Welcome to the Union Pacific fourth quarter 2014 conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded and the slides for today’s presentation are available on Union Pacific’s website. It is now my pleasure to introduce your host Mr. Jack Koraleski, CEO for Union Pacific.

Welcome to Union Pacific’s fourth quarter earnings conference call. With me today here in Omaha are Eric Butler, our Executive Vice President of Marketing and Sales; Lance Fritz, our President and Chief Operating Officer; and Rob Knight, our Chief Financial Officer. This morning we’re pleased to report that Union Pacific achieved fourth quarter earnings of $1.61 per share, an increase of 27% compared to the fourth quarter 2013 and another quarterly record. Total volumes were up 6% with increases in all six of our business groups. Industrial products and coal showed particular strength up 10% and 9% respectively. These strong volumes along with solid core pricing and productivity helped drive 3.6 points of improvement on our operating ratio to a record 61.4% for the fourth quarter. These strong fourth quarter results rounded out a full year 2014 which was very successful on many fronts. We posted record financial results in revenue, operating income, earnings per share, and operating ratio. The strong demand we experienced back in the first quarter was sustained throughout 2014 driving total volume growth of 7% for the year. Robust volumes challenged our network for much of the year and we remain focused on adding the necessary resources to safely improve service and we’re encouraged with the progress that we’re making. We remain fully committed to delivery safe, efficient, value added service for our customers. With that, I’m going to turn it over to Eric.

In the fourth quarter volume was up 6% as solid demand across our franchise led to volume gains in all of our business groups. Strength in industrial products and goal led our volume gain for the quarter and intermodal and chemicals volumes were strong as well. Growth moderated in ag products during the quarter as we are now comparing to the strong grain harvest in 2013. Core price increased 3% which drove average revenue per car up by 3% in the quarter. Our volume growth and improved average revenue per car combined to drive freight revenue up 9% which set a fourth quarter record of $5.8 billion. Let’s take a closer look at each of the six business groups. Ag products revenue was up 9% in the fourth quarter on a 4% increase in volume and a 5% improvement in average revenue per car. [Indiscernible] car loads were up 3% in the fourth quarter reflecting another record crop year for both corn and soybeans. US corn production was up more than 3% and soybean production was up 18% over the 2013 crops. We saw strong overseas export feed grain shipments this quarter, partially offset by lower exports to Mexico as receivers switched to local supply. Domestic feed grain shipments also contributed to our growth as lower corn prices drove demand. Wheat car loadings continued to be a headwind as lower wheat prices drove down export shipments. Grain products volume grew by 4% as strong gasoline demand and favorable export conditions drove another strong quarter of S&L shipments. Food and refrigerated shipments were up 4% for the quarter. There was a strong domestic sugar beet crop which combined continued import beer growth to more than offset softer fresh and frozen food shipments. Automotive revenue was flat in the fourth quarter on…

I’ll start with safety where our full year results included a record low reportable personal injury rate of 0.98, an 11% improvement versus 2013. I’m very proud of the team as we made a nice step forward on our commitment that every employee returns home safely after each shift. In rail equipment incidents or derailments, our reportable rate improved 7% to 3.00 falling just short of an all-time record. Enhanced TE&Y training and continued infrastructure investment helped reduce the absolute number of incidents including those that do not meet the regulatory reportable threshold, to a record low. In public safety our grade crossing incident rate increased 5% versus 2013. Driver behavior continues to be a critical factor in crossing incidents. We continued to reinforce public awareness through community partnerships and public safety campaigns, and focused our counter measures on high risk crossings. In summary, the team has made terrific progress on our goal of achieving annual safety records on the way to an incident free environment. In regards to network performance we worked hard in 2014 to match network resources with the robust volume growth we enjoyed. During the latter part of the fourth quarter our available resources were largely aligned with demand. That, combined with a successful Thanksgiving holiday operation and better winter action plans, contributed to substantial service improvement in December. The net result was sequential velocity improvement in each region of our network, all while handling strong volumes. While our velocity in December was more than a mile an hour faster in November, and the best since January, our service performance still fell short during the fourth quarter. As reported to the AAR, fourth quarter velocity was down 8% and freight car dwell up 11% when compared to 2013. Our performance in December was a step in…

Let’s start with a recap of our fourth quarter results. Operating revenue grew 9% to nearly $6.2 billion driven by strong volume growth and solid core pricing. Operating expenses totaled just under $3.8 billion, increasing 3% over last year. The net result was operating income growing 20% to about $2.4 billion. Below the line, other income totaled $71 million up from $37 million in 2013. Included in the $71 million was approximately $0.02 per share of onetime items including real estate gains. Interest expense of $146 million was up 15% compared to the previous year, primarily driven by increased debt issuance during the year. Income tax expense increased to $867 million driven primarily by higher pretax earnings. Net income grew 22% versus 2013 while the outstanding share balance declined 3% as a result of our continued share repurchase activity. These results combined to produce best ever quarterly earnings of $1.61 per share, up 27% versus last year. Turning to our top line, freight revenue grew 9% to nearly $5.8 billion. This is driven primarily by volume growth of 6% and core pricing gains of 3%. Fuel surcharge revenue was about flat for the fourth quarter as the decline in fuel price was offset by the lag in fuel surcharge program and higher volumes. All in, we estimate the net impact of the reduced fuel prices add $0.05 per share in the fourth quarter versus last year. This includes both the surcharge lag and the lower diesel costs. Business mix was also about flat for the quarter as the positive mix impact from frac sand volume was offset by the increase in lower average revenue per unit intermodal shipments during the quarter. Other revenue increased 8% in the quarter. Primary drivers included revenue associated with the per diem on auto parts…

