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Executives

Robert E. Noorigan – Vice President, Investor Relations

E. Hunter Harrison – President, Chief Executive Officer

Claude Mongeau – Executive Vice President, Chief Financial Officer

James Foote – Executive Vice President of Sales & Marketing

Analysts

[William Green] – Morgan Stanley

Christopher Ceraso - Credit Suisse

Jacob Bout - CIBC World Markets

Jason Seidl - Dahlman Rose & Co.

Thomas Wadewitz - J.P. Morgan

Edward Wolfe - Wolfe Research LLC

David Newman - National Bank Financial

Walter Spracklin - RBC Capital Markets

Cherilyn Radbourne - Scotia Capital

Bill Mackenzie - TD Newcrest

[Ken Holdister] – Merrill Lynch

David Feinberg - Goldman Sachs

Randy Cousins - BMO Capital Markets

Canadian National Railway Company (CNI) Q4 2008 Earnings Call January 22, 2008 4:30 PM ET

Operator

CN’s fourth quarter and year-end 2008 financial results conference call will begin momentarily. I would like to remind you that today’s remarks contain forward-looking statements within the meaning of applicable Securities laws. Such statements are based on assumptions that may not materialize and are subject to risks described in CN’s fourth quarter 2008 financial results, press release and analyst’s presentation documents that can be found on CN’s website. As such, actual results could differ materially.

Reconciliations for any non-GAAP measures are also posted on CN’s website at www.cn.ca. Please stand by. Your call will begin shortly.

Welcome to the CN’s fourth quarter and year-end 2008 financial results conference call. I would now like to turn the meeting over to Mr. Robert Noorigan, Vice President, Investor Relations. Ladies and gentlemen, Mr. Noorigan.

Robert E. Noorigan

Thank you Patrick. Thank you for joining us for the conference call on CN’s fourth quarter results. I’d like to remind you today of the comments that we’ve already made regarding forward-looking statements. With me today are Hunter Harrison, the President and Chief Executive Officer of CN; Claude Mongeau, the Executive Vice President and Chief Financial Officer; and Jim Foote, Executive Vice President of Sales and Marketing.

After our presentation we’ll take questions from those of you who are listening on the phone. Please identify yourself when asking a question and in order to be fair to your colleagues, would you limit your questions to two or three. With that it is my pleasure to introduce CN’s President and Chief Executive Officer, Hunter Harrison.

E. Hunter Harrison

Thank you Bob and thanks everyone for joining. These are clearly challenging times. I’ve been in the business 40 plus years and I don’t know that I’ve faced the challenges and things we’re trying to deal with now. Before I call on Claude and Jim to give some more in the level of detail on the results, let me just make a few observations.

We saw our revenues up as reported 13%. Clearly we had a tailwind there from foreign exchange and from pricing. If you adjusted those for foreign exchange, revenues were actually up 1%. Our operating ratio came in 62.7 which is relatively flat year-over-year. It’s a pretty outstanding performance in the face of the environment we were in. Our adjusted earnings came in at $1.21. That did include a 9% earned income tax recovery so they were up 24% on a comparable basis with the benefit of that $0.15 from the fuel surcharge lag and the 10% benefit from foreign exchange.

Probably one of the most encouraging things and what gives me the degree of confidence I have going forward is some of the continuing improvements in operating metrics. There’s a page there in your presentation that you have hopefully before you that looks at some of the key measurements and [inaudible] the company and operate that side of the house and continues to brighten records every day.

They’re doing a wonderful job of controlling expenses relative to revenues and they’re going to have a continual challenge throughout the year of doing the same thing. I won’t go through those in detail but you’ve been through and we’ve talked about it before. So overall I thought that the quarter was pretty outstanding. Operating performance we saw a significant reduction in some dividends being paid for the hard work that we’ve done on the personal injury and accident side of the shop. In fact we made substantial improvements in our expenses for train accidents.

In the quarter we did make one strategic acquisition of Quebec’s Short Line, the [DMU] which is kind of a niche acquisition for us that will be helpful. And we just received hot off the press from the courts in D.C. that the stay was denied for the J. D. transaction and so we will be closing on that transaction any day now.

And that overall performance that I’ve just described produced about $794 million of free cash flow. There’s not many people I think recording results now that can talk about cash flow like that. We also announced today the 13 consecutive dividend increase since the IPO of 95 increased it another 10%. So we’re pleased about that and that certainly gives some indication of management’s competence going forward.

After Jim reviews revenues and Claude some of the financials with you, I will have some wrap-up comments and then we’ll be happy to address some of your questions. Claude.

Claude Mongeau

Thank you Hunter. These were indeed solid fourth quarter results. We had turned in reported earnings per share of $1.21 which is down 28% over last year because we had very significant deferred income tax recovery in 2007. If I exclude these tax elements and also the sales that gained in 2007, our adjusted EPS is $1.12 which is up 24% year-over-year, a good finish to the year in terms of performance clearly.

That strong performance is given despite the 10% volume decline. As Jim will explain to you, basically all of our business units except coal have seen a volume decline during the quarter but we were able nevertheless to turn in these kinds of results because of basically two factors. The first is our focused management. We are protecting the top line with significant pricing. We are running a very fluid network.

And we also had help from what I call the shock absorbers in terms of our performance; lower foreign exchange and [FSC] which was the headwind in the first half turning into a tailwind in the back end of the year. During the fourth quarter, duo elements helped us to the tune of about $0.10 in terms of foreign exchange and about $0.15 for the fuel surcharge lag.

We finished the year with the fourth quarter pre-cash performance of more than $300 million and that’s despite having funded $50 million for the cost of the small acquisition of the CFQ in eastern Canada. So very good fourth quarter performance.

Let me turn to the expenses. Our reported expenses increased by 15% but that’s largely due to the impact of the lower Canadian dollar. If I exclude FX as you can see on your chart, expenses were well contained to only a 2% increase. Our labor and fringe benefit costs were up 7%, mostly due to higher stock-based compensation we mark-to-market and last year from

September 30 to December 31 there was a larger decline in the stock price than what we saw in 2008.

So that is basically the reason for the increase in labor and fringe because we were able to offset higher wages and also higher bonuses with lower headcount. Our headcount came down by roughly a percentage-and-a-half during the quarter and also very tight management of labor expenses across the board, but particularly in transportation. For instance, our row and yard [stark] during the fourth quarter were brought down by more than 10% in reaction to volume decline.

Fuel expenses are down 19%, 60% of that is price and the other 40% is from lower volume and productivity gains. Our equipment rents are up 15% or $9 million on an FX adjusted basis, largely as a result of receiving less car hire income of our cars which go offline normally pick up income and this line of equipment rents is the net of income and expense. And when the volumes go down we see less income and that’s the reason for the increase on a year-over-year basis.

Finally, casualty and other this expense category is up 50%. About two-third of that is due to a higher legal claims credit in 2007. We had a small legal claim credit this year, but 2007 was larger and so that’s an increase on a year-over-year basis. The other third is because of bad debt which flows through in casualty and other.

