CSX Corp (CSX) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the CSX Corporation fourth quarter 2009 earnings call. As a reminder, today's call is being recorded. During this call, all participants will be in a listen-only mode.

For the opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Assistant Vice President Investor Relations for CSX Corporation.

Thank you and good morning, everyone, again. And welcome to CSX Corporation's fourth quarter 2009 earnings presentation. The presentation material that we'll be reviewing this morning, along with our quarterly financial report and our safety and service measurements, are available on our website at csx.com under the investor section. In addition following the presentation a webcast and podcast replay will be available on the website for your review. Here representing CSX this morning are Michael Ward, the Company's Chairman, President and Chief Executive Officer, David Brown, our Chief Operating Officer, Clarence Gooden, Chief Sales and Marketing Officer, and Oscar Munoz, Chief Financial Officer.

Now before we begin the formal part of our program this morning, let me remind everyone that the presentation and other statements made by the Company contain forward-looking statements and actual performance could differ materially from the results anticipated by these statements. In addition, let me also remind everyone that at the end of the presentation, we will conduct a question-and-answer session with the research analysts this morning and with over 25 analysts covering CSX today, I would ask as a courtesy to everyone to please limit your inquiries to one primary and one follow-up question. With that let me turn the present over to CSX Corporation's Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Well, thank you, David. Good morning, everyone. Last evening we reported fourth quarter earnings per share from continuing operations of $0.77, down 16% from the same period last year. The economy continued to show modest sequential improvement during the quarter. While volume was down 7% overall, in the period after Thanksgiving business levels were essentially flat with last year. Still revenues were down 13% as lower volume and fuel recoveries more than offset pricing gains of over 5% on a same-store sale basis. These gains reflect the increasing value that our transportation service brings to our customers. The big story, however, continues to be our operating leverage, as our employees once again delivered strong safety and service levels while aggressively driving productivity in a still tough economy. Turning to results for the year, 2009 represented both a challenge and an opportunity for CSX. The challenge was clearly the economy.

We faced that challenge, making fundamental improvements in our operations, driving productivity and positioning ourselves as a much stronger Company. As a result of our efforts, we achieved all-time record operating ratio of 74.7%. This was driven by our strong performances in safety, service and productivity and our continued focus on yield management. These same efforts helped us achieve the second highest operating income and earnings per share in our history. For 2010 we anticipate better overall conditions and are looking forward to the opportunity for our operations to get even better under a different set of circumstances. Before I turn the presentation over to Clarence, let me take this opportunity to once again personally thank Tony Ingram for his truly remarkable contributions that he made to our Company and the railroad industry. If results are the truest demonstration of leadership, then Tony's exceptional leadership is well proven.

There will be further testaments to Tony's leadership seen in the future success of the remarkable next generation of CSX leaders he mentored, including David Brown, our new Chief Operating Officer. We welcome David to the call today and I know that he is looking forward to sharing with you the outstanding accomplishments of our operations team in 2009 and building on this success going forward. With that, I'll turn the presentation over to Clarence.

Thank you, Michael, and good morning. In the fourth quarter of 2009 the economic impact moderated across many of the markets that we serve and we continue to see the evidence of a gradual and steady recovery. Inventory cycles are playing a significant roll in the recovery, as we have seen a slowing in the rate of inventory reductions in several markets, yet some markets, such as utility coals, still have further reductions to be made. As I will discuss later in my presentation, the macro economy, which turned positive in the third quarter of 2009, is expected to grow throughout 2010. At the same time, we continued to deliver a safe and reliable service product and we remain focused on pricing our services to reflect the value we are providing to our customers. Now let's look at the change in revenue for the prior quarters on the next slide. CSX revenue declined 13% to $2.3 billion due to the continued impact of lower fuel prices and the lower volumes. As you can see on the chart, the impact from fuel prices further reduced revenue $182 million in the quarter. This includes a negative fuel lag impact which Oscar will speak to later in the presentation.

Also revenue continued to be impacted by unfavorable volume. While volume declines moderated, they still resulted in $175 million less in year-over-year revenue. Finally, as you look further to the right side of the chart, the combined net affect of rate and mix accounted for $3 million in year-over-year revenue growth. Yet, as you look within this net $3 million impact, it is important to note that core pricing vibrancy remains strong as pricing gains of $82 million were essentially offset by a negative mix impact in the quarter of $79 million. This mix impact can be more clearly understood on the next slide, as we take a closer look at overall volume changes across the markets we serve. Total volume in the quarter was nearly 1.5 million units, down 7% below the fourth quarter of 2008. Looking at the top half of the slide, the bar show the procession of the year-over-year volume change for each of the major markets that we serve for each quarter in 2009. Looking at the green bars, which represent the fourth quarter change, you can see volume declines worsened in coal when compared to earlier in 2009.

At the same time, volume declines in merchandise moderated significantly from earlier in the year and volumes grew in intermodal and automotive during the fourth quarter. These volume changes have affected the overall mix of the markets that we serve. Looking at the bottom half of the slide, you can see how our mix of traffic has changed between the first quarter and fourth quarter. Specifically, the share of coal versus our overall book of business has declined, while the share of other markets has held steady or increased. This leads to the negative mix impact I discussed on the prior slide, as volume grew in lower revenue per unit markets like intermodal, while higher revenue per markets like coal declined. So turning to slide nine, let's look more closely at our pricing results. This slide shows that overall revenue per unit declined as continued core pricing growth was more than offset by reduced fuel surcharge revenues. The line on this chart highlights the year-over-year change in total revenue per unit, which includes the impact of price, fuel, and mix. On this basis, revenue per unit declined 7.1%.

At the same time, the bars on the chart, which represent our same-store sales price increases, were 5.3% for the quarter. Remember, that these shipments represent approximately 75% of our total traffic base. Our improvements from price continue to reflect the value we are providing to our customers, as well as the relative value of rail transportation. Despite the impact of significantly higher fuel costs, rail customers are still paying roughly half of what they paid prior to deregulation. Looking forward, in 2010 we expect price increases in the range of 4% to 5%. At this point, we have approximately 75% of our price negotiated, which is normal for this point in the year, and we have a good line of sight on the price environment for the remaining 25%. Longer term, we still expect price increases to exceed rail inflation on a sustainable basis. And now let's look at each of the major markets that we serve, starting with coal. Coal had fourth quarter revenue of $641 million, down 24% versus 2008, driven by a 23% decline in volume and 3% lower revenue per unit.

Lower domestic demand resulted from reduced electrical generation, high stockpiles, and declines in metallurgical coal, coke and iron ore due to weaker steel production. Volume also declined on weakness in global demand for exports and an especially tough comparison from 2008, when worldwide coal supply was extremely tight. Finally, natural gas availability remains at high levels and prices remained relatively low, leading utilities to continue their shift of some electrical production away from coal and to natural gas. Looking forward, unfavorable coal volumes are expected to continue, influenced by several drivers. On the positive side, the export market is showing signs of substantial strengthening and natural gas substitution has eased as gas prices have risen, but substitution may again be a factor should prices drop. On the negative side the primary drives will continue to be the week domestic demand and coal inventory levels. Turning to the next slide, let's again take a closer look at coal inventories and their implications on coal moving forward.

