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Canadian Pacific Railway Ltd. (NYSE:CP)

Q4 2009 Earnings Call

January 28, 2010 11:00 am ET

Executives

Janet Weiss - AVP, IR

Fred Green - President & CEO

Kathryn McQuade - EVP & CFO

Ray Foot - GVP, Sales

Brock White - SVP, Operations

Analysts

Walter Spracklin - RBC Capital Markets

Tom Wadewitz - JPMorgan

Randy Cousins - BMO

Edward Wolfe - Wolfe Research

David Newman - National Bank

Matt Troy - Citigroup

AV Delton - Macquarie Capital

Cherilyn Radbourne - Scotia Capital

Chris Ceraso - Credit Suisse

Ken Hoexter - Banc of America

Ken Hoexter - Banc of America/Merrill Lynch

Jeff Kauffman - Sterne Agee

Anja Soderstrom - Maxim Group

Benoit Poirier - Desjardins Securities

Kevin - CIBC

Operator

Good morning, my name is Michelle, and I will be your conference operator today. At this time I would like to welcome everyone to the Canadian Pacific's fourth quarter 2009 conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (Operator Instructions).

Thank you. Ms Weiss, you may begin your conference.

Janet Weiss

Thank you, Michelle. Good morning and thank you for joining us. The presenters today will be Fred Green, our President and Chief Executive Officer; Kathryn McQuade, our Executive Vice President and Chief Financial Officer; Ray Foot, our Group VP of Sales; and Brock Winter, our Senior VP of Operations. Also joining us on the call today is Brian Grassby, our VP and Controller.

The slides accompanying today’s teleconference are available on our website. 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 MD&A filed with Canadian and U.S. 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. (Operator Instructions). Here then is our President and CEO, Mr. Fred Green.

Fred Green

Good morning everyone. Canadian Pacific finished 2009 on a positive note posting adjusted EPS of $0.94, Strong operating performance and our continued focus on cost management drove the result. Looking at the quarter, we sustained our improvements in train weight and length. We continue to realize fuel efficiency gains through our train design and technology initiatives and we posted another strong quarter in train safety performance. All of these actions contributed to our solid earnings results. I'll let the team take you through the details but all in we continue to respond effectively to a difficult economic environment.

Looking at the full year, 2009 was extraordinary in the volume reductions and volatility. In some months our volumes were down as much as 25% to 30% and the team demonstrated the flexibility to manage our variable costs to these lower business levels. A particular satisfaction this year; we successfully strengthened our balance sheet by restructuring our debt maturity profile and created positive free cash by tightly managing working capital and opportunistically selling non core assets. We seamlessly integrated the DM&E and we made good progress on structural cost reduction initiatives including the consolidation of loco motor repair care facilities.

Our 2009 agenda was to maintain a disciplined approached in the market place to enhance the financial and operating flexibility of the railway and to focus on sustainable improvements. I am satisfied that we made meaningful programs. But we have more to do in 2010 and we're ready to meet any level of demand which may materialize. I'll turn it over to Kathryn, Ray and Brock to supply some additional insights on our Q4 performance and our 2010 prospects and then I'll come back and wrap up.

Kathryn McQuade

Thank you Fred and good morning everyone. Let me start with the reconciliation of our GAAP to non-GAAP earnings that we refer to as adjusted earnings. During the quarter we terminated the lease agreement with RailAmerica on Okanagan Valley Railway, OVR. Improved train efficiencies now allow us to move this service over our main line rather than using the OVR bypass. The net after-tax charge to terminate this lease was $38 million and we will now avoid approximately $15 million per year in haulage payments. Next, the Ontario Government passed a tax legislation which created a one-time reduction in our deferred income tax liability of $48 million. And finally, we resolved a prior year income tax matter with a favorable outcome of $27 million. These items net of FX on long term debt increased GAAP diluted earnings for the quarter by $0.21 per share.

Before I get into the line-by-line details I would like to walk you through the impact of an accounting change made this year. Over time we have modified the way we do locomotive overhauls from a major one stop repair every 7 years to 8 years to a more proactive process which does major repairs in sections. This process has improved both our efficiency and locomotive reliability. As a result we believe these repairs are better classified as an expense rather than capital. Therefore we have applied the accounting change as accounting policy retroactively. The accounting change results in increases in purchased services, materials, compensation and benefits, benefits with nearly offsetting reduction in depreciation expense.

Slide 7, shows the quarterly and full year impact of this change. You should note that the policy change increased total operating expenses by $5 million in the fourth quarter. We have also restated 2008 which is included in the appendix. From this point on all of our presentations will refer to 2009 and 2008 adjusted earnings after the impact of the accounting change. Also 2008 is a pro forma that has been adjusted to reflect a full year consolidation of the DM&E to assist with comparability.

Returning now to slide 8 and the income statement, Q4 continued to show the cost saving trends and efficiencies reported in the previous quarters. And despite tougher weather conditions and higher fuel prices our operating ratio matched Q3 at 76% and improved upon Q4 2008 by 120 basis points. Cost per GPM excluding fuel was an impressive $1.26 improving by almost 6% versus last year. Productivity gains and aggressive cost management continue to be a priority as we bring resources back to meet demand level changes.

Looking at the top of the slide, I will focus my comments on the percentage variances. That far right column represents our FX adjusted performance based on a stronger Canadian dollar this year versus last year. Total revenues were down 16%; while FX adjusted revenues were down 11%, reflecting lower volumes and fuel surcharge revenues. Operating expenses were down 17% with foreign exchange adjusted expenses down 12% and I will go through each of the line items in a moment.

Operating income was down 6% when you exclude the impact of FX. Interest expense and other was down $17 million, primarily due to FX. And finally, the effective tax rate came in at 22% which was well below our expected rate of 26%. The primary driver was the recording of the full year impact of the Ontario rate change, which improved fourth quarter earnings by approximately $0.05. Looking at 2010, we expect the tax rate to range from 25% to 27%. Adjusted EPS came in at $0.94, down 12% from 2008. This includes a $0.05 hit due to our foreign currency.

Now let's go through each of the expense line items starting with comp and benefit from slide 9. The average number of expense employees came in just under $13,500, slightly better than the expectation I projected on the last call. On a year-over-year basis employee counts were down 10% versus a 6% decline in work load, a great example of the productivity improvements we are sustaining. With gradually increasing demand and continuing winter conditions, I expect Q1 expense employees to be higher than the year end number by about 300 to 400 employees.

Lower volumes less overtime and improved productivity saved us $31 million while less training cost and managing invested vacation reduced expenses $16 million. Pension expense was lower by $9 million. However, looking at 2010 full year pension expenses will increase by approximately $15 million or $12.5 million per quarter as a result of the lower discount rate and a phasing in of our 2008 equity losses. This will be a substantial head win of over $0.20 a share for the year. Finally incentive compensation was up by $13 million due to a more normal bonus accrual in 2009, an increased gain share payment to union employees. Other items total $9 million with the principal driver being higher wage rate increases for our agreement work force. Including a foreign exchange benefit of $11 million comp and benefits declined by $45 million or 13%.