If I turn to free cash flow for the full year now I’m particularly pleased with the performance. We have delivered $794 million of free cash flow. We were focusing on all levers including for instance monetization of surplus assets. We had a joint theme this year and I’m pleased to report we were able to monetize a lot of scrap rail, a lot of surplus equipment and we did that earlier in the year before the scrap price just collapsed in the back part of 2008. In total, our monetization activities are up $60 million on a year-over-year basis to give you an order of magnitude.

We manage our CapEx envelopes very smartly. Overall our CapEx on a gross basis was around $1.5 billion which was just over $100 million of [capsule inaudible] and you can see the net there on the statement of free cash flow of $1.424 million during the year. We used the free cash flow of $794 million to buy back shares. Our total program during the year was just under 20 million shares for about $1 billion.

At December 31 we were also fortunate to have $400 million of cash on our balance sheet and that $400 million will be used to fund the J transaction any day now when we can do the closing.

In 2009 our focus will continue to be on generating strong free cash flow and also protecting the strength of our balance sheet. We expect our overall CapEx envelope to be about $1.5 billion inclusive of the amounts we will spend on the J transaction, which should be on the order of

$100 million for infrastructure and also for mitigation.

If I exclude the J transaction and I look at it on an apples to apples basis, taking into account the impact of foreign exchange, this represents a reduction in our CapEx budget on the order of

13 to 15%. So clearly managing for our capital envelope to reflect the current business environment, but also protecting the integrity of our plant and continuing to fund the initiative that will propel our earnings going forward.

If I just say a few words on the full year results, I think it’s been a challenging year from the beginning to the end, particularly at the end. But we are very pleased with the overall performance. If you look at it for the full year, it’s basically the same story of focused management; 7% top line growth, driven by yield improvements; solid cost performance with an operating ratio of 65.9%; and delivering adjusted EPS growth of 9% on a year-over-year basis backed up with strong free cash flow.

I think you can take comfort with this kind of performance and with the background of looking forward into 2009. And if I can say you know turning to my last slide it’s clear that 2009 will be an even more challenging year than 2008 was. There’s a lot of uncertainty out there. There’s a lot of volatility. Clearly the economy at the moment is coming down at a fairly fast pace.

You just look at the Q4, the run rate in terms of housing starts was in the range of 600 to 700,000 housing starts. Auto sales in North America around 10 million and clearly a lot of inventory reduction to face up to the current environment. So it’s tough to call exactly where the bottom of this economy will be but we are bracing for a tough environment and an economy that will come down for sure at least 2% if it’s not 2.5% GPP into next year.

But we know we can even in that kind of environment we know we can continue to deliver good results. We have shock absorber working for us. Oil prices are below $50. The Canadian dollar is at around $0.80. These will continue to act as cushions to our earnings going forward, but more importantly we have a proven business model. We have a strong franchise. We’re focused on structural growth opportunities.

As Jim will tell you we’re disciplined in our pricing approach. We are managing the cost side of the equation and managing our resources with a view to come out of this tough environment strong and protect our earnings, and continue to deliver strong free cash flow and superior value to our customers and to our shareholders even in tough times.

And with that Jim.

James Foote

Thanks Claude. Total revenues in the fourth quarter grew 13%. On an exchange adjusted basis, the method I will use when we’re discussing the numbers today, revenues increased 1%. As we went through the first three quarters of this year, our carload volumes were basically flat and increased in the third quarter. This was despite significant declines in our forest products and automotive segments.

However, each successive month in the fourth quarter we saw larger volume declines. Minus 5% in October, minus 13 in November and minus 14 in December as customers reduced production and extended their shutdowns over the holiday period. Total fourth quarter RTM’s declined 10% and carloads were down 11%. Looking specifically at the rail freight revenues, we were flat.

The negative drivers were the 10% decline in volumes and a CTA decision to retroactively apply a rate reduction for shifting regulated grain which reduced revenues by $26 million or a little over 1%.

The largest offset to those declines was price. Our same store price increases were approximately 5%. Fuel surcharge made up half the remaining amount, with mixed representing the balance. Other revenues grew 12% at quarter, reflecting the increase in our non-rail transportation activities and driving total revenues up 1%.

Let’s take the various segments part briefly, starting with petroleum and chemicals which was up 3%. The continued growth in the diluent shipments into the Oil Sands region, longer haul shipments of fuel into western Canada were benefits in the quarter but were offset by lower shipments of plastics, sulfur, and chemicals. Metals and minerals was up 5%. There we had strong shipments of pipe, large diameter pipe, good shipments of aluminum and zinc from Canadian producers although they were offset by an overall weakness in the steel industry.

On the mineral side we had good [frack] sand loading which we’ve had in the past because of the ongoing drilling activity in Canada, but iron ore shipments really slowed down as we progressed throughout the quarter. Forest products down 7% and certainly well understood, well discussed difficulties that continue to persist with the lumber and panel customers. And while in the paper and pulp side we had some benefits there from some log shipments and stronger wood pellet shipments though those were offset as there were some curtailments and shutdowns by customers in the pulp and paper business.

Coal really the bright star of the quarter, up 26%. That’s associated with good business in our U.S. coal franchise. The benefit of a new mine that’s come online in the Illinois basin as well as some increased shipments of western coal that we get in Chicago and then deliver to their final destination that drove our U.S. car loadings up actually almost 30% in the quarter. Canadian coal on the other hand down. That’s mostly metallurgical coal in western Canada. There were some production issues with some of the mines out there as well as some lower demand and some slower petcoke shipments.

Grain and fertilizers in total are down 3% mostly due to lower fertilizer shipments in the quarter, especially potash due to a strike by one of our customers, lower U.S. corn exports and some reduced barley shipments in Canada. On the intermodal side of the house in the overseas segment the international side of the business, again the second vessel call at the Port of Prince Rupert is helping our numbers there in the quarter, giving a favorable comp offset by reduced volumes through the Port of Vancouver and on the east coast at the Port of Halifax.

The domestic intermodal business doing pretty good in the circumstances; new business opportunities there as we continue to focus on providing a retail service product in the marketplace versus just playing the wholesaler role. And then automotive down 16% really just showing the rationalization of production cutback by manufacturers.

If I go to the last page here and just kind of summarize a little bit about the rest of the year, first pricing. Our strategy of having reasonable, sustainable pricing should continue throughout ’09. Our target continues to be the same for same store pricing increases in the range of 4 to 5%. Sixty-five percent of our business is already re-priced in that range for this year and I see no reason why that will not continue.

I think it’s important to remember that even with these price increases with the decline in fuel surcharge customers are going to be paying less in ’09 to ship their products than they did last year.

On the growth side not all is doom and gloom. As I talked about in this quarter about coal, the coal mine expansions in the Illinois basin continue. Williams Energy [Poncrete] Mine is producing very well and their new mine there, the Sugar Camp Mine should begin producing developmental coal late this year. The Canadian grain crop has again been revised upward to 21% above the 5 year average.

So despite the very low carrying that we had the previous year, available supplies are at their highest in 10 years; as a result, wheat exports are expected to increase to 16 million tons. We continue in the other segments in the metals area to serve some of the various highest technologically advanced and low cost producers in steel mills, iron ore plants up in Minnesota as well as some aluminum smelters. Whereas people look to downside and concentrate their operations, we are seeing some of our customers see some good volumes.

