Canadian Pacific Railway Limited Q4 2008 Earnings Call Transcript

|
 |  About: Canadian Pacific Railway Limited (CP)
by: SA Transcripts

Operator

Welcome to Canadian Pacific’s fourth quarter and full year 2008 results conference call. At this time all participants are in a listen only mode. Following the presentation we will conduct a question-and-answer session. (Operator Instructions) I would like to remind everyone that this conference call is being recorded on Tuesday, January 27th at 11:00 am Eastern time.

I will now turn the conference over to Miss Janet Weiss, Assistant Vice President, Investor Relations of Canadian Pacific.

Janet Weiss

Thanks for joining us for our 2008 fourth quarter teleconference. The presenters today will be Fred Green, our President and Chief Executive Officer; Brock Winter, our Senior VP of Operations; Marcella Szel, our Senior VP of Sales and Marketing; and Kathryn McQuade, our Executive Vice President and Chief Financial Officer. Also joining us on the call today is Brian Grassby, our VP and Controller.

Before we get started let me remind you that this presentation contains forward-looking-information. Actual results may differ materially. The risks, uncertainties and other factors that could influence actual results are described on slide one in the press release and in the MBNA filed with Canadian and US Securities Regulators. Please read carefully as these assumptions could change throughout the year.

All dollars quoted in the presentation are Canadian unless otherwise stated. This presentation also contains non-GAAP measures. Please read slide two. The slides are available on our website so please feel free to follow along. Following the presentation we will conduct a question-and-answer session. (Instructions) Here then is our President and CEO, Mr. Fred Green.

Frederic J. Green

This quarter our adjusted EPS was $1.15 down 4% versus the fourth quarter of 2007. The quarter proved to be challenging with global market uncertainties triggering some sharp volume reductions. Many of our customers leveraged the holiday period with extended shutdowns affecting the last few weeks of Q4 and early 2009.

Our recent efforts have been strongly tilted towards efficiency and cost control while ensuring that our safety performance continues to be the best in the industry. We are firmly focused on managing variable costs, reducing our fixed costs, pricing for value and remaining flexible so that we can respond to marketplace changes for new opportunities.

This quarter the operations team did a good job of not only adjusting our plan to match market conditions but also progressing our execution excellence for efficiency or E3 initiatives, improved training productivity even as volumes declined with GTMs on the core operation down 10%, train miles which drives expenses down even more by 12%. As Brock will expand upon we’ve also been quick to adjust resource levels in light of the declining volumes.

We peaked at over 1,450 temporary layoffs just three weeks ago. We can’t control the volume demand so we’re focused on what we can control and I’m pleased with the early results. I’ll now turn it over to Brock, Marcella and than Kathryn to take you through our results in more detail.

Brock M. Winter

In Q4 we focused on improving our fluidity and productivity and the implementation of our E3 initiatives. These initiatives are giving us the flexibility to react quickly. We’re continuing to adjust for volume changes and I am confident you’ll see further improvement in our fluidity and cost containment and evidence that our E3 initiatives are working.

Our early recognition and response to the unfolding economic conditions has positioned well to respond to whatever the current economy may bring. In addition this flexibility will provide us with the ability to respond quickly when the recovery occurs. Looking more specifically at our results let’s start with safety on Slide 6. Our safety results for the year for the core CP operation were excellent.

Our FRA personal injury frequency improved by 30% the fastest rate of improvement in the industry and we continue to be the industry leader in train operation safety with an improvement of 9% in FRA incident frequency. With respect to the DM&E I am confident that our safety integration plan will drive solid results. In Q4 we completed an important first step, starting with the safety orientation training of all of our operating managers.

Please turn to Slide 7. With respect to our fluidity metrics we’re reporting up to December 20th. This is due to our decision to take extended shutdowns over the holiday period. We made this decision given the volume trends and outlooks we were seeing. Train speeds improved by 10%. We attribute this to the action we have taken to run longer trains to reduce starts as well as the volume softness.

Yard dwell improved by 7% due to the proactive action we took to store cars and our continued focus on [inaudible] execution of our integrated operating plan. These actions allowed us to reduce our active cars on line by 10%. Car miles per day improved by 4% upon the result as it shows we are taking out train starts without compromising velocity.

We’ve had some weather challenges coming out of the holiday shutdowns including prolonged periods of cold weather with temperatures below minus 35 Celsius over large segments of the network with some areas as cold as minus 45 degrees. However our fluidity trends are now back to pre-holiday levels. We will continue to improve the reliability of our delivery services allowing us to command value for the services we provide.

Turning to Slide 8 as I told you last quarter we’re aggressively attacking the operational cost control opportunities given the continued slowing economy. We started our E3 initiative back in July when we felt the economy was becoming increasingly uncertain. We have hard wired specific initiatives that will create sustained value to ensure that we have the flexibility to be more responsive to adjust our costs quickly.

There are some time lag issues with those initiatives given the dramatic drop in volumes in the month of December but they are starting to bear fruit. In the face of declining volumes we have tied up over 270 road and yard locomotives representing 15% of our fleet. We have stored over 15,000 rail cars or roughly 20% of our fleet and in an unfortunate but necessary step our temporary layoff of crews and maintenance staff peaked at 1,450 and today sits at just over 1,000.

This is about 10% of our unionized train crew and maintenance workforce. We’re sizing ourself to meet the volume and we continue to do that week to week. I’m very comfortable that we have the focus and discipline to do this throughout 2009 and our Q4 results very clearly demonstrate that. As Fred mentioned we improved train weights driving a 3% improvement in our scheduled service and a 2% improvement in our bulk trains even in the face of declining volumes.

Our intermodal train density in terms of feet per FEU improved by 3% as we more precisely match rail car capacity to the mix of domestic and marine container business and improved intermodal train utilization and our AC locomotive miles per day improved by 3%. And there was more to come as we turn over every stone. We have been analyzing every locomotive shop and major yard facility to ensure they are needed.

I expect that we will have opportunities in these areas on a short and long term basis. We continue to adjust our IOP to drive reduced train starts and train miles while still delivering a consistent and reliable product to our customers. We’re taking a very balanced approach to managing total costs to get the best bottom line results while improving service levels.

A good example of this is our application of lean management principle to the export grain cycle where we drove a 25% reduction in cycle times, a better product and less assets required and we’re applying this approach to other areas of our business with intermodal up next. I’ll close with the observation that while we don’t know exactly when the volumes will turn for the better at some point.

What we do know is that our cost control initiatives will allow us to be nimble and will in now way impede our ability to ramp up quickly. We have the mobile assets and crews readily available to reactivate when the economy recovers. I look forward to reviewing our performance with you next quarter and I’ll now turn you over to Marcella.

Marcella M. Szel

The fourth quarter delivered 10% freight revenue growth over Q4 2007 a very good revenue result. The foreign exchange contributing 9% of this lift are underlying performance reflects a story of strong price offset by lower volume. Through a consistent focus on value we delivered very solid price results both on the quarter and most importantly through year end contract renewals which I’ll discuss shortly.

