, Agee.

Please go ahead with your question, sir.

Okay, thanks.

Good morning, guys.

Good morning, Jeff.

This is getting long, so I'll keep it short because most of my core questions have been answered.

But Dennis, can we think a little bit out of the box?

Obviously, the Megatrain isn't the future.

You mentioned the 10%, 15% excess capacity in the system, which to me is thinking within the box, the way you're used to running.

What needs to happen, and how much opportunity is there on the train length upside?

What can you realistically run the way your system is configured today, and what do you think you could run if you have the ability to make the changes to your system?

What could you run safely in terms of train length, in terms of future opportunity for productivity?

Well, we've established that we could run an 18,000-foot train safely.

But not without media and YouTube and all that, right?

Well, yes.

(Laughter).

Well, you said think outside the box, and we did.

Exactly.

But the real issue is it's not going to be the safety issues from an internal perspective, it's not going to be the operational characteristics; it's going to be the public affairs issues and dealing with those, and the structure by which we can operate trains efficiently into and out of these various terminal complexes.

So we are making little niche type investments to facilitate longer trains.

We've grown our train length every year now for the last ten years.

We will continue to do that.

We think we understand the theoretical upside, but we've got to make sure that we continue to bring the average train size up, because that's where the leverage is.

It's not so much running the maximum trains, it's getting the average train lengths up.

There's more leverage in the average train than there is in the longest train, and that's the way we're going about it, and we want to design our network accordingly to take care of those average trains, and we'll deal with these idiosyncrasies as we see the opportunities.

There is still plenty of leverage in just doing that -- getting every train longer than it was yesterday and that's what we're all about.

Okay, thank you.

And one last thought on coal.

I'm a big follower of Farmer's Almanac, and they were saying sun supplied activity is down, expect the cooler weather for the next few years.

Do we need a more normal summer to really resolve this coal issue in the service areas with the higher inventories, or is this something that through exports and the burn that we're seeing this winter could potentially be a pretty decent situation by the spring?

I guess what I'm asking is, where there's the overhang -- particularly in the Eastern service or some of the Midwest regions, are we less likely to get that solved before summertime?

Wow.

I think we need a normal summer burn to help us get through this.

All right.

So -- Okay.

Very good.

Thank you, guys.

Thanks, Jeff.

Our next question is from [Sharalyn Redboney] with Scotia Capital.

Please go ahead with your question, ma'am.

Thanks very much and good morning.

We are running long, so I'm just going to ask one; and that is with regard to the FTB reauthorization build, can you just comment on the Committee's level of openness to continue to work with you on the bill?

Because my sense was that the original posturing was that they wanted to settle all of those issues before the bill was actually released, and their thinking was once it was released there would not be material changes?

No, I don't think that's ultimately how it came out.

Again, it's a very complex bill.

They are very open to discussion -- we're continuing discussions today.

They're talking with really both sides, and one of the things I've seen with the Committee, they want to get it right.

Again, it -- the members that we talk to are scared to death that they get this wrong, because we've made it very clear we don't -- we have very little room -- there's no room to move, and if they get it wrong, investment and good jobs go the wrong way, and that is the last thing you want in today's environment.

And with the health care debate sort of dragging on and the prospect of mid-term elections, what do you think the risk is that this gets deferred again?

I'm not quite certain on how to call that one.

Obviously, what happened in Massachusetts is most people don't want more government oversight.

I look at our industry.

We're the only industry when you look at it in terms of transportation infrastructure in this country that we've kept our word.

As profits moved up and returns moved up, substantial new capacity went in.

And it's a pretty hard argument to debate, because those are the facts.

So we'll see what happens.

Okay.

Thanks very much.

That's all for me.

Okay, Sharalyn.

Our next question is from the line of Scott [Flowers] with [McQuary] Bank.

Please go ahead with your question, sir.

Yes, good morning, all.

Good morning, Scott.

Yes, just a couple of quick questions.

Couple for Jack.

You mentioned that ag and industrial are a little bit more tariff based.

What proportion of those business launch roughly are more tariff versus contractual?

I would say that the industrial products business, that is primarily -- is primarily tariff based, and I would say ag products world -- my ag products world is a little unique in that some of my contracts take their pricing from tariffs, so it's kind of a mixed bag in there.

So tariffs do have more of an influence both on the contractual side as well as the tariff side.

Okay.

And then what proportion of your auto business is the legacy renewal this year?

In other words, is it a third of the auto business that you currently have?

I'm just trying to get a sense on revenues, just to get a common sizing of just the legacy renewal relative to your auto business in total.

Man.

Roughly.

I would say roughly it's in the 25, 30%.

Okay.

And then just one quick question for Dennis.

Is the velocity number that you showed us on -- I forget the exact page -- is that mix adjusted?

In other words, obviously everything fell off in terms of volumes, but some of the intermodal fell off less than some of the slower moving bulk trains or manifest trains.

Is that a mix adjusted number?

It's an absolute number.

Whatever it is, it is, Scott.

Okay.

So there was some benefit from mix, then, because you had relatively lesser fall off in intermodal versus some of the other businesses?

Yes, there would be a small amount of mix in there, you bet.

Okay.

Good.

Well, thanks very much.

Thanks, Scott.

Thank you.

Our last question will be from the line of Jason Seidl with Dahlman Rose.

Please go ahead with your question, sir.

Hey, everyone.

Listen, Jim, I think you guys mentioned that you guys might pull back some of the capital spend.

Could you talk about some of the areas that you might reduce capital spending if this bill goes on as is?

Well, you have to ask yourself the question, what's the viability of growth in returns.

If you look at -- Rob gave you the number -- we've got 2.5 billion kind of targeted.

I still need the Board to approve where we're going there, which includes 200 million of positive train control.

So that leaves you 2,3; you look at the 2, 3, and you've got 300 to $400 million of growth capital in there.

And what we will do is take a very hard look at the returns, where we thought we would be -- I mean, we're not there yet.

That's the thing I keep reminding members of Congress; while we've had a nice run in our profitability and our returns, we still, in my mind, are a long ways away from justifying kind of new capital.

So we take a hard look at it, and our capacity, our facilities, new locomotive acquisitions, all that comes into play.

Okay.

That's good color.

Last question on coal, on the stockpiles.

Given the normal seasonal weather patterns, how long does it take to start drawing down the day supply among the utilities that you guys supply?

Jason, I think we're actually in kind of a drawdown now because of the extreme weather situation, so that's good.

There's a lot of things that are going to enter into it.

It's going to be -- some plants will take some sort of maintenance shutdowns here into the spring leading up to the summer burn.

I guess we're probably in a situation where you have some discretion as to whether -- typically what would happen, if they'd stockpile a little bit to get there this year, they probably won't do that.

So that will probably help to some extent, and then whatever is going to go on with industrial production -- the steel utilization is at 65% versus last year at 45%.

If that stays true, if US Steel brings up their -- I think it's Long View is one they're talking about bringing up -- all of those things consume electricity, that industrial production will help us as well.

It's really a myriad of different things that will help us.

Fair enough.

Guys, I appreciate the time as always.

Okay, thanks, Jason.

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.

Well, thank you, everyone, for joining us this morning.

I look forward to talking to you again in three months.

Have a good day.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.