Domestic intermodal will continue to focus on shifting from a wholesale to a retail product. And finally a little color on the Oil Sands. Clearly the current low prices of oil have resulted in delays and cancellations to virtually all of the planned upgraders up there. Here, too, not all is lost. To date we have seen significant growth in our diluent shipments to the Oil Sands and these will continue. In fact, the upgrader delays will likely mean that we will see increased diluent potential in the near term. And it may present new opportunities to move bitumen out of the Oil Sands by rail.

And we’re going to continue to focus on extending our reach and providing more services to the customers. You saw the results in the fourth quarter of our selling non-transportation services. It’s producing good results. We will build upon the new 20 facilities that we added in 2008 with more trans-load and reload facilities and we’re also focusing on making more truck pickups deliveries at these facilities.

So that’s a quick summary of the revenue outlook and I’ll turn it back to Hunter.

E. Hunter Harrison

Thanks Jim and Claude for those presentations. Very informative. Let me just add a little more of the long term focus here. The one thing that I would emphasize in ’09 that is going to be intense, even more intense than we have in the past, is this whole drive toward productivity. You know we can’t do much about the economy, so if there’s not freight there to move, there’s not freight there to move until the economy gets stronger.

But we can and are still turning over stones every day to improve our operating metrics and improve our productivity and cost controls. And let me just give you a couple of examples to mention to you. We just completed this summer the new Mini Hump as we refer to it at Memphis. We’ve already made some improvements to the physical plant at that yard, which has increased the throughput. And the rationalization that allowed us to do, particularly throughout the U.S. is kicking in very strong.

And if you looked at the first three or four weeks results, three weeks here, they’re pretty amazing considering the weather that we’re dealing with. Also our plans are as soon as the spring thaw, we will probably all indications are close our Hump facility at Edmonton and it will become more of an industrial yard and complex within the classification facility. We’re just leaving no stone unturned and I think we will continue to break records in ’09 that we hadn’t dreamed about before.

If you look at the locomotive fleet, if you look at the car fleet, they’re both at all time low levels. They’re both at all time highs productivity wise; throughputs in terminals our overtime is down; Claude mentioned the headcount was down. We’ve had some layoffs, 600 I think, 650 layoffs. The one thing that we have working for us there is that we’ve maintained a real tight control on our headcount and employees and our attrition has been running. We expect it to run this year right at 10%.

So that in itself is about 2,200 employees that will come out, that if the economy does not bounce back quickly those positions will not be replaced. The bottom line of this is this operating strategy, the most important thing about it is to have not unlike a football team or hockey team. You start off with a strong fence.

And you’ve got to be able to have a strong fence and get by in these rough times to be able to do well when times prosper. It’s pretty easy when things are rosy and all to do well. The real cream comes to the top when the going gets tough and I think that this is an organization that can put those things together and produce the results that Claude described to you.

Jim talked about our continual discipline towards pricing. I certainly agree with him there. The continuing focus on market share growth and the bottom line of all this is we are we think very well positioned to weather this storm and win there the bounce back to take advantage of it. And with that, we will be more than happy to answer questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [William Green] – Morgan Stanley.

William Green – Morgan Stanley

Hunter, I’m wondering if you can talk a little bit about maybe lessons learned from E J & E. Does this mean that maybe the big mergers are off for quite some time? How do you think about what that experience says about the merger environment?

E. Hunter Harrison

Bill, I wouldn’t read too much into that. There’s not but one Chicago that I know of in the U.S. that’s got the congestion, the rail congestion, that Chicago has. And we certainly learned a lesson there. I learned a lesson that I just did not recognize the opposition we were going to have and not backyard mentality of some of the communities. But we have worked very diligently with them. I think we signed an agreement effective with 11 of the communities.

We continue to reach out in spite of the fact that today we’ve got the final decision, the final stay will be through appeal processes. But that’s behind us now. If we ever get into something like this again, did we learn something? Yes we certainly have learned. I mean that we could have done some things probably up front that we didn’t do not anticipating the opposition. But I don’t think this is any signal that as a result of the environment issues that were so sensitive in Chicago, that this would necessarily throw cold water on a transaction.

Although I don’t think anything – there’s a transaction out there. But if and when that ever comes about, I think that people will learn from our experience and will deal with it better. This transaction was unprecedented and the environmental review, and if you look at other transactions it’s very – it’s extremely different. So we certainly learned from it.

William Green – Morgan Stanley

So you just think it was more a local issue than anything else.

E. Hunter Harrison

Oh, absolutely. I mean absolutely. If you look, I mean effectively the Chambers of Commerce, all the business associations, the [Met league] everybody that was not in one of the western suburbs was in support of the transaction. There were very few that the tracks were going through their backyard that were in support of it. So it was clearly an issue that it was the local people that were going to be adversely affected in their view.

William Green – Morgan Stanley

Jim, maybe I can ask you just a quick question. On the Canadian grain rates for 2009, how should we think about where those are going? And in the U.S. on the grain side how much competition are you facing? How big a deal would that be for your volumes this year?

James Foote

Well, the grain rates to be established in August of ’09 for the ’09-10 crop year will be impacted my guess at this point in time as [jewel] prices have come down, so therefore we are not assuming any kind of a real up kick for that crop year. You know they’re a cost based set rate. In the U.S., clearly there is capacity not only on the bulk vessels but on the barges on the river, and so those rates are moving around. But we’re always remaining – we always remain competitive in that marketplace because of the niches that we’ve carved out.

William Green – Morgan Stanley

Just one last question for Hunter. If I’m not mistaken your contract’s up this year. How should we think about where your plans are going to be?

E. Hunter Harrison

You should think about, Bill, what you just said that my contract’s up at the end of the year. And I mean nothing’s ever for sure, but all indications are that my contract will expire then and I will move on to other things. We planned the succession and we’ve gone through that with you.

Operator

Your next question comes from Christopher Ceraso - Credit Suisse.

Christopher Ceraso - Credit Suisse

Claude, could you just give us your view on what was the primary factor behind the margin compression in 2008? Was it fuel? If not, was it something else? And then as we look at 2009 as fuel comes out of the top line, should that result in margin expansion or is the volume going to be too weak to see that?

Claude Mongeau

Well, clearly you’re right to point out that when you have more than $1 billion of your revenue, which is effective – we had 100% operating ratio under the fuel surcharge, that that’s just the [math] of it will compress the margins or the operating ratio. We also had larger legal claims credit in the prior years than we did in this year. And so that explains, those two factors and the little bit of stock-based compensation and IR bonuses would explain the majority of the increase.

Looking forward, I think we don’t have these headwinds necessarily in front of us, and we’ll be looking at protecting margins. But the key is knowing where the volumes will be in 2009, and that’s difficult to read at this juncture.

Christopher Ceraso - Credit Suisse

But you should get some help by pulling some of that fuel out of the top line, right?

Claude Mongeau

For sure. In fact you’re seeing it to some degree in Q4.

Christopher Ceraso - Credit Suisse

We’ve heard on a couple of these calls a mention of higher bad debt expense. That happens when economic times are tough, but was it notable? Is it something that you worry about going forward? Or just something that you need to kind of pay attention to?

