Union Pacific Q4 Earnings Call Transcript

123jump.com Staff
31 Jan, 2010
New York City

The largest railroad operator in North America reported a 12% drop in revenue to $3.75 billion and a 16.6% drop in net income to $551 million due to recession which was offset to some extent by lower expenses. Earnings per share came in at $1.08 as against $1.31 in the prior year period.

Union Pacific Corporation. ((UNP))
Q4 2009 Earnings Call Transcript
January 21, 2010 08:45 a.m. ET

Executives

Jim Young - Chairman and Chief Executive Officer
Rob Knight – Chief Financial Officer
Jack Koraleski – Executive VP, Marketing and Sales
Dennis Duffy - Vice Chairman, Operations

Analysts

John Larkin - Stifel Nicolaus
Walter Spracklin - RBC Capital Markets
Matthew Troy - Citigroup
Thomas Wadewitz – JP Morgan Chase
Gary Chase - Barclays Capital
Randy Cousins - BMO Capital Markets
William Greene - Morgan Stanley
Ken Hoexter – Bank of America Merrill Lynch
Christopher Ceraso - Credit Suisse
Edward Wolfe - Wolfe Research
Jon Langenfeld - Robert W Baird
Rob Simon [ph] for Justin Yagerman - Deutsche Bank
Donald Broughton - Avondale Partners
Jeff Kauffman - Sterne Agee
Cherilyn Radbourne - Scotia Capital
Scott Flower [ph] - Macquarie Bank
Jason Seidl - Dahlman Rose & Co

Presentation

Operator

Greetings, and welcome to the Union Pacific Fourth Quarter 2009 Earnings. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) If anyone should require operator assistance during the conference please press “*0” on your telephone keypad. As a reminder, this conference is being recorded and the slides for today''s presentation are user controlled.

It is now my pleasure to introduce your host, Mr. Jim Young, Chairman and CEO for Union Pacific. Thank you, Mr. Young. You may begin.

Jim Young – Chief Executive Officer

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, Marketing and Sales, and Dennis Duffy, Vice Chairman, Operations.

For the fourth quarter, we’re reporting earnings of a $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 on 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 to act as 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 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 through the benefits of rail transportation. In addition, UP’s increasing value proposition continues to support our long-term pricing objectives. 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 dividend and a strong year-end cash position. Overall, we feel satisfied by what we have 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 over to Jack to walk you through the business themes. Jack?

Jack Koraleski – Ex Vice President Marketing and Sales

Thanks Jim and good morning. So 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 lines. 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 the 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 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 level as damage to the South American soybean crop combined with a plentiful U.S supply to create a strong export market. Demand was also strong for soybean meals with the Pacific Northwest export shipments more than doubling the previous best achieved back in 2003. With all the former VeraSun plants now operational and under new ownership, ethanol volumes grew 13% and DDG’s 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 hype, they remain 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 of 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 continued 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. The 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 loading. 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 shortfall in volume to lower revenue 22%. Powder River Basin volume was down 16% as a result of softer demand and the SPRB contract 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 have 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 shipment. Our rock business was down 29% because of soft demand and high inventory. 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 level. Hazardous waste posted significant growth with our uranium tailings move in Utah and the Hudson River clean up combining to add over 10,000 new units of business in our fourth quarter 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 the third quarter. More than offsetting the softness in international was the 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 streamline 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 revenues surpassed international in our intermodal business lines.

As Jim said, 2009 was a great year for customer satisfaction. Great service continues to underpin the 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 4 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 the 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 the 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 revenues 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% intermodal and the remaining 4% is spread among the other four businesses. So we are continuing to make good progress. We are continuing to work hard to accelerate the renegotiation of legacy deals where that makes sense. And although the benefits of the new Pacer arrangement are phased in between now and the original exploration, our legacy contract renewals are still a solid contributor to our price plans 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 forecasted a slow recovery with key indicators climbing from the lows of 2009 but still remaining below the 2008 levels that were already depressed. Key to recovery will be improved consumer confidence, reflected in increased spending. So if the economy doesn’t falter, we believe that all of our businesses 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 the 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. Expectant sales are going to be somewhere between $11 million and $11.5 million for the year. As downstream demand improves, so should our chemical business, and we are hoping to see an improved fertilizer market both here at home and abroad. And we are not really counting much at this point on volume growth in coal, but the recent reports indicate that this 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.