As you would expect however a weakening economy hurt volume. Turning to Slide 10 the graphic illustrates the car load impact of the deepening recession and a very sharp decline in December. On the quarter CP core carloads exclusive of the DM&E were down year-over-year by close to 11% and 17% in December. The addition of two months of DM&E carloads leads to a net 6% decline in volumes.

Now onto revenue performance for the quarter on Slide 11. Despite Q4 volume challenges revenue edged up a percentage point before FX. The breakdown is as follows, strong price results took us up by just over 85 with fuel representing about 40% of the improvement including a short term lag benefit of just over $20 million. This benefit neutralizes the impact in curd during the first half of the year.

The impact of the Canadian Transportation Agency’s retroactive adjustment to the Grain Revenue Entitlement had a negative 2% impact on the quarter. Volume and mix took us down close to 10% for core CP. The consolidated DM&E results provided a 5% revenue lift and finally FX was close to a nine point gain. This leads the all in reported freight revenue growth of 10%.

Turning to Slide 12 I will now take you through an overview by market area. I’ve included an extra column this quarter that shows the impact of the DM&E. I will focus my comments on the foreign exchange adjusted numbers including DM&E revenue. So starting with grain, grain revenues were up 8%. Volumes exclusive of the DM&E lift came in flat.

In Canada a strong crop improved pipeline performance and other price gains including seasonal pricing offset the impact of the retroactive reduction to the Grain Revenue Entitlement. Grain volumes for the year ahead are a strong positive. Canadian grain production is now estimated at 54 million metric tons for the current crop year up 4 million from earlier projections. In our US grain territory there are near record crops.

In coal despite downward pressure on volumes Q4 revenues were up 3%. The improvement reflects price as well as additional DM&E volume. For the year tech coal volumes were up about half of the one million ton increase previously expected. This was due to a mine outage and a weaker market in Q4. Looking ahead tech recently announced an expected reduction of their overall 2009 production.

This clearly reflects the uncertainty surrounding the global fuel market and as I indicated last fall we have anticipated coal volume to be lower than in 2008. And now as for the April 1st contract renewals negotiations continue. In the sulfur and fertilizer portfolio revenues were down 11% during the quarter. Falling global demand and crop prices as well as a pod ash mine strike impacted pod ash and chemical fertilizer volumes.

Indications suggest the market to be slow for the first half of 2009. We remain confident in the fundamentals however and we will be flexible to capture the pod ash industry’s expected recovery later in the year. Forest products revenues declined by 22% this quarter. With US housing starts pointing to the 550,000 unit range continued uncertainty in this sector is to be expected.

Industrial and consumer products continued at strong performance with 21% revenue growth demonstrating a good finish to the year on both price and volume gains. The results came from the added DM&E volume, growth in energy and fuel and continued strength in pricing. Given the decline in oil prices as well as falling commercial construction and industrial production rates future sector growth is uncertain.

Automotive revenues were down only 7% on the quarter despite a 27% decrease in carloads. Average revenue per car was up 45% reflecting mixed changes and improved price and fuel recovery from contract renewals I mentioned last quarter. For the year I expect to see continued weakness as recent US auto sales point below 11 million. Finally intermodal revenues were down 3% in the fourth quarter.

Price and fuel improvements were offset by volume decline. Looking forward lower GDP forecasts will mean lower volumes. The size of the decrease is unclear given the significant uncertainty in the retail sales outlook. Now over to Slide 13, I expect that our focus on value within our pricing program will continue to deliver solid results. Our renewals came in close to 6% for the quarter and 5% for the year in line with expectations.

With respect to committed price lifts for 2009 we said in November that we had over 50% booked. With progress since then we are now at just over 60% excluding the tech coal contracts. I expect also that our fuel program will continue to deliver in this volatile market based on our improved quality and coverage. In the face of economic challenges my team continues to identify and capture new opportunities such as diluence and expanded canola crush capacity.

The overall demand picture is very uncertain. Commodity markets and consumer production cutbacks along with falling volumes confirms a challenging year ahead with the timing recovery as the big unknown. I will caution you that early January volume trends are also a reflection of slower startup post-holiday shutdowns and the impact of severe weather. These trends are now showing some improvement.

To close as Brock has highlighted we will be positioned and responsive in areas that show the earliest recovery. Now over to Kathryn for the financials.

Kathryn B. McQuade

This quarter the economic slowdown reduced our volumes by almost 11% before the inclusion of DM&E. Operations responded quickly to the rapid decline by reducing headcount, consolidating trains and tying up assets. At the November Analyst Day I spoke to three strategic priorities, first financial conservatism, second producing free cash flow and third, balance sheet strength.

Now I would add the importance of flexibility. We’ve worked hard to develop plans to allow us to anticipate an respond quickly to changes in the economic environment and our success this year depends on our ability to swiftly react to market changes and seize opportunities. Now let’s start on Slide 15 with the income statement. This quarter includes the DM&E results for one month on an equity basis and two months on a consolidated basis.

We have provided you a full year 2008 restated for consolidated DM&E to help with comparisons next year. Let’s start with the income statement, total revenues increased 9% with 8% of that increase driven by FX. Strong pricing, fuel recovery and the DM&E revenues more than offset lower volumes and the negative impact of the Canadian Transport Agency or CTA's grain decision.

Reported operating expenses were up 13% or 5% before FX with most of the increase due to the inclusion of the DM&E. Operating income was flat so without the benefit of FX it would have been down 12%. Below the line the DM&E was only classified as equity for one month leading to a 15% decline in this line item. Interest expense and other was up by 14% with FX adding 11% of that while income tax expenses fell by 10% with an effective tax rate of 25%.

Overall adjusted diluted earnings per share for the quarter was $1.15 down 4% with an operating ratio of 76.5%. Now let’s turn to each of the expense lines and a more detailed look at the variances. Starting on Slide 16 comp and benefits were up $41 million. With volumes falling sharply we quickly adjusted our IOP and made the tough decision to lay off employees, as many as 1,450 at our peak.

Since many of these temporary layoffs occurred late in the year the full impact of these savings are not fully reflected in the fourth quarter. However these actions did reduce expenses $11 million. We have provided employee counts with and without DM&E. The core CP quarter end headcount shows a reduction of nearly 700 employees.

With the layoffs occurring late in December the flysheet count does not fully reflect the impact of all the layoffs due to the notification periods and outstanding vacation entitlement. DM&E and foreign exchange each added $12 million to the comp and benefit line. Stock based compensation expense increased $7 million due primarily to our total return swap which was partially offset by lower stock option expenses.

Sensitivity for the TRF for the first quarter 2009 is for every dollar our stock price closes the quarter below $41 on the TSX expenses increased by about $1.3 million. On the upside for every dollar the quarter end price closes above $41 there is a reduction in expense of $800,000. Rate increases and inflation were partially offset by a reduction in incentive compensation for a net increase of $9 million.

