Norfolk Southern Corp (NSC) 2007 Q3 法說會逐字稿

Greetings and welcome to the Norfolk Southern Corporation third quarter earnings conference call.

At this time all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is my pleasure to introduce your host, Norfolk Southern's Director of Investor Relations, Leanne Marilley.

Thank you, you may begin.

Thank you.

And good morning.

Before we begin today's call I would like to mention a few items.

First, we would like to welcome to you our third quarter conference call.

We remind our listeners and internet participants that the slots for presenters are available for your convenience on our website at nscorp.com in the investor section.

Additionally, MP3 downloads of today's meeting will be available on our website for your convenience.

As usual, transcripts of the meeting also will be posted on our website and will be available upon request from our corporate communications department.

At the end of the prepared portion of today's call, we will conduct a question-and-answer session.

At that time, if you choose to ask a question, an operator will instruct you how to do so from your telephone key pad.

Please be advised that any forward-looking statements made during the course of this presentation represent our best good faith judgment as to what may occur in the future.

Statements that are forward-looking can be identified by use of the words such as believe, expect, anticipate, and project.

Our actual results may differ materially from those projected and will be subject to a number of risks and uncertainties, some of which may be outside of our control.

Please refer to our annual and quarterly reports filed with the SEC for discussions of those risks and uncertainties we view as most important.

Additionally, keep in mind that all references to reported results excluding certain adjustments, for example, non-GAAP numbers, have been reconciled on our website.

Now, it is my pleasure to introduce Norfolk Southern's Chairman, President and CEO, Wick Moorman.

Thank you, Lee Ann.

And good morning.

It is my privilege to welcome you to our third quarter 2007 analyst conference call.

As part of our initiative to enhance communications with you, we are reporting today's results via teleconference.

This format will provide the opportunity for many listeners to ask questions at the end of the prepared portion of today's call, time permitting.

As always, we value your thoughts and opinions on how best to share our results with you, so please let us know what you think of today's call.

We have with us today several members of our management team, including our Vice Chairman and Chief Operating Officer Steve Tobias, along with Don Seale, our Executive Vice President and Chief Marketing Officer and Jim Squires, Executive Vice President Finance and Chief Financial Officer.

We are also joined by Rob Kessler, our Vice President of Taxation, Bill Romig, Vice President and Treasurer, and Martha Stewart our Vice President and Controller.

Norfolk Southern's Vice President Corporate Communications Bob Fort whom many of you know and has been a familiar presence at these events retired in August after 30 years of service to our Company and I know that you join us in wishing him the very best in retirement.

Turning to the third quarter, I'm pleased to report that Norfolk Southern continued to deliver solid results, reflecting the strength of the market for our transportation products as well as our sustained focus on providing a higher value service product.

Softness in certain segments in the economy resulted in reduced traffic volumes, which we were substantially able to offset through pricing gains and cost controls.

We remain confident in the overall strength of our franchise, and we continue to take a long term perspective as we plan new traffic corridors, improve technology, and support our work force with the tools necessary to provide superior service.

Despite fewer intermodal and coal shipments as well as continued weakness in the housing sector of the economy, we have reduced improvement in revenue yield and total revenue was only slightly below last year's record level.

We were also able to control operating costs where appropriate given the business environment.

The result was net income of $386 million, or $0.97 diluted earnings per share for the quarter.

And as you know, this includes the effects of Illinois tax legislation enacted during the third quarter that reduced net income by $19 million, or $0.05 per diluted share.

Jim Squires will provide you with the full details of our financial results in just a moment.

Operationally, we continued to safely and reliably handle what are still strong business demands.

We also continue to improve our service performance by strategically investing in the network and carefully managing all of our assets.

I will have a little more to say about our service metrics for the quarter later, and Steve Tobias is also ready to answer your questions and provide commentary on our service initiatives.

We also remain focused on our long-term growth initiatives.

Work commenced in this quarter on the tunnel clearances on the Heartland corridor and we remain on schedule to complete this initiative in 2010.

Additionally, construction continues on our Rickenbacker global logistics park in Columbus, Ohio, with operations set to begin in early 2008.