Claude Mongeau

Yes, we need to pay attention to it but we’re not worried. We’re following every customer, we’re working with our customers. We have very good collections performance in the fourth quarter and that’s helping explain how we can finish the year on a nearly $800 million free cash flow. Having said all this, when a few companies and you will see some of that for sure in 2009 file for bankruptcy or protection under the CCAA, you have the risks of having a few instances where you have to recognize the loss on that bad debt. That’s just part of business but we’re on top of it.

Christopher Ceraso - Credit Suisse

So you’re raising your reserve in anticipation of potential bankruptcies?

Claude Mongeau

No, what we did in the fourth quarter is reflect the bankruptcies that we have seen and we have our reserves on a go forward basis, our properly, and we’ll just adjust that as things unfold.

Operator

Your next question comes from Jacob Bout - CIBC World Markets.

Jacob Bout - CIBC World Markets

Just a question for Jim here on contracts and pricing. You talked about 2009, for 2010 what is the percentage of contracts that have been renewed and what is the average price increase there?

James Foote

Well, we don’t have very many long term contracts you know. Our strategy clearly has been to have short duration contracts. So I have very little that is already priced into 2010. I think that the range of pricing that we have outlined for ’09 if the economic conditions stay kind of where they are today is a range that I would be comfortable thinking about for 2010.

Jacob Bout - CIBC World Markets

Just a push back on pricing, specifically on the automotive and the forest products side, what are you hearing from your customers out there? I think [Ken] back in particular, you know, telling their suppliers there that they’re looking for kind of a 10 to 15% decline.

James Foote

I think that that’s something I hear from a lot of customers and that’s not something that we’re interested in entertaining.

Jacob Bout - CIBC World Markets

Just switching to what we’ve seen year-to-date here, if you take a look at the carload, volumes are down roughly 20%. If you were to put things into buckets, in regards to let’s say plant shutdowns versus restocking versus freight moving to truck or a decline in underlying demand, how should we look at that 15 to 20% decline in carload?

E. Hunter Harrison

Let me make this comment first and then I’ll let Jim give you some of the details. It’s – I don’t know that it’s good to look at the first three weeks and draw a conclusion. If you look back last year at the calendar, last year the first three weeks of the year were pretty good weather conditions. And then about the fourth week kicked in, pretty horrible conditions like we face now. So one of the things that we’re trying to sort through is certainly the weather has some degree on the 18 or 20% number that you referenced to, and so it’ll be better than that. I can’t tell you how much better, but we’re trying to sort through that right now.

But I think the comps will look much better and won’t be maybe as alarming when people see the 20% on three weeks doesn’t make a year. Jim you might want to give more of the specifics.

James Foote

Well, just to follow up on your comments there in terms of automotive and forest products in particular. Clearly the automotive manufacturing facilities took extended downtimes over the holidays, really starting with U.S. Thanksgiving through Christmas and New Year’s and have extended them into January. And so many of the 16 served assembly plants that we have have been slow to come back online, but they are coming back online, more and more each week. And so that kind of 20% run rate just for automotive as an example is going to improve.

I think that’s kind of the case across the board, where everybody is very slow and very hesitant and very cautious about bringing facilities back online that were shut down for the holidays. But we are seeing that activity pick up, although unfortunately slowly.

Jacob Bout - CIBC World Markets

So your thoughts then if you look past the plant shutdowns, past the weather issues, underlying demand would be down kind of order of magnitude of 15%?

James Foote

You know, I can’t – that’s really speculating. You can draw your own conclusion based upon what you see and kind of ratcheting down of overall economic activity and our volumes are really not that much different. Excluding the bulk. The bulk segment, which is kind of hopefully on a life cycle of its own here.

Jacob Bout - CIBC World Markets

Last question here for Hunter, with Obama getting in what are your thoughts as far as his interaction with the rail industry? What does it mean over the next four years, specifically for the talks of re-regulation and the potential for price caps?

E. Hunter Harrison

Well, I think that clearly you make the case it’s a breath of fresh air there. A lot of people in Washington have been making efforts and are making further efforts to infuse cash into the system and do the appropriate things, whether they’re the right things or not we can argue. But I think my view is that we’ll do some things short term that are certainly going to help. I think they’ve got some longer term implications, but it’s kind of one of these deals that we’ve got to deal with the short term first.

I do think there’s some encouraging things talking about potential in tax credits. The deal with infrastructure improvement that would have – we’d have certainly an interest in things given the J situation and our capital spend in the U.S. I don’t – I’ve been hearing about re-regulation ever since the Staggers Act.

I think in this kind of economy we’re in, if somebody started tinkering with rail re-regulation and I’m not talking about the anti-trust exemption issues, I’m talking about beyond that into rate re-regulation and whatever, it would be the most fatal mistake that anybody could ever make.

So I’m encouraged. I think he appointed a pretty strong Cabinet. I think generally speaking people are pretty favorable to those choices. I think there’s some optimism. And so I’m looking forward to his leadership.

Operator

Your next question comes from Jason Seidl - Dahlman Rose & Co.

Jason Seidl - Dahlman Rose & Co.

Getting back to one of the last points, you mentioned that some of the activity is slowly coming back from some of the call it shutdowns of the plants. Where is it coming back? Is there any specific industries that are slowly coming back first?

James Foote

Well I think the example that I used in terms of the auto facilities, that is actually where we’re seeing the facilities that had been shut completely for the holidays are starting to pick up activity. And that’s happened over the last few weeks. We are seeing on the lumber side of the business returns from basically for our center beam activity, we’re seeing the demand, the orders coming back. Clearly not at spectacular rates but up from where they were during kind of the period from U.S. Thanksgiving to the week after New Year’s.

So there was unprecedented low levels of demand for our equipment during that five or six week period, which we are now seeing slowly but the trend in the upward direction in just about every commodity.

Jason Seidl - Dahlman Rose & Co.

Any trend up is a good trend these days. I think this is probably one more for Claude. Claude, the penalty of $4 million that’s associated with the grain crop revenues that we saw in the quarter, should we expect any more than that? Or does that cover 2008?

Claude Mongeau

No, that’s it, Jason. That’s the full amount that we were over the grain cap, was $30 million and $26 was booked in against revenue and $4 as a penalty against expenses.

Jason Seidl - Dahlman Rose & Co.

And I guess, Hunter, this is probably one for you guys. Obviously you guys do a great job of generating free cash flow out there and that’s one of the reasons why you’re able to raise the dividend, but talk me through the thought process of raising your dividend in a period where a lot of people are viewing sort of cash is king for companies right now.

E. Hunter Harrison

Well, I think that Claude has provided the leadership there. If you look at our balance sheet, if you look at our anticipation of free cash flow into ’09 although it’s going to be hard to predict, we’re very, very comfortable that the shareholder deserves something. And so if we can sit there, I’m not sure what we’re going to do with the cash, if we just sit on it. I think that and Claude can take you through this but I think we’re comfortable with the increase to dividends.