Moving now to slide 10 and fuel expense which was down $87 million or 36%. Lower prices save this $28 million as our all in cost were US $2.28 per gallon, down from $2.84 a year ago. Lower volumes coupled with continuing improvements in skill efficiency saved us 26 million. On a year-over-year basis, hedging provided a $9 million benefit. Looking at our hedging program, we covered approximately 7% of our full purchases in Q4 and expect to cover between 10% and 12% in 2010. We have provided some more details in the appendix. Foreign currency partially offset the gains from pricing and volumes by $25 million.

Turning to purchased services and other, Q4 was down $22 million or 11%. Less volumes accounted for $4 million and lower equipment maintenance, $2 million. Within the other category, casualty expenses were down $14 million as we lapped some very expensive incidents in 2008 and our train incident frequency continues to improve. Finally, on slide 12, materials were down $24 million with fuel locomotive overhauls and volume declined as the primary driver. Depreciation was up $3 million while equipment rents fell by $2 million.

Now summing up the full year on slide 13. Total revenues ended the year down $924 million or 18% with lower volumes and fuel prices being partially offset by gains in foreign currency.

Operating expenses were down 17% with our productivity gains, cost management initiatives, improved to fuel efficiencies and lower fuel prices driving the reduction. Operating expenses were down $228 million or 20% and our operating ratio ended the year at 79.1%, up only 70 basis points in a year we're with double digit volume declines. Our ability to reduce both variable and structural cost allowed us to offset much of the impact from the depressed economy. Finally the effective tax-rate came in at 23%, leading to an adjusted EPS of $2.67. This is down 31% from the adjusted 2008 earnings of $3.99 due in part to the equity issue in January as well as lower earnings.

Now turning to slide 14 and an update on our 2009 free cash flow and our planned capital spending of 2010 excluding the $500 million pension free payment and the early termination of the OVR lease, free cash flow ended the year at $483 million. Despite a tough economic climate that saw fall volumes fall by 17%, our core operations generated cash flow of $269 million after paying for capital expenditures and dividend of a $163 million. We supplemented our core operating results by monetizing non-core assets of $214 million. I am pleased with the focus on cash that the team accomplished in 2009. Our capital plan ended the year at $722 million, down from our previous guidance due to the accounting change for locomotive overhaul. In 2010, we expect our capital to range from $680 million to $730 million. Approximately 585 million is allocated for the renewal of our track infrastructure.

And finally, before I close on slide 15, I would like to remind everyone that beginning with the first quarter of 2010 we will convert from Canadian GAAP to U.S. GAAP. We will communicate with you in the first quarter to ensure all investors and analysts have a clear understanding of the changes that will take place. Overall the net impact on earnings will be very small but we will see some movement between line items on the various financial statements.

Summing up we come out of 2009 running a more productive efficient operation than were a year ago. We strengthened our balance sheet despite the tough economic environment and we continue to execute on both structural and variable cost initiatives. In 2010, we enter the year prepared to respond to changes in the business demand and are committed to driving further efficiencies and cost savings across our network. However, we face continued uncertainty in the economy and considerable headwinds in pension expenses and foreign currency. With that I will turn it over to Ray for the marketing section.

Ray Foot

Thank you Kathryn and good morning everyone. We will start on slide 17. In the fourth quarter volumes were up 3% over Q3. This builds on the sequential 7% increase we saw last quarter. While this is encouraging we remain well off 2008 levels and there are still uncertainties in the market place. I will talk about the prospects shortly but first I'll summarize the numbers on the quarter. As reported, freight revenue was down 16% from last year. On a currency adjusted basis this was 10%. Total car loads were down about 7%. I will now take you through an overview by market area and for clarity I'll speak the currency adjusted revenues from here on.

Grain was a good story in 2009. Overall in the quarter Grain volumes were off 2% on some pretty comps. In the U.S. stronger soybean and wheat shipments drove a volume growth of 2%. In Canada volumes tailed off in the final weeks due to whether issues in the supply chain finishing just off to 2008 pace. Moving to coal, car loads were up 16%. About half of that on export metallurgical volumes and half on the U.S. short haul thermal business. Lower Canadian rates and the short haul canvas route offset volume gains. In the sulfur and fertilizer segment, volumes were off 22%. We did see some increased spot activity on exports on the quarter that drove volumes higher then Q3 that we did not see a breakout in either the U.S. or export markets.

Moving to slide 19, in our merchandise portfolio volumes were down 5% while revenue declined 8%. Bright spots in merchandize on the quarter were the auto and energy sectors. Autos were up 8% year-over-year but we didn’t see the same lift on the revenue side due to mix. Our shorter haul traffic to the U.S. markets grew rebuilding inventory from cash for clunker sales while the longer haul import volumes softened. Energy was strong on the quarter, primarily on better LPG and Ethanol movements.

Of note, all the ethanol facilities on our U.S. franchise our now in production. Forest products in our mines and metals portfolio however remain very soft and we did not see any positive signs in these areas. On intermodal, units were down 14% and revenues were off 11%. Retail shipments continue to be sluggish. We saw a modest growth in Q4 over Q3 driven by some restocking. This led to some positive comps on West Coast imports.

Turning to price, renewals on the quarter on the majority of the book came in at just under 4%, consistent with our price strategy. Adjustments on a few large contracts particularly in coal brought the overall quarter renewal increase to about 2%. I will remind you that the Teck coal decision and the regulated grain adjustment earlier this year impacted price list on the quarter. In addition some of our industries went negative on the quarter due to the drop in fuel price year-over-year.

So, turning to slide 21, I will now give you some thoughts on 2010. Before we discuss the macro market trends or reiterate that my sales team continues to be active in the market place. Despite the weaker economy they have uncovered and landed some good new business. Moving to the market fundamentals, on grain in Canada based on the carry over of a strong 2009 crop, we are modeling the first half to be a lot like last year and the second at more normalized levels. In the U.S. corn quality is an issue and may impact first half shipments. So overall as I said in the third quarter, maintaining 2009 levels in Grain may be difficult.

That brings us to the fertilizers and coal segments. We expect growth in both areas. The question remains how much and when? On the domestic fertilizer front farmers are starting to show more willingness to buy. We've seen some early signs of the stronger spring shifting season. But how it will play out over the rest of the year remains uncertain. Export fertilizer demand will continue to be weak until Canpotex secures the deal with China. We don’t know when this will occur or the pace at which shipments will ramp up, but we continue to be ready to immediately resource to the volumes as they come online.