We have a number of other new service initiatives in the works for next year as well, which we'll be telling you more about as they develop.

I'm now going to turn the program over to Don Seale, who will walk you through our third quarter results from a revenue and traffic perspective.

Jim Squires will follow with the financial overview.

And then I will return with some closing comments before we take your questions.

Don?

Thank you, wick.

And good morning.

A year-long cycle of a weakened domestic economy that began in August 2006, continues to impact freight transportation demand.

During the third quarter, manufacturers appeared to slow production and in September the ISM index fell to 52.

While a number above 50 still represents modest expansion, September marked the third consecutive decline in the index which is at its lowest since March.

As shown in the next slide, the sluggish domestic economy and changing international trade patterns resulted in total volume in the quarter of 1,909,000 units, a reduction of nearly 82,000 units or 4% below last year.

Volume declined in five of our seven business groups.

The weak housing market continues impact our volumes and accounted for a majority of the short fall.

Excess trucking capacity and high coal stockpiles accounted for most of the remaining loss but lower volumes of imports also came into play.

This slide highlights the changing nature of imports and exports in the quarter as the dollar continued to weaken.

Total import volume declined by 7%, while export traffic grew by 14% as export growth exceeded import declines by some 8,000 loads.

With lower volume, total revenue as outlined in the next slide reached $2.353 billion, down $40 million below the record revenue of $2.393 billion in the third quarter of 2006.

Weaker volumes were partially offset by record revenues in our agricultural sector, growth in chemicals revenue, and continued improvements in pricing across most of our business segments.

Accordingly, as noted in slide six, revenue per unit reached an all-time high of $1,232, an increase of $30, or 2.5%, over third quarter 2006.

This was our 20th consecutive quarter of RPU growth.

Traffic mix impacted revenue per unit growth as volume declines in some higher rated commodities such as utility coal, iron and steel, lumber and automotive parts traffic, were offset by growth in lower rated river coal traffic, aggregates and municipal solid waste.

However, the pricing environment remains favorable and rate increases across our markets generally offset the effect of shorter haul traffic.

And as reported in the second quarter, the timing of repricing of contracts and rates, particularly in coal and intermodal suppressed RPU for the third quarter.

Now, turning to our individual business sectors, merchandise revenue of $1.291 billion grew $8 million over third quarter 2006, despite a 3% decline in volume, due to lower shipments of iron and steel, and forest products.

This was the 15th consecutive quarter of year-over-year merchandise revenue per car growth which was a record at $1,866 per car.

Our paper, chemicals and automotive groups recorded all-time highs in RPU, and each of our merchandise groups benefited from improved pricing during the quarter.

In slide eight, you will note that our agriculture group set a record for both revenue and volume for the quarter.

Revenue of $264 million was up $25 million, or 10% over third quarter last year, while volume grew 2%.

Wheat volumes were higher due to increased export shipments as a week international crop in Australia, Egypt, and other international regions prompted a spike in demand from U.S.

producers.

Also our integrating agri-fuels market which includes biodiesel, ethanol, corn for ethanol production, drive distiller's grain or DDG, soybean meal and fertilizers grew by 1500 carloads in the quarter.

Turning to automotive, revenue reached $221 million for the quarter, up 10 million, or 5% compared to third quarter 2006 accompanied by a 4% increase in volume.

Easier comparisons for the third quarter 2006, which included 46 -- 47 weeks of downtime, versus 26 weeks this year, led to the first year-over-year of volume gain in automotive since the second quarter of 2004.

As you can see in the next slide, North American automotive production increased 2% over the same period in 2006.

Our new domestics volume rose by 6% during the quarter, while the Detroit Three volume improved by 3%.

New business and finished vehicles and parts added to our favorable results in the quarter.

With respect to the other three merchandise sectors, as shown in slide 11, chemicals, paper, and metals and construction continued to feel the adverse impact of the housing market, along with slower consumer spending and reduced imports.

Despite these head winds, chemicals recorded its 17th consecutive quarter of year-over-year revenue gains, chemical revenue reached $297 million, up $11 million or 4%, over third quarter 2006, while volume was down 1% due primarily to weaker plastics traffic.