I think we’re going to take a good look after we get the J transaction closed and behind us, I think we anticipate hopefully getting back in the market with the repurchase program in the second quarter, if things go as we anticipate. So we’re pretty optimistic that – are times tough? Yes. But I mean we’re pretty good at dealing with tough times. And so I’m pretty proud of the ’08 performance with free cash flow, with our earnings increased, with the environment we had. And you know not a lot of companies can say that.

And I would say this, the reports that I’ve seen so far the other rails did pretty well, a pretty good job. And if we can do what we’re hopeful to do in ’09 and that’s hard to describe right now, because we just cannot see through the economy yet, and I think it’s inappropriate for us to give anymore specific guidance when we really don’t know because we’re just shooting in the dark. But I don’t think three weeks is a good indicator. I’m not going to put a number on where I think it’s going to be.

But the one thing I feel good about is I know what Keith can do for growing expenses. And we’ve got opportunities there and so that’s why we’re in the position we are with the dividend and being able to do. We’ve got plans for our capital spend. I think our plan today if the year plays out like it is, the capital spend will be down considering J about 15%. I can’t imagine it, but if things got worse do we have a Plan B to look at that further? Absolutely.

But at the same time would we ever see a situation where free cash flow third quarter is going better than we thought and anticipate, would we be opportunistic with the cash? Absolutely. And if there’s a better cause for cash and use of it than the typical use is, we’d certainly take a look at that.

Operator

Your next question comes from Thomas Wadewitz - J.P. Morgan.

Thomas Wadewitz - J.P. Morgan

Jim, you talked a fair bit about when demand might improve a little bit. I might have missed this, but on grain it sounds like you’ve got a whole lot of grain and it potentially could move but I don’t have a good sense for the catalyst to get the grain numbers improving. Do you have any sense of timing where some of that might start to move and the volumes would look better? And perhaps level of conviction that that will improve?

James Foote

Well, on the Canadian side we’re actually seeing some improvement in the demand for car loadings into the future now. So kind of closer, I’ve got the demand will be kind of closer to around 85% or so of what we normally run kind of in the winter time. So I think there were issues associated with people wanting to adjust the delivery times of their grain that they were buying from Canada because vessel rates were dropping so dramatically, and certainly I think there were some issues with the question of liquidity.

There were certainly some issues with the question of the grain itself and the times when they were buying it. And all of that is just starting to get some normalcy to it and so our grain loadings are kind of getting back to a more normal level. In the U.S. on the corn side, that crop had just come in very late and we’re just starting to get an assessment there of how that product is going to move and what the export business there is going to be like.

Still there’s a significant demand for ethanol. You know, our ethanol continues to grow so that’s going to be a big factor in our numbers going forward. So I think both of this is we’re starting to see some stability, obviously at a slightly lower rate than what we’d like to normally see at this time of the year, but stability has returned.

Thomas Wadewitz - J.P. Morgan

So it sounds like we should see that pretty quickly in the weekly numbers. On the – you’re pretty firm on the view on pricing which is always good to see. I wonder if you could give us a sense of whether customers that are probably in a more difficult environment than in a long time are pushing back to the arbitration process and kind of the regulatory levers that they have. Is that a mechanism that could harm you on the pricing? Or is it just kind of a small component that a customer segment that could use it or would use it that it’s not really a factor to consider?

James Foote

Well, in Canada you know we have the FOA process which is baseball arbitration which is a pretty easy process for the customers to use. And to date I have seen no more – no higher activity levels from customer complaints than we’ve had in the past. And then most importantly, the arbitration process is about the fairness of our rate – our transportation rate. It is not a vehicle whereby the customer can go in and arbitrate that his cost structure has changed or that there is some undue hardship on him that whereby we should lower our transportation rate to subsidize him.

That is not the vehicle for that use. And so based upon the overall stability and the overall increase in rail transportation rates, and the fact that I believe that we lead the industry in terms of a long term view with reasonable rates, I’m very confident of my ability to support that position in arbitration.

Thomas Wadewitz - J.P. Morgan

On the headcount side, Hunter, you made some pretty – I mean I don’t know strong comments or how to characterize it, but a pretty good level of conviction on the ability to reduce headcount. And you talked about 10% attrition rate. If it looks like volumes might be down 10% for awhile, is it reasonable to think you get close to headcount reduction matching up with the volume reduction?

E. Hunter Harrison

I think we’re getting pretty close. I think everybody would agree if we’re talking today that worse case is we’ve seen volumes down 20% and if they don’t get better than 20, and if you’d step we’re going to be at 10, we’re starting to get close. If you look at our train starts today, both yard and rows, they’re down in the 15, 16% range. And some of that is hurt by volume, so you could bring more volume on without any more train starts.

So I feel pretty comfortable to give you just a rule of thumb, I think we can adjust expenses off the top line. If we’re business down 15%, we can reduce business 15%. Now the math cause is that’s not as good and it doesn’t convert to the same earnings, but we’ve got the ability and the wherewithal and we’ve proved that over and over and over again, and so I feel pretty good about this.

Operator

Your next question comes from Edward Wolfe - Wolfe Research LLC.

Edward Wolfe - Wolfe Research LLC

Just a follow-up to that, Hunter. Is there some number or you know feel directionally where volume’s down x number, I can’t get back to break even, even at year-over-year. Was that number down 7% or 10%? Or what’s kind of a feel where you’re taking out expenses and you’re chasing them down as quickly as you can, but at some point you can’t grow the EBITDA. Is it if pricing’s 4 or 5? Because –

E. Hunter Harrison

It’s more related to density. I’ll tell you the worst nightmare. If you’ve got one train a day that’s going to a market – just pick it, Memphis to Baton Rouge, you’ve got one train a day. And the capacity’s 100 cars and business goes down 10%. It’s hell to cut the 10% and still run the one train. Where you’ve got multiple starts and the opportunities to do some things that we’re doing with BP, with longer trains, with [every Peter] cars, there’s certainly a point where if you’re starting to get into the high range of business being off – we’re not going to touch that range I think.

In fact I think that we can even this year we can even exceed what we’ve done in the past on a relative basis with expenses relative to the top line.

Edward Wolfe - Wolfe Research LLC

Do you expect to grow your EBIT on the same currency basis this year over last year, in ’09 over ’08?

James Foote

I think there’s many other factors. I wish there was a simple rule of thumb that you’re asking, but you have to look at all of the factors and we said that we will not provide guidance for the full year at this point.

Edward Wolfe - Wolfe Research LLC

Claude, I missed it. You talked about the breakdown of price fuel and mix in the yield. Can you do that again?

Claude Mongeau

Oh, well, I think when I described it I said that of the gain, we were down 10% on freight revenues and we came in basically flat. In order to carve back that and the 10% we had 5% price increases, so roughly half of that was coming back was price. Half of the remaining half then was from the fuel surcharge and the remainder was mix.

Edward Wolfe - Wolfe Research LLC

So five, two-and-a-half and two-and-a-half.

Claude Mongeau

Yes. Slightly more on fuel surcharge.

Edward Wolfe - Wolfe Research LLC

What percentage of the revenue at this point is priced in for ’09?

Claude Mongeau

Sixty-five percent.

Edward Wolfe - Wolfe Research LLC

And I’m guessing virtually nothing for ’10 at this point.

James Foote

Yes, virtually. There is some out there, but it’s safe to say nothing.