As we look at the Eastern utility market, the goal line in the lower portion of the chart, labeled "Coal consumption" represents tons of inventory consumed each month in the eastern US power sector. The dark blue line in the upper portion of the chart labeled "Coal inventories", represents tons of inventory at utilities in the Eastern United States. As you can see stockpile inventories are still at high levels and significantly greater than the monthly rate of consumption. Also on this chart we have tried to depict a range for typical stockpile levels, as represented by the green shaded area and line, although typical levels vary by utility, coal price, seasonal, and other factors, a rule of thumb that we have used here represents a ten year historical monthly average for coal consumption. When coal inventories have exceeded this range a correction period has usually followed. As a result, we expect demand for utility coal shipments to remain weak until stockpiles return to these historical levels and until coal consumption increases. Reductions are projected to more than offset moderate improvements in electricity demand.

In our opinion this weakness in utility coal should persist for most of 2010. Turning to the next slide, let's review the results in merchandise. Merchandise had fourth quarter revenue of over $1.1 billion, down 10% versus 2008, driven by a 5% decline in volume and 5% lower revenue per unit. We experienced the largest volume declines in forest products, in emerging markets and food and consumer, where continued housing and construction weakness led to lower volumes. Metals also experienced volume declines, as steel production weakness continued. Yet we experienced strength in the areas of phosphate and agricultural products due to domestic inventory replenishment, strong demands for exports and growth in ethanol consumption. Once again the unfavorable year-over-year change in revenue per unit was driven by declines in fuel recovery. Looking forward to the first quarter, the ongoing economic recover is expected to result in moderate growth across markets led primarily by growth in phosphates and metals. Turning to the next slide, automotive had a fourth quarter revenue of $176 million, down 3% versus 2008, driven by a 3% increase in volume and 6% lower revenue per unit.

The increase in volume was driven by both inventory replenishment resulting from the sales during the third quarter related to the government's cash for clunker stimulus and by slightly improved vehicle sales during the quarter. The unfavorable revenue per unit change was driven by year-over-year declines in fuel recovery. As we look forward volume levels are expected to improve due to more normalized inventory replenishment and double-digit increases in light vehicle production. At the same time we continue to work closely with our customers to adapt to the many production changes that are taking place. And now turning to our intermodal results. Intermodal had a fourth quarter revenue of $340 million, up 2% versus 2008, driven by a 5% increase in volume, which was offset by a 3% decline in revenue per unit. Overall, revenue per unit was down in the quarter on decreased fuel recovery and the impacts of a very competitive truck pricing environment.

While the international market continues to feel the affect of the global economy, volumes improved sequentially due to a slight fall peak in advance of the holiday season. Domestic volumes were up due to continued over the road conversions, expanded service offerings, and an uptick from the peak shipping season. As we look forward, we expect favorable year-over-year international revenue reflecting stabilizing consumer demand, improving global trade and easier prior-year comparables. On the domestic side we expect volumes to moderate on a year-over-year basis, as well as continued pricing pressure from over the road truck competition due to the abundant truck capacity. Now looking ahead. The macroeconomic recovery, which began in late 2009, is expected to continue throughout 2010 as reflected in the gross domestic product and industrial production forecast shown in the chart. These forecasts project the macro and industrial economies to grow between 2% and 4%. As a result, line haul revenue growth is expected across most markets with the exception of coal, where we still face headwinds for much of 2010.

In closing, let me reiterate that we continue to deliver reliable service and to sell the value of rail transportation, especially as shippers look for the most cost effective and environmentally friendly business solutions. As a result we continue to expect core pricing to increase above rail inflation on a long-term and sustainable basis. Thank you very much, and now let me turn the presentation over to David to review our operating results.

Thank you, Clarence, and good morning. It's great be here to talk about 2009 performance, the strength of our team, and our ability to handle future growth safely and efficiently. The operating team finished 2009 with another strong quarter. Our employees delivered another quarter of improvement in safety, with a record performance in personal injury frequency. The actions we took to control cost, adjust resource levels, and drive productivity contributed to record operating margins in a difficult environment. At the same time we maintained high levels of service reliability for our customers. We remained committed to executing the plan and the network continues to run well with fewer resources. Now let's look at some of the details. Slide 18 shows the significant improvement in both personal injury and train accident frequency we delivered over the last four years. The FRA personal injury rate improved nearly 17% to 0.99 in the fourth quarter. This is record quarterly performance.

Most importantly, 27 fewer employees were injured on the job compared to prior year. The full year 2009 injury rate of 1.19 represents another CSX record. The fourth quarter train accident rate improved by 5% to 2.65 compared to last year. The full-year rate also improved by 5% to 2.77. These results continue the compelling story here at CSX. Our strong safety performance is the direct result of effective leadership and sustained effort by all of our employees. I thank them for their continued resolve and while the results are very positive, we are committed to continuous improvement. We will make a safe environment even safer for all stakeholders, our employees, our customers, and the public. Let's turn to productivity and cost management. This chart shows the change in carload volume and road crew starts versus 2008. You can see that through the first three quarters of 2009, the changes in volume and road crew starts generally move together, as we work to align our train network to lower business levels. In the fourth quarter, the two lines separate.

Volume increased 2% sequentially and year-over-year comparisons eased. At the same time we held the train network stable and handled the growth in existing train service. As a result, road crew starts were down 16% in the fourth quarter, with volume down only 7% compared to prior year. This results in increased train productivity and creates operating leverage. Turning to the next slide. As you can see the number of active T&E employees and locomotives are down sharply compared to prior year. As I illustrated on the last slide, we actively manage the size of our train network through 2009. This more streamlined network requires fewer resources. The number of active employees was 15% lower in the quarter, while the active locomotive fleet was 16% smaller. You can see that resource levels remain stable in Q4, even as volume grew sequentially. Looking forward, as volume continues to grow we will manage our resource levels to meet the needs of our customers.

That said, we will not be adding back resources on a one for one basis. Now let's look at service performance on slide 21. As we aggressively lowered cost and increased productivity in 2009, we continued to execute the plan and protect service reliability. While train originations declined to 79% for the quarter, they remained at historically high levels. At the same time, train arrivals improved to 79% in the quarter, matching originations. This improvement was aided by an increase in velocity, which as you can see on the right side of the chart improved to 22 mile per hour. Trains were getting across the line of road faster, arriving on time more frequently, and making their connections. Average terminal dwell increased to 24.3 hours in the quarter and remained stable across 2009. Terminal dwell is largely a function of the train plan. As the scheduled train network was adjusted lower, planned well increased. With fewer scheduled trains, cars have fewer opportunities to make connections and depart terminals.