As you’d expect with 2014 behind us, we’re intently focused on the year ahead. Here’s what it’s looking like. Overall, the US economy continues to move forward at a moderate pace but of course, there’s always some uncertainty out there. Clearly, one of the biggest uncertainties is the outlook for energy markets which will bring both challenges and opportunities as we move ahead. Lower energy prices could slow the recent [shale] related domestic energy boom depending on how low the prices get and how long they stay there. On the other hand, lower gasoline prices could spur continued auto sales and help strengthen the consumer economy which would create opportunities in our other market segments. On balance, with all the pluses and minuses taken together we expect to see positive volume growth for the 2015 year. We’ll watch closely and stay agile so that we can meet our customer’s needs across our diverse franchise. We’ll also continue to build on the progress we’ve made in improving our network capability so that we can provide the safe reliable service our customers expect and deserve. We’re entering the year well-resourced and we’re looking forward to safely providing efficient value added service for our customers and increasing returns for our shareholders in 2015. With that, let’s open up the line for your questions.

Thinking about frac sand in 2015 and the number of wells drilled is expected to be down somewhere in the 25% range and sort of offsetting that would be the better capitalized E&P companies high grading and improving productivity per well, if you sort of balance these factors do you think you can still grow frac sand carloads year-over-year? What scenario do you think volumes would outright contract?

I think you have it exactly right where there are ins and outs in terms of there have already been reported probably about 20% rig reduction but the well capitalized companies are focused on continuing to drill where they could make their profit and there’s a wide range of economics in all of the shales, so thinking of all those factors. Having said that, I think it really is too early to tell how all of that is going to play out. We certainly don’t know if oil prices will remain this low. If oil prices increase certainly, that’s going to be a lift for us so there are a lot of ins and outs. We feel really, really good that we have the premier franchise in terms of kind of frac sand coverage. We have the best franchise for most of the major shales, particularly the shales that will arguably still be profitable the Eagle Ford, Permian, you can see growth in the Niobrara. There’s even rumblings about the Haynesville coming back. We feel really, really good about our franchise and our position and at this point we, like everybody else, is keeping a close eye on it.

Just as a follow up question, Jack some of your comments at the end I think, in terms of thinking about the broader economic benefit of lower oil prices sort of against the backdrop of weakness and shale related activity, how do we think about this in terms of overall volume growth? Obviously, there’s a lot of puts and takes but are you thinking about it sort of as like a net-net neutral sort of on a relative basis with benefits maybe in autos, consumer products, etc. and then that being offset by crude by rail, frac? Could you help us think about that?

I think your heads in the right place on that. I think when you look at it, I think popular opinion says consumer drives two thirds of the economy. If consumers are having discretionary spending and they’re going to buy automobiles, they’re going to build houses, they’re going to buy new furniture, consumer goods, those kinds of things, those kind of all hit right within the sweet spot of our franchise and we’ve seen that in the fourth quarter, the construction products up 17%, lumber up 10%, automobile business the SAR at 16.7% so it’s not unreasonable to think that knocking on the door of $17 million for 2015. Again, when we add it all up pluses and minuses, we think at the end of the year barring anything that is unusual that we haven’t seen at this point in time, we’re going to still end up with positive volume by the time we get to the end of the year.

Your next question comes from Ken Exeter [ph] - Bank of America. Ken Exeter [ph]: Rob, when you set the operating ratio target fuel was much higher and you noted a 1.5 point benefit. Are there any other offsets that don’t get you to move up that timeframe? I guess if you think about the 1.5 point benefit from the 63.5 along with the repricing that’s already locked in what can happen in terms of - is there a chance you hit that target in 2015 or is there something there that can offset that?

Clearly, this unprecedented fall off in fuel helped us and clearly, if it stayed at this level or dropped even further that would be a contributor towards achieving our targeted 60 plus or minus operating ratio target. But you know, we’ll see how fuel plays out. I’m not willing to bet that over the long haul fuel will stay where it is and the rest of the story if you will in terms of us running a safe efficient railroad getting core pricing, squeezing out productivity so I think what the drivers are really going to get back to is our core fundamentals in the business that will enable us to get to that sub 60 as soon as we possibly can.

Ken said that 1.5 points came from fuel, I don’t think that’s quite right is it?