Finally a 2007 restructuring adjustment of $11 combined with some other small items increased the quarter-over-quarter variance by $12 million. Looking at Slide 17, fuel expense was up $43 million. The largest driver was foreign exchange which added $31 million while our hedges cost us $12 million. The incremental DM&E expenses added $7 million. Lower consumption due to lower volumes reduced our fuel expenses by $22 million.

The year-over-year decline in fuel price saved us $4 million. While we did have lower WTI our refining margins increased this quarter. Finally the one time Minnesota tax credit in 2007 combined with some other miscellaneous items were a headwind of $19 million. On Slide 18 we outline our hedge position in Q4 and through 2009.

Let me remind you the purpose of our hedging strategy is to protect against fuel price volatility on the book of business that is not fully responsive to fuel price changes in the short term such as Canadian grain. Our primary protection for rising fuel remains for our fuel surcharge program. Now turning to Slide 19 purchased services is up $20 million again foreign exchange and DM&E expenses being the largest contributors.

Casualty costs were higher by $4 million and the net of multiple other items were down $3 million showing some early E3 successes. Turning to Slide 20 and the remaining operating expenses, you will note that absent the impact of including DM&E and FX our initiatives to drive cost reductions are working. Material expenses were down $2 million despite the addition of DM&E and FX impacts.

We saw lower material usage across all areas of operations with major reductions for locomotive and freight car repairs. These reductions did not impact asset reliability as we continue to see improved locomotive availability. Equipment rents were up only $1 million including a large FX headwind. Managing our active car count and aggressively reducing train starts reduced leasing costs even as we saw higher per volume rates.

Depreciation increases were driven almost exclusively by the addition of DM&E expenses which also reflect the adjustments associated with purchase accounting. We also saw slight net decrease even after the impact of our capital programs again reflecting some early E3 successes. Slide 21 gives you some examples of the diverse portfolio of our initiatives.

At our quarterly calls earlier this year and at our Analyst Day we spoke to the need to address the economic uncertainty by aggressively managing costs and reducing capital. While there is a lot of noise in our financials this quarter due to FX and the inclusion of DM&E I am pleased to see that our focus on cost containment can already be felt in every line of our financial statements. These programs and process changes are now getting legs so we see opportunity for continued improvement going forward.

This is even more challenging in this volatile economy but these programs are designed to transform our cost structure not just cut temporarily in this down economy. Turning now to Slide 22 and the full year results, 2008 has been a wild ride. The volatility in both FX and fuel was significant. In fact the impact of FX in the first nine months was essentially reversed in the fourth quarter.

Total revenues were up 5% with freight revenues showing solid pricing gains. Improving fuel recovery and the inclusion of DM&E for two months being tempered by a 2% volume decline. Reported operating expenses were up 9% with fuel contributing 75% of that increase. Casualty and the incremental DM&E costs also added to the increase. Net of both taxes and the associated interest expenses the DM&E added $0.18 to EPS which exceeds or original expectations which we had given you earlier last year at $0.15 to $0.17.

On an adjusted basis diluted earnings per share was $4.06 with an operating ratio of 78.6%. Now let’s to turn to Slide 23, free cash flow ended the year a strong $232 million which is above our previous guidance of about $150 million. Our cash capital program ended the year at $1 billion including the DM&E on a full year basis. On an accrued basis capital was approximately $1.1 billion due to the decision to finance locomotives through a capital lease.

Our expectation for 2009 capital remains at the $800 million to $820 million range including the DM&E a reduction of 20% over 2008 and this is consistent with our Analyst Day presentation. Finally I would like to touch on the DM&E integration. It has been almost three months since we took over the property and I’m pleased with our progress to date.

We remain focused on our transition plans which include safety processes and planned capital improvements, information system rollouts, training and communication of these changes to all employees. To date we have found no surprises and a very engaged workforce. We continue to be ahead of our planned synergies. I will now turn it back to Fred.

Frederic J. Green

Let me wrap up by making the following comments. 2008 was challenging with volatile fuel and falling traffic volumes pressuring earnings. Mid-year we recognized the economic uncertainty and took aggressive action to create more flexibility within our operating plan and at the same time launched a new set of efficiency initiatives dubbed E3. This quarter we also gained control of the DM&E and began the transition process.

During the final two months of consolidation the planning and execution have been flawless. Looking forward economic uncertainty is obviously a key consideration in 2009. Our focus in these uncertain times is on managing costs both fixed and variable, ensuring we continue to price for value and maximizing our strategic and operational flexibility.

We have a strong franchise in an industry with tremendous long term potential, we’ve preserved our options for future growth and are addressing our short term challenges. The team understands the challenge is very focused on our immediate tasks. With that I’ll turn it back over to Luke and open the call to questions.

Question-And-Answer Session

Operator

One moment please. (Operator Instructions) Your questions will be polled in the order that they are received. Please limit your questions to two. We will take questions from analysts until five minutes to the hour and then we will go to media. One moment please for your first question. Your first question comes from Bill MacKenzie – TD Newcrest.

Bill MacKenzie – TD Newcrest

This may be starting with the DM&E, I’m just trying to get a better handle on the timing of the profitability in the quarter. I’m just looking at the equity pick up that you had for the one month this quarter versus the three months last year and even though you only had it for one month, it’s only down 15%.

Is the profitability heavily weighted towards October in the quarter or was there just such a significant improvement year-over-year?

Kathryn B. McQuade

One of the biggest things in the fourth quarter was a tax adjustment as well and of course your equity income is net of taxes so part of the good performance of the DM&E was driven by a tax credit.

Bill MacKenzie – TD Newcrest

Can you quantify that?

Brian W. Grassby

This was a short line tax credit that was passed into law in October so it was roughly $6 million to $7 million.

Bill MacKenzie – TD Newcrest

Just a couple of questions on cash flows, starting with working capital for the year I think it was $130 million that you’ve invested in working capital and I’m just wondering how we should look at that in 2009. Is that an item that’s going to reverse or is this related to the DM&E or what should we expect from a working capital perspective in ’09?

Brian W. Grassby

I think with respect to the working capital that you’re referring to a big part of that is $120 million repayment of the accounts receivable securitization. You should not see as much movement in 2009.

Bill MacKenzie – TD Newcrest

Finally on the pension situation, could you tell me how much was expensed in ’08, what your expectations are for ’09 and then if you quantify what, I guess this will be out later, but if you just quantify what the size is of the pension deficit both on a solvency basis and an accounting basis at the end of the year?

Kathryn B. McQuade

Our pension expense was about $45 million to $50 million this year. We don’t anticipate seeing large increases in 2009. In terms of our pension deficit, that will be dependent upon our valuation if we do a valuation at the end of the year.

Brian W. Grassby

Bill, we’ve provided the sensitivities in the press release, if I recall correctly, isn’t it?

Kathryn B. McQuade

Yes.

Brian W. Grassby

So you can get a pretty good feel for the numbers we’re providing at that point.

Bill MacKenzie – TD Newcrest

I can see that the cash contributions and that the sensitivity you guys have provided has been great the last couple quarters, very helpful. I’m just wondering in order to come up with those I guess you have to maybe some assumptions on what the solvency deficit would be at the end of the year?