Given the current surplus of rail cars, we are making the appropriate tradeoff between dwell and the size of our train network. Over all the network is running well and remains stable and fluid. Turning to the next slide. As we entered 2009 we faced an extremely challenging business environment. The operating team responded decisively to sharp volume declines and helped deliver a record operating ratio of 74.7%. Looking forward the challenge will be somewhat different. As the economy recovers and our volumes grow, we will handle growth more productively and push incremental revenues to the bottom-line. Although the challenge is different, we will employ some similar approaches to improving financial performance. We will use our one-plan processes to adjust our scheduled train network to business conditions and build productivity gains into our operating plan. Resources will be closely managed and added back only when necessary. Growth gives us a clear opportunity to increase productivity and capture operating leverage.

Finally, our structured productivity initiatives will continue to help offset inflation. Moving to the next slide. The table on the left summarizes the significant number of resources that are idle as we begin 2010. While this is not an ideal situation, it does position us to respond quickly to growing demand. We currently have nearly 1900 train and engineer employees furloughed and most are ready to return to work within a few weeks. We will be calling furloughed employees back to work as ongoing attrition reduces the active work force. Further, we anticipate hiring new employees at specific locations towards the end of 2010 to meet demand in the summer of 2011. Finally, there are currently 564 serviceable locomotives and over 23,000 freight cars in storage. These assets can return to service quickly to meet demand. As I stated earlier, we will continue to take a disciplined approach and activate available resources only when necessary.

Let's wrap up on the final slide. In summary, we delivered record safety performance in 2009 and will remain a leader in one of America's safest industries. We will continue to drive productivity, control costs, and manage resource levels as business conditions improve. The network is running well and we remain focused on meeting the needs of our customers with consistent reliable service. Our motto of leadership, discipline, and execution delivered results in a very challenging year. This same model will deliver results as the economy, our customers and our volumes recover and grow. Now let me turn the presentation over to Oscar to review the financials.

Thank you, Mr. Brown. Well, let me start with an overview of the quarter's result. I'm starting at the top of slide 26. Revenue fell 13% to $2.3 billion. The key drivers were a 7% decline in volume and the cycling of significant prior-year fuel-like benefit. Expenses declined 12% to $1.7 billion. About a third of this change was due to lower fuel expense, with the remainder being driven by continued productivity and cost-management initiatives. Operating income declined 16% to $583 million, as our continued cost discipline helped partially offset revenue losses. As we move below the line, one thing to note is that the $155 million of income tax expense in the fourth quarter included a $15, 1-5, million benefit primarily related to a change in the apportionment of state taxes. All in we finished the quarter with EPS from continuing operations of $0.77, also a 16% decline versus last year, which in summary reflects the lower volume, solid pricing, continued productivity, as well as a fuel-like impact, which we will look in more detail on the next slide.

As we have discussed in prior quarters, the lag in our fuel surcharge program produces a favorable earnings impact in times of falling fuel prices and a headwind in periods of rising prices. Looking at the left side of this slide 27, you can see that fuel prices declined rapidly in the fourth quarter of 2008, resulting in approximately $150 million of fuel lag timing benefit. Beginning in the second quarter of 2009, fuel prices began to recover, resulting in a fuel-like headwind for much of last year, including a $12 million unfavorable impact in this fourth quarter. Using the forward curve, the lag impact is expected to continue to moderate in the first quarter of 2010, as the projected change in fuel price should result in a neutral to slightly negative impact. Now if I could return to the fourth quarter for a moment, it is important to note the $162 million year-over-year headwind was a key driver behind our operating income decline of only $109 million. Said differently, absent the lag impact in the quarter, we would have experienced positive year-over-year operating income growth. So that concludes my high level remarks for the quarter.

Now let's look at the expenses in more detail and we'll start with labor on slide 28. Labor costs decreased 9% or $63 million from last year. The majority of this variance is driven by labor reduction savings of $103 million, reflecting lower overtime hours and a decrease in headcount that David Brown discussed earlier. Looking at the chart on the left, average headcount for the quarter declined by nearly 4,000 people, or 12%, reflecting our continued necessary focus on our adjusting our work force to current business levels. Now these gains were partially offset by the unfavorable impacts of inflation, which increased expenses $18 million, and in addition to several smaller items totaling $22 million, but tended to be more unique to the quarter. Looking forward, we will continue to aggressively monitor our staffing needs in relation to business levels. Now that said, CSX and the industry as a whole will face significant inflationary pressures in 2010 related to rising health and welfare costs and union wage increases that are expected to add around $40 million in additional expense per quarter for our Company.

And it also underscores the importance of controlling our volume-related costs and generating the operating leverage that David Brown mentioned earlier. Now let's continue our expense review on the next slide, 29. MS&O expense declined 19% or $105 million versus last year. Consistent with my comments last quarter on this line item being roughly 50% volume variable, we were able to realize $47 million in volume-related savings in areas such as locomotive and freight car repair and intermodal terminal expense. Next, and as a reminder, our casualty reserves, which include both personal injuries as well as occupational injuries, are regularly reviewed every second and fourth quarter by management and independent experts. A decrease in the number of occupational injury claims was the primary driver of this quarter's net $25 million favorable casualty reserve adjustments. Now if we keep moving down the slide, a reduction in our bad debt expense yielded a $10 million benefit in the quarter due to improved collections and a stabilizing economic environment.

Finally, the remaining $23 million variance represents a collection of several smaller items, including the $7 million ongoing benefit from the casualty reserve reductions taken in the second and fourth quarters of this year. Now let's move on to fuel on the next slide. Total fuel costs declined $81 million or 24% versus last year. Looking at the table to the right, the decrease in volume accounted for $31 million of fuel expense savings. Fuel price continued to drive results, although the impact is moderated versus the trend seen earlier in the year. For the fourth quarter, CSX average cost per gallon fell 9% or $0.19, yielding $20 million of favorability. Fuel efficiency, as measured by gallons per thousand gross ton miles, drove $17 million of year-over-year savings due to a 6% improvement, as can be seen on the chart on the left. Finally, the remaining variance was due to a $13 million decrease in non-locomotive fuel expense, primarily driven by lower fuel prices. Moving to the next slide, let's review the remaining expenses.

All other expenses collectively increased 1% or $4 million versus last year. This variance was primarily driven by higher inland transportation expense of $13 million due to a significant increase in off-core intermodal volume. Those costs were partially offset by lower rents, which decreased $8 million led by cost savings associated with improved asset utilization and the decline in volume. Depreciation was also slightly favorable, as the net increase in our asset base was more than offset by lower depreciation rates from life studies completed in this fourth quarter of 2009. Now that we have reviewed our expense line items in detail, I would like to update you once again on our cost reduction scorecard as we move to slide 32. Although the economy is strengthening, it is still critically important that we continue to manage our cost in response to changing volume levels. As we have discussed, we will not bring back resources on a one for one basis and we will continue to be transparent with our performance as volume builds. With that, let's review the results within each cost category on the right-hand side of the chart.