Edward Wolfe - Wolfe Research LLC

The E J & E I heard you say $400 million for closing costs, I thought the price was $300. What else is the cash going to on the close?

James Foote

No, $300 million U.S. but at today’s exchange rate that means $375 million for the acquisition and then we will be investing for mitigation and for infrastructure in the range of perhaps a little bit under $100 million next year.

Edward Wolfe - Wolfe Research LLC

One hundred million Canadian?

James Foote

Correct. Yes.

Edward Wolfe - Wolfe Research LLC

I didn’t hear a whole lot about Prince Rupert. Is it possible to get an update of kind of in ’08 I think the goal was $100 million of incremental revenue, whether you hit that and going into ’09 given how bad the world is what we should expect from Prince Rupert.

James Foote

In ’08 I think that we achieved our expectations. When the second vessel came on in terms of the guidance, the number that Bob – the $100 million that Mr. Noorigan had been so generous in providing to you. And the unfortunate thing was that we didn’t get more. So that’s at about 60%, 65% or so in the capacity at that facility is today sold and we had hoped to pick up more. At this point in time and again without providing any kind of guidance, we’re just assuming that that kind of level is going to be there throughout this year.

I’d like to think that we can still get another customer for more volume to come there. But until the import activity ramps up, we’re just assuming that the volume that we have there today continues and we’ll be the happy recipients of that through the first half of the year, because that second vessel wasn’t there the first half of the year.

Edward Wolfe - Wolfe Research LLC

So you want easy comp and hope to keep it where it is and maybe the world gets better by the second half.

James Foote

Yes, easy comps in the first half and hopefully something turns around in the second half.

Operator

Your next question comes from David Newman - National Bank Financial.

David Newman - National Bank Financial

Just on shock absorbers, if you look into this quarter obviously oil is still continuing to come down. Any early sense of what the benefit might be in Q1 and I would assume that that’s pretty much all you’ll get for the year on the oil side. Any thoughts, Claude?

Claude Mongeau

In actual fact if you look at it, we finished – and there’s always two month lag, so the last two months of 2008 is what you have to look into to fold into the first part of this year. And the price is about the same level that the spot rate is today so $45 or in that range. So we don’t see a big lag benefit in the early part of the year. If the fuel price was to come down on a soft basis for our expenses, although where it is today.

David Newman - National Bank Financial

And then on pricing obviously you have the spread with the trucks. Are you finding that customers at all are realigning their supply chains to use rail versus truck, obviously given the lower costs and maybe less pressure on the supply chain for manufacturers? Are you seeing any of that at all?

James Foote

Oh, I think that clearly has been our strategy all along is to sell that as we have certainly continued to focus on the schedule for precision railroading which provide the better quality product to the customers. That’s something that we have been selling. And in this environment when there is less pressure to get the product to the end market and more pressure to save costs in doing it, I think we have continued to have a product that’s saleable.

David Newman - National Bank Financial

Just on the infrastructure spend, and obviously it’s going to take some time I think for the economic stimulus packages to really hit the railroad, but if there is an area that you thought that might benefit from any stimulus packages that were to come down where do you think you have the most gain?

E. Hunter Harrison

Clearly the infrastructure in Chicago is with E J & E and with the spend there, and then with potential growth in Chicago. Further expansion of that franchise would be probably the first call on capital spend for us. We’re in pretty good shape in our terminals and our intermodal facilities. Hopefully in the out years here, two or three years away we’ll be looking at an expansion of Prince Rupert and a couple of other things like that. But in the U.S. that clearly would be – it would be Chicago.

David Newman - National Bank Financial

Hunter, I meant more the sort of the any economic stimulus package that might come down from the government, what that might touch on and any sense of when the timing on that might be? Would it be aggregate or forest products? When do you think that might sort of hit the railroad in terms of any benefit from the government spending?

E. Hunter Harrison

I would think that at least a year, year-and-a-half away from us seeing direct impact of that if we do see direct impact. I mean, there’s going to be a lot to be debated in Congress about where it goes and is there pork in there and what is it really? And everybody’s going to be calling for the cash. And so I mean that’s not really in my plan about when things come back. I don’t know that all of that’s going to take place. Because I think a lot of it’s going to go other places that might not necessarily be of great benefit to us.

Operator

Your next question comes from Walter Spracklin - RBC Capital Markets.

Walter Spracklin - RBC Capital Markets

Just coming back on Prince Rupert, Jim, obviously one of the key selling points on Prince Rupert was its ability to divert from some of the congestion that was happening at the LA – Long Beach. Is there any risk or in your discussions with the Costcos and the users of that line right now, have they talked to you about potentially moving any of that down? And are we – and if you look at your risk profile in Prince Rupert, what do you say? How would you consider the likelihood that we might lose that second ship again, the one that we picked up in 2008?

James Foote

I would have no reason to believe that we would lose the business that we have today. They’re very, very, very happy with the service. We have not only met their expectations for traffic into Chicago and I mean the biggest destination for that traffic today is Memphis. And we continue to grow more and more business moving east of Chicago into the Ohio River Valley as well as some of the eastern Canadian destinations. So at this point in time I don’t see – I don’t feel nervous about losing that business. I just feel that it is more difficult to try and grow the business.

And so that’s why we’re very cautious about saying we’re probably pretty happy to have what we have right now for this year.

Walter Spracklin - RBC Capital Markets

Just a little bit of housekeeping on the percentages in terms of your book of business for next year, you said 65% of ’09. Is that of your total revenue or is that just contract? In other words, is your tariff business included in that number?

James Foote

That’s total revenue.

Walter Spracklin - RBC Capital Markets

And then on the 5% pricing that you’re looking at for next year. Is that after any non-fuel surcharge related fuel impacts on your [r-caf] or any other cost [escalated] adjustments?

James Foote

Four to five and that’s just on the base price. It doesn’t include fuel.

Walter Spracklin - RBC Capital Markets

Hunter, just one question on your experience going back on customer contracts and those that you’ve negotiated in the past, you mentioned this is one of the worst times in 40 years. Based on previous recessions and tough times, how have customers who have already contracted reacted and have you had a sense that people come back and ask you to reopen contracts that you may have already thought were in the books and signed on the dotted line kind of thing? And how would you react to that customer that comes back, asking you to renegotiate an existing contract?

E. Hunter Harrison

Well I think we would say no. We think that our service we earn and merit that 4 or 5% increase. And I think something that kind of upholds this conventional wisdom to some degree with my experience is this; chances are that picking up market share are better in tough times than they are in good times. Some people you’d be surprised say you know what transportation gets 5, 6, 7% of my spend. I don’t really you know I don’t really watch it real closely. But when times get extremely tough and they’ve got to watch every dollar, then they’re willing to make change that before they just don’t like change.

And they’ve got to make change to go out there and survive. And so that’s when the strong and that’s when the people that are providing the service for them have a chance of making inroads there. And so you know the likelihood of us reopening a contract to do something different unless it was something compelling reason that I have, you know, I don’t seem to visualize, you know, 4 or 5% is 4 or 5%.

Walter Spracklin - RBC Capital Markets

And there have been no recent cases where people have asked you to do that?