Revenues for paper and forest products, along with metals and construction materials, declined 4%, and 9% respectively, as volume declines offset a 4% RPU gain in paper, while adverse mix in metals and construction coupled with weaker demand drove revenues lower.

For example, higher RPU imported steel slab traffic was down 4,500 cars in the quarter, and lower RPU aggregates traffic was up 3%, or 2,500 cars.

Now turning to our intermodal market, revenue in the quarter of $484 million was down 6% versus 2006 as volume declined 6% as well.

Revenue per unit fell slightly for the quarter as contractual and general rate increases were offset by very strong East Coast short haul growth in August and September.

In addition, the 24% decline in higher RPU trailer traffic continued to impact overall RPU.

As depicted in the truckload freight index, in the next slide, one of the major drivers shaping current intermodal volumes continues to be the availability of excess trucking capacity.

Truckload volumes have declined and the latest index is below 2002 and approaching the recession year of 2001.

The trucking industry has been negatively impacted by softer imports, and higher consumer products inventories.

And ample capacity in the spot truckload market has ushered in another soft peak season this year.

Within our intermodal market segments, international volume was down 5% for the quarter.

Declines were driven by softer consumer demand and resulting import weakness, as well as some ocean carriers' ongoing reduction of inland transportation services and changes in vessel port of calls.

Our East Coast port volumes grew 16%, while West Coast port volume fell 17%, as shifts in business between ocean carriers and a general decline in transcontinental imports impacted our total intermodal volume.

In the combined truckload and domestic IMC segments, volume decreased 9% for the quarter.

Domestic IMC traffic loss reflected economic softness, and increased over-the-road truck competition.

Truckload shipments were also down for the quarter, due primarily to a loss of business from some asset-based carriers.

These losses were somewhat mitigated by over-the-road traffic conversions in our local Norfolk Southern markets.

Premium intermodal volume declined 3%, as increased parcel volume did not fully offset soft LTL traffic.

And finally, triple crown volume decreased 1% versus 2006, primarily due to excess trucking capacity.

Now, turning to coal, looking at our coal markets, coal revenue was $578 million, down $17 million or 3% below third quarter last year, accompanied by a 2% decline in volume.

Revenue per car was down 1%, as higher revenue per car long haul volume decreased 5%, and lower revenue per car short haul volume increased by 7%.

Let me give you an example.

One of our large short haul movements to the Ohio river equates to only 26-mile haul, and the volume in this corridor was up over 21% in the quarter.

Conversely, long haul utility coal from Central App to the Southeast was down 10% in the quarter.

These two movements, which are at opposite extremes in length of haul, represent a per car differential of over $1,900.

Now, turning to our individual markets in coal, electric utilities ended the third quarter with record demand for power.

Cooling demand extended well into September and continued into October for the NS-served southern states.

For the quarter, electricity generation in our service area was up 4% over the same period last year while coal-fired generation increased by 2%.

High utility stockpiles were able to meet this increased demand for coal, which is reflected in our 4% decline in utility coal volume in the quarter.

In addition, Chesapeake Energy switched earlier this year from domestic to all-water imported coal, at its Chesapeake, Virginia plant and continues to negatively impact year-over-year volume, revenue, and revenue per car comparisons.

Higher export coal movements more than offset declines in domestic metallurgical coal, coke and iron ore.

In the third quarter, export volume was up 12,000 cars and 44%, while domestic metallurgical coke and iron ore was down 7,400 cars or 13%.

Export continued to benefit from Australian port congestion and the devalued dollar.

Domestic met coal, coke and iron ore continued to be challenged by weak market conditions which have led to the closure of coke batteries and the loss of 2006 spot iron ore shipments.

Cottages at the Buchanan and Pinnacle Creek mines and the closure of Citizen's Gas coke plant in Indianapolis in July also reduced metallurgical coal shipments.

Finally, industrial coal carloads were up 1% in the third quarter.

New business and stronger demand were their primary factors that drove growth in this market.