First, we were able to realize a 15% reduction in short-term variable expenses versus last year, significantly exceeding our volume decline of 7%. Next, our long-term variable expenses, where operating leverage is most evident, declined 16%, driven primarily by the reduction in headcount and overtime in our terminals and scheduled network. Finally, our fixed and indirect expenses decreased 9%, aided by the favorable casualty reserve adjustment I mentioned earlier. So finishing out the slide, collectively we were able to reduce our expenses by 12% and when normalizing for the impact of fuel price, total operating expenses declined 11% on the quarter. Now I would like to put this quarter's performance in a broader perspective with our previous results over the course of the year. This chart on slide 33 depicts the sequential view of the cost reductions produced during each quarter of 2009. For the purpose of simplicity, we have combined the short-term and long-term variable expenses into one variable cost bar.

The darker bars on the chart represent fixed cost and our variable and total cost adjusted for fuel price changes, while the lighter shaded portion of the blue and gray bars show the unadjusted variable and total costs. As seen on the chart, we have made consistent improvements each quarter towards our goal of variablizing as much of our cost structure as possible. In the fourth quarter, even more so than the third, success is again evident in the fact that cost savings have exceeded volume declines in all our cost categories, even after adjusting for declines in fuel prices. This performance has been accomplished through quick and decisive actions taken to adjust all our key resources to changes in volume. Looking forward, we will begin to cycle some of the initiatives put in place during 2009, but we remain committed to controlling cost and achieving operating leverage as volume continues to return. This concludes our review of the quarter. Now let's turn to slide 34 and quickly review our performance on a full-year basis.

Our safety and productivity initiatives, coupled with strong service and continued committment to inflation-plus pricing, has resulted in solid 2009 earnings. On the right side of the chart you can see that both operating income and EPS from continuing operations experienced double-digit declines versus 2008. However, these results still represent the second-best performance for these measures in our Company's history and were achieved despite a 15% year-over-year volume decline. Additionally, as Michael discussed earlier, our full-year operating ratio was an all time record of 74.7, a year-over-year improvement of 70 basis points. Going forward the actions taken to achieve these results position us well for continued success in 2010 and beyond. Move to the next slide, let's review our free cash flow performance. Solid 2009 earnings also produced significant positive free cash flow of $670 million for the year.

While down from 2008 levels, free cash generation supported a $250 million contribution to strengthen our pension plan and allowed us to maintain the strong level of investment of $1.6 billion, which will benefit customers and investors in the near and long-term. Our continued ability to generate cash also supports our investment grade bond rating and strong levels of liquidity. As we have discussed in the past, we remain committed to deploying capital in a balanced manner for our shareholders. That balance begins with investments in the business. Now let's take a look at our 2010 capital budget on slide 36. Barring regulatory changes that reduce our earning potential and force us to reduce capital spending, we are expecting to invest $1.7 billion in our network for the upcoming year. On the chart on the left, you can see that the bulk of our capital spending will be used to maintain our infrastructure base, helping to ensure our network runs fluid. Roughly 10% of our spending this year will be strategic in nature and will be driven mainly by our national gateway initiative, a project that will connect mid-Atlantic ports with mid-western markets.

We will also continue to invest on our equipment base this year in an effort to maintain capacity by offsetting asset retirements, while at the same time driving productivity gains through newer and more efficient equipment. Finally, regulatory requirements will account for a full 12% of our 2010 capital spending. This represents various regulatory-driven projects, including $170 million for positive train control, an unfunded mandate that must be operational by the end of 2015. Our estimates adjust the total cost of PTC implementation will exceed $750 million for CSX and will drive a substantial multi-billion dollar expenditure for the industry as a whole. It is important to note that as this regulatory spending ramps up, it will continue to displace other important capital projects. Now let me wrap up on slide 37. Looking ahead to 2010, we will maintain our focus on running a great business. The drivers of our success in 2009 are in place and will continue to produce positive results.

Now as we've discussed, we do expect utility coal, one of our more profitable segments, to be a headwind for most of this year. As the same time we project steady growth in our other commodities. While this mix change will put pressure on margins, we will remain focused on mitigating part of this impact through two main drivers. First, by maintaining our strong service product, our sales and marketing team will be able to capitalize on a pricing environment that continues to reflect the favorable value of rail transportation. And secondly, by being even more productive we will generate operating leverage as volume builds. Selectively our sustained improvements in safety, our ability to manage with an appropriate level of resources, and the superior value we provide to our customers underlie the strength in our earnings and margins. Our actions have allowed us to emerge from the recent recession as an even stronger Company and will now allow us to leverage the benefits of an improving economy. With that let me turn the presentation back to Michael for his remarks.

Well, thank you, Oscar. Once again, CSX has demonstrated its operating ability, withstanding the worst economic period of our time, while further improving the fundamentals of our business. We are emerging from this recession as a stronger Company and ready for growth. At the same time, we're making substantial investments in America's rail system. Rail investments that mean infrastructure, traffic relief, environmental improvements, and jobs. At this critical time, we're pleased to see that the Federal government affirms the fundamental importance of freight railroads to the US economy. The Federal Railroad Administration's October 2009 preliminary national rail plan acknowledges that freight railroads, unlike all other modes of transportation, must pay their own way. The report also acknowledged that railroads have a responsibility to generate income for their shareholders. These words are absolutely true, but we need Congress to make policy that is consistent with that reality.

Today we're concerned about actual and threatened Federal regulations and mandates that will, without a doubt, cut investment in critical freight rail systems. As Oscar mentioned, $200 million of our capital expenditures in 2010 will be diverted from other worthy capital improvements in order to meet unfunded Federal mandates, including the implementation of positive train control. We will comply with the PTC mandate and are committed to its implementation. At the same time, we see other substantial Federal demands on the horizon, which could impact the financial health of the industry and will discourage rail investment. The Senate's current version of the STB reauthorization bill is not balanced. It contains dramatic and negative changes in laws that were designed to allow freight rail to be sustained. The bill, as currently written, fundamentally changes the government's approach to freight rail access and pricing by adding requirements and increasing government involvement in the day-to-day operation of trains. That is a recipe for real problems and many requirements are not yet fully defined.

Let me be clear, we will continue to work diligently with the Senate staff to forge an balanced regulatory approach, but as the bill is written today, we have serious concerns. The rails have a mission, to bring real benefit to customers, the environment, the public and our investors. The proposed legislation would sharply undercut our ability to achieve those missions. CSX is going to remain engaged in ensuring that the value of rail success will be reflected in Congressional policy. Now absent potential longer-term headwinds that could be created by government policy, 2010 is a year of opportunity for CSX. It's what we have been preparing for over the past several months. I said -- as I said before, we are a stronger Company today, our 30,000 employees will respond to the opportunities of a better economic environment with the same rigor and innovation they used to overcome the challenges of 2009. So with that, we would be delighted to take your questions. Operator ?

(Operator Instructions) Our first question comes from Tom Wadewitz of JPMC.

Yes, good morning.

Good morning, Tom.

I wanted to see if you could give a few further comments in terms of the price in fourth quarter and the outlook. I think your same-store price metric -- I want to understand what the mix affect of coal is. You highlighted nicely, that coal volumes were a lot worse relative to total volumes. Does that flow through and have some kind of an impact to your same-store price metric, where it would push that number down and explain somewhat why that was 5.3 versus, I think, 6.3 in the third quarter.