E. Hunter Harrison

They didn’t ask me. They know better.

James Foote

We keep them away from Hunter.

Operator

Your next question comes from Cherilyn Radbourne - Scotia Capital.

Cherilyn Radbourne - Scotia Capital

The first question I wanted to ask was just related to the E J & E, just curious how soon after closing that transaction you can actually start to begin using those tracks and adjusting your routings and achieving some of the synergies?

E. Hunter Harrison

Well, first of all regulatory says 30 days before we can do it. But there are other limitations given that we have some of the infrastructure projects, some of the connection projects and so forth that are key. We have to get done before we can reroute all the traffic. So I think our estimates are that it would be from the time of closing probably at least three years and that maybe is a little bit aggressive to get the whole thing done where the master plan is.

Cherilyn Radbourne - Scotia Capital

In terms of the operational changes that you made in Q4 in response to a very rapid decline in volumes, can you just speak about whether there were either particular corridors or particular areas of the business where those adjustments more and more difficult? And can you give us a sense as to how much equipment you would have taken out of the business in Q4, locomotive cars and other equipment?

E. Hunter Harrison

We take the expense out when the business is down. So we’re very, very sensitive to where we’ve had reductions in business levels. And that kind of model is changing. Eastern Canada has been hurt so much over the last three or four years, that business is actually better and flatter from a top standpoint than some of the places that we’ve had the real growth in western Canada. So we’ve been able to adjust expenses pretty well across the board to where the business has been down, without impacting and one of the rules we have without impacting the service levels.

We have reduced the car fleet in the 15, 16% range. I’m talking about active cars. We were down as low as 91,000 cars. I can remember when I got to the company it was about 150,000 cars that we would have in inventory at any given time. Our locomotive count is in the same kind of level. We have about 12% or so stored and/or leased, besides ones that are off on foreign line paying horsepower hours.

So the one thing that we do and one thing we try to even change our managers on is they do this on a daily basis. If they look and see their train load’s down, they’ve got to figure out a way to get it up. If the gross tons are down, they’ve got to reduce the train starts. They’ve got to reduce the yardage. And so their chore and their job is to keep expenses in line with revenues and they do an awful good job of it and they’re going to do even better.

Operator

Your next question comes from Bill Mackenzie - TD Newcrest.

Bill Mackenzie - TD Newcrest

Just on the J acquisition when you guys announced it originally you provided some financial targets in terms of the run rate, EBITDA and the synergies that you’d realize on the E J & E line as well as synergies that would be realized on your own network. I’m just wondering given how long it took to get the regulatory approval if you’ve had any additional sort of thoughts on those numbers? And I guess I’m most interested on the benefits to CN line and the traffic that goes through Chicago, if you have any update on I think it was $20 million you said that would be beneficial to you. Any update on that?

James Foote

There is no update other than we feel very, very comfortable about the opportunity to deliver on those numbers going forward. The base profitability of the J may get [tramped] a little bit just at the first of the year because of the economy and the shipment from the customers on that line. But the synergies of integration, we’ve had more time to plan while we were doing the regulatory process. The synergies on the network we are confident will be achieved or exceeded going forward.

E. Hunter Harrison

When we see some bounce back from the economy, I think that what we’ve learned about the J as this process has taken much longer than we thought, it was even in better physical condition than we originally thought – we’re going to put most of our operation from a classification standpoint in [Kirk] yard, their smaller Hump yard, which frees up [Markham] for industrial development and expansions. It positions us strategically so we just need to get a little more experience with it before we can be real definitive about what these overall impact on CN’s impact will be.

Bill Mackenzie - TD Newcrest

And then just a clarification on the CapEx guidance of $1.5 billion, does that include or exclude leases?

Claude Mongeau

When I talk about CapEx it’s always gross CapEx so some of that amount might be capital leases next year although we don’t have any locomotives on the books for 2009.

Bill Mackenzie - TD Newcrest

And roughly you’d say about $100 million of that? Does that sound reasonable?

Claude Mongeau

That’s what it was in 2008, so that’s a good number.

Bill Mackenzie - TD Newcrest

And then just one final question on the succession issue, just wondering if there’s any color on timing on announcements in terms of who is going to sort of fill your shoes, Hunter, since you are –

E. Hunter Harrison

I think I’ll just repeat what I’ve said, abbreviated before. I think the thought is I mean we’ve been going through this process and preparing for it for over three years. My prediction is with some 90 degree level of assurance that the candidate will probably come from within. And we’ve made all the preparations you can make. I don’t know what else I can add.

Bill Mackenzie - TD Newcrest

In terms of the timing of an announcement, though, could we expect something sort of mid-year? Is that reasonable?

E. Hunter Harrison

No, I think that might be a little bit early. I think maybe that there’ll be some indications in September or October that you can read into what we might be discussing.

Operator

Your next question comes from [Ken Holdister] – Merrill Lynch.

Ken Holdister – Merrill Lynch

Jim if you could just kind of – I know you gave the breakdown in RX after I guess adjusting for currency exchange, but of the 25% I guess total revenue can you look at each of the what seven commodity groups and give kind of a non-currency increase as you’ve done I believe in past years on slides?

James Foote

I think it’s in the presentation that it’s both there as reported and then the adjusted number. So the spread right there is on – I’m sorry, whatever the slide is, the first slide of my presentation right after Claude’s wrap-up slide. If you don’t have it we can get it to you, if you don’t have access to it.

Bill Mackenzie - TD Newcrest

And then what percent of your revenues are in U.S. dollars and what percent of expenses?

James Foote

Fifty percent of the revenues and the structure is slightly different with the operating expenses.

Claude Mongeau

Overall, about 50, 55% of the revenues. In operating expense it really depends on what you consider U.S. dollars but we have close to a third which is operating expenses in the U.S. and you take fuel which is really a U.S. denominated expense. You get – and you add in interest below and you get to the point where we have natural adds as you know, Ken, for every $0.01 of appreciation in the Canadian dollar there’s a $0.02 impact on EPS because effectively the revenue and expenses offset.

Bill Mackenzie - TD Newcrest

And then Jim when you went over some of the things coming back online you know like the auto and grain being down, some exaggerated volumes now, but some of the other commodities as well are running in the mid-teens to 25% like chemicals and metals, minerals. Just looking at that is that more what Hunter was talking about, just simply the good weather this year relative to last year? Or I’m sorry harsh weather? Is there a good weather comp? Even those products seeing the exaggerated level of economic downturn and just wondering what the confidence was that we’re going to see that level improving going forward.

James Foote

I think Hunter was right on in terms of across the board. Obviously we had much better operating conditions last year than we do now. So I think that had an impact clearly on all of our results. There are certainly areas right now where I could tell you despite what I said about some of the segments starting to see some rebound, there’s certainly some segments where we’re not. I mean iron ore as an example, iron ore is not picking up and that’s not going to pick up until steel making facilities in North America begin to ramp up their production rates.

So it is not across the board. I was just trying to provide some anecdotal evidence in some of the key areas like automotive, in center beam lumber loading and some of the certain areas. Not, I would say, across the board.

Operator

Your next question comes from David Feinberg - Goldman Sachs.