Now looking ahead, increased global demand for coal and the low U.S.

dollar will continue to bolster export markets for U.S.

coals.

On the other hand, demand for domestic met coal remains less vibrant due to lower U.S.

steel production, which may continue into early 2008.

Finally, as previously stated we expect both the Buchanan and Pinnacle Creek mines to resume production which will enhance coal supply on NS going forward.

In the longer term, replacing coal sources in the coal fields is an important part of our market strategy as production and coal supply reflect the changing reserve base.

We are working on numerous coal sourcing projects that will add new coal volume in our network.

Among these highlighted here are four new coal sourcing projects that could generate a minimum of 6 million tons per year of additional coal volume starting in 2008.

Of these four projects, two are in Central App and two are in Northern Appalachia.

Next slide in our merchandise markets, there is significant project and industrial development growth planned ahead.

New cement terminals are being developed on Norfolk Southern in Georgia and South Carolina.

Our scrubber stone network is poised for continued growth, driven by NS access to high calcium limestone quarries and coal-served utility plants.

There are an additional 40 utilities who have announced plans to begin scrubbing in the near future.

Also, Thyssen Krupp will break ground on the $3.7 billion steel plant in Mount Vernon, Alabama on November 2.

This new mega mill should be a major source of new steel-related business as it ramps up in 2010.

As described in the next slide, we also expect to see continued gains in our ethanol markets, as new plants ramp up, and several new distribution terminals open early next year.

These include terminals in New Jersey and Georgia.

And finally, we're excited about the continuing improvements in car utilization and customer service that we're seeing from our new 75-car grain trains which move with dedicated locomotives.

This service has improved car turns by almost 50%.

In turn, shippers and receivers are developing origin and destination facilities for rapid loading and unloading to take full advantage of this improved product.

And in intermodal, despite soft volumes in the quarter, we remain committed to continuing improvements in service and launching new products for our customers.

During the quarter, we launched the westbound Blue Streak service over Shreveport, Louisiana, which reduces transit times and offers a service guarantee.

We also begin a new Savannah domestic intermodal service to tap growing shipments of import freight in 53-foot equipment out of the Savannah market.

Our intermodal service during the quarter improved by 7% versus the first six months of the year, and all-time performance was up 13% versus third quarter of 2006.

Our guaranteed service over the Meridian Speedway is performing at 95% on time.

In short, we're well positioned to convert motor carrier traffic as the market improves.

Now, to summarize, slower economic conditions across much of our business during the third quarter impacted both volumes and revenue.

We do not foresee a materially different outlook through the fourth quarter, and into early 2008, as industrial production, a weak housing sector, and excess trucking supply are not expected to improve in the near term.

Taking the longer view, however, we fully expect demand for our services to again build as the domestic and global economies expand.

We are continuing our clear focus on improving yield and designing new services and products to fully meet the needs of our customers, while generating the appropriate value to our shareholders.

Thank you.

And I will now turn the microphone over to Jim Squires for the financial report.

Thank you, Don.

I will now provide a review of our overall financial results for the third quarter.

Net income for the quarter was $386 million, a decrease of $30 million or 7% compared with the $416 million earned in the third quarter last year.

Diluted earnings per share for the quarter were $0.97, which was $0.05 per share, or 5% less than last year.

The decreases in both net income and earnings per share reflect the impact of Illinois tax legislation enacted during the third quarter, which was $19 million or $0.05 per diluted share shown in yellow.

Excluding that item, diluted earnings per share would have been $1.02, even with last year.

Let its start with an overview of our operating rests.

As Don described, operating revenues declined $40 million or 2%.

This resulted in a $34 million or 5% decrease in income from railway operations as operating expenses declined by $6 million.

The railway operating ratio rose 1 percentage point from the record low of 70.1 in the third quarter of 2006.

Before reviewing the operating expenses, let me comment on short-term cost controls.

While our cost structure does have a large fixed component, there are of course costs we can vary in the short term.

We divide these into two categories, those linked to current business levels and those that affect our ability to capture future opportunities.

Norfolk Southern's long-term prospects dictate our approach to costs associated with future opportunities.