Tom, this is Clarence Gooden. The answer to that is yes. As you know the same-store sales price increases measure both same origan, same designation, same commodity type, and same car type. So as that coal volume declined, it impacted how much of the price, same-store sales price increases that we got.

Okay. And in terms of your 2010 comments, I -- my own view is 4% to 5% sounds like a pretty good number for your same-store price target. That's better than what I have modeled, but at the same time, I guess, if you look at the 5% to 6% target you had versus 2009, it does imply a point of deceleration. Can you give us any comments in terms of why you think that 4% to 5% number is somewhat lower versus the 2009 target that you had?

Tom, there's a couple of factors there. Number one, as we mentioned in the presentation, we have got 75% of our contracts, give or take, already negotiated and we have about 25% left to go. We have got a pretty good line of sight on that. Number two factor in that is, is that we have virtually no legacy contracts now coming up for renewal. And the third factor is, is that some of these contracts now we have touched three, four, five times since the 2004 pricing vibrancy in the rail industry came in and it's difficult to continue to get some of those rate increases that we have. And the final factor is we're in an economic downturn now and capacity is readily available in multiple modes competing with us, so capacity is the enemy of price.

Right. Okay. Great. Thank you for the comments, Clarence, I appreciate it.

Thank you.

The next question comes from the William Greene of Morgan Stanley.

Yes, good morning. Clarence, just one quick follow-up on those comments. Does the same-store sales matric that you guys report include an assumption about escalators or [ARCAF] or something like that in the 2010 4% to 5%?

Yes, it does.

What assumption can you use for escalation? Do you know what that inflation looks like now?

For 2010?

Yes. Yes.

I think it's 3% that we have got in there for 2010 on rail inflation.

Okay. Clarence, if you look at the comments that you made on intermodal, you mentioned that there's competitive truck pricing in intermodal, but you're still seeing conversion in the domestic market to intermodal. So how do we reconcile that? If you're trying to get price higher, if you are trying to be disciplined on price, but yet you are competing with truck and winning business? I don't understand how those two reconcile?

A couple of our truckload partners that are fairly large truck lines are in a significant conversion from over the road to highway pricing, if you will, to intermodal services that is the single biggest driver of it.

So you are not cutting price to win that business, that's a decision made by your partners.

That's correct.

Okay. And then just one quick last one, this is a little bit of nip, but, Oscar, if you look at the other rail revenue it dropped quite a bit in the fourth quarter. It hadn't for the other quarters in the year and I don't know if that's the right run rate of roughly $51 million to use as we think about 2010?

No, Bill, I would go back to sort of the average you have seen over the last few quarters, I think it's roughly 60. I would use that going forward. That line item includes both the subsidiary rail revenue, which has been declining with volume obviously, and a host of ancillary items and there were some minor adjustments to those in this quarter and cycling of prior year, so it was more unique to the quarter. I would go back to the average for your modeling purpose.

Okay. Thanks for the help.

The next question comes from Edward Wolfe of Wolfe Research.

Hi, good morning.

Good morning, Ed.

Sorry to beat this into a dead horse, but, Clarence, when you look at the same-store pricing go from 6.3 in third quarter to 5.3 in fourth quarter, can you talk specifically about that point? Directionally that point sequentially that thing's decelerated by, how much of that is a legacy contract that grandfathered? How much of that is coal? How much of that is the environment and slowdown? All of the points that you made that we're seeing in the marketplace?

Ed, I don't think I can give you the specifics as down to the 10th of a point in there, but there was two factors that were predominantly driving it. One that was not. The one that was not was there was very little -- I don't think there was any legacy pricing at all involved in that. Number two was, is that coal drove a large portion of that number. And number three is, is that we started to see as we moved towards the end of the year there, a more competitive price structure, frankly, in the marketplace due to the capacities that we mentioned in the multiple modes, both barge and truck and other rail competition.

Okay, thank you, Clarence. On the intermodal side. The domestic intermodal if you look at volume, pricing, profitability all improved quite a bit. You mentioned that there was a good peak season. How much of this do you think is sustainable and how much of this was just very seasonal and a push? And as part of that is some of the benefit you saw the result of Pacers wholesale business going away and CSX grabbing some of that with their legacy wholesale business?

I'll answer those in reverse order. Virtually no impact at all from the Pacer line of business. Secondly, on the profitability side of it, as the volume picked up, we didn't put on additional train starts, therefore the actual revenue per train start went up and that influenced the operating ratio that was in there significantly. We saw some price increase eastbound off the west coast with the transloading and the lack of box availability on the west coast during the fall peak season. And as we go forward, of course, the first quarter of 2010 will be sequentially worse in terms of operating ratio, because it's a seasonal number, seasonal affect.

But the year-over-year in first quarter relative to year-over-year in fourth quarter, and then I'll let someone else have it, should these trends of year-over-year improvement continue?

We think our profitability will continue to improve in intermodal, yes.

Okay. Thanks for the time.

The next comes from Ken Hoexter, Merrill Lynch.

Great, good morning. Just looking at the contrast of the rail operating ratio deterioration versus the intermodal improvement. How do you plan on adjusting the network? In other words, what should we see in terms of velocity and cost as the mix changes go forward?

Ken, it's Oscar. Ask that question again.

Well, just as the mix continues to change, so as you get more intermodal and auto business and coal stays down throughout 2010, as Clarence talked about, I'm just wondering how should we see that impact on the velocity and cost going forward? So obviously we will see the velocity numbers each week, I just want to see what we should expect as those volumes come back? And then what kind of things, impacts we should see on a cost structure? Obviously we're seeing the operating ratio at the rail decline now because of the mix change. Just want to see what your thoughts are going forward on that.

Ken, this is David -- David Brown. I guess what we see is as we bring more intermodal volume on, we probably have the greatest amount of capacity to bring into our existing train network without additional train starts. So we see a pretty good upside in terms of growth without additional costs. And relative to say, like our unit train network where coal is a train load on, a train load off type change in volume, so we think it's favorable as intermodal grows.

And Ken, this is Michael. When the operating ratio on the rail side, don't forget that fuel surcharge lag made a significant impact on what that operating ratio was between the two quarters. So it was both the mix of traffic, but also the [lag] of fuel surcharges year-over-year.

And then on the velocity or operating side.

Velocity-wise, again, continuing to operate the network relatively flat in terms of train starts we -- our initiatives around velocity we believe are sustainable. They are not just related to volume and we believe strongly that we'll sustain the gains we have made in velocity and continue to improve that.

Okay. Great. And then if I can on a follow-up, on the coal side, Clarence, maybe you could talk a bit about what you're seeing now with, obviously, with these extreme cold temperatures that we just went through, are you seeing any production cuts from the coal producers? Just wondering how quickly we could continue to see some maybe rebound in some of the utility demand that could maybe fix some of that extra inventory supply.

Well, yes, if I understood you correctly, you asked two questions. One was the producer, if we had any impact on producers from cold weather. and the other was on the demand side of it, did we see the stockpiles decline? Is that correct?

Yes.