Modest increase in housing and construction activity should translate into modest growth in lumber, rock, cement and steel for our industrial products line. And when the construction season rolls around, we are going to be looking to see a stimulus spending provide 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. 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 are 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 net value proposition is excellent service that results from the commitment of our employees, our strategic investments and facilities and equipments and the new and innovative solutions and offerings that we are providing to our customers. Our customer satisfaction score says we are heading the right direction. We’re confident in 2010 we can do even better.

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

Dennis Duffy – Vice Chairman, Operations

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 continue deploying total safety culture, which emphasizes everyone''s role in working safely together. Customers benefit from the safer railroad through enhanced reliability and lower cost. In 2009 the rate of equipment incidence was better by 10%. Our improved track infrastructure training and process improvements all contributed.

For the communities where we operate, our rate of gate 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 set in 2002. Freight car utilization, the slack of 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 2 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 record at 24.8 hours. 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 cost 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 three-fold. 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, delivery of service excellence, looking at the middle chart, from 2006 when volumes where 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.

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 is 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 have 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 Mainline. It 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 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.

Rob Knight – Chief Financial Officer

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 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 a $1.8.

Turning to slide 23, this slide gives some perspective about how we view the year-over-year change in earning. 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 months lag in our fuel surcharge program, 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 earning. 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 0.5 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 portfolios that match 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 work force 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 a year-ago quarter and saved a little more than a $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 purchase services and material expense down $37 million or 8% to $421 million. On the purchase services side, this category continues to see the benefit of Union Pacific 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 cost and other contract services declined year-over-year. Raw material cost, on-going reductions for locomotive and freight car repairs contributed to the lower quarterly expense. Similar to what we have 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 equipments 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 increased 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 semi annual 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 experienced with a provision for bad debt 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 trade environment. As shown by the chart on the left, while our business volumes declined 16% in 2009, we reduced operating expense, 13%. In this chart, we have 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 have accomplished in 2009 is to combine lower volumes with strong efficiency gains and cost management to drive permanent changes.

In fact we would 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 volume. 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 headwind 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 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 pricing. Our average diesel price of a $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 rates. 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 investment 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''re 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 return. We must balance that, however, against the current economic environment. An example of this type of 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 are paying over $0.60 per gallon more than 2009’s first quarter average of 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 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 return. Let me turn it back over to Jim.

Jim Young

Thanks, Rob. We will wrap up here. With 2009 behind us, we are 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 will 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 have 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 the 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 cost.

It will cost us millions more annually to maintain this system. The PTC mandate is an example of a 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 onto our customers to the extent that 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 DC 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 70''s operating ratio by 2012 and should make further progress towards 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 propositions. 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.

Question-and-Answer Session

Operator

Thank you. We''ll now be conducting a question-and-answer session. (Operator Instructions) If you’d like to ask a question, please press “*1” on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press “*2” if you wish to remove your question from the queue. For participants using speaker equipment, it maybe necessary to pick up your handset before pressing the * keys. In the interest of time and in order to allow as many participants as possible to ask their questions please limit the number of questions to two or three. Thank you. Our first question is from the line of John Larkin with Stifel Nicolaus. Please go ahead with your question sir.

John Larkin - Stifel Nicolaus

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.

Jim Young

Well, there are no more contractual obligations other than the potential of a call-out sometime in the middle of the year. I would look at pretty even overall and you know 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.

John Larkin - Stifel Nicolaus

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

Jim Young

Rob, you want to answer that?

Rob Knight

A little not much. Not a material amount, John.

John Larkin - Stifel Nicolaus

Okay, and then maybe a broader question regarding the opportunity to grow domestic intermodal, which has obviously being doing quite well. I think there is a perception amongst 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?

Jim Young

Jack, you want to take that?

Jack Koraleski

You know, John, I think there is 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 businesses that''s moving out there today, there are still plenty of opportunities to convert business. We''ve had our streamline subsidiary that does door-to-door is doing quite well and 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.

Jim Young

John there''s one other piece. 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. But we are in a very good position. When we put new products in the market today, we are seeing great success. When we open a new ramp, we are seeing great success. So I think there is, again like Jack, I think there is a very good opportunity for us to grow.

Jack Koraleski

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

John Larkin - Stifel Nicolaus

Thanks very much. That was very helpful.

Jim Young

Right John.

Operator

Thank you. Our next question is from Walter Spracklin with RBC Capital Markets. Please go ahead with your question sir.

Walter Spracklin - RBC Capital Markets

Thank you very much. Good morning, everyone. Just on the operating efficiencies, found it interesting, you noted that two third due to the volume decline, one third due to efficiencies. Is that a good way to look at now what the productivity initiatives that you can hold on to regardless of whether where volumes come back?