Just to clarify that because I’m not sure I did catch exactly how you asked it, but just to clarify the impact of fuel, the benefit of the failing fuel price in the fourth quarter was about 1.5 points of benefit in the fourth quarter. For the full year the benefit of the fuel was more like .7 of a helper on our operating ratio. Ken Exeter [ph]: I was extrapolating that fourth quarter benefit through the year if we stayed at these lower prices. If I could just get a follow up. Eric, you mentioned low nat gas prices can impact, there’s a lag before it impacts coal flows, can you maybe delve into that a little bit? Talk about maybe the outlook for coal, do we see one more quarter of replenishing stock piles and then starting in the second quarter we see a fall off with these prices or is it still kind of in that flux point even at these levels? In terms of PRB switching it seems like it’s already impacted the Colorado Utah side? Maybe you can delve into that a little bit?

We’ve historically said and I think the market convention was kind of the switch over point was below the mid twos for natural gas pricing. The Colorado Utah impact was really an export coal world coal price impact, it’s not a domestic US natural gas impact. As we look forward we’re not really seeing a lot of switch over impact for us now. We are still seeing replenishment. As you suggested the inventory numbers for December should come out here in the next couple of days, we still expect that inventories are going to be low when they come out here in the next couple of days but the other - we’ve said forever, the real driver is weather and the economy and so that will be the ultimate driver for our coal volumes. We do feel really good about where we stand from a position - one of the strategic factors that I think may have changed from the past is that if you go a year ago and what happened with natural gas prices there was a lot of volatility and I think there’s been rethinking on many of the utilities to really think coal as a base line fuel as a risk hedge against the natural gas volatility. For that reason I feel pretty good about our coal outlook.

Your next question comes from Justin Long - Stephens, Inc.

I wanted to ask a question about intermodal. I know this varies by lane, but when you look at the price differential between intermodal and your truck in your network today, what’s the typical spread and how has that spread changed, if at all, over the course of the last couple of quarters as we’ve seen fuel prices come down?

I think we’ve said historically that the spread can be pretty wide, as much as 25% to 30% in some lanes and it can be narrow, as low as 10%. I think the factors that we’ve been talking about are still there or even growing. The factors being driver shortages, I think that is still a factor that is going to drive conversions. If you look at the experience that we’ve had, we’ve had another year of record domestic intermodal volumes. You can look at our fourth quarter volumes and we’ve had new products and services. Last year we talked a lot about the new services that we put in place. We opened Santa Teresa, so we’re entering new markets. You still have driver shortages. Growth in domestic intermodal is still a sweet spot. There still is a gap there, but as we are selling out value our goal is to grow volume and close that gap.

Maybe just as a follow up to that, do you think that 2015 is a year where intermodal pricing mirrors contractual rate increases and truck load? I’m just curious if this would be the best proxy, truck load rate increases or if there’s a reason you think intermodal pricing should be any different than truck load this year?

We still think we have strong opportunity to grow price in our intermodal book of business. If you look at what happened in ’14 as demand increased on truck drivers, etc., some truck loads, some truck entities, have shorter term prices so they probably were able to respond quicker than entities that have longer term contractual arrangements, but we feel really good about our opportunity to price going forward.

Your next question comes from Thomas Wadewitz - UBS.

I wanted to ask a bit about legacy contract repricing. I think you highlighted that you were successful in retaining all that was coming due in 2015 and so that was good news, but also pulled forward what was in 2015. I think in the past you talked about - maybe it was a 2013 impact where you got like a 1.5 point boost to pricing, to core price, from legacy. Given the success on legacy in 2015 should we think of that as higher than the 1.5 point impact to core price? Is it more like two points or above that? How can you kind of frame that legacy impact to core pricing in 2015?

What I’ll tell you is it’s a positive but we’re not going to give the specific numbers on that as we never have in terms of our guidance. We’re pleased with the business, we’re pleased that we were able to compete and retain those contracts that we talked about for ’15 and ’16 and it will certainly be a positive contributor to our core pricing in 2015.

Is it reasonable to think it’s maybe a bigger impact than 2013?

I’m not going to answer that. The caution that you’ve heard me say many, many times is that I wouldn’t straight line past performance and overlay that on top of these contracts. When we report our pricing in the first quarter and beyond you’ll see that embedded in the pricing numbers that we report but I’m not going to give any more details on it.

On a follow up question, the industry had capacity challenges in 2014. Your western competitor perhaps had greater challenges than others and I think it’s fair to say you probably gained some volume as a result of that. How would you think about the impact of that to 2015 volumes? Their velocity seems to be improving. I think you said you believe that you’re adequately resourced so is there some volume that goes back to them potentially? Should we assume your volume growth slows down because you don’t gain share like you did, or how would we frame that potential impact from change in capacity and service performance of your competitor?

I think overall when you look at the business we were able to move in 2014 the table is set for us to prove the value proposition of Union Pacific versus our competition and our competitor has always been right there chomping at the bit so it’s always a head-to-head competition in any one of those opportunities. Our challenge and our ability to convince those customers that the Union Pacific value proposition is what fits in their business model more effectively is really what we’re all about here. Yes, we may lose some of that business, we may gain some additional business, we’ll just have to see how the competitive world plays itself out in 2015.

Your next question comes from Tom Kim - Goldman Sachs.