On the producer side, there for about a two or three week period when it was extremely cold in the central and northern Appalachian coal fields, particularly in the surface mining, we did see impacts from -- on the production level, both from the inability of the producers to mine the coal, as well as once the coal got into the cars, even being weather treated, we had frozen coal. So that impacted us for a very short period of time. On the consumption side of the house, as you saw in some of the slides that we showed, the inventories are extremely high for this time of the year, number one. Number two is, is that with demand itself being down on the industrial side and the commercial side of the house, we're not seeing the electrical generation we would like to see. And although we have had extreme cold weather in the east, it really impacts us mostly south of the Ohio River, where we have electric heat pumps and all as opposed to north of the Ohio River. So we really so far have not seen any impact on the coal inventories at the utilities.

Thanks for the time.

The next question comes from Matt Troy of Citigroup.

Yes, thanks. Oscar, a question for you. You ended the year with more cash than I think I can recall CSX ever having. This morning you talked about balanced approach to capital deployment. There are a couple of variables this year that may not be as prominent in past years, things like pension, PTC. Could you just talk about the dashboard or metrics you use when you think about deploying that $1 billion-plus in cash in terms of prioritization. And if we think about the economy stabilizing, how much cash do you need to run with on the balance sheet at any given time.

Thank you, Troy -- Matt. I think, as we've said before, we do follow this balanced deployment. And that probably the general priority that we do is obviously first and foremost reinvesting in the business, the second being the dividend policy that we've established, and then, of course. the repurchase of shares. I agree with you that the economy has stabilized and is slightly improving and I think what we've said historically is we will monitor that situation very closely and make our decisions based upon that. And as far as your last question with regards to how much cash we need, I don't think we have been public necessarily about that, but I would tell you, obviously, that it is probably significantly less than what we are today.

Okay. Thank you for that. And then one question for Michael as my follow-up. You talked before rather frankly, which I appreciate, about some of your concerns with the STB Reauthorization Act. I was wondering if you could perhaps just take us a step further into your mindset as you look at what has been proposed. Is there a short list of one, two, or three items which have you kind of scratching your heads or which give you fit, or is it really more broadly the mentality change? As we watch this work its way through the Congress, what are the, let's call it, the short list of items that the rail industry has, from your prospective, sees as problematic as proposed?

Well, Matt, there is a lot of elements of that bill that we find to be not so attractive. I guess the -- maybe the major ones would be the impact potentially on our revenue, which obviously would impact our ability to invest for the future with some of the provisions. Secondly, the increase in the day-to-day operational involvement of the STB around service levels and those sorts of things. And then finally, we still have not seen any language on an anti trust basis, which clearly could be troublesome with dual regulatory environment of both STB and DOJ and state's attorneys generals, potentially. So those three would be primary, but there are other concerns we have as well. And as I said, we continue to try to work with the Senate. They have to come up with something balanced, but what's there now is not balanced.

All right, thank you. Michael, I'll stick to the two question form. Thanks for the time.

The next question comes there Chris Ceraso of Credit Suisse.

Thanks, good morning. Maybe just as a follow-up to that, Michael, do you have a ballpark estimate of what you think, as written, the restraint on your pricing or your revenue growth might be?

I don't think that's really possible at this time, because if you think about it many of the aspects of this they refer to the Service Transportation Board for their rule-making audit. Until we get some better specificity from them, I think it's really difficult to gauge that, but clearly it will have a negative impact on revenues as written. The question is how negative would that be? And again, we are concerned that it is going to restrict our ability to give the returns to shareholders and invest for our infrastructure for the future of our Company and country. So a lot of it be in the details as the STB eventually gets these things, but clearly it is not going to be a positive on the revenue side.

Right. Okay. Looking at the performance in the quarter, with train starts down about twice as much as your volume, I would have expected to see more leverage, but you talked pretty clearly about the impact from fuel. It is fair to say that ex the fuel your operating ratio would have been closer to 70? And then how do we think about that with regard to your comments, Oscar, about the operating ratio in 2010? Is it going to be net-net better or worst than your margin in '09?

Okay, Chris. Let me start with the -- can you restate your logic on the 70% operating ratio? That caught my attention by the way.

If I just -- you provided us some detail in the back of the slide deck on how much revenue you lost versus a year ago, so if I add that back and then make an adjustment for the decline in the cost of the fuel, I come up with something closer to 70. You can tell me if that's too simplistic an approach. And then how does that fit with your expectation for 2010 on your margin?

Yes, certainly, the logic is great. It's probably a little too extreme. I would say there's probably a point or point and a half of operating ratio that's kind of fuel related. I don't know that I would go all the way down to 70.

And then I wasn't clear exactly on your comment about the margin you expect in 2010. I know coal is going to be pushing down, but your operating leverage will be helping. Is it net better or net worse than '09?

I think my specific words, and we did choose them carefully, it will mitigate as much of the impact as we can. But that's a big hill to climb. We are going to do it a couple of different ways. Our other business commodities will improve and build on some of that, we'll be, continue to be productive and continue to do our pricing business, but just like you saw here in this sequential fourth quarter, that mix does have a noticeable impact. So we'll have some headwinds around that, but we'll manage through it. But your question, not a completely offset that.

Okay. Thank you.

The next question comes from Justin Yagerman, Deutsche Bank.

Hi, guys, appreciate the time. I guess asked a different way, following up on the comments you just made, is it possible if coal remains as material a headwind as it is now for OR to improve this year?

I'm sorry -- (inaudible). State your question again. I apologize, Justin.

Yes, no. I just asked a different way from the prior question. If coal remains as material a headwind as it is right now, can you find the positive operating leverage in the other segments in order to overcome that.

That's a bit of a hypothetical question. I think we manage all our resources across all our business commodities as well as possible and that's certainly what we'll attempt to do and we hope to kind of walk you through that as the year goes on. Okay (Multiple Speakers)

Yes. I'm sorry.

We normally don't predict or project what our OR will be for the coming year.

Got it. And then just to follow-up on pricing, just curious when you look at your book of business at any given time, how much of the business is sensitive on a real time basis to competitive dynamics. You'd mentioned at one point that the weaker overall environment played a role in the moderation of pricing from Q3 to Q4.

Well, we -- normally, Justin, we don't give that type of competitive information out. I will tell you that about 50% of our total business is repriced on a yearly basis.

Okay. Thanks a lot guys.

The next question come from Gary Chase, Barclays Capital.

Good morning, everyone. Two questions, if I could. The first is just on the coal side, as you were discussing that in response to a question a minute ago, Oscar. Is there any reason to believe that's going to be incremental headwind or is the issue that you just don't see that getting better?

Which portion, again, I'm sorry?

When you talk about coal and you speak to the headwind, is that going to be a headwind relative to where it was this year or you just don't think there's room for improvement and you expect to see improvement in all of the other parts of the operation?

I think -- yes, our expectation would be that the total headwind that we see will probably be similar to what we saw in the fourth quarter throughout the year as they work the inventories down. And the other markets we would expect to see over the course of the year improvement as the economy continues to recover.

Okay. So year on year, you are expecting some definite incremental negative from coal.