On Metallurgical Coal, tech has indicated an expectation for higher sales levels in 2010. We're modeling within the tonnage range they’ve given. So we expect growth in the coal and fertilizer sector but the level, timing and sustainability remain uncertain. In the merchandize business there does seem to be consensus forming around some big economic segments. U.S. auto sales forecast are settling at levels slightly higher than 2009. Our franchise is well positioned with the key manufactures and on the import lanes and is poised to the recovery when it comes. While we don’t see auto sales rebounding in a big way in 2010, stronger production will spur higher first half shipments. Second half shipments will depend on sales volumes. With regards to forest products U.S. housing starts aren’t expected to see any significant change over 2009, given unemployment stats and housing inventory levels.

On intermodal, there are some mixed signals December sales were less than expected. We do think there will be some restocking activity through the first half of 2010 which should drive some improvement in the domestic and export and import shipments. Volumes after that will depend on sales activity. So overall we're modeling slow growth, something in the GDP range in the Intermodal and Merchandize sectors.

On price we have a reliable product and my team will remain disciplined in our approach to drive value from contract renewals. We continue to target 3% to 4% looking to exceed inflation over the course of the year on the longer term. I will remind you that there are some head wins on price list in 2010, particularly in the first half. The tech export rate outcome applies through the first quarter and we can predict how price will move on this business beyond that.

The regulated grain adjustments is a 7.4% drag due to August, but remember this is largely a fuel adjustment and the fuel inclusive industries that apply on a small number of multi-year contracts will also have a downward impacts on our 2010 price list.

But I should mention that these same fuel inclusive industries could provide some price upside as we enter 2011 if fuel price settled in at today’s level. In summary there are still uncertainties as we head into 2010. We will see improvement over 2009 but we won’t reach the volume levels of 2007 or 08.

We are modeling modest growth in carloads in the first half of the year a last half remains dependent on economic recovery and the results from some key export segments. And we will lonely gain clarity on this as the year progresses.

Now I will turn it over to Brock for operations.

Brock Winter

Thanks Ray Q4 was another very strong quarter for the team; we continue to see evidence of our flexibility to adapt quickly to changes in volume. The productivity improvements we achieve during 2009 are sustainable. And when the volume recovers we will be able to handle it without adding cost at the same rate.

Total the mix of intermodal and carloads versus bulk shipments will be an important factor. Looking more specifically at our results let's start with safety on slide 23.

Our FRA train incidence frequency improved by 24% on CP and 85% on the DM&E. for the core CP operation we continue to be the industry leader in train operation safety with a year-over-year improvement of 23% setting an all time record.

This is driving significant benefits to reduce casualty cost. For the quarter our FRA personal injury frequency on the DM&E. Improve by 30% for the quarter CP operation we were up by 22% and we are not happy with that result even though it’s our best our second best annual performance in our history and we will continue to be focused on improving it in 2010.

Turning to slide 24, we saw further improvements in key productivity metrics despite a few challenges including a late Canadian and U.S. grain harvest which lead to peaking in work load, a strike at a major interline connection which impacted interchanges and slowed rail operations. And chalky West Coast pipelines in all commodities due to weather trading late and bunch vessels, add to this record rain fall cause slow loading operations for grain and coal at the Port of Vancouver.

This impacted our floating metrics particularly in December, but even with that we are able to match last year's trains speed while increasing train rates by 10% to the execution of our long train strategy, GTM’s down by 6% our focus on productivity enabled us to reduce both train starts and crew starts by 11%. Fuel efficiency improved by 6% as we continue to drive improvements with our fuel trip optimizer investment and the disciplined execution of our operating plan, we’ve established record performance this year with these action we continue to pilot our long train models and believe there is more to achieve in combination with some targeted investments. We’ve established good momentum and we will review what more can be achieved at our investor day.

Please turn to slide 25. With respect to our structural cost initiatives we are on plan, as we have told you in the past we marked all several yards and we are completing construction to expand our aloft locomotive repair shop this is allowed us to rationalize repair activity at Vancouver. On the free fare side we have completed our review of inspection frequency and identified opportunities for consolidation.

Over the coming months we will be meeting with various stake holders including regulatory agencies to review changes for increase the yard efficiencies and repair staff utilization. While continuing to maintain and improve safety.

Concurrently we have been implying lean management techniques to our core operations processes. We have been experiencing early successes which will share at our investor conference in June. Between our structural cost initiatives lean management implementation and our demonstrated ability to quickly size upper balance volumes we have tightly managed our resources to improve productivity. Please turn to slide 26.

In summary, strong cost management actions implementing quickly are leading to improved efficiency. Additionally our significant accomplishment for us in Q4 was integration of the DM&E on to our operating systems platform. Our employees continue to get more comfortable expert with the tools.

We see opportunity or even more efficiency in new products to grow our business. In 2010 we will leverage our ability to grow intermodal and carload business on existing trains starts. While at the same time delivering reliable service to our customers including first and last delivery.

We continue to demonstrate our ability to be flexible in implementing sustainable improvements. That is lowered our variable and structural costs. Safety, providing a reliable product and cost control will remain our key priorities. I look forward to reviewing our performance with you next quarter and I will now turn you over to Fred for the Wrap up.

Fred Green

Thanks Brock I will wrap up 2009 with the mixed message I am just appointed on the U.S. regulatory fronts but pleased with CPs programs. Meeting the U.S. policy environment that continues to be supportive of investment. Despite the rocky start to this effort we will continue to work with our industry counter parts to seek a fair and balanced regulatory environment. With regard to our CP 2009 performance our focus was on building more financial and operational flexibility into our railway, we group CP can be nimble and are well positioned to realize operating leverages volume to recover, particularly on the intermodal and merchandise trains.

Looking forward going to keep a reign on cost and will be ready to respond to any sustained increase in demand there's clearly some potential for volume growth particularly in the bulk business but the economic signals on the general economy remain week and volatile, looking at 2010 you can expect more the same from CP. Emphasis on cost management productivity and the realization of longer term structural savings. The focus on the balance sheet continued pursuit of new growth opportunities and valued pricing and delivery of increasingly reliable service with particular focus on the first and last month.

Thank you and I look forward to updating you as the year progress and I will turn it over to Michelle our operator for some questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will take questions from the analysts first and then we will go on to the media. There will be a brief pause while we compile the Q&A roster.

Your first question comes from Walter Spracklin your line is open.

Walter Spracklin

Thanks good morning everyone.

Fref Green

Good morning Walter

Walter Spracklin - RBC Capital Markets

My first question is going to be on operating leverage this is obviously a very schematic focus on the whole rail road industry from an investor standpoint. So when I listen to Kathryn’s presentation about some of the head wins that we are going to see in 2010, $0.20 pension expenses so on and then they try to balance that with what Brock has been talking about in terms of his leaning initiatives his structural cost savings. When we look at 2010 are this going to be offsets or they going to be is Brock going to outweigh Kathryn here on his efforts. How do we look at this from quantitative sort of measuring the impact in 2010 perhaps you can give some insight on that.