I wanted to follow on Tom’s earlier question on the legacy reprice. First off, can you just quantify the amount that was up for renewal for 2016 as you highlighted what was for 2016 previously?

I would just call your attention to the last pie chart that we showed at investor day. The revenue that we reflected there, which is based on historical by the way it’s not a projection of what those contracts are going to drive going forward, but we said there was about $300 million of revenue in the legacy bucket for 2015 and about $140 million in that bucket for 2016, so those are the buckets we’re talking about here.

Just the same in regard to the timing, should we factor this in sort of staggered over the course of the year, or is this sort of a January one effect? If you could just give us a little bit of sense in terms of how to be thinking about how that flows through it would be helpful?

The bulk of that $300 million for this year was front end loaded so we should start getting it relatively early on that piece this year.

Your next question comes from Scott Group - Wolfe Research.

I actually had one more follow up on the legacy stuff. Rob, is there any way to put some color on historically how much of the benefit of a legacy deal was in the base rate and how much was just getting a fuel surcharge for the first time? Could that suggest that maybe the legacy benefit isn’t as good as maybe it would have been now that oil is much lower? That’s one question if you will.

Fuel not only in the legacy contracts but in all of our contracts will obviously play a role in what we report in average revenue per car or per unit. But in terms of your question of can I give you some historical or shed some light on that, the answer to that is no. It was a combination of walking up the pricing on our historical legacy renewals, and as you know, rolling up or improving. It wasn’t always a case of going from zero to adequate. In some cases there were fuel surcharge mechanisms in place in those old contracts, we were just able to look at them and make sure that they were adequate. I would say the same thing applies in this go around, but trying to quantify or give you a percentage split, I can’t give you that.

Can you guys just give an update on what you’re seeing at the west coast ports? What contingency plans you have in place in case there’s a lock out and strike, and just how you’re thinking about what the impact there could be?

We’ve been staying very close to the situation and working with our customers. Eric, why don’t you talk about some of the things that we’re doing and thinking about?

I think you probably know that both sides did ask for federal mediation so that mediator was appointed I think, last week or so and they’re going through the process. I don’t think we have any unique knowledge of how that process is going. We’re hopeful that the issue does get resolved. We had put a contingency plan in place in the event of a work stoppage and we’ve communicated those to our customers in terms of the things that we will do to manage our network and do the best job we can of managing customer needs and expectations through a work stoppage. As Jack said, we’re staying close to it. I’m not sure we have any specific knowledge beyond the parties in a federal mediation that is going on.

Do you think just the uncertainty is going to have an impact on your volume or your ability to get price?

The uncertainty has nothing to do with price, the price is driven by kind of the market opportunities and the value of our product and that still remains. Certainly, in the short term BCOs are doing what they need to do to protect their supply chain. That’s expected, that’s what has occurred at times in the past when similar labor issues have gone on in any port. We think going forward, that once the issues are resolved and they’re behind, the whole supply chain effectiveness of the rail transportation network, our rail transportation network with the ports of Long Beach, LA, still is a premier way of getting products into this country. The Southern California west coast destination market is still a huge market so we are very comfortable going forward with the value of our franchise and our proposition once this labor issue is resolved.

Your next question comes from Rob [Zelman] - Deutsche Bank. Rob [Zelman]: As a follow up to Allison’s earlier question regarding the frac sand franchise, could you give us a sense of how the split of that business is broken down by contracts versus tariff pricing and any sort of overall exposure that you guys have to the different shales?

We don’t talk about kind of the structure of our pricing by business. We don’t do that. What I would say, and if you refer back to some of the materials at the investor day, we did share that the majority of our franchise is destined in the Eagle Ford and Permian shale plays. I think we said about 60% of that, but we do have a great broad franchise in all the shale plays whether you want to look at Niobrara, Uinta, if you want to look at Marcellus, Haynesville, etc., we have a great franchise and so we think that does provide us a natural hedge for whatever the change is that the market and these low oil prices may bring. Rob [Zelman]: Rob, switching directions over to the core pricing side of the equation, with the roughly $140 for 2016, will be experiencing step up in 2015 regarding that pricing or are you just kind of saying we’ve already agreed to lock in the pricing which will commence in 2016?

I’m not going to get into the details of that particular renewal. We’re confident with the business that we renewed. We like the pricing, we like the margins on it, but in terms of the timing I’m not going to get into that.

Your next question comes from Brandon Oglenski - Barclays Capital.

Eric, in the past you guys have quantified your exposure to the frac sand, the crude oil, and the pipe. Is there any way that you can just update investors right now with your aggregate volume exposure to those three segments?

I think in the past, and I’m checking the number, but I think in the past we’ve probably said about 5% of our volume is related to that. I think that’s about the number. Just to be clear you were asking in total what is our oil, frac sand market share percent of our volume and we’ve said 4.5% all in. 2.5% from the sand the rest like, 1.5% from oil, and then the remainder is some of the materials, pipe, etc., just to kind of size our total.