Kathryn B. McQuade

Again, the solvency deficit is dependent upon whether we do a valuation at the end of the year. It also depends upon smoothing, non-smoothing. So there’s a lot of moving pieces and until we understand the exact implications of the temporary regulation and everything, that whole insolvency issue is still a moving target.

Operator

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

Thomas Wadewitz - J.P. Morgan

I guess one follow up on the pension side, it looks like the cash contributions are pretty big numbers. When you’re factoring those in, you’ve cut a nice cut in cap ex as well so that helps you, but do you think you’ll be in a position to generate free cash in 2009 and 2010 or is that probably a bit too optimistic given what seems to be a pretty meaningful pension headwind on the cash side?

Kathryn B. McQuade

When you look at the range of what we’re seeing in terms of pension contributions, it is only about $60 million to $100 million so that is well within our capabilities of our existing cash flow and with the reductions in our capital as well. We don’t see that as an issue. We’re giving sensitivity on 2010 but there are so many moving targets as well as whether the government will provide any permanent relief on contributions for pension plans.

At this point, all I would really like to speak to is 2009.

Thomas Wadewitz - J.P. Morgan

In terms of the outlook for demand, I guess one of the things that we would hope to see at some point, some of the plants that have been shut down and extended holiday shutdowns, maybe you see some relief on some of that capacity coming back online. I don’t know, Marcella, is there any sense you can give us on early indications from customers of mining or manufacturing capacity that would come back online and what the timing for that might be?

Frederic J. Green

I think the very broad view is that we just don’t know what the volumes are going to be going forward. So to your specific question, what we can tell you is that the coal mines are back up and running. We can tell you that the number of the forest products facilities that had shut down have stayed shut down largely. We can tell you that auto production tends to have been very slow to come back up but some is starting to come back up.

Unfortunately those are very qualitative statements but I just have to stress we just don’t know. The customers don’t know, that’s the problem face. It’s not that we don’t want to tell people, it’s just that the customers don’t seem to know yet what they can expect and as a consequence our program is all about nimbleness and agility and how do we respond when the customers go.

What I can tell you in a very broad way is that the first couple of weeks of the year which looked awful, that’s not at all reflective of what’s happening. Of late the numbers have come back to the point that they’re clearly down versus last year, but nowhere near what we experienced in the first two or three weeks.

Thomas Wadewitz - J.P. Morgan

So you do have a pretty good degree of confidence that the December/January numbers were probably the low point and volumes may not look very good going forward, but they probably don’t look as bad as what you saw December/January?

Frederic J. Green

The answer is I don’t know but that seems like a reasonable hypothesis at this point in the year.

Thomas Wadewitz - J.P. Morgan

If I can have one more quick one on pricing for either you Fred or Marcella, as your number that you talked about in fourth quarter was very solid and I guess a little better than the full year re-pricing number so that’s obviously good to hear.

But I’m wondering on current contracts, is there any kind of wavering in what you can get on pricing or what you are willing to do relative to significant customer weakness that would indicate that pricing outlook maybe needs to decelerate a bit or do you think that you’re just able to pretty much maintain this really constructive rate that you had for a while on pricing?

Marcella M. Szel

Tom, our approach is consistent in all of our market conditions and we’re looking to price based on the full value of our product offering. As you noted Tom, much of our pricing occurred in very tough times, November/December and some going into January, and we’ve been able to maintain pricing and I would expect to continue to main the level that I indicated in November which is a 4% to 5% price range on renewals.

Frederic J. Green

Tom, if Marcella starts to waver I’m going to be there to help her.

Operator

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

Jacob Bout - CIBC World Markets

Question on contract renewals for 2009 and 2010, maybe in comment on the percent that is complete at this point outside of the metallurgical coal and the pod ash contract?

Marcella M. Szel

As I mentioned in my remarks, Jacob, we have 60% of our price lift which is complete for 2009. If you look at it a different way, which is to say how much of our contracts are completed overall as opposed to just the price lift, that range goes up to 80% for 2009. I’m not providing an outlook for 2010, it’s too early at this stage.

Jacob Bout - CIBC World Markets

Just on the metallurgical coal contract, are you still looking for price participation and a five year contract like you did on the last one?

Marcella M. Szel

Jacob, it’s too early to say. We’re in the middle of negotiations and I just can’t make any comment as we’re having those negotiations. We will update you when we know.

Jacob Bout - CIBC World Markets

Maybe talk a little bit about what the impact of declining fuel prices has been on your end market and just how competitive trucks have been for your book of business.

Marcella M. Szel

In terms of the declining fuel markets in terms of overall price what that does is take the total price of the customer fees down obviously which is one of the reasons why I believe that we’ve got continuing strength going into the marketplace. In terms of looking at it from a competitive rail to truck issue, you’ve got to remember that the bulk of CP’s business on the intermodal side, particularly as long haul or domestic, is about 1,900 and that’s not a space where trucks are typically competitive.

Now having said that, when I look at some short haul business that we do which is truck competitive which is the Montreal/Toronto lane, in that lane our volumes held flat which I think is a pretty good result in this particular marketplace.

Jacob Bout - CIBC World Markets

What do you attribute that to?

Marcella M. Szel

The strength of the values of the rail service to our customers and being competitive in the market.

Jacob Bout - CIBC World Markets

Maybe just a last question here for Fred, since the Analyst Day that we had in November, how has the outlook changed for you and for your end markets?

Frederic J. Green

I think, Jacob, the extreme drop off that every railway experienced post-US Thanksgiving and really into the first couple of weeks of January just reinforced the work that we had done starting last July on E3 about the importance of nimbleness, the importance of being very quick to respond. You heard Brock taking out 1,450 people unfortunately and now some have come back parking locomotives.

I think if anything what it’s done is reinforce for me the importance of being flexible, to use Kathryn’s word of being nimble, and really staying on top of the marketplace because literally things change week to week. I don’t have any further insight into what’s going to happen with regard to volumes over the course of the year. There’s no way to gather that. What’s important is to control what you can control, be as nimble as you can be.

Early evidence is that we’re performing quite well in that regard.

Jacob Bout - CIBC World Markets

So reading between the lines here obviously it’s a cost cutting measure. What are you looking at specifically on cutting operating costs? Because if look at it from an operating cost per GTM, not seeing the type of decline which I thought I would see on a year on year basis.

Frederic J. Green

Jacob, I don’t know what draws that conclusion. I guess that’s the kind of thing we should probably take off line. I can tell you that Brock can give you a strong list of the things that are being done and have already started to have some results. Brock, just help Jacob a bit.

Brock M. Winter

Jacob, as we talked about in November, we’ve been very aggressive number one in reducing our train starts, reducing our train miles. In fact we were down pretty much 10% in the fourth quarter and obviously followed that up in the first three weeks in January down in excess of 20% in our train starts and train miles. Similarly on the headcount we acted very quickly when the coal mines went down.