Fred Green

Walter it’s a tough question to answer because we are not going to give any EPS guidance so I think that best I can offer for you is that you have seen frankly I think a remarkable fourth quarter with the work of Brocks team and the operating leverage that we are getting on the train weights. Certainly we would expect to see some volume recovery I would again ask everybody to pay lot of attention to the type of recovery. So we believe and hope that we will see some domestic potash activity. We know over the course of time the export potash will go metallurgical coal appears to be strong for now I don’t know what the sustainability of the client will have to advise on that in due course.

Each of those of course starts training so these are as volumes increase in bulk you get train starts. On the general merchandize sector you heard from ray that the nature of that will probably be a lot more stop start inventory fill check it I would see how the business gets consumed.

So, I really want to separate the two and if it is merchandise general intermodal business recovery there is great operating leverage available to us. So we do have some headwinds as Kathryn has stated you all have to those we have done our best to give you the numbers against them. We are not giving guidance and I therefore can't do any better than just tell you that stick with us we are going to do all the right things on cost management and we will just have to ride the way of uncertainty with regard to volumes as we go forward.

Walter Spracklin - RBC Capital Markets

Okay fair enough and thanks very much, second question now I know your in negotiation Teck so I’m not going to ask anything about the Teck agreement but on a longer-term basis this is your biggest customer, coal shipments are up, coal prices are up this should be a good time for Teck, a good time for their supplier like yourself what are, regardless of what happens in this negotiation what are you going do to repair this obviously strain relationship with what is your biggest customer?

Brock Winter

Well again you can’t answer a question like that, without talking about the negotiating strategy relationship management so I am not going to do that on the call Walter but I will say is that we are a very large customer there are clients that we would like to have a better working relationship with culturally the orientation is more tactical than strategic in partnership that’s right and so we have to figure out how to accommodate that and we will do our best to position ourselves as the long-term be it tactical, or be it a longer-term partner. I can’t do anything to that other than enter in to dialogue with our partner and see if we can find a better outcome then the ones that we all experienced in the last while and we are going to do that.

Walter Spracklin - RBC Capital Markets

Okay thanks very much.

Brock Winter

You're welcome

Operator

Your next question comes from Tom Wadewitz from JPMorgan. Your line is open.

Tom Wadewitz - JPMorgan

Yeah, good morning. Fred I’ve got another one on the coal, broader coal topic for you, I think what we have seen from the Eastern U.S. rails is that weakness in coal was highlighted in the sense that coal's a very high margin business for them so it effects your margin outlook and so forth even that you had the pretty sharp reduction from the (NYSE:SOA) on your coal, is coal very different from your average margin when you look at it and is that coal coming back is that something we should really think about in terms of your margin performance in 2010.

Ray Foot

Well Tom as you guys know we would never comment on the profitability of any sector or contract I think you probably characterized it which is as a result of the SOA that the value or the earnings leverage of that particular sector as it grows is not as great as it would have been in the prior world.

So I can't really make any further comment obviously it's an important sector to us and it deals good at this point that the demand for metallurgical coal appears to be strong and I think all of our issues have to be determined whether that is a sustainable and consistent demand or whether it's going to be a lot of surges based on activity that frankly at this point of time is largely driven by China’s demand for steal not for the rest of the world at this point.

Tom Wadewitz - JPMorgan

Okay and then with respect to overall pricing I guess I know you can talk about certain pricing is around 4% and that’s good to see but if you look at you have got other areas where you don’t get pricing over pricing is down. What you think overall base Ray, looks like in 2010 is it 2% is it can it get up towards 4 or how would we look at that for 2010?

Ray Foot

Tom its Ray just as in previous quarters I don’t think we can predict what the overall outcome's going to be there is a lot of moving pieces there obviously and I talked about those in terms of the renewal as we have secured with some of the headwinds that are there. I think that we just go back to the fact that if you look at it through the course of the year the majority of our renewals came close to the 4% and our target going forward we will continue to be in that range and to cover inflation.

Tom Wadewitz - JPMorgan

Okay thanks for the time.

Ray Foot

Thanks Tom.

Operator

Your next question comes from Randy Cousins from BMO, your line is open.

Randy Cousins - BMO

When we think about the coal business and I want to belabor this but you guys have got a lot of noise in your coal number so you got thermal coal, you got this new contract the switching issues, you know there (are connect) business was 13.36 the average revenue per carload was 13.36 in fourth quarter is that a good number to use when we think about 2010 absent some sort of change in the Teck contract?

Ray Foot

Well, its Ray, Randy so first off we got to look at the thermal coal that we picked up in the U.S. and that’s certainly has an impact on the revenue per ton situation there. We don’t see a significant change on that as we look into 2010 from the stand point of Teck as Fred’s already said the negotiations coming up its going to be changing after the first quarter as I said and we can’t give you a picture as to what that might be.

Randy Cousins - BMO

But just in terms of, if we took status quo is the 13, is the Q4 arc a good number to use kind of for 2010, again we don’t know how that contract will resolve itself?

Fred Green

Randy I hesitate to give any guidance on a specific, I mean you're asking me what's the pricing on the contract or the pieces of the contract with the particular client it’s a pretty focused question, I understand the question but I just I’m really reluctant to give into that too much, there are multiple pieces of our relationship with both thermal coal and the met coal game and obviously in certain circumstance there are competitive pressures in another circumstance, you try to work to the average of the market and obviously in that sector there is a lot of pricing pressure and we'll have to figure out how to work with that.

Randy Cousins - BMO

Okay my second question is on PTC, its being mandated I don’t think your main line in the U.S. has centralize track control you do move chemicals you move Ethanol. What’s PTC going to cost CP?

Kathryn McQuade

Okay I will start then Brock can tell you for us and it is in our annual report and quarterly reports that we actually had in the third quarter we are estimating right now that over the 2015 it would cost us about $250 million.

Randy Cousins - BMO

Okay, thank you.

Operator

Your next question comes from Edward Wolfe from Wolfe Research. Your line is open.

Edward Wolfe - Wolfe Research

Hey good morning.

Unidentified Company Representative

Good morning Ed

Edward Wolfe - Wolfe Research

Can you talk a little bit about yield if we breakout the minus 9.4 reported you said too surprising can you break out the FX in fuel impact and the mix impact.

Ray Foot

So, its Ray Ed, we said 16% overall volume in FX was 7 and 6 if we look at the price in mix combination we are at about 2% there and that includes the negative impacts of the regulated grain and the Teck goal.

Edward Wolfe - Wolfe Research

Okay. If I look at that pricing going forward that 2%, how much I guess in the regulatory grain goes away as we go into 2010. Does the noise around the coal go around and is that how you get to the 3 to 4 or does the 3 to 4 include your visibility of how contracts are coming in for this year or any kind of longer-term contracts for coming up.