Especially if you looked at our coal last year, the first quarter was particularly strong.

Okay. And then, Oscar, if I could ask you just on that scorecard that you like to speak to. If we start thinking about how that might look in an environment where volumes are improving, I think we know what the short-term variable piece is going to look like. I'm curious on the long-term variable, that second bucket, you have done a very good job of keeping up with that this year, is that something that we would expect to scale with volume and then, I think, most importantly, that last piece that you label "Fixed and indirect", how do we think about that? Is that something that is going to grow at some rate of inflation, like say, 3% no matter what the volume outcome is.

Yes, I think I'll stay to the comments that I made during the script reading. We do expect inflationary impacts and as you heard David Brown says we're not going to bring back assets on a one for one basis, so we'll manage that variable portion. But the inflationary impacts that we talked about will definitely impact those areas. And on -- (Multiple Speakers) Go ahead.

Sorry. Just beyond normal inflation, is there anything that would move that fixed and indirect bucket?

Nothing beyond normal inflation.

Okay. Thanks very much.

The next question comes from Jon Langenfeld, Robert W. Baird.

Good morning, this is Ben Hartford in for John. I just had a question on operating income seasonality in 4Q, when you look at it relative to 3Q historically it has been up, at least over the past five years or so. This quarter it was down about 3%. So, can you explain that? It is all mix? We talked a lot about -- is it mix related, is it added -- the fact that we had volumes coming back in the quarter is it attributable to that or pricing? Can you talk about the thought process there?

Yes. I think as you think of the sequential decline there, I would attribute a large portion of it to the mix impact that we have been talking about. There are seasonal cost increases into the later part of the year. The weather has an impact, certainly vacations are taken into account. But for us in this fourth quarter it was clearly that coal swing in mix that had the most drastic impact. And again, don't forget some fuel. There was some fuel going from 3Q to 4Q that also had a pretty noticeable impact.

Okay, good. And then separately, on the intermodal side, specifically domestic being up a good amount year-over-year, how much of that is all east coast versus transcon?

How much of that is what?

Is all east coast versus transcon volumes? Just looking for the relative growth rates between those two.

I don't have that answer right now off the top of my head, because as you know we don't split that domestic out. t Transcon versus the core. I will tell you that there was strong growth off of the west coast.

Okay, great. Thank you.

The next question comes from Cherilyn Radbourne, Scotia Capital.

Thanks very much and good morning. Good morning. I wonder with respect to PTC specifically, whether you have any comments in reaction to the FRA's final implementation rule and whether you could just comment on your level of optimism that you may be able to convince the government to provide some form of funding assistance, such as a tax credit.

Two issues. One on the final rule or the interim rules, the final interim rules, the FRA did note that originally it was a $10 billion cost for the industry with $600 million in benefits, which is a 15 to 1 negative cost benefit. It's actually changed to 22 to 1 under the final rule and there are still concerns we have with that, especially as far as a few of the key items in there. We are reviewing the potential impact of that on the scope timeline, et cetera, and we expect the industry will respond within the allotted timeframe asking for some reconsideration of some of those. We continue to work with Congress to see whether there's some sort of investment tax credit or some other relief. And while there is some sympathy for that, I think with the current situation with the Federal budget, I think there's some hesitancy on the part of people, even though it's an unfunded mandate, to do another thing that would further increase the Federal deficit. We'll continue to push forward.

Thank you. And second question. Different topic, can you talk about the average duration of the furlough for people that now will be lapping almost a year since some of these furloughs began. Is the duration of those furloughs a concern as you call people back?

The duration really varies quite a bit depending on the geographic area. Just the location where the employees are furloughed. Some have been furloughed a fairly extensive period of time, but we're seeing an overall return rate of about 70%. A little bit higher in some areas, a little bit lower in others. It really has more to do with the local job market, not the duration of the furlough. So we're optimistic about the return rate and we continue to bring employees back as we can, as we see attrition occur mainly through retirements.

And we're anxious to bring the people back and we hope the economy comes back such that we're allowed to. But in many cases the railroad is a good paying job and it is unlikely they found a better paying job in the interim.

Thank you, that's all for me.

The next question comes from John Larkin of Stifel Nicolaus.

Good morning, gentlemen.

Good morning, John.

With respect to the capital budget for 2010 and I guess beyond with the unfunded mandatee of PTC, you mentioned that you would be foregoing roughly, I guess, a couple hundred million a year of otherwise needed capital expenditures. Could you elaborate a little bit on the types of projects that might be delayed? Would we expect to see, perhaps, fewer national gateway initiatives here over the next two or three years while you're building that PTC technology?

John, I think it would fall largely in four areas. As to your national gateway, we are committed to that and we are continuing to fund that because we think it's a great long-term initiative for the Company. But I would say the four areas that will be impacted, one is upgrading our car fleets. Secondly, modernizing the technology throughout our network. Thirdly, increasing capacity of [liner] road and terminals and purchasing locomotives. Now, given today's environment, the purchasing of locomotives is not so detrimental, we have 560 parked, but certainly on a long-term, ongoing basis that's a cause for concern. So all of our key places we would make investments, we have to displace due to PTC.

Okay. If volumes were to come back dramatically and pricing were to remain robust as it is now, do you think there's a chance that you might be able to spool up investments in some of those four areas, while still maintaining the timetable for PTC?

We would love that world. Sign us up, John.

Got it.

More revenue, more profits and we will invest more, as long as the regulatory framework stays in a good spot.

Got it. And then on the intermodal side, I guess it was in November where there was a big announcement that your geographic competitor signed up a company that is generally viewed as being the leader in the intermodal arena and that that deal might be better than the deals that are offered to other truckload partners or intermodal marketing companies. Does that set up CSX to perhaps be the favored alternative to other large truckload carriers and intermodal marketing companies and would you expect to maybe gain some share by leveraging that marketing approach?

John, this is Clarence. I don't think so. JB Hunt, who you are referring to, has been a long-time user of Norfolk/Southern's services. They remained on Norfolk/Southern. We do quite a bit of business with JB Hunt, particularly into the Atlanta market and some -- and New England markets and other places. And -- so with our other truckload partners, we're out trying to grow our business and do highway conversions every day of our life.

Okay, but no substantial change in the market share distribution between the two eastern railroads.

I don't think so.

All righty. Thank you very much.

The next question comes from Randy Cousins of BMO Capital Markets.

Good morning.

Good morning, Randy.

Oscar, did -- I just wanted to make sure I got this correct. Did you say that labor costs are going to go up $40 million a quarter in 2010? So if you came out of this quarter at sort of 660 that means we should be modeling $700 million as labor cost as a run rate?

On the base I'm not sure, but the $40 million of additional expense per quarter is something you should put into your model. I don't want to comment on what the number you have. I don't have it in front of me. Yes, that's what we said.

Yes, okay. And then the second question with reference to the reserve adjustments, you booked a number of reserve adjustments this year, in 2009. You continue to make headway on your safety performance, but is the reserve adjustment for 2010 versus 2009, is that looking like it's going to be a headwind? Are you going to be able to sort of put up again, sort of incremental adjustments? How do you -- how should we think about the reserve adjustment benefit that we saw in '09 versus 2010?