We reacted and laid off approximately 300 people on our coal route to deal with that. On the auto business, as the auto assembly plants announced shutdowns we took our train services down dramatically and we talked extensively about applying our distributed power models and extending our trains particularly on our bulk business but also applying that to our merchandise and transcontinental intermodal business.

Again, Jacob, the real trick here for us as Fred has mentioned is to be really anticipating some of the volumes and taking our variable costs out as quickly as we can to match those drops. Of course it’s not all variable but to the extent that we can reduce those variable costs quickly, we’re taking that action very quickly.

Kathryn B. McQuade

Jacob, I’d like to add something. One of the things that happened was the rapid drop off right at the end of the quarter and as I tried to indicate Brock took quick action so GTMs went down right away but some of the cost savings won’t be felt until the first quarter. Part of is just when you’re cutting off and how quickly you can do it, but when you have literally the clip happen right at the end of December, that matching of expenses directly on a month to month basis is very difficult.

Operator

Your next question comes from Edward Wolfe – Wolfe Research, LLC.

Edward Wolfe – Wolfe Research, LLC

To constitute Tom Wadewitz’s question of the cash impact, you had something about $60 million to $100 million for the pension over the next couple of years each year. How does that compare to what’s in the release of the $150 million to $195 million contribution for ’09 and the $295 million to $345 million?

Kathryn B. McQuade

It was $95 million this year, so I was looking at the year-over-year increase, so $150 million minus $95 million is $55 million, so that’s essentially how I got that. I was looking at the incremental increase of what we are seeing.

Edward Wolfe – Wolfe Research, LLC

And the difference is obviously in the release between the ’10 and ’09 on the incremental the next year?

Kathryn B. McQuade

Yes.

Edward Wolfe – Wolfe Research, LLC

I asked about the income statement impact from the expensing of the pension in ’09 and what your assumptions were? Are you giving any guidance as to what that might look like?

Kathryn B. McQuade

We’re not giving any direct guidance yet because the valuation hasn’t been completed but we will not see because pension accounting is very different from how you calculate your contributions. Because of asset smoothing and discount rates we do not anticipate any increase in pension expense in ’09.

Edward Wolfe – Wolfe Research, LLC

I know you’ve mentioned that it’s early on Teck Cominco, Peabody today announced that the coal year is going to be late this year. Is it your sense that everything’s getting pushed past April in terms of timing though?

Marcella M. Szel

In terms of the coal negotiations, Ed?

Edward Wolfe – Wolfe Research, LLC

Yes.

Marcella M. Szel

We’re seeing a lot of different news out there in terms of when negotiations have started, will start and that they would likely be pushed back. So my information is the same as yours.

Operator

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

Walter Spracklin – RBC Capital Markets

On the pension contribution, when we’re looking at your 2008 free cash flow, $232 million, obviously it’s going to be weaker in 2009 with the slowdown in volumes and the economic activity, but seeing you did a 10% assumption for growth in your equity and real estate markets for ’09.

My question is essentially if we don’t see that 10%, and of course we can do the sensitivity, but if that doesn’t come up and you have lower free cash flow growth and you’ve got a bit of a shortfall there, what’s your plan in terms of financing ’09 and then going into 2010 work, there’s even more significant ramp up?

Kathryn B. McQuade

For one thing the assumptions on what happens in ’09 does not impact the 2009 pension contribution. That will have been set for what happened in ’08. So we have no risk in terms of the required contribution in 2009. Whatever the equity markets and the assets perform in ’09 will have an impact on our 2010 contributions.

Again that right now is going to be a function of relief from the Federal government as well as the equity markets’ performance. That’s why all we can is provide you sensitivity based upon what history shows reasonable returns on the assets and continue to see what the government will do in terms of permanent relief.

Walter Spracklin – RBC Capital Markets

I guess what I’m asking though is understanding the sensitivities are there, the question is if we weren’t to get that increase and you don’t get the relief from government, you gave us that range. So if that were to happen, do you have the facilities in place right now that give you a little bit more lending capacity to be able to finance any shortfall if that were to happen?

Kathryn B. McQuade

Absolutely. We still believe we can fund this through cash flows from operations. Absent that we have a great syndicate, we have good headroom on our debt facilities. We don’t see any immediate issues in terms of meeting those obligations.

Walter Spracklin – RBC Capital Markets

On impacts of a few items and I don’t know if Marcella you could quantify or not or perhaps Kathryn, on the fuel surcharge side, a lot of your peers have been reporting benefits from the two month lag effect. Just wondering what that impact in terms of an EPS amount would have been in the quarter from that, purely from the lag, not from the surcharge?

Marcella M. Szel

Walter, I’ll just remind you, in my remarks I commented that the lag benefit this quarter was just over $20 million in terms of a pure number. That’s about $0.10.

Walter Spracklin – RBC Capital Markets

On foreign exchange and the CTA ruling on an EPS after tax, did you look at on an EPS basis for the after tax impact of foreign exchange on CTA?

Brock M. Winter

The impact of those two actually would offset each other. In fact when you took the benefit coming from the foreign exchange and the CTA, they actually wash each other out.

Walter Spracklin – RBC Capital Markets

Lastly, on your tax rate, it came in very low in the quarter and then even for the year down well below what you had normally been, call it 29% or North of 30% that you would typically guide us. I think you came in at just over 23%. When we’re looking at 2009 what kind of tax rate should we assume in our models for 2009?

Kathryn B. McQuade

It will not be as low as it is in ’08 and we are looking at probably the high 20, 28% to 30%.

Operator

Your next question comes from Jason Siedl – Dahlman Rose & Co.

Jason Siedl – Dahlman Rose & Co.

Real quickly, Marcella I think you talked about some price renewals, about 5% for the year. Did I hear you correct saying you got about 6% in 4Q?

Marcella M. Szel

Yes, that’s correct, Jason.

Jason Siedl – Dahlman Rose & Co.

That’s surprising that you saw an uptick in pricing renewals. Is that just commodity specific mixes that you renewed in 4Q compared to the prior nine months?

Marcella M. Szel

That’s right. It has to do with the contracts that came up in that period of time. A few of them were legacy contracts that we had the opportunity to re-price, some old ones, and the specific commodities.

Jason Siedl – Dahlman Rose & Co.

Could you give us some color on the specific commodities?

Marcella M. Szel

No, I think I’ll just leave it at that.

Jason Siedl – Dahlman Rose & Co.

Also question on the DM&E, obviously we saw the renewal of the short line tax credit. Does the integration of the DM&E into CP’s network impact the short line status in the eyes of the STB and the government?

Kathryn B. McQuade

Yes, it will.

Jason Siedl – Dahlman Rose & Co.

So you no longer are going to be receiving those tax credits then?

Kathryn B. McQuade

There’s still some question as to if we’ll qualify in some future years but I would say longer term, they will not.

Operator

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

David Newman – National Bank Financial

In terms of the DM&E now that you’ve folded it in, is your currency exposure going to be roughly $0.02 in earnings for every $0.01 change in [inaudible]? In other words, it probably is not the $0.01 to $0.01 now?