Ray Foot

Okay so let me just go through at those in pieces let's say I'll just restate somewhat I just said. The regulated grain pricing at negative 7.4 is in place till August the 1st. We've said that Teck is in place through the first quarter, so when you look at 2010 what we said is the reliability of our product has allowed us to achieve 4% on the majority of the renewals through 2009 our focus and our discipline going into 2010 as we are going to look to that same kind of renewal increase and so you do the combination of those in terms of what your number might be. I tried to give you some picture that there is going to be those headwinds that will continue through the first quarter in the first half but you know we will be looking for three to four consistently in our renewals.

Edward Wolfe - Wolfe Research

That’s helpful just lastly

Ray Foot

Just one more piece, you know I did mention about the index component too so keep that in mind as you go into 2010.

Edward Wolfe - Wolfe Research

Okay thank you, just last one on the cost side, you haven’t announced any specific cost savings plan going forward other than the headwinds of the pension are there any expansions that jump out of you that are right for either improvement or for inflation beyond normal that we should be thinking as we go to next 12 or 18 month?

Fred Green

Ed I wouldn’t jump to anything right now what we did do we recall I think we are back 12 or 18 months ago we said we are going to target the 100 million bucks and then we are going after the fix structural cost side. So we’ve been progressing those matters and I think as you can see on the variable cost side, we’ve done an outstanding job on the structural side, there's equal amounts of energy and effort going into that they just have longer talk time horizons. So what we are really targeting is our June Investor Day will be a day where we can sit back and take stock and give you guys a much better understanding of the emerging success and some forward looking belief of what impact that could have over multi years. So I don’t have any new news in that other than to say that the patterns that you're seeing with train lengths, train weights and management of our variable costs are [truly] and you've seeing the beginning of some of the structural cost improvements the diesel sharp rationalization. Brock made reference to some of the inspection activities and the whole organization is going through a bit of review to assess where we're at structurally, whether we have too much, too little resources in different places. So I would just ask you bear with us until we get our investor day and we'll really be able to give you a better picture on the longer term.

Edward Wolfe - Wolfe Research

That’s great. So (inaudible) is there is more to do and you've done such a great job so far on the cost side and we'll learn more in June I take it.

Operator

Your next question comes from David Newman from the National Bank. Your line is open.

David Newman - National Bank

Fred you've been somewhat more cautious I guess than so many other CEO's from the other rails as to the outlook and certainly things look like they've flat lined a little bit here. Absent coal and potash shippers and other rails have been calling for a high single digit volume growth and I know the inventory to sales continues to decline. Absent those two commodities, would you feel more comfortable about providing guidance if wasn’t for coal and potash and like how are you feeling about the others sectors and where are you a bit more [liri] and where do you feel a bit more comfortable that we're on track as far as economy and volumes go?

Fred Green

Well, David, I think you're right. Last year at this time I was probably the most negative and I think arguably the facts kind of came out consistent with that apprehension that we had at the time. Today I would find myself and I think you've done a good job. Let's fence those two big commodities because they're kind of unpredictable and when they happen, they'll happen. But on the general merchandise and the intermodal side, which is driven by consumer activities almost in both cases, entirely both cases, I think you have to look at 10% unemployment rate in United States and I think you have to look at 4 million to 5 million more houses to be foreclosed and I think you have to look at some discomfort in what is the largest trading partner that Canada has right adjacent to our borders. So despite the fact that the Canadian economy is surprisingly strong, largely driven by the resource product side which will address the coal and potash, you have to have some collateral damage in the Canadian economy in my view as a result of the biggest trading partner going through such a difficult and prolonged period. So I think there is perhaps unsupported optimism for the levels of recovery that people are hoping for and while we will be ready for that, should it materialize, we hope that we've delayed it if it does. I think that those estimates are probably a little optimistic relative to my personal expectations.

David Newman - National Bank

Okay and you have some other headwinds obviously that you're facing. Your free cash flow level that you're looking out for this year and I know you haven’t given guidance on that front, but I am assuming that things remain somewhat soft. Is there more asset sales and other things that you have to consider or what's out there and what do you need to do and are you comfortable with the balance sheet going forward if the environments stays somewhat soft.

Fred Green

I’m going to ask Kathryn to jump in a second David but as a overall broad statement, I would say that it's not about having to or not having to monetize certain non strategic assets. Clearly last year we made the decision to do that because there is nothing more important than a robust balance sheet and I think Kathryn and team did a great job in that regard. We have a portfolio of assets. We will never, willingly sell our strategic asset. But if we have non strategic and obviously within anyone's portfolio you have something like that and we think it's in our company’s best interest to strengthen the balance sheet I would absolutely entertain the possibility of monetizing more of those. I will just flip it over and Kathryn can give you a broader comment.

Kathryn McQuade

So David, just one thing. We have normalized asset sales every year of our noncore assets and we see us going back to our more normalize general trends in 2010. And in terms with the balance sheet I am very comfortable with the balance sheet. We've got more to do as we continue to focus on reducing overall indebtedness and as I have said many times we plan to pay down the $350 million in debt that’s due in May of this year, year on end and so I'm comfortable with the balance sheet. We've done a lot of good things this year. We extended maturities. We took a nice slog out of our pension obligations and so overall I think we did a lot. If the economy stays soft I think we show the core rail road can still make great cash flows as we did this year and so I'm not overall concerned with that.

David Newman - National Bank

Excellent, great answer.

Operator

Your next question comes from Matt Troy from the Citigroup. Your line is open.

Matt Troy - Citigroup

Kathryn, just a couple of questions following up on the cash flow theme. First on a CapEx, the number came in. Your outlook for 2010 closer to $700 million, a little bit lower than I would have thought. You guys were certainly conservative last year. Could you just help me with the breakout of what would be considered traditional maintenance CapEx in that number and what would be more incremental or growth CapEx and what the primary projects might be that are driving that slice of the pie?

Kathryn McQuade

Okay. So one thing I will say is that because we have the change in accounting for our locomotive over haul that will no longer be in the capital. So that’s one of the reasons that the 722, that we came in, the share was down from what we had originally said. We did the same thing. It's just a reclassification to expense. Overall what we're seeing is essentially a similar program to what we had last year. Our maintenance which also in the press release is about $585 million for the renewal of our track structure and that’s pretty in line with what our base maintenance has been and what see to a reasonable level in the foreseeable future. Again that’s going to be depended upon what [GTM's] go across the railroads. If you're not wearing your railroad out as much as you wore before your maintenance not as high. We are still committed on our DM&E and so this does include the upgrades on our DM&E property as well. So overall, the other projects, what we’ve had in the past were a lot around our West Cap projects and needed for capacity. As we've indicated, our volumes are such that we don’t see any need to add capacity to our railroad. We have good leveraging upside and so most of the other projects can be around some opportunity in areas of developing some of our growth opportunities. We continue to keep our options open and Fred has mentioned those from time to time. So we continue in that area as well as information technology projects that we will continue to move forward with. So all in all it’s a very similar program to what we had in 2009.