In spite of the current volume softness, we believe demand for rail transportation will grow.

Therefore, as shown on the right side of the slide, we have continued to spend prudently on maintenance.

A well-maintained network, in addition to enhancing service, allows us to attract and retain future business.

Moreover a stable pattern of spending minimizes outlays in the long run.

At the same time, current volume conditions have allowed us to cut spending in the areas shown on the left side.

Now, let's look at the expenses in detail.

The largest reduction was in casualties and other claims, which declined $17 million.

This decrease is largely due to favorable personal injury and laid-in claims development, demonstrating the impact of our employees' continued commitment to safety.

In addition, the quarter benefited from an environmental insurance settlement.

Compensation and benefits decreased $5 million, or 1%, in the third quarter compared with last year.

This is a modest change, but there are a few moving parts I would like to point out.

First, stock-based compensation rose $15 million in the quarter, due entirely to last year's $9.17 per share quarterly stock price decline.

Next, the accrual for incentive compensation decreased $10 million, reflecting the higher bar set for our bonus calculation.

And finally, there was a $10 million decrease from lower volume-related payroll costs.

This is one example of variable costs that we try to carefully manage by watching our payroll hours in the areas directly affected by traffic volumes such as train crews, while not pulling back on hours in our maintenance areas.

This is not to say the plans can't be modified.

They can.

But always with a longer term view.

Turning to the expense increases, diesel fuel expense rose by $1 million.

Here again, you can see our focus on the part of the cost equation that is controllable.

Fuel consumption was down $13 million, reflecting a 5% drop in gallons used that exceeded the 4% traffic volume decline.

This largely mitigated higher fuel prices which rose $14 million in the quarter.

Material services and rents increased $3 million, or 1% in the third quarter compared with last year, as lower volume related equipment rents partially offset higher maintenance costs.

A strong focus on asset utilization enabled an 8% decline in equipment rents.

Other operating expenses increased by $4 million, or 7%, primarily due to higher property, sales and use, and franchise taxes.

And finally, depreciation expense increased by $8 million, or 4%, reflecting continuing investment in our net worth and equipment.

Now let's turn to our non-operating items.

Other income net for the quarter was $31 million, compared with $41 million last year, a decline of $10 million.

Gains on sales of property and investments rose $14 million this quarter.

As you know, the timing of these sales is somewhat unpredictable but, year to date, we are about even with 2006.

Interest income decreased $11 million as a result of the lower cash balances and returns from corporate-owned life insurance declined $8 million.

Interest expense on debt was $13 million lower than last year largely due to less outstanding debt.

Now I would like to provide some detail concerning our synthetic fuel investments.

The next slide shows amounts recognized during the third quarter related to our synthetic fuel investments, which as you know have a pre-tax and an after-tax component.

As of the end of the third quarter, the tax credit phase-out was expected to be 43%, the net benefit from these investments in the third quarter was $7 million.

This was $11 million less than we projected three months ago due entirely to the rise in oil prices during the quarter.

Turning to the next slide, assuming the same 43% phase-out that was projected as of quarter end, our synthetic fuel investments would result in a total net benefit of $16 million for the remainder of 2007, compared with $7 million in the fourth quarter of 2006.

That 43% phase-out equates to a NYMEX per barrel average price for the last three months of the year of about $81.

Of course, as you know, oil prices have risen significantly since quarter end.

Each dollar variability in the $81 average price affects the net benefit by almost $2 million.

For example, should the average price for the fourth quarter approach $90 per barrel, our net benefit for the quarter would be zero.

Turning back to our results, third quarter income before income taxes declined 5%, reflective of the lower traffic volumes.

Income taxes for the third quarter were $219 million, compared with $220 million last year.

The effective tax rate of 36.2% compared with a rate of 34.6% in 2006.

The increase resulted from expenses associated with recently enacted Illinois tax legislation, which increased deferred taxes by $19 million.

For the full year, assuming a 43% synthetic fuel tax credit phase-out, the effective tax rate will be around 34%.

I want to reiterate that this is affected by changes in oil prices.