I think Jack hit on it earlier, that you’re seeing quite a bit of improvement in your construction markets so can you talk about - and I know this might be more difficult to quantify, but what’s your exposure to non-res construction or even housing starts and how do you weigh that versus where you think construction projects were going into the energy markets, and does that become a net benefit for you going forward?

I think what you’re asking is geographically where are our markets. We’ve shared before kind of the fastest growing states are kind of in the southwest and the west and then the southeast. Certainly, when you think about the south to the southwest and the west we have a great franchise exposure to those. Certainly, some of the growth has come from the energy related growth in Texas, particularly around the Houston market, but we’re seeing good growth in our construction products in housing in non-Houston non-Texas markets also.

Your next question comes from Jason Seidl - Cowen and Company.

You mentioned that there’s probably going to be a little shift change between international and domestic intermodal, particularly in 1Q given what’s going on in the ports. Can you remind us the impact that’s going to have on your intermodal yields?

We have not discussed what our yield are by our intermodal business. We are seeing positive trends in yields across our book of business whether it’s domestic or international because of our strong pricing, and we expect that trend to continue.

I’ll ask it a different way. Is there any big difference between the length of haul between domestic and international?

There’s not a significant difference in the length of hauls between those two. There’s a minor difference because again, our domestic business runs east west from the west coast kind of to the Midwest Chicago and Midwest interchange and our international business runs over that same route. The minor difference would be the mix of our business that runs north south which would have a shorter length of haul.

Sort of related, as a follow up, I guess this may be a little bit more for Lance, but obviously the rail industry was challenged in ’14 operationally, it impacted sort of everybody’s bottom line. Can you talk about productivity gains assuming everyone shows a little bit of improvement this year in 2014, if we can put a number on it?

Without putting a number on it I’ll remind you that as we discussed going through 2014 we said we were getting significant productivity and probably a little bit aberrational in that we would have liked to have more crews and locomotives to run the network. As we move into 2015 we expect to continue to get productivity. I would expect it maybe not to be quite as turbo charged as it was in 2014 because we’ll now be matched in terms of resources to demand, but we will get productivity continuing in 2015.

Especially when the cycle times improve we’re able to pull locomotives out of - put them back in storage pull them out of service, those kinds of things. Those are the least productive units that we’ll be storing so there is just some natural productivity occurs as velocity spools up. I think our latest numbers that we reported is a velocity of 25.3 and headed in the right direction so we feel good about that.

Your next question comes from Chris Wetherby - Citigroup.

Thinking about pricing for a second, if we put legacy aside and think about sort of the underlying potential of the business into 2015, it would appear that we’re sort of getting a little bit of inflection more positively throughout the year of 2014. I just want to get a rough sense of how you think about that outlook for sort of everything ex legacy as we think about the next year? Sort of what you’ve had the opportunity to touch and maybe what could be coming up?

As we’ve said throughout 2014 and as we’re saying today, we feel good about our market value and our opportunity for pricing and we have a strong value proposition, the economy is strengthening and we’re excited about our ability to get price going forward.

We don’t really see anything that’s changing our view on our pricing model at this point in time. Reinvestability has to be the threshold to get onto the Union Pacific franchise, price to market, take advantage of opportunities across the franchises as we see them and we don’t see anything that’s happened here recently that would cause us to veer from that at all.

As a follow up, on the intermodal side just thinking about the international intermodal side with what’s going on in the west coast ports and the sort of prolonged period of negotiations there, do you have any sense that some of the disruptions that you’re seeing may ultimately be permanent or semi-permanent as shippers look for other alternatives? We’ve talked about this before in the past and my guess is most likely business comes back once we get resolution but I just want to get a rough since maybe how we should be thinking about that. Do you hear that at all?

I think you’re exactly right. Certainly, any shipper in terms of while this uncertainty is here they’re trying to identify options to protect their supply chain and you see that for example, right now with growth into Oakland or shippers trying to get into Oakland which is part of our franchise also. Long term the port of LA, Long Beach, is in a sweet spot in terms of the connectivity with the rail network, our network, our competitor network. Long term the expectation is once these things are behind that will be the preferred option for shippers.

Your next question comes from David Vernon - Bernstein Research.

A couple on trying to get some help in modeling forward RPUs. As you think about the demand outlook, I think we’ve talked about in terms of crude oil and frac sand, should we also be expecting that with reduced demand for sand or oil transportation there’s also going to be an impact on the RPU or is the pricing going to be pretty well divorced from the supply/demand economics in the underlying commodity?

As I’ve said before, we still feel really good about our franchise, and our strength, and our value proposition. We still see upside opportunity to drive value and to drive price in that market.

But say the price of frac sand goes down a lot, should we expect that the producer is going to eat that or there’s going to be a little bit of pain shared between the producer and their transportation partner?

We have never and we don’t anticipate ever tying our value of our transportation products to commodity price values.

Then maybe just as a quick follow up, as you think about the outlook as we talked about it maybe a little weaker depending on what oil prices do, maybe a little stronger on construction, as you think about that mix impact would you expect that the average RPU on the construction stuff that would be growing would be directionally better or worse than maybe some of the oil related stuff that’s going to be coming down? I’m not looking for specifics I’m just trying to get a sense of directionally what impact that mix should be having on the result.