Fred Green

So Matt, it's Fred. I’ll just compliment that with a very short statement that, if you think about when you're trying to do opportunity projects, it often involves kind of a front end and then you go through periods. So the front end was the acquisitions of Right of Way, the acquisitions of blocks of land. We've done all of that and whether that’s in Montreal, Virginia, Edmonton, there are places where we've done that as you have over the last two or three years. We're now in a period where we're doing things like environmental permitting getting ready so that when the day comes that the economy has recovered and our clients want to grow, we're able to move very quickly. And then when that occurs, there will be that surge of capital required to actually make some of those developmental benefits. So we're at a period of time and we don’t know if it will be one or three years, four years before that is required but yeah, you are right, there is not a lot of core development capital because we don’t need it right now.

Matt Troy - Citigroup

Got it. Understand. Second question related to cash flow would just be, on the pension side, I was wondering if you could help us in terms of with the funded status as of yearend versus the year ago period. I think said that you had an actuarial evaluation to file recently. I was wondering if you could just help us, what the funded status was and given the take down, the 500 million payment, I'm just trying to get a sense of what run rate funding and expense might be in 2011-2012 now that you've taken a pretty big dent out of that pension number.

Kathryn McQuade

Okay so we have taken a good dent out of it. It kind of flows through on a more smooth in our expense line items but it will have a direct impact on our contribution. I do encourage you to look at our full disclosure that we have in our annual report and in our quarterly fillings since we are giving guidance into that regard. But our cash contributions for next year are $150 million to $200 million and for 2011 we haven’t said because there are so many variables that happened in 2011, the one thing that you have to keep in mind and what we did with the flexibility of our $500 million contribution pre-payment of our pension contribution, it allows us to apply that pre-payment on a year-by-year basis. So we actually will try to utilize that in a most efficient way to smooth our overall pension contribution, so as we get the next factorial evaluation we see what our asset returns are, we understand what are 2011 which are all those variables then we will decide how much that prepayment we will want to apply in 2011, so there's a lot of moving pieces that it really can’t go far out but the purpose of the $500 million was that then we would not have the big huge peak that would have happened without the 500 million.

Matt Troy - Citigroup

Thank you and just the funded status of your end was that in the release or has that not been filed yet.

Kathryn McQuade

We do not do our solvency, we will have our accounting deficit that is disclosed and I am not sure I have that on the tip of my papers.

Brian Grassby

Matt, this is Brain we will be releasing that with our annual report in early March just the deficit last year was just under 1 billion and just to remind you the its very sensitive discount rates and we predict our the year end discount rate for 2009 will be about a 100 basis points lower than where it was last year, so that the sensitivity on that is it drives up the deficit by about $400, $450 million on the other hand there are good healthy returns this year and so but we will be releasing that in March.

Matt Troy - Citigroup

Thank you very much.

Operator

Your next question comes from AV Delton from Macquarie Capital, your line is open.

AV Delton - Macquarie Capital

That there wouldn’t be significant up trend in volumes for Potash until Canpotex has a deal on pricing how. How quickly would we see a deal translate in to significantly higher volumes for you?

Fred Green

So AV we missed just the first little bit of the question but let me repeated it and see if I got it right. I think what you are asking was if how quickly the decision in between Canpotex and China would manifest itself in real volumes. Did I Capture correctly?

AV Delton - Macquarie Capital

That’s right.

Fred Green

Okay so, we have made some commitments to our clients both domestic potash and export potash that we will be ready. There is a little bit of price to pay for that and that we are bringing people back we are reading our organization we got a few more locomotives and we probably have to have that’s because we got some deep partnerships with these folks and it's important for us to be there when they are there.

So I would suggest you based on our dialog that the domestic be slightly different the domestic market when the sales take off and they are starting to pickup I think they are going to go reasonably quickly. In the export side I think you would more likely see or call it a month of ramp up even though we are ready to go and I think the capacity is I think there is realism that has to go on they got to get vessels lined up and they got to do other parts of supply chain. So we are ready to go we can take a surge immediately but my guess is you should not look at a normalized run rate in the first month after an announcement just because what takes to ramp up the whole supply chain, that said we really have gotten people back and we got locomotives on standby ready to go and that’s a good thing to keep those plans satisfied that we are able to meet there supply chain meaning.

AV Delton - Macquarie Capital

Now on coal just in a worst case scenario here if there is no negotiated deal with tech at what point in time would it go back to arbitration and then how long would it take for the arbitrator to arrive at the terms of the new contract?

Fred Green

AV you got me I haven’t been thinking about arbitration, I’ve been thinking about trying to settle the deal with the directly with the clients, Ray might be able to help me out a little bit here.

Ray Foot

As we’ve said where the situation that we are in today last through the first quarter so I will use that as kind of the time frame and you know arbitration changes its time frame are depended upon when ship are two as to move forward if they choose to do it and then there are set time frames within the frame work of the legislation as it relates the selection of an arbitrator decision and all of that but you know what in the first quarter is kind of the component that I would be looking at.

Operator

Your next question comes from Cherilyn Radbourne from Scotia Capital, you line is open.

Cherilyn Radbourne - Scotia Capital

Thanks very much and good morning, just wanted to ask you a question on some of your efficiencies initiatives you had outlined by basic operational initiatives that were associated with that $100 million of cost savings and in listening to your calls year-to-date it sounds like you have made quite a bit of progress in terms of running longer trains, improving some of your, maintenance activity, to what extend have you also made progress around eliminating specialty trained services and standardizing the product offering.

Brock Winter

Cherilyn, its Brock. We’ve have made great progress and me let give you an example there one of the things that we’ve done and it does tie into the bulk business as well, there were some bulk business that we are moving in unit train or solid train business they clearly that quite frankly the cycle times we are seeing were quite lengthy. Working with our clients we work with them we are able to integrate those shipments into our merchandise trains. What that allowed us to do was to get again productivity in our trains as well as get our clients business to market faster we also able to do that with the less assets in terms of cars and locomotive.

So that’s one example where again our product design team has worked very hard looking at opportunities to like that to remove what I would call who achieved specialty in services. Working with the client not doing it independently again and we had great success in a number of just like I have shared with you.

Cherilyn Radbourne - Scotia Capital

Okay and then my second question I believe mention need during the pricing section of some one time coal contract adjustments is there any further clarification you can provide in terms of why those adjustments were made in whether they did or did not relate to the tech coal contract?