For example, if the average oil price for the fourth quarter is $90 a barrel, the full-year effective tax rate will be 35%.

Now, I will update you on our share repurchase program.

The next slide shows quarterly purchases since the in essential of our current program.

During the third quarter of 2007, we bought back 6.7 million shares of stock at a cost of $341 million.

In total, we have purchased and retired 36.9 million shares for $1.7 billion at an average price of $46.93 per share.

This activity represents about half of our existing share repurchase authorization.

Thank you for your attention.

I will now turn the program back to Wick.

Thanks, Jim.

As you've seen, the third quarter presented us with some challenges similar to those we experienced in the first half of the year, as we continue to see volume declines on a year-over-year basis.

But even in the face of these volume head winds, as Don had said, we were able to realize an improvement in revenue per unit, which speaks to our continuing ability to improve yield for our services.

Despite some near-term economic and legislative uncertainty, we are confident that the long-term fundamentals continue to favor the market for our transportation services.

We are also convinced that, while the fundamentals are on our side, our future success will depend to a large extent on our ability to provide a superior level of customer service.

As I mentioned earlier, we're seeing continuing improvement in our service as the result of our ongoing investments and initiatives.

All of our internal operating and metrics improved both quarter-over-quarter and year-over-year, as did two of the three public metrics, terminal dwell time and cars online.

System velocity remained constant, but this is in the face of the elimination of several of our automotive-related schedules.

These were some of our faster schedules so that the result has been that our theoretical maximum system velocity has been slightly reduced, so we're very comfortable with the fact that our overall velocity has remained constant.

The important point here is that our overall asset velocity continues to improve with resulting benefits in both customer service, and reduced costs.

Now, on the cost side, as Jim mentioned, we are continuing to work on our operating costs, wherever possible.

But with the philosophy that we are not cutting in those areas where we will know that it will cost us additional dollars to catch up in the future.

Jim gave you a couple of examples.

Another is head count.

You will see that our employment numbers are down quarter-over-quarter for the past two quarters, as we have cut back on hiring.

And we expect that trend to continue.

However, having said all of this about costs, we think that while an operating ratio of 71.1% for the quarter was good, we know it was still higher than last year's.

We are still intent, as we always have been at Norfolk Southern, on operating ratio improvement over the long term, and we remain focused on reducing costs wherever possible.

On the legislative and regulatory front, as you all know, we along with the rest of the rail industry, face some significant challenges.

We at Norfolk Southern are committed to promoting fiscally sound legislative policy that encourages rail investment.

And it offers an environmentally friendly solution to our nation's growing infrastructure crisis.

The rail industry has an important role to play as transportation capacity inevitably becomes more constrained in this country.

And I remain optimistic that policy makers understand that.

As we move forward, Norfolk Southern will continue to closely monitor business conditions and as I said, exercise cost discipline wherever and whenever possible, but without sacrificing service quality or deferring maintenance, continue to review our operating plan, commensurate with demand and make adjustments where necessary to ensure optimum asset utilization and network efficiency.

Looking at the fourth quarter and at least the first half of 2008, as Don indicated, we are somewhat guarded, as to economic conditions.

We do expect to remain on course to price our service to reflect the value that we are delivering.

Widening the lens, as I've said, we remain confident in our long-term opportunities and anticipate that demand will strengthen as the domestic and global economies expand.

Continue to focus on new products, and innovative service solutions to meet this growing demand as we move forward.

Our track record for volume growth over the past five years shows you what Norfolk Southern can do in a strong economy and we fully expect that growth to continue as the economy rebounds.

Thank you and I will now turn the program over to the operator so we can begin the question-and-answer session.

Thank you.

Ladies and gentlemen, at this time, we will be conducting the question-and-answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Thomas Wadewitz with JPMorgan Chase.

Yes, good morning.

Good morning, Tom.

Let's see.

I've got I guess a couple of questions for you.

On the yield side, you explained some of the mix factors and I wonder if you could break down what -- kind of what came from price and what came from fuel and what came from mix.

And on the coal side, are we -- is this just a one quarter event, where coal yields are weaker on the mix issues or is that something which is going to persist for a few more quarters?