I think overall when you look at it, it will depend on which market. So, if it’s a manifest business, if it’s a lumber business, things like that tend to have a somewhat longer haul than some of our frac sand. But you know, there are so many moving parts to this that it’s pretty difficult for us to say what mix is going to come our way as we look ahead to the year.

Can you give us any insight into that directional sort of average construction unit versus the average crude and frac unit, higher or lower?

The answer is no to your specific question. You’ve heard me say many times that we avoid giving any guidance on average revenue per car and that’s not a negative thing. I think what it says is the strength of the UP franchise is so diverse that we play in multiple markets and just because one piece of business has a lower average revenue per unit is not a bad thing, it might have a higher margin. That doesn’t bother us when we see an average revenue per unit go up or down because it speaks to the diversity, it speaks to the mix. In every case we’re focused on improving our margins. The other thing that’s clearly going to impact average revenue per unit right now and potentially throughout the year is going to be the impact of fuel so you’re going to see I think, some swings up or down but that in and of its self doesn’t trouble us and we can’t give guidance on that.

Your next question comes from William Greene - Morgan Stanley.

Rob, I wanted to ask a question on the cost side and that is there’s a sense that given the number of locomotives and employees that we’ve added and embedded in the cost structure, if volumes disappoint us perhaps in the second half of the year or whatnot for whatever reason, that you’ve embedded a kind of fixed nature into this cost structure. Can you speak to the variability of the cost structure, how much you could take out if you had to adjust because the markets turned against us in ways we don’t expect?

I would answer that by saying we’re not projecting that. As you know, our guidance is positive volume for the year with all the moving parts. But to your point, I think we’ve sort of proven over the years, when there are times when the economy goes south on us that we’ve taken the right steps and Lance highlighted some of them in his talks, the furlough opportunities, the storage of the less efficient units. If you had to go deeper you’ve got opportunities to consolidate terminal operations, etc., so without putting a number on it I would just tell you that that’s something that we take pride in, in terms of being agile and being able to react to market conditions. So as Lance pointed out in his comments, we feel like we’re fully resourced right now with people and locomotives. We played catch up, if you will, through the back half of 2014 and we’re confident that there’s still opportunities to grow our business and we’ve got attrition on the labor front still in front of us so we’re confident we’ll make the right steps should what you’re outlining play out.

Then Jack, I wanted to ask you more on the legislative front we’ve seen that Senator Thune is potentially going to put forward the bill that he’s talked about in the past. I don’t know how much of the bill you’ve seen but maybe you can speak a little bit to is this the sort of thing that you can work with them on? Is there something here that we could get out of this or is it all sort of bad news and we’d rather keep the status quo as we have? Can you speak to any of that?

I think Senator Thune has kind of opened the door to comments and working with the industry and asking us what we think about the provisions of the bill and things like that. We’ve been able to provide some input. As always, we try to be a positive voice at the table and look at both the good opportunities as well as the challenges that each piece of legislation presents and I have no concern that we won’t be able to do that again. I think we’ll have an opportunity here to help shape that piece of legislation and work to mitigate any of the negative consequences and hopefully even add some positives for us.

Your next question comes from Matt Troy - Nomura Securities.

The service issues that plagued the industry through much of 2014, each carrier to varying degrees, operations seem to have stabilized if you talk to a lot of the IMCs out there kind of mid to early fourth quarter with some improvement. I’m just wondering, the next two months are critical from a weather perspective, what specific steps are you taking - you talked about the loco adds, and the crew additions, and the headcount additions, but what do you see as the critical focal points of your service remediation improvement plans let’s call it, in the first three to four months of the year as we look at a winter that so far has been benign?

Matt, one thing we’ve done is learn from last years’ experience during very difficult weather environments and we’ve beefed up our winter action plans. That includes that at any sign of inclement weather 24/7 command centers locally that can make the right adjustments and calls on the ground. We’ve taken advantage of this benign weather and done some engineering work on our track that is positioning us better for the spring thaw so I’m very pleased with that. We’ve also been working with our interchange partners at critical gateways like Chicago to put in early warning systems that are more robust and have more robust action plans around them and they’ve actually kicked in at different points during this winter, during bitter cold periods, and proven to be very effective. I’m really, really pleased with how we’re navigating this winter notwithstanding that in certain parts of our territory been a more benign winter than last year.

A follow up question would be just to clarify on the surcharge, there seems to be varying opinions out there in terms of the potential benefit of lower fuel costs if they were to remain down where they are currently. If oil stays kind of in this mid $40 range is it fair to think about, you had mentioned I think, something to about the tune of $0.05 of a benefit from lower fuel costs in 4Q, if I just look at the slope and the two month lag it would imply something similar, maybe $0.01 or $0.02 higher. Is that a fair assumption with fuel where it is and should we expect thereon if fuel stays down here at the same level that it becomes somewhat of a wash in second quarter and beyond? Just trying to think about kind of the benefit. I know it’s a long run net/neutral but just timing is obviously an issue here, if you could help us there that would be great.