Rob Knight

Well, it''s not a linear relationship as volume goes back. These are all kind of step variables, but I think that’s not an unreasonable way to look at it, long-term. The first -- again, you think about the first jump in volume, we are going lever it significantly. I''ve got 16 hour locomotives sitting in stores that would depreciate. So you think about some of these costs that we will, we''ve got a long way to run here on volumes before you see a substantial jump in costs.

Walter Spracklin - RBC Capital Markets

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 out of that suggest that you can''t support it. Can you give us some color on what you looked at that you really don’t like in this bill that is causing you to take this step?

Jim Young

Well, it’s a very complex bill and it covers a whole range of areas. The ability to earn adequate revenues, there is no language on anti-trust when you look at it. And again what we are trying to do here is to step back and look at how do we may be bring some certainty to our industry where you know they''ve been talking about new regulations ever since we were largely deregulated 20 some years ago, that’s out here. And my number one concern is the ability in this business to earn returns.

Again there is no discussion of replacement cost in this bill. That’s a huge issue for us as we go forward but you know we have worked with Chairman Rockefeller, he is a believer in rail. When he is -- I have met with him personally. He is, he really advocates more business movement in the freight railroad. So I hope common sense prevails here and that we are incented to grow this business and not go the other way.

Walter Spracklin - RBC Capital Markets

That was great color. Thanks very much guys.

Operator

Our next question is from Matt Troy with Citigroup. Please go ahead with your questions.

Matthew Troy – Citigroup

Yeah, 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''s ever ended the year with. Historically, you ran with about half the level of cash and investments you have on the balance sheet. 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 in priorities you have for redeploying that cash as the economy feels a little bit better in 2010?

Rob Knight

Matt, I mean you are exactly right. We ended the year with $1.8 billion on the books. Of course we have had payments that have brought that down to about closer to one-and-a-half-ish today. That is, you are right, that is a higher level than sort of a historical level, but our priorities remain the same in that is we''ll look at capital investments where the returns are there. We 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 are waiting on there is just more clarity in the markets, more clarity in the economic environment, and we''ll see that in a consistent business levels and when we see that, we''ll feel more comfortable moving forward deploying that perhaps in the form of share buyback.

Matthew Troy – Citigroup

Okay, and is it fair to assume that levels let''s call it between $500 million to a $1 billion is a more reasonable level of cash balance for the balance sheet directionally, if things --assuming things do stabilize?

Rob Knight

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 have to see how the economy plays out.

Jim Young

Matt, to me -- this is Jim. It’s really a function of what you see happening here in the economy. Obviously, we have been conservative, it’s the right decision. There is still uncertainty when you think about where the economy is going this year. We are 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.

Matthew Troy – Citigroup

Well, 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, no one it''s going away anytime soon, but obviously 2010 looks to be a challenge here at least early on. I''m just curious. Are you seeing any of your customers come to you seeking to renegotiate or on take or pay contract and break the floor or just think about being a little bit more aggressive on negotiations given the intermediate term weakness and how should we think about the recovery into the years? Are we really just waiting for more extreme weather, what gets us to the other side of this little blip in coal? Thanks.

Jack Koraleski

Matt, 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 these kinds of things in terms of potential impact that the cold weather is having.

I think it’s the cold weather prospects here in the US, but also in Europe and China that says there are actually maybe a little more upside out here than what we were thinking when we first got into this year. So I am the eternal optimist in the crowd here, but I am 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.

Matthew Troy – Citigroup

All right. Thanks for the time.

Jack Koraleski

Thanks Matt.

Operator

Our next question is from the line of Tom Wadewitz with JP Morgan Chase. Please go ahead with your question, sir.

Thomas Wadewitz – JP Morgan Chase

Good morning. Lets see, I wanted to ask you a couple of questions I guess on pricing and in specific the impact of legacy re-pricing, so you gave us the charts on slide 24, they were pretty helpful. If you looked at the numbers in 2009, I guess 5.5 excluding RCAF fuel, can you tell us how much of that 5.5 was due to legacy contracts?

Jim Young

You know Tom, we have said and it’s been pretty consistent at about 2 points is what you look at and that roughly is how it is playing now.

Thomas Wadewitz – JP Morgan Chase

Okay, so of that ex-legacy, it would have been about 3.5. It looks like you have got potentially a bit bigger impact from legacy contracts in 2010. I guess you got the Pacer late in 2009. So for your impact in 2010, you got the GM and you’ve got some other things. I guess it appears that there is a little more legacy impact in 2010. Would we assume that that maybe another percentage point, maybe you get 3% impact or how would we view that?