Tom, this is Don.

With respect to coal, it is all a matter of timing of repricing of contracts.

We talked a little bit about that in the second quarter.

We had very little activity on repricing during the third quarter.

That will begin to transition, as we get into the fourth quarter, but most of that will be visible in the first quarter of '08 moving forward.

We do expect -- we do expect utility coal, which is higher rated than some of the river coal that we're handling today, hopefully to pick up as stockpiles continue to be challenged by fairly good weather for coal burning in September and October, and coming out of the summer months.

Was there something unusual in the comparison quarter on the coal yield?

Because it was just surprising to see yields -- it looks like they were actually down year-over-year.

And now that was a bit surprising to see?

As I mentioned with Central App utility tonnage down by 10% in the quarter and some of our very, very short haul traffic being up as strong as it was, as I mentioned, the Ohio river traffic, one of those moves, 26 miles in length, was up 21%.

So we pretty much had a perfect storm with respect to mix and coal.

I don't see that as being an indication of any change in yield going forward.

Okay.

One other thing that I would mention, too.

That -- and this cuts across our entire book of business, particularly our merchandise and our coal, is that year-over-year with respect to fuel, our actual fuel surcharge for the aggregate was -- there was about a $3, $3.90, per barrel less average cost of west Texas intermediate crude oil this year versus last year.

It was actually $72.10 in '06 versus $68.36 in 2007.

So we had an effective lower fuel cost in terms of west Texas intermediate crude.

And also, our coverage as I mentioned in the second quarter is about 93%, and we will not see that continue to go up until we can get some legacy contracts expiring and they're repriced with fuel surcharges.

So I might have missed this, but did you talk about, if you back out fuel and mix effect, any kind of pure price number in the quarter?

I did not provide that, but I would direct you back to the first quarter when we looked at a 2% RPU gain, and we did back out the Katrina related higher RPU traffic and generated 2%, there is is a lot of similarity to the first quarter and the third quarter.

Okay.

So 2% is that type of area for the pure price number?

No, no, no.

What I'm saying is that is higher than, that Tom.

The lower rated RPU traffic, the low rated RPU traffic washed out a higher actual effective price.

Okay.

Yes, I mean my recollection was you had talked about kind of 4% effective price in prior quarters.

That's correct.

Okay.

Great.

And then one -- I guess for Wick or for Steve, if we look at the other railroads results, we saw a meaningful reduction in head count on a year-over-year basis, something around 1%, a little bit more maybe for some of the other railroads and your head count was actually up a little bit.

Is there room for you to be more aggressive on head count reduction?

And especially in light of some caution on the volume outlook?

Or how should we think about that?

Because it is a meaningful difference versus what we're seeing from the other U.S.

rails.

Tom, this is Steve.

As Wick spoke specifically to, and both Jim and Don alluded to in their presentations this morning, we really do focus on the long-term here, rather than a quarter-by-quarter comparison per se.

Are there opportunities down the road?

Certainly.

And I would say that we are positioned to either increase our employment if the economy turns in the right direction and we determine that to be necessary, or take other steps that -- if it goes the wrong way, as we have displayed in the past.

Let me add, to build on that, one of the things that we have looked very carefully at, Steve and his team, is furloughing employees.

We have chosen not to do that at this time.

Basically because where we think we have those opportunities, we think that the employees that are furloughed that will be effectively many of our newer hires, that we will lose them, and we have invested a fair amount in those employees, and we think that that's an investment that we would rather hang on to.

Now, in the light of continued softness in the economy, as Steve indicated, we will take more aggressive steps if need be, but I think what you're seeing is, and we talked about this, as you know, in the past couple of years, is the way -- the other way to bring head count down is to simply reduce hiring, which we have done, and I think you will see our numbers continue to trend in the direction that you're seeing them now.

So if we think about attrition, and you might actually see year-over-year head counts start to go down, is there just a little bit of a lag to the impact of the attrition, is that fair?

I think that is a fair comment.

Okay.

Great.

Well, thank you for the time and the responses.

Thank you, Tom.

Our next question comes from the line of William Greene with Morgan Stanley.