Matt, under your assumption if fuel kind of stayed in the same neighborhood it is in the first quarter, I would expect that the first quarter looks similar to what we saw here in the first quarter or so and that’s consistent with your thinking. Beyond that, there are 60 plus surcharge mechanisms and we’re not guiding that fuel is going to stay flat forever, but we endeavor of course to keep the cost impact neutral so if it did just flatten out that would be certainly our objective. It doesn’t usually play out that way but I don’t think you’re thinking about it wrong.

Your next question comes from Jeff Kauffman - Buckingham Research.

Just a follow up, I think most of my questions have been answered at this point. I think you mentioned a higher amount of labor cost per employee inflation in 2015. Could we delve into a little bit more detail on that? In particular I’m thinking more on the pension and benefit side, can you talk about any headwinds that you’ll have in 2015 there?

I said that the labor inflation line for ’15 was going to be more in the 4% to 5% range and really the big driver of that is wage inflation. There were a couple of kicks, if you will, at wage increases in the contracts that were negotiated several years ago and there’s a kick up of call it half a point or so in that number of higher pension expense as well and those are the two main drivers.

Okay, so mostly base wage?

Yes.

Your next question comes from Keith Schoonmaker - Morningstar.

With Santa Teresa open now could you highlight two or three of the capital investments you expect to be most impactful in the next couple of years?

Let’s go around the railroad a little bit, start down in southeastern part of our network. We’ve been increasing our capital investment in Texas, Louisiana, up into Oklahoma and Kansas both in our north/south routes and in the Texas area. That’ll continue and pay very big dividends for a multitude of commodities that use those routes. We have added about 40 miles of double track on the Sunset. We’re going to continue to add double track there. We’re at a point now we’re about 80% double tracked on that route so that will be good. We’re adding some capacity in the P&W for our critical bulk and premium routes. We’re adding capacity in Chicago. We have a public/private partnership project on our primary corridor in and out of Chicago which is the Geneva Sub, to triple track a critical portion of that’s shared with a metro service and that will be very, very helpful. We’ve also announced a Hearne new network terminal in the middle of Texas and I think at the investor day we talked about a $600 million kind of number and a 25,000 daily car count kind of number and that will be very impactful, probably taking us the next two and a half years or so to build, maybe a little bit more.

A question on intermodal, looking at the AAR velocity data it appears you maintained your intermodal velocity quite well even when overall velocity slowed a bit. I recognize that velocity is only one measure, but could you speak perhaps to your on time performance within intermodal? Is it where you want it or excluding new intermodal lane offerings is it still an area in which you expect a little improvement?

We do expect improvement in intermodal. If you look backwards I would not be as charitable in terms of our premium intermodal service in 2014 as you were. Our expectations were for better performance than that. We were able to differentiate the service compared to other services we provide. A real positive note is that in the peak season ending the year we performed very well and as we’re entering this year that same level of performance has sustained. There are opportunities on certain lanes in our premium domestic intermodal franchise, but it is showing better service and I anticipate it will continue to show better service this year.

Your next question comes from [Denis Hartman] - Robert W. Baird. [Denis Hartman]: Going back to the west coast issues, putting aside some of the labor disputes at the moment, how much conversation have you had with some of the international intermodal shippers that are more reluctant today than they have been in the past to allow some of their containers to free flow inland and more interested in doing trans loading activity to make sure the containers get back to Asia? Can you talk about any sort of conversations that you might be having that could affect international intermodal volumes in 2015 and presumably to the benefit of some trans loading in domestic intermodal activity?

As you mentioned, that has been a trend going on for probably three to four years where international shippers are seeing a value proposition of letting their [ISO] boxes or international boxes to just destine on the west coast, trans load into a domestic box, and then go inland. So, that trend we have been seeing for probably three or four years. We think that that is a trend that will probably continue mainly because a lot of the BCOs as part of their supply chain organizations are using the trans loading function as part of their kind of distribution management strategy so it’s less kind of a transportation driven issue but it’s kind of their overall warehousing and distribution center management strategy. We think that is a trend, it will continue. I don’t think that west coast labor issues have any particular significant long term change to that trend that has been going on for several years. [Denis Hartman]: When we look at some of the expected weakness in international intermodal in 2015, we should subscribe it to the ongoing labor dispute and not an acceleration of that trans loading trend?

That would be the assessment right now.

Your next question comes from Cleo Zagrean - Macquerie.

My first question is related to the impact of the recent volatility in the energy markets on your investment in business development. Please help us understand how you are thinking about it. Are you looking at winners and losers from an environment of sustained [load] prices? Are you expecting these to recover? For example, is the southern chemical franchise less of an urgency and consumer related areas more in focus? Please highlight a few areas that are gaining traction in business development for you this year?