Ray Foot

So Cherilyn its Ray, the comment that we made was that if you look at the fourth quarter renewals although the majority of the increases were at 4 there were a few contracts that brought it down to two in total on the quarter. And as we said in the past when we negotiate any contract all contracts are different we are looking for what’s the value equation that we can bring through the settlement that we arrive at. And I am not going to be any more specific in terms of what they were or who they for I think that as I said we are looking for value and those particular contracts were the ones that we felt we got value on it the numbers that we negotiate.

Fred Green

Cherilyn I will just add a little more color and say that you need to think about vast majority of the efforts that we were successful, they fell within kind of the bell curve and then occasional you got a few on either tail and extraordinary opportunities to get better than that target number and occasional you will end up with kind of one of two situations on the other end the negative tail, and those would either be situations where you’ve got a long-term strategic client with the great long-term asset who's going through a real tough time and we have to make a call about whether we can contribute to their I'll call it survival or their ability to go forward and we would generally do that we if thought that, A, they were a strategic client and they behave that way and that they had a great asset and that this would benefit us for many years to come if we help them in their tough times.

So that's a consensual effort to give a bit of relief in certain cases for people in really tough shape. Then there's the second part of that and that would be that there will be circumstances where competitive forces have come to bear that did not exist in the past, be the regulatory or be the commercial forces and you got a choice, you can either deal with them or not deal with them and obviously over time you deal with them.

So it's important to understand that while the critical mass is still moving to those targets, there will always be expectations and I think any industry in an company that doesn’t match the product profile of the adverts that they provide.

Cherilyn Radbourne - Scotia Capital

Okay. Thanks very much that’s all my questions.

Operator

The next question comes from Chris Ceraso from Credit Suisse, your line is open.

Chris Ceraso - Credit Suisse

Just a couple of quick ones, can you tell us what you think the increase in compensation expense will be in 2010 versus 2009 outside of what you already given vis-à-vis pension?

Kathryn McQuade

Well I think I mean we do have unionized wage rate increases of about 3% but other than that we have but other than that we have some exposure on stock base compensation so as to stock price goes up and up and down we'll have some exposure there and I think I provided an insight into a more normalized bonus that we have this year.

Chris Ceraso - Credit Suisse

But the 3% is the wage does that include health and welfares or any increase on that side.

Kathryn McQuade

Not significant, in Canada most of our work force is covered by the healthcare system up here. So we will have some exposure in the U.S. but it's not what I would call material.

Chris Ceraso - Credit Suisse

Okay and then actually speaking about U.S. exposure Fred you mentioned in your closing remarks, you are concerned about the U.S. regulatory changes, can you quantify for us your exposure there and what’s specifically about the proposed legislation you're most vary of?

Fred Green

Well you could probably repeat what you heard from every other railroad CEO on the last week it’s the frustration is that its, such a capital intensive business and you need a stable regulatory environment that has the ability to warrant taking the shareholders capital and keep reinvesting it. And the language that has been provided has I would argue two or three things that worry us, the first of which is that it is not clear and what I mean by that is that it could be interpreted very differently and that’s very scary and uncertain period for us to be in.

And then the second thing that we worry about is it a big shift to lot of that vague language then has a second risk that it could subsequently be interpreted by another regulatory body (NYSE:FCB) in this case and it kind of depends on what attitude exist in that body. So I think what you have got here is an industry that has finally started to earn its cost of capital until this deep recession and we all worry that some knee-jerk reaction will cause a radical change of that regulatory climate.

So you all know that everything from paper barriers to just work your way through the three or four major items, what we are looking for is everybody has just clarity if somebody’s going to change something we sure like it to be locked in so you know what it means and you can quantify the impact right now its day number one and second it's got a second level of interpretation to that business which would be a double whammy, and that’s just its uncomfortable and we like to see that move towards clarity and obviously clarity that’s not harmful to the industry.

Chris Ceraso - Credit Suisse

Thanks, that’s helpful. And then just lastly that you mentioned to change to U.S. GAAP will you still be reporting in Canadian dollars?

Kathryn McQuade

Yes we will.

Operator

Your next question comes from Ken Hoexter from Banc of America, your line is open.

Ken Hoexter - Banc of America/Merrill Lynch

Hi guys it's actually Scott Webber sitting in for Ken. Hi Just following up on the last question on Potash, I think someone mentioned the word surge and just wanted to try and get your macro view on ship that's down there, or when that’s down there with China and as far as Potash is concerned do you see that as something that would end abruptly or something that would happen more certainly overtime so would you expect sort of the flood gates to open or would it be kind of slowly normalizing into a consistence stream of Potash being exported.

Fred Green

You know Scott, I don’t know that I can intelligently answer the question because ahead I tried to answer that same question for last seven months, I probably would just kept giving you an evolving answer. It appears to me from a distance and I say from a distance even though we are close to the customer, they obviously have their confidentiality. My believe is that there is a lot of buying going on the stock market and as a consequence that may cause the new norm may not be the relationship that we, not we but the shippers had with in these case the Chinese. So we don’t know what is likely to look like in the future therefore we can't say it will repeat what it used to be in all of a sudden we're going to back to 9 million tons of potash.

I would anticipate over the course of time that there will be a demand for this product and I what I can predict is will it be 30 day ramp up or nine months ramp up or 90 day ramp up we just don’t know. So I do know is we are ready so if they want it we have made the commitment we put the resources at the ready and we will be there to come as fast as our customers want to go.

Ken Hoexter - Banc of America/Merrill Lynch

Okay that's helpful and then just following up on some earlier comments about some of the cost that were, that has been taken out and while its seems like the suggestion is that its mainly been variable cost thus far and you're moving into some of the more permanent type cost cutting measures. Can you comment it all on what kind of access capacity you have on the railroad right now and to what extent you could add volume today without adding back any other cost that have already come out.

Fred Green

I think probably the best way maybe clarity on the quote term permanent. The variable cost reductions is a combination of the absolute volume not being there but it's also the productivity against some variable cost so Brock and his team have done a great job on train lengths and train waits. Those are permanent benefits that we will enjoy as long as the volumes or we can figure the trains to reflect changing volumes. With regard to access capacity I won’t again stress that it depends on the type. So Brock's got the next 10,000 tons of coal the next coal train. The next 50 cars merchandize can probably be carried on the merchandize trains or the intermodal trains. So it's very important to separate the bulk from the general merchandize. In some cases Brock may even be able to as he described in one of his answers to Cherilyn that he may very well be able to take some of that bulk commodity on merchandize trains benefiting both parties. So we have an abundance of capacity obviously like everybody does, whether it's locomotive, people, cars, track capacity. We're going to leverage to the extent we can, any of the IOP that’s our trains that are scheduled first and then to the extent that there is a business case we will put on a train start as soon as that business materializes.

Ken Hoexter - Banc of America/Merrill Lynch

Great, okay.

Operator

Your next question comes from Jeff Kauffman from Sterne Agee, your line is open.