Good morning.

Just real quick on the casualty and other line, can you break out for us how much of that might have been one-time, or won't repeat in future quarters?

Bill, this is Jim.

I think that we, as I said, we have seen favorability, not only this quarter, but in the first two quarters of the year as well, in terms of the personal injury actuarial adjustments, and we think that that's a reflection of our continuing commitment to safety.

So we would expect and hope for continued favorability in that part of the casualties and other claims.

There was also an insurance settlement in the quarter, that was $5 million of the 17 favorable, and that is something that will occur sporadically, but certainly not on a continuing basis.

Okay.

And then if I can just come back to coal for a second, with Don, if you look at the projects that you outlined here, and talk about sort of a 6 million increase, I presume there is also some facilities or changes that will occur in the business on your lines that may cause an offset to that.

So if you think of kind of the net potential here, how much should it actually be?

Don here.

Actually, we're talking about 6 million tons of additional sourcing, with those four projects.

I also mentioned that Buchanan and Pinnacle Creek mines.

They have been down for the last several months, and we -- Pinnacle Creek is beginning to ramp back up this week, and we expect Buchanan to come back online within the next 60 days or so.

Those two mines combined are 7.2 million tons.

So we have those two mines coming back, plus this sourcing at the additional project.

So we're continuing to look very closely at coal sourcing not only in the Central App region but also the Northern App region, as well as the Illinois base and the PRB.

So it is just part of our overall strategy to continue to look at coal sourcing as the markets change.

Right.

But I presume we shouldn't be adding in sort of all 13 million tons here?

There's got to be some puts an takes so what's sort of the negative issues that are going on beyond sort of just utility stockpiles being high?

Well, the market itself will drive the consumption of coal.

So as this new production comes on, certainly some of it may go into the export market, some of it may go to the utility market, but we want that additional sourcing available as markets continue to change and evolve and that is the point here, as opposed to adding it in, as all new business.

This will be part of our sourcing to go to current markets, and as markets change.

And then just one last question, on CapEx, you guys are pretty disciplined in terms of how you spend it each year so I wouldn't expect it to be much different, but given the weakness that we've seen and that you suggested that can continue into the first half, any reason to think '08 CapEx would drop?

You know, we haven't finished working through the capital budget yet.

We will be announcing that next month.

And so I really don't want to foreshadow anything, because we really don't know what the numbers are.

But capital expenditures are in general, as all of you know, the sum of two components, one is the money that we spend on the maintenance and renewal of our existing physical plant, and the other is for new capacity and new business, and we will certainly look very hard at the business opportunities, but we look hard understanding that a lot of the capital that is employed on the railroad is for projects that have a fairly long lead time and so we will take that into account, not only looking at immediate business conditions, but where we think our business is is going to go over the next few years.

Thanks for your help.

Our next question comes from the line of Ken Hoexter with Merrill Lynch.

Great.

Good morning.

If we can switch over to intermodal for a second, I think, Don, you mentioned that there was strong demand in -- particularly on the East Coast, yet some weak pricing.

I just want to -- and I think you noted that trailers were up pretty strong.

Can you talk about I guess the impact or can you I guess go over it again in detail of what we're seeing, where you're seeing the strength and weakness come in, just so as the trucking market continues to deteriorate, how much of an impact is that on your eastern business.

First with respect to trailers as we discussed in the past, we are continuing to see a migration away from rail trailers in intermodal to containers.

And our trailer traffic has been higher RPU, but not necessarily higher margined intermodal traffic in the past.

That business continued to transition down in the third quarter.

It was down 20%.

So trailer traffic was down 20% in the quarter.

And that impacted mix because it is higher RPU, but not necessarily higher profitability.

In fact, we do better with double stack container traffic.

Now, with respect to what is taking place in the ports, as I mentioned, we continue to see a shifting of vessel rotations to the East Coast, all water, using the Panama Canal and the Suez Canal, and our business through the East Coast ports in the quarter was up 16%, and we saw a decline, a corresponding decline of about 17% in our transcontinental import traffic.

And I think that if you look at the numbers through some of the West