Jim Young

Tom, I think you kind of stick around that 2 points. You have to also keep in mind, we still have legacy contracts that have negative and have a negative impact in pricing when you look at it long term so, I wouldn’t go that far.

Thomas Wadewitz – JP Morgan Chase

Okay and if you take out legacy, would you expect much of a change in the re-pricing of the other part of your book that’s really not legacy contracts?

Jim Young

Well, you''ve got some areas. Always when you think about 2010 is where is the economy going? We do have some areas that are softer like we said, the intermodal area, maybe ag a little bit, but given 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''ll tell you, we''re 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.

Thomas Wadewitz – JP Morgan Chase

Okay and I guess this other question is 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 operating expenses at a low, a number around that in 2010, or is that kind of a materially lower than what you would think is a reasonable run rate because 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?

Rob Knight

Yes, there was some puts and takes in there. I think from a modeling standpoint, you are probably better off looking at 2008 level as more of a run rate. It could be a little higher.

Thomas Wadewitz – JP Morgan Chase

That backed up like the $180 million level?

Rob Knight

Somewhere around there yes, that''s probably a safer run rate for your modeling purposes.

Thomas Wadewitz – JP Morgan Chase

Okay all right. Nice quarter. Thank you for the time.

Operator

Your next question is from Gary Chase with Barclays Capital. Please go ahead with your question, sir.

Gary Chase - Barclays Capital

Good morning guys. I wanted to ask Jack and 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 is a way to generalize and what do you think the outlook is for 2010?

Jack Koraleski

You know, 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 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, let’s reinvest them going forward. We are working with customers to reflect market conditions. So, it’s just kind of 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.

Gary Chase - Barclays Capital

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

Jack Koraleski

It’s really market specific. In some places, we''ve been able to see some turnaround 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.

Gary Chase - Barclays Capital

Is there a way, Jack, to give us just a qualitative feel on how Pacer phases in? Is it, bulk of it front loaded, back loaded. Is it relatively even?

Jack Koraleski

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.

Gary Chase - Barclays Capital

Okay guys. Thanks very much.

Operator

Our next question is coming from Randy Cousins, BMO Capital Markets. Please go ahead with your question, sir.

Randy Cousins - BMO Capital Markets

Morning. I guess Jack, for you first question, CSX yesterday was kind of very bearish on the outlook for coal and 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 at some level that maybe they are just being a little overly bearish?

Jack Koraleski

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 have seen the plants in the Northeast and Southeast which would be their served 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 our sourcing from Colorado, Utah and Powder River Basin, even when you look at national statistics, our overhang in terms of the number of day stock pile doesn’t appear to be quite as onerous as Appalachian coal and some of those kind of sources.

Jim Young

Randy, I think one thing to keep in mind here, the ability to shift pretty quickly has happened, that happened when gas was at $3 here a while back. So you’ve already had wherever you have a capability shift in our system, that’s pretty much been done now. When new plants are built, you get to look longer term there, but I’d also argue, while Jack might sound a little bit more bullish, we averaged about 30 trains a day out of the Powder River Basin in 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 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 is some potential there.

Randy Cousins - BMO Capital Markets

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

Jack Koraleski

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

Randy Cousins - BMO Capital Markets

Okay and then to, Dennis, his slide number 17, you got freight car utilization for the year and previously you have given them from the quarter, wondered if you could give us some indication 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 car loads a week, then it was 180,000 car loads a week. I think the low was like a 140,000. You got back up to 160,000.

Let''s assume we go back to 180,000 car loads a week. Can you maintain the same kind of network velocity, the same kind of cycle time statistics and is the headcount that we''re looking at today, the kind of headcount that we would have with 180,000 car loads a week. How should we think about this sort of again, in real hard terms to cost take out?

Dennis Duffy

Your first question first, on the quarterly numbers, everyone on the same suite of numbers that I showed to you, velocity, freight car utilization was all improved significantly, and specifically in freight car utilization a year ago, 4Q was 9. We''re 8.4 this year. So the terminal dwell service delivery index all were up, I think you know at least 10-15% over Q-over-Q, 4Q versus 4Q.

And if we got into the 180, we''ve already 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. You know if we''re running at 160 and we get to 176/180, we see marginal, very low marginal increases in possibly some train starts, but there might be some recalls possibly out of the A wards boards but it would be minimal. We think we can handle that level in the foreseeable future with principally train length improvement.