Unidentified Analyst

Hi, (inaudible) sitting in for Jeff Kauffman. I have a question about the weather impact in the quarter. In its fourth quarter earnings report your Canadian competitor alluded to the impact of the deep freeze in Western Canada on its results. Can you provide any color on what the impact was on your results in terms of higher labor, fuel and operational inefficiencies?

Fred Green

We had about a 10 or 20 day period where Brock and his team were working in -20 to -35 and it was tough. But I don’t know where I would consider it to materialize and this is kind of what we do. So to me it's just winter railroading and we got through it and I don’t know how to quantify it.

Unidentified Analyst

Okay and then just a few quick clarifications if you don’t mind. So my understanding is what you said earlier is that the pure price for 4Q was 2% overall but 4% when you exclude the impact of some of the coal contracts. Is that correct?

Ray Foot

Well, its Ray. What I said was that a combination of the price in mix on the quarter was 2%. What I talked about was that if we looked at our renewal increases on the quarter it was 4% before the two contracts that we talked about that brought us down to 2%. And as we looked into 2010 we were targeting that same 3% to 4% on our renewals going into 2010.

Unidentified Analyst

Okay so the 4% is on the renewals and 2% is the price in mix on the overall. Is that correct?

Ray Foot

That’s right. And we also talked about the index applications that came into play in the fourth quarter that would carry over into 2010.

Unidentified Analyst

Okay. Now that 2% is in the fourth quarter. That 2% is price and mix combined.

Ray Foot

That is correct.

Unidentified Analyst

Is that about a point of price, a point of mix or…

Ray Foot

Its 2% price and mix combined

Unidentified Analyst

Okay, and then regarding the outlook for the 2010 price, that 3% to 4% which said is on the renewals correct?

Ray Foot

That’s correct.

Unidentified Analyst

Does that exclude the three headwinds you mentioned, the regulated, the tech contract, the regulated grain and the fuel inclusive indices? Does is that exclude those headwinds?

Ray Foot

Yes it did. What I was trying to give you color on is that the team that’s negotiating on an ongoing basis is going to continue to sell the value of that product and seek those 3% to 4% increases on renewals but the headwinds going into 2010 are tech coal for the first quarter the regulated grain through to August 1st, and the indices carried over into 2010 from the reduced fuel component.

Unidentified Analyst

Okay so, I guess it's fair to say that we'll some yield number or some pure price number south of 3% to 4% for 2010?

Ray Foot

What we’ve said is we're going to get 4% on the majority but you have both headwinds against that. So you need to look at that.

Unidentified Analyst

Understood, okay. And then just the fuel surcharge, did you mention earlier in your comments what the change was year-on-year?

Janet Weiss

Its Janet. We’ve got quite a few people to sort of work through and you've got some pretty detailed questions and it sounds like you might have missed the beginning of the call. So why don’t you (inaudible) and we'll take care of it.

Operator

Your next question comes from Anja Soderstrom from the Maxim Group. Your line is open

Anja Soderstrom - Maxim Group

Hi, this is Anja. I'm filling in for Charles Rupinski today. I have a follow-up on the potash. You said there has been a lot of productivity in the pricing there. Is that correct?

Fred Green

I'm not sure I understood the question, Anja.

Anja Soderstrom - Maxim Group

The Potash negotiations

Fred Green

Yes

Anja Soderstrom - Maxim Group

I heard you were saying there was a lot of productivity in the pricing negotiations there? Correct?

Fred Green

No, I don’t think you heard that correctly. The potash business is under contract and the volumes will be what the volumes will be both domestically and export.

Anja Soderstrom - Maxim Group

Okay, I don’t know. I miss heard you.

Fred Green

Okay, sorry.

Operator

The next question comes from Benoit Poirier from Desjardins Securities. Your line is open.

Benoit Poirier - Desjardins Securities

Hi, this is Benoit Poirier from Desjardins Securities. First question; Kathryn, you were talking about the last termination of lease that will provide about $50 million of savings per year going forward. Where should we see the impact on the income statement?

Kathryn McQuade

That would have been in the revenue.

Benoit Poirier - Desjardins Securities

Okay

Kathryn McQuade

Yeah, with a reduction to revenue.

Benoit Poirier - Desjardins Securities

Okay reduction to revenues. Okay, excellent. And with respect to free cash flow, could you maybe provide more color about your forecast for 2010 and when you talk about the normalized level asset sales going through 2010, what would it be?

Kathryn McQuade

So we're not going to give any guidance on our 2010 earnings or cash flows but we have had on an annual basis. I believe it's about $35 million a year on normalized asset sales.

Benoit Poirier - Desjardins Securities

Okay, excellent. And maybe just a quick one if I can. How much of the price based increase is already booked right now for 2010?

Ray Foot

Benoit, its Ray. If we look at the carrying number, we're probably in the 50% range. What I'd reiterate to you is the comments that I made before which we have tailwinds in terms 3% to 4% that we've negotiated and we have those headwinds that carry into 2010 as well.

Benoit Poirier - Desjardins Securities

Yep. Clear enough.

Operator

Your final question comes from Jacob Bout from CIBC. Your line is open.

Kevin - CIBC

Hi, this is actually Kevin calling for Jacob. Can you discuss what kind of rebounds in export volumes you're seeing under Vancouver and Montreal?

Fred Green

On the container side, Kevin?

Kevin - CIBC

Yes, correct.

Fred Green

Frankly it's pretty flat. What I would relate that to is that the general consumer confidence levels, while you hear stories about it, it's not apparent to me that the retail sales, I think it was U.S. fax that came out that were not very supportive of the December numbers. I'm going to ask Ray to give you just a bit more color.

Ray Foot

Kevin its Ray, So it is a bit of a tails of two ports and a tail of quarters. So if you look at Q4 over Q3 relative to Vancouver, the volumes were up there both 15% sequentially quarter-over-quarter. But they were down a little bit compared to 2008. If you look at the port of Montréal, you haven’t seen the same kind of improved activity there. So Montreal has been harder hit, particularly across the course of the year but if you look at the activity levels in the fourth quarter.

Kevin - CIBC

Okay that’s helpful. And on the DM&E, what type of impact will the weaker U.S. thermal coal volumes have on that network?

Fred Green

So if we look at it that’s, not a very significant component of the DM&E's business and it's not really long haul traffic that they handle there. I would tell you that in the fourth quarter on the business that they had that same gas versus thermal coal replacement issue and we would expect some of that to continue into 2010, but not a very big impact.

Kevin - CIBC

Perfect. That’s all from me

Operator

That’s all the questions we have at this time. I'll turn the call back over to you.

Fred Green

Okay, well, thank you everybody. Thank you operator and look forward to talking to everybody next quarter. Bye now.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Canadian Pacific Railway Ltd. Q4 2009 Earnings Call Transcript
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