I’m not quite sure exactly what the question is. I would say we are continuing a focus on business development. Energy, even with the recent volatility still I think, has some positive drivers for us in North America because we still have relatively low energy price and in fact, even lower energy prices than what we thought earlier. That is going to be a positive driver for things like chemicals production in this country. That’s going to be a real positive driver in terms of continuing the trend that we’ve seen or near sourcing. We’ve talked in the past about trends of manufacturing moving back to North America. We think that’s still - if anything, it’s going to be even a more positive driver from some of the volatility so we still think that’s positive.

I think one of the things as we look at this and as we talk to our customers, first of all this is still a relatively early phenomena in terms of the dramatic reduction in oil prices that we’ve seen. Nobody that I can find expects that this is going to be a long term trend and certainly no one at this point in time has made any decisions to alter long term capital, facility expansions, or things like that. I think it’s just way too early to see if this is sustainable trend in energy prices.

My second question relates to operations, productivity specifically. Can you share with us a few operating initiatives that your team is most excited about this year so that apart from volume and price impact on the operating ratio we can get a sense of where you might gain the next important improvement in the OR?

One of the things that we talk about routinely that continues to be an exciting opportunity for us is the penetration of [indiscernible]. Our interpretation of lean manufacturing principles and Cameron and the operating team, in fact, the whole corporation is doing a wonderful job of absorbing those principals, turning them into projects and action plans and removing variability out of the network. I can see dozens of different projects at any given time that are going to be paying off either from a productivity perspective, a safety improvement perspective, or a service improvement perspective. That’s the first thing I would highlight. The second thing I would highlight is we’ve got a very robust menu of capital investment that is gaining significant traction as we enter this year and each one of those critical investments is going to make an improvement in safety, in service, and in productivity and unleash different bottlenecks around the network. I’m just really, really jazzed with what we’ve got facing us for the coming year.

Your next question comes from John Engstrom - Stifel.

I’m looking at intermodal and I’m trying to tease out the story which is a difference between competition with truck versus having low diesel prices versus a weaker tail season, things of that sort, also with a soft year on your baseline. Can you talk to me a bit about given your sequential decline in car loads how you think about what the primary drivers were behind that?

You’re talking about an intermodal sequential decline in car loads? What are you looking at?

Yes, I’m looking at the sequential decline between 3Q and 4Q just given the year-over-year comps are a little challenging given the winter in December last year. I’m just trying to tease that story out.

Again, the international side for our intermodal business, all of the west coast labor challenges through the fourth quarter, all of the uncertainty. The domestic side of our intermodal business with the new products and services and the road truck conversions, and the whole story about truck availability and all of that, we’ve had a record year on the domestic side of the intermodal business.

One follow up question on capacity. We talked a little bit about adding crews and locomotives as a primary lever behind velocity. I’m wondering if you can talk a bit about your cap ex investments in Fort Worth, Robertson County, opening up Santa Teresa and if you also see that increase capacity as being another lever which is sort of beneficial for you guys on velocity and there’s a bit of a tradeoff moving forward?

Absolutely, the investments that you outlined have helped us in terms of velocity and service performance. You take just a little snapshot like Fort Worth and Tower 55, we increased speed through that facility on both the north/south and east/west route. We increased capacity adding the ability to run an incremental 20 trains a day through the facility and we reduced the complexity of the facility itself and simplified it’s signal systems which is a safety enhancement. One project that did all three and we’ve been seeing the benefit of it and on that particular route that impacts our manifest product to and from the shale play, it impacts our premium intermodal product from the west coast to the southwest United States. You outlined it just right.

Your next question comes from John Barnes - RBC Capital Markets.

Just two quick ones. Number one, on the west coast issue if in the event that there is a more pronounced labor action and as much as a shutdown, how much will that impact service level immediately in terms of just equipment balances and then once normal operations resume how long does it normally take you to recover from those imbalances and get the intermodal network, the velocity there back up to normal levels?

We have been monitoring it closely already taking steps storing equipment and staging them in critical locations so that if the next move takes place of a total shutdown we will embargo, we will lock down and not allow the congestion of the ports to impede on the velocity of the rest of our networks. We can’t allow that to happen so we have plans in place to take those steps. We’ve communicated with customers about our intent to do exactly that in the event of a total shutdown and I feel pretty well about our ability to stage and think about this so that if it does happen we will have positioned ourselves for a quick return once services have been restored to the ports?

Secondly, the eastern rails have talked a little bit about that their coal franchise has become more surge dependent than base load dependent and therefore more dependent on heating days and cooling days. Where do you believe your coal franchise stands in that paradigm? Are you close to a point where it’s more surge dependent or is the cost benefit still close enough that you’re still seen as a vital piece of the base load in the western US?

Coal remains a vital piece of the base load energy in the western US. It is a critical part of utility and manufacturing fuel source.

If you think about it, our coal business has been very dependent upon weather whether you have cold or hot summers and those kinds of things and so to that extent there is some surge component. But, I think the interesting thing that Eric talked about in his remarks is a realization that a coal base kind of helps cushion against the volatility of natural gas and I think that realization on the part of the utilities is making it a little more stable than what most people would think.

I would now like to turn the floor back over to Mr. Jack Koraleski for closing comments.

Thanks everybody for joining us on the call today. We look forward to speaking with you again in April.

This concludes today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.