Yes, that's hard to forecast only because it's driven by this external folks along with our management team that do that and our safety performance. As our safety performance continues to improve, and our teams do a great job of that, that does reduce the rate and the frequency and severity of those actions and it does continue to drive that. And so we, obviously, hope to continue that. How that turns up in the actual financials, we won't see until we get those. But can't project those until they come out. That is the only unfortunate issue that we can not provide for you.

Okay. Thank you.

The next question comes from John Mims, BB&T Capital Markets.

Hey, good morning. Looking at the freight cars in storage, can you break those out by car type?

John, this Clarence Gooden. The preponderance of those are either coal, automotive, or metals cars. metals being both for scrap and finished steel products, and then the rest are a hodgepodge of boxcars, center beam lumber cars, all of the usual suspects you would imagine.

Okay. Thank you for that. And then just kind of following on that, if you look at the equipment part of the CapEx budget for next year, where -- can you give more color on like how that is split out as far as what equipment you would be buying first, if it is locomotives or intermodal well cars or how that is split up?

This is Oscar, we have not usually shared that level of detail for a couple different reasons, but it is across the board and it is the areas that you would expect us to be doing it in.

All right, I appreciate it. Thanks for the time.

The next question comes from Walter Spracklin, RBC Capital Markets.

Thanks very much. Good morning, guys. Good morning. Just on the -- when we are talking about operating leverage here, obviously, when you are getting higher volumes you are looking for some good returns as those volumes come back on. And I wanted to get a better sense of where the, let's call it, startup costs or the most significant startup costs might be. My question, I guess, is would it be in pulling some of those cars or locomotives out of storage, getting them up and running again, or it is bringing back furloughing work -- furloughed workers. Where could we see and is it a material cost to get that startup cost going again?

This is David. Yes, our -- there's not really a huge cost in starting those resources back. We have locomotives in position to bring back fairly quickly. We have a lower level of maintenance that we do, so we have them in serviceable condition. Calling back furloughed employees is also happens relatively quickly. Like Michael mentioned, railroad jobs generally are very good jobs that the job market people want to come back to work on the railroad. It does take a few weeks of additional training, bring them up to date with some of the certification requirements and that sort of thing. Make sure they are ready to work safely, And then we bring them back relatively quickly at a fairly low cost, so it's not a big number for us to handle either one of those resources that way.

Okay. My second question then is for Mike, the color you provided on the rail bill. My question for you, when you look at going forward, now you said that if there is no changes in this rail bill, you have concerns. What is your take on your ability and the railroad's ability to affect change and lobby Congress and lobby the Senate to effect that change? And how would that compare to perhaps six months ago, given some of the changes that have happened recently and we're looking at an election year and a change in Massachusetts as well?

Well, I think that there's a growing recognition of the importance of rail and the infrastructure we provide for this country, because we're relieving highly congestion, the environmental and the fuel efficiency benefits. So we're going to continue to press with key policy makers in the Senate and eventually in the House. Let's make sure we continue to have that ability to invest and I think there's a great recognition of that need. So I think we will have a number of people that will want to listen to our concerns and hopefully come up with something balanced. So we're going to continue active involvement, as I'm sure all of the other class 1 railroads will, and again, we're going to keep working. If we can't find balance we are going to do whatever we can to make it better.

But are you optimistic in terms of ability right now to affect that change, or do you see it as still a difficult thing to get given the makeup of the Senate committee right now?

It's pretty wide open right now. As you know a lot of the conversation in the Senate is around the healthcare bill and I think that's where a lot of the attention is going to be at this point. So I think that will have to clear the deck before they really -- I don't think rail is on the top of the agenda of the current Congress..

Right. Okay. Thank you very much, guys

The next question comes from George Pickral, Stephens.

Hi, Clarence, I just got one question for you. On slide 11 where you broke down coal stockpiles versus consumption, it only goes back to 2001. Can you remember when the discrepancy was this large? And after that, how quickly that changed and what made it get back to equilibrium.

This is Michael, let me take a cut at that. I've been involved with our coal side of our business for a long time. In my years here, I don't remember the gap being that large ever. And you'll notice from the chart, on those smaller peaks earlier on, it usually takes a number of quarters for them to bring those inventory levels down to where they would like to see them, but to my recollection, and I have been here 32 years now, I don't ever remember seeing the inventory overhang being as large as it is at this point.

Okay. Wow. Thank you for that.

The next question comes from Jeff Kauffman, Sterne, Agee & Leach.

Thank you very much. Quick question following up on John Larkin's on the CapEx program. If I look at the capital spending on a per thousand gross ton mile basis, it seems like the infrastructure spending is up maybe 35%, 40% from where it was in the mid-90s. I understand some of the gateway initiatives, but can you give me a sense on what has driven that spending higher consistently and whether this is really the new level going forward or there's more growth in that infrastructure number and eventually that comes down a bit?

This is Michael. Two points I would like to make on that. When you compare it to the '90s, I think I might need to remind you that in 1999 the FRA gave us a compliance agreement that we had not been maintaining our track structure to a sufficient state of repair. So obviously, we were not spending as much as we needed to back in the '90s. Secondly, I think right now we are getting our infrastructure into a great condition and we know that if we're going to provide that high level of service that we need to provide to our customers to serve them well and to have the ability for Clarence to continue to get price, we need to keep that infrastructure in great shape. It is in great shape and we're going to keep it that way.

Okay. I was looking more to the 2000s, but I understand what you are saying there. Oscar, one quick question. There were some smaller items that were more transient that effected 4Q, fourth quarter accruals. You mentioned the casualty reduction and the depreciation asset change in terms of life, can you give us a sense for whether the weather impacted the quarter, maybe year-end bonus accruals, and just kind of a sense of what the depreciation run rate going forward should be?

Start with depreciation going forward. That's doing the asset base, it is probably going to be around 5 or so per quarter you should expect going up into 2010. As far as -- what was your other items? You listed a whole host there.

Just weather and maybe bonus accruals fourth quarter year on year, how different they were?

Yes, there was not a lot of incentive comp in there. There was a small amount, maybe $4 million or $5 million involved in that. Weather has always has an issue towards the end of the fourth quarter, last week or so we had some significant thing. But again, that's just part of our business process and really would not be material to the quarter.

Okay, guys, thanks so much.

The next question comes from Anthony Gallo, Wells Fargo.

Thank you very much. Just briefly two expense questions. First, are reserves affected at all by volumes. And then secondly, just to try to tie together some of the furlough questions. Assets and employees being brought back onto the system as volumes recover, are they more expensive or less expensive than what is already operating on the network? Thank you.

The assets that are parked and we would redeploy as the volumes increased are no more or less expensive than our current assets. And on the reserves question, I don't think the reserves are so volume dependent. It's more activity related on, say, things like the occupational personal injury is on the rate of incidences, more than on the volumes.

Great. Thank you.

This concludes today's teleconference, thank you for your participation in today's call. You may disconnect at this time.

Thank you for your attention and time.