Jim Young

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 to 200,000 cars a week. But we do have a lot of leverage moving up here on volume in our capital and you know honestly I hope we get to the point where we''re out hiring, and that means we are growing that side of our business. Dennis said at 180,000 cars right now, we are better railroad today or tomorrow when we''re at 180,000 cars than we were the last time we''re at 180.

Dennis Duffy

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 runs.

Randy Cousins - BMO Capital Markets

Excellent, outstanding, thank you very much.

Operator

The next question is from Bill Greene with Morgan Stanley. Please go ahead with your question, sir.

William Greene - Morgan Stanley

Yeah, sorry just one quick follow up on the coal issue, did you actually say what the days outstanding are in terms of the stockpiles in your region?

Jim Young

You know, Bill, it''s about 75 days on average and again, you know that 75 days, I have got guys that are probably at a 100 days and I have got some that are at 50 and may be even a little below that.

William Greene - Morgan Stanley

And historically 50-ish is about normal for you?

Jim Young

You know I have customers probably average in the 50 to 60 range.

William Greene - Morgan Stanley

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 financially related but also service related. So would that suggest we should have less of a headwind at least on that metric looking into 2010?

Rob Knight

Bill, that’s exactly right. I mean it is down in ''09 versus ''08, but not significantly. Again we don’t have some of the equity programs that require mark-to-market like some comparisons I know you''ve looked at. So that’s exactly right.

Jim Young

You will not have a headwind in 2010.

William Greene - Morgan Stanley

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 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?

Jim Young

You want to handle that one, Duff?

Dennis Duffy

Well, there is not as much as you saw on that mega train believe me, but overall, Bill, let me say it''s 10% to 15%. We can handle the next 10% to 15% on average across all of our major train categories.

William Greene - Morgan Stanley

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

Dennis Duffy

The first place you would see it is in fuel and equipment costs, yes. That’s it. The labor will be very minimal, if any.

Jim Young

Bill, don’t read that 18,000 ton train is where we''re heading. We are doing some testing and technology in train dynamics and fuel efficiency but you are not going to see us run 18,000 ton trains consistently.

William Greene - Morgan Stanley

All right, thanks for the time.

Operator

Thank you. Our next question is from the line of Ken Hoexter, Merrill Lynch. Please proceed with your question sir.

Ken Hoexter – Bank of America Merrill Lynch

Good morning. Rob, just want to follow on the employee question there, the cost per employee. Just looks like if we go back, if the contract kicked in mid-year last year, the last few quarters look like cost per employee average selling and benefit per employee was down about 1%. In this quarter, it jumped up about 3%. So I am just wondering what the cost per employee kick ins were just as we look forward into 2010 where because you talk about no headwinds but I am wondering why that jumped up this quarter.

Rob Knight

This quarter actually was more reflective of what we would have expected given the 4.5% wage increase to the agreement work force. I think that’s a pretty fairly -- that answers the fourth quarter question. The point I was making in my prepared 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 of that line item. 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.

Ken Hoexter – Bank of America Merrill Lynch

Wonderful and then, Jack, you mentioned earlier that about the Powder River Basin coal contract that was lost early last year, are we now grandfathered past that?

Jack Koraleski

Yeah, we will January 1st.

Ken Hoexter – Bank of America Merrill Lynch

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 are renewing some contract at lower rates or what are you trying to suggest there? I think you were talking about the intermodal at that point.

Jack Koraleski

I have existing legacy contracts that have pricing provisions that in the third and fourth quarter resulted in negative price. Some of those were persistent to the 2010.

Ken Hoexter – Bank of America Merrill Lynch

So inside the legacy contract that had some reductions, it''s not that you''re re-pricing old legacy contracts at lower price?

Jack Koraleski

That’s right.

Ken Hoexter – Bank of America Merrill Lynch

Okay, I just wanted to clarify that. Thank you. And then just to wrap up, Jim, I just want 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 -- Duffy mentioned that there''s ability to earn adequate returns, it actually mentions that four separate times that it''s focused on that, and you said it doesn’t mention replacement cost. It actually mandates the STB to review six months after passage to review replacement costs. And then you said there is no language on anti trust, so I am wondering since there is no language why would that be a concern? Is it a concern because some thing might get stuck in before passage?

Jim Young

That’s right, Ken. And remember that language includes a study, so you can study things a long time and get no place.

Ken Hoexter – Bank of America Merrill Lynch

Okay so, and then ba