Kathryn B. McQuade

Actually it still is the $0.01 to $0.01. We’ve really balanced off the debt and the property as well. So it is $0.01 to $0.01 but what you saw in the fourth quarter this year is anytime FX moves so rapidly within the quarter that sensitivity will be off a little bit.

David Newman – National Bank Financial

On the DM&E in terms of bottom line, regardless of the accounting thereof to Walter’s question, how much would that have contributed in terms of bottom line in the quarter?

Kathryn B. McQuade

In the quarter, I gave that in my speech. It came in at $0.18.

David Newman – National Bank Financial

On the top line with the grain adjustment was it $23 million that adjusted? Because I noticed you trued up your provision up to $33.8 million so what was the net top line impact on that?

Kathryn B. McQuade

We were accrued in 2008 for the total amount.

David Newman – National Bank Financial

The $33.8 million? Including the penalty?

Kathryn B. McQuade

Yes.

David Newman – National Bank Financial

Now the penalty flows through costs versus the top line, correct?

Brian W. Grassby

We have flowed it to the top line.

Kathryn B. McQuade

It went through revenue.

Brian W. Grassby

The negative revenue.

David Newman – National Bank Financial

The full $38 million would have gone through in Q4?

Kathryn B. McQuade

No, a portion of it was accrued prior to the fourth quarter and the $23 million occurred in the fourth quarter.

David Newman – National Bank Financial

The flux in your business in terms of labor, you were down 1,450 at one point and now you’re down 1,000. How much can you right size the headcount and as you look into Q1 what would be the net benefit year-over-year from the 1,000? It looks to me like about $15 million to $20 million. Am I in the ballpark and how much flexibility do you have to right size the volume or the headcount to the volumes?

Kathryn B. McQuade

I’ll let Brock talk to the right sizing, I think they’ve shown a lot of flexibility there, but I think you’re in the ballpark in terms of what you were quoting on a cost per FTD.

Brock M. Winter

On the numbers, David, our running trades they make up about 5,000 employee in total and our maintenance folks on the mechanical side make up about a couple thousand employees. Let’s call it 7,000 would flex with volume and of course there are some fixed expenses on maintenance, etc. But again I think the real flexible group is really our running trades that really match with train starts.

There is a little less maneuverability on yard crews but on the road crews they flex with train starts and train miles.

David Newman – National Bank Financial

What is the maximum amount that you think you can flex the system to if volume stayed at relatively depressed levels I guess is what I’m asking. Could you go North of 2,000?

Frederic J. Green

David, I really hesitate to speculate. It really is just math. If you’re not having train starts you clearly won’t keep on that number of running trades employees and the proportionate number of mechanical employees who are repairing the locomotives can also be laid off. On those two areas, which is what Brock spoke to, clearly there is almost a direct correlation between activity and the number of folks you need.

It becomes increasingly more difficult when you get into some fundamental base level you can get to and certainly on the maintenance of the infrastructure that’s a more difficult task because you clearly will be wearing out less activity but you have a certain minimum requirements with regard to inspections, etc.

David Newman – National Bank Financial

On the price renewals, does that include regulated grain and how much cover would you have I guess for 2009 if you include the regulated grain in terms of revenue that you feel pretty comfortable with right now?

Marcella M. Szel

I talked about two different ways of looking at it so when you look at it in terms of the total book for 2009 the 80% that I referred to that would include the regulated grain in there. We have an index increase which will be coming in July.

David Newman – National Bank Financial

And I guess 60% for the actual other part, right?

Marcella M. Szel

I’m sorry, say that again.

David Newman – National Bank Financial

And 60% I think in renewals, correct?

Marcella M. Szel

Yes, 60% on a price lift.

Operator

Your next question comes from David Feinberg – Goldman Sachs.

David Feinberg – Goldman Sachs

First question for Kathryn as it relates to cash flows. You talked about ’09, any contingent payments for the DM&E that may get triggered here in ’09?

Kathryn B. McQuade

No, none at all.

David Feinberg – Goldman Sachs

And I think at your Analyst Day it was you, remember your team had talked about the possibility of $50 million of land sales in ’09? Is that still on the table?

Kathryn B. McQuade

We’re still actively selling land. It is moving with the economy to some extent but we’re still looking at that range at this time.

David Feinberg – Goldman Sachs

In terms of your debt maturities, I just wanted to confirm you paid down the bridge financing you had in place and there are no debt maturities in ’09? Is that true?

Kathryn B. McQuade

Other than some small little capital leases. But yes, generally for ’09 we have no need to renew any debt.

David Feinberg – Goldman Sachs

As a follow up to the question on the foreign exchange sensitivity, outside of the actual every $0.01 change in the FX gives you a $0.01 change in, it’s annual EPS first of all, correct?

Kathryn B. McQuade

That is correct.

David Feinberg – Goldman Sachs

Can you give us a sense in terms of overall book of business US versus Canada, how that breaks up on a revenue and expense item?

Brian W. Grassby

I think it ranges during the year, but I think you could use both revenues and expenses are between 30% to 35% based in US dollars.

David Feinberg – Goldman Sachs

Turning to compensation, I just want to confirm, you talked about the increase in stock based comp year-over-year. That was just related to fluctuation in the stock price, correct? It’s not that you had granted any additional stock based comp year-over-year. Is that the right way to think about it?

Kathryn B. McQuade

That is correct. It is almost entire the increase was due to the total return swap that I gave complete sensitivities around and there was actually some reduction in expenses due to stock option expense being lower.

David Feinberg – Goldman Sachs

As it relates to wages and benefit increases, whether it be a unionized or non-unionized workforce, are there any scheduled increases that we should be baking in here in ’09 and when do they start to flow through?

Brock M. Winter

On the unionized side it’s a range between 3.5% and 4% for ’09.

Frederic J. Green

On the non-unionized side, David, we’ve made the statement that there will be no increases to the compensation of the supervisory, manager, executive salaries at least until we see the results of the second quarter. At that point in time we’ll pass judgment on whether the original planned increases can be applied or not.

David Feinberg – Goldman Sachs

Two questions for Marcella. Marcella, you talked about the difference your book of business and your contracted book of business. Excluding Canadian grain which is you’re getting your price list from the government, can you give us a sense in terms of the tariff business and how that’s pricing in ’09 over ’08? Are the price increases there comparable to the contracted business? Are they different? If so, where?

Marcella M. Szel

When I spoke about both numbers, both the 60% and the 80% they included the contract and the tariff business, David. We approach the tariff business in exactly the same way we approach the contract business and I include it in my results.

David Feinberg – Goldman Sachs

One last question for Marcella as it relates to your coal business, we’ve heard some reports that overall Canadian Pacific’s become a little bit more competitive within the coal market excluding the Teck Cominco business, can you comment on any new coal business that may have come up for bid in ’08 that CP won, what contributed to Canadian Pacific winning that new business and what type of pricing you might have seen on those contracts?