David Feinberg - Goldman Sachs

In terms of the 65% in contracts that you have in place for this year, does that and I think this question was asked, I just want to make sure I heard it correctly – does that imply then that 35% is tariff based? Or do you expect to put some more contracted revenues in place for the year?

James Foote

No, I think 65% of the revenues are already – no that’s right, 65% of the contracts are there. There is a larger percentage of business that I would say is already priced because of the tariffs. You know there’s certain – the grain tariffs and other tariffs that were adjusted up in say October that would carry through into October of 2009. So there’s a larger percentage of business that is priced.

David Feinberg - Goldman Sachs

On a relative basis you had a bullish outlook for grain whereas – as it relates to the export markets, whereas we’d heard expectations for export grain in the coming year were lower or going back to ’07 levels from both Burlington and Union Pacific. Am I missing something in terms of the translation or is it a matter of timing about talking about which of the harvests? Maybe you can help me think through that.

James Foote

I think you’re thinking about two different countries. I think the Canadian export wheat program is much more bullish right now than the U.S. export corn business, which is exactly why I said I felt much more optimistic about our Canadian wheat business than I did about the U.S. corn. So we would be – we would certainly be in the same camp with our views as BN and UP about the U.S. export program.

David Feinberg - Goldman Sachs

And is the bullish outlook on Canadian grain related to foreign exchange benefits or the fact that the – due to the regulation in terms of pricing or a combination thereof?

James Foote

I think that the bullish outlook on Canadian grain is the fact that it’s the largest available stockpiles of Canadian grain in 10 years and usually it is the availability of the commodity that drives the export program, not the price or anything else.

David Feinberg - Goldman Sachs

I think about a year ago when we were talking about the E J & E and the new terminals in Memphis, the focus was on eliminating bottlenecks. Obviously with volumes down not as much in terms of the forefront but as you look at your network if and when volumes came back on, what regions, which businesses would be capacity constrained first and how would you think about alleviating those? Is it continued M&A? Is it investment? How should we think about it?

E. Hunter Harrison

We don’t have any bottlenecks. I mean, we are – right now and we’ve always said that the only bottleneck on the CN was Chicago. The E J & E small for Chicago. Toronto backyard, which is one of our largest transportation facilities, is probably at 70% of capacity. I want to tell you hump capability is probably at 50, 60% of capacity. As I said we’re going to eliminate Edmonton. One of our issues is that eliminate – I mean we had a place like Battle Creek that used to work 12 or 14 engine assignments a day now works one.

So we are blessed with a franchise that does not have capacity constraints. And if we saw business booming back all of a sudden at rates like we’ve never seen before, we’ve got the capacity easily to add a siding here or there or a little bit of double track, if we got into that after 30% growth. That’s just not an issue that we have to deal with.

Operator

Your next question comes from Randy Cousins - BMO Capital Markets.

Randy Cousins - BMO Capital Markets

Claude, I just want to get some clarification. I think you went past it fairly quickly so I didn’t get it down. In terms of the per share contribution from the fuel lag, did you say it was $0.15 in the quarter?

Claude Mongeau

Yes, on order of magnitude about $0.15 and FX would have been about $0.10.

Randy Cousins - BMO Capital Markets

And looking to the first quarter, did you say that there won’t be a lag benefit in Q1? Did I catch that?

Claude Mongeau

That’s correct because really when you look at it there’s always a difference between what we charge on the FSC and what we pay on the stock market. And today’s fuel prices are in the low 40’s and the last two months of the year were in the same range. So I don’t see a big lag on this to fuel prices on the spot, expense basis would come down from where they are now.

Randy Cousins - BMO Capital Markets

And on the comp line which you know as fuel was catching up to it at one point, but comp is now obviously again once again the largest single expense category that you have, I wonder if you could talk to us about the put and takes in 2008 versus what you see as put and takes in 2010? Because for example this year or in 2009 you had the win on pension accruals that was a reduced number. Can you give us some sense of what the swing in bonus accrual was or equity linked comp?

Is there anything looking to 2010 that can stand out sort of like an opportunity or a point of variability for us?

Claude Mongeau

That’s a mouthful, Randy, but I think that fortunately the key elements tend to balance out. We did have about a $75 million benefit on pension in 2008. But if you recall in 2007 we had no bonus and this year we will have a bonus which will likely be in the same range as or a little bit less than what the pension benefit was, so those two offset. What we’re doing in terms of managing our headcount and managing the productivity helps us offset whatever wage increases we have with our scheduled employees.

That leaves you with effectively [saw] based compensation and this won’t stop the call, but as we’ve provided before, give or take, $1 on our stock price has an impact in the range of about

$5 million to our expenses. The part that’s tricky is the call because it’s mark to market from quarter to quarter. So this one is very volatile.

Randy Cousins - BMO Capital Markets

So in the fourth quarter it would have been a win then, right? In terms of sort of the comp line?

Claude Mongeau

Yes, in fact as I said – no, it would have been an increase on a year-over-year basis because the year before the difference between September 30 and December 31 was a bigger decline than what we had this past fall.

Randy Cousins - BMO Capital Markets

No, but quarter-to-quarter – so Q3 to Q4 it would have been a positive. Like if we’re trying to figure out a run rate –

Claude Mongeau

Oh, yes, Q3 to Q4 would have been a benefit. Q4 to Q4 was a headwind.

Randy Cousins - BMO Capital Markets

And just on housekeeping, tax rate that we should use for 2009?

Claude Mongeau

I think our tax rate in the – if you take out the deferred income tax and the recovery that we had in 2008 our tax rate effective was about 30%, 30.1 I think is what we’ll report when we file our MD&A statements. And I think that’s a good number to use for next year.

Randy Cousins - BMO Capital Markets

Last question I guess for Jim is that coal, you know in the United States some of the coal companies announced production cutbacks. The outlook for export coal has deteriorated quite dramatically. The new mines that have kicked into operation that are on your lines, or the new mines that you expect to come online, are they selling utility coal? Are they selling export coal? Do you have commitments – are there commitments to move that coal to a customer that’s going to use it?

James Foote

It is steam coal, very good quality steam coal, slightly higher in sulfur than BRB coal and they are selling it to utilities in the Northeast as well as the Southeast as well as the export markets, and are very optimistic about the prospects and that’s why they’re developing the second line.

The Illinois Basin coal outlook if you look at any kind of projections has much greater opportunities than BRB.

Randy Cousins - BMO Capital Markets

But in terms of sort of like for 2009 given how sloppy the demand conditions are, and this is a new facility, it’s going to take market share from some other coal mine then?

James Foote

It’s basically taking market share from the northern [ansa] coal, which those mines are just shutting down.

Operator

Thank you. This concludes today’s Question-and-Answer Session. I would like to turn the meeting back over to Mr. Harrison.

E. Hunter Harrison

Well thanks very much for joining us. We wish we could have given you more maybe direction but maybe the next time we talk and meet there’ll be the smoke will have cleared a little bit and we can see some light at the end of the tunnel and see how well we’ve dealt with some of the challenges and the optimism as we expressed today. So thanks again for joining us and we’ll see you next time.

Operator

Thank you. The conference is now ended. Please disconnect your lines at this time. Thank you for participation.

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