Marcella M. Szel

I can and I just want to remind you, David, that I did comment on that in our Analyst Day where I indicated that we had been successful in winning a new short haul business in the United States, very short haul business, 50 miles. However it’s significant car loads. We won it on the competitive basis based on the service that we offer in the marketplace.

We’re always in the marketplace seeking to gain new business and we were fortunate being able to get this on our service.

David Feinberg – Goldman Sachs

And it’s safe to assume that business was already existing, right? It’s not a new haul, it was an existing haul that CP won, correct?

Marcella M. Szel

Yes, that is correct.

David Feinberg – Goldman Sachs

Can you give us a sense maybe how long was the previous contract in place for before it came up for bid? Was it 20 year in duration, 10 year in duration?

Marcella M. Szel

I have no idea, David.

Operator

Your next question comes from Cherilyn Radbourne - Scotia Capital.

Cherilyn Radbourne - Scotia Capital

Just wanted to ask a first question on the DM&E and wondered whether you could comment on how their volumes were affected in Q4 and the early weeks of 2009 by the deterioration in the economy that we saw late in the year?

Marcella M. Szel

Cherilyn, they had about the same impact in terms of a pattern on their car loading as CP saw.

Cherilyn Radbourne - Scotia Capital

I believe the EPS contribution that was given during the prepared portion of your comments was that the DM&E contributed $0.18 for the year. Is it possible to break out what the Q4 EPS contribution was?

Kathryn B. McQuade

I think it was around $0.05 to $0.06.

Cherilyn Radbourne - Scotia Capital

Does that include this $6 million to $7 million tax credit that was talked about?

Kathryn B. McQuade

Yes, that would be an all in.

Cherilyn Radbourne - Scotia Capital

In terms of the operational metrics that you presented in the slide presentation, the reduction in material you said that you talked about, just as a practical matter as a management team when you look at your operating metrics, how do you separate the impact of much lower volumes versus the benefit of your efficiency initiatives to basically satisfy yourself that there is some benefit from the E3 plan in addition to what happens as a result of volume alone?

Frederic J. Green

Cherilyn, the way that process works is we would break out and you see it in the financial side, you see it broken out with volume versus say foreign exchange versus price. Well we do the same thing from an operations perspective. We’re going to work our way through those numbers obviously and ensure that the attribution of any benefits that are flowing to the bottom line is appropriately linked to the efforts of E3.

We’ve got a whole organization who have their bonuses tied to the successful delivery of that $100 million over a couple of years of economic benefit. So I can assure you the Executive Committee literally reviews the linkage between activity and benefit of the E3 initiatives.

Kathryn B. McQuade

Let me just add something there, if you look at what we’re going to track, the one that’s sustainable is the productivity enhancements on the assets. The way you track that is the ability to see your locomotive utilization numbers, productivity numbers, etc. because at the end of the day yes, we did get cost savings because Brock had tied up locomotives.

We hope that those locomotives get back to use with higher volumes, but we will look and demand the essentially even improved productivity from those locomotives so that when he’s bringing them out they’re at less than what it would have taken beforehand.

Operator

Your next question comes from Kenneth Hexter - Merrill Lynch.

Kenneth Hexter - Merrill Lynch

Fred, can you just refresh on the negotiation process with Teck? I know you declined to comment on the actual negotiations, but what is the timing as we get closer to the end of March when we should start to expect to hear more details?

Frederic J. Green

Ken, it’s pretty straightforward. The contract expires at the end of March and hopefully we’ll have a contract in place to replace the one that expired. If for any reason we don’t, that would lead to an arbitration process and the arbitration process, I’ll let Marcella comment, but it’s pretty structured and I’m going to guess it’s 50 to 60 days from the beginning to the end. Marcella, please put some color on that.

Marcella M. Szel

I think Fred has got it right that it will take about that period of time for the arbitration should there be an arbitration to conclude.

Kenneth Hexter - Merrill Lynch

Just to revisit Kathryn, I know you’ve beaten this one down, but on the pension side when you jump up to another $200 million to $300 million of incremental spend for your 2010 target, I know you wanted to try to stay away from 2010 because things can change so much, but I guess then looking at the cap ex figure and you decreased it down to about $800 million this year, how long can you keep it those levels?

Are you at maintenance, are you below maintenance when you’re running at these levels or do you still have growth capital built in? I just want to understand what on the cash flow side you’ve got some levers to pull?

Frederic J. Green

Ken, I think the two things that are important there is that certainly if we have any more ability to take the one offer so real estate sales, etc. you would obviously try to expedite those as long as you’re commanding value for them. Second is from a capital perspective we have contracted the capital by the $200 million. The majority of what’s there is maintenance capital. There’s still some room as there always is on discretionary capital in the sense of productivity and other initiatives.

Obviously we like to pursue those because those are for the long term benefit of the shareholder. You can actually trim back your other maintenance capital further if you want, it just has collateral damage. We’d like not to get into that spiral but if one has to do it to survive a short period, you can but you have to have compensating vehicles in place such as slow orders or other mechanisms that allow you to perhaps preserve another $50 million, $100 million, $150 million.

We’ve tried to not go there, we prefer to not go there, but we can go there if we ever get in that circumstance.

Kathryn B. McQuade

I just want to add to that if you think about your maintenance capital as well the ability for us to generate cash flow will be based upon the volumes and the business environment. If the business environment is making such that the cash flow is not available, then you don’t have as much tonnage going across, therefore, you can start reducing some of your maintenance.

It’s not a one for one, but generally what we would rather see is to see the maintenance up and with the volumes up so that we’re generating the cash flow and back to a normal operating level of volumes which would make these pension contributions just marginally difficult.

Kenneth Hexter - Merrill Lynch

Fred, if you could take a slight guess on how volumes are running if you said some of the plants are starting to come back online, obviously December and January got a bit exaggerated. What would you say the run rate now would be based on what you’re seeing as far some of the plants returning? I know you said forest wasn’t but some of the autos were.

Frederic J. Green

We monitor things on a seven day basis. As of this morning we’re probably in the 5% to 10% under last year range, maybe even 7%, 8% under. We’re in that zone and our challenge, Ken, is we can give anybody a point in time where we are. Our problem is we’re not sure if we can extrapolate that number out and say that’s what you can expect because we just don’t know.

Kenneth Hexter - Merrill Lynch

My last one is just on the headcount. I just want to understand this because it sounds like you had up to 1,400, now you’re down to 1,000. What happened? Did you bring those people back to work or is that process you go from furloughing to them laying off? I just want to understand what’s going on with the employee count.

Brock M. Winter

Ken, it’s two primary reasons. One is we took aggressive moves when the coal mines announced their shutdowns in Southeast BC both on the running trade side as well as our mechanical forces on that route. The second issue is we have recalled a number of running trades employees again to deal with the winter scenario, again to give us robustness in terms of our fluidity metrics, our on time performance, our train speeds and obviously as we get through some of the tough conditions I referred to in my remarks.

Again we had extreme cold and again extreme amounts of snow if you will in the P and W, the Port of Vancouver in the North P and W area, so we brought back a few employees to compensate, to give us that fluidity. We will be able to flex those resources as required on the circumstance on he railway or as volumes recover.

Operator

Your next question comes from Chris Ceraso – Credit Suisse.

Chris Ceraso – Credit Suisse

Just one follow up on the question about headcount, what do you pay folks when they’re on layoff? Is there some benefit that still gets paid?

Brock M. Winter

Essentially no, it varies by craft but in general, no we do not pay them when they’re laid off.

Chris Ceraso – Credit Suisse

So you get full savings from people when they’re on layoff?

Brock M. Winter

In general, that’s correct.

I didn’t see it anywhere in there but do you have a price per gallon fuel that you paid in the quarter?

Frederic J. Green

Chris, I think it’s in there but if not we’ll get the gang to call you right afterwards.

Chris Ceraso – Credit Suisse

If I’m looking at expectations for volume that you’re going to see over the next couple of quarters, roughly how many points of volume growth on an unadjusted basis if I don’t change the year ago number? What is the DM&E worth in terms of volume?

Frederic J. Green

I think that data is in the flysheet where we try to do the sensitivity and the pro forma for last year but again, Chris, rather than try and wing it off the top here, why don’t get to you with the exact numbers?

Chris Ceraso – Credit Suisse

The last question on thought to revising down your assumed rate of pension return from 10%? I know some folks in industries have started to ratchet that expectation back.

Kathryn B. McQuade

I’ll let Brian expand. That is not going to be the assumption that we have in terms of our accounting assumptions but in terms of the sensitivity we try to provide you for expectations on contributions, that’s where we use the 10%.

Frederic J. Green

The 10% was really around the equity return

Kathryn B. McQuade

Right.

Frederic J. Green

Not so much the fixed stat returns on the pension plans. When we release our MD&A and annual report we will outline the, last year we used 8%. We’re reviewing that now and will announce it when the MD&A comes out in March.

Operator

Your next question comes from Arturo Vernon - Macquarie Research Equities.

Arturo Vernon - Macquarie Research Equities

Your debt covenants, how are you shaping up against them times being what they are?

Kathryn B. McQuade

We are fine with our debt covenants. We have plenty of headroom with them so we don’t see any issues there.

Arturo Vernon - Macquarie Research Equities

That would involve your revolver credit facility?

Kathryn B. McQuade

That includes all of our debt facilities.

Arturo Vernon - Macquarie Research Equities

You may not be at liberty to comment but looking at ’09, do you perceive that something would change from that judgment?

Kathryn B. McQuade

I certainly hope not, we’re not anticipating it. I guess that depends on where the economy is going but no, we don’t see any problems.

Operator

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

Randy Cousins - BMO Capital Markets

Just points of clarification, I guess Kathryn on your wage and benefits you indicated that benefit increase was $9 million offset by an incentive reduction. I wonder if you could give us a sense as to how much the incentive reduction was?

Kathryn B. McQuade

I think it was about $4 million, Randy. Again, if you go back to the sensitivity I don’t have it off the top of my head but the $800,000 that I had given you on the TRS, you can use that as what the net increase from the TRS was. Then whatever my net number was would be the difference in the incentive stock option expense.

Randy Cousins - BMO Capital Markets

Thanks for the flysheet, I think it’s going to be very useful to all of us, but if I just compare the differences between the reported ’08 number versus the flysheet issue, it looks like you had about $87 million in EBIT contribution for DM&E in 2008 on a comparables basis plus the two months you pick up in Q4. Can you give a sense what you notionally would target in terms of EBIT growth out of the DM&E for 2009?

I recognize there’s a lot of uncertainties but you got a lot of opportunities in the cost side and certainly there’s huge room for improvement in your safety performance.

Kathryn B. McQuade

I can’t argue with that, Randy, but what we’re going to really try to is get away from looking at the DM&E in isolation because at the end of the day as we start looking at the synergies that we’re going to get in terms of the DM&E, in terms of revenue growth as well as our cost synergies, it’s all intertwined with our overall CP operations.

It is very hard to start to isolate the DM&E on a go forward basis which is why we try to give you good consolidated numbers for 2008 so on a go forward basis that were looked at a consolidated entity.

Frederic J. Green

Randy, I would add that first of all the importance of what Kathryn said from my perspective is I don’t want us optimizing the DM&E at the expense of the main railway. What we’ve said to them is let’s keep this isolated for a period of time for the importance of two key things in their first phases. We need to get our financial systems in place, our operating systems in place, our safety systems in place first.

We are already in the process of starting to generate the planned revenue synergies which are longer haul better synergies for the company and the third leg of that is the expense synergies if you will or the benefits we think will materialize. But again it’s important to look at it through our lens as a holistic enterprise, not as an independent enterprise. Pretty quickly as we start to migrate down this path it becomes increasingly less relevant but it’s “DM&E” and what is CP?

It’s all one enterprise, as Kathryn says.

Randy Cousins - BMO Capital Markets

Let me come at it from another perspective, then. In terms of achieving those does the slowdown in the economy or the constraints that you put on capital expenditure affect the timing of these synergies, the benefit that you talked about?

Kathryn B. McQuade

In terms of the capital expenditures we are committed to the capital expenditures that were outlined in our safety integration plan so you have not seen a cutback on those. That will be critical in terms of us realizing the safety benefits as well as the safety programs themselves.

Frederic J. Green

Randy, on the revenue side whatever is moving today, if it’s 95% of what was we anticipated to move because the economy slowed down then obviously the proportionate amount of synergies will have to be deferred somewhat but the principles of routings and longer hauls are all being migrated towards very quickly.

On the expense side of things there won’t be much impact because we didn’t count on anything in 2009. It was all about getting the systems and safety processes in place and obviously once they were in place we anticipated they would generate some benefit.

I can tell you we have had some early collateral unorganized wins in the sense that they come from fleet economies or locomotive economies where we just started to work together and all of a sudden discovered the stuff that can happen without the system that we see as prerequisite for most of the long term benefits.

Randy Cousins - BMO Capital Markets

Kathryn, final question, if you write a check for $100 million to put in your pension plan is that a tax deductible expense to you? Do you get some tax cash relief on that contribution?

Kathryn B. McQuade

We do, Randy.

Randy Cousins - BMO Capital Markets

How much? So if you put in $100 million how much tax relief do you get on a cash basis?

Kathryn B. McQuade

It should be at your incremental rat of 30%.

Randy Cousins - BMO Capital Markets

So you put in $100 million you have to put in net $70 million worth?

Kathryn B. McQuade

So all these numbers that you’ve quoted are pretax, right?

Kathryn B. McQuade

They are all pretax. They would be your straight pension contributions.

Operator

Mr. Green, there are no further questions at this time. Please continue.

Frederic J. Green

Thank you very much everybody. It’s obviously been a tough quarter, but that said the team’s done a good job to address the variable costs and to do all we can to position ourself for a good robust run at it in 2009. We’ll chat with you again the next opportunity.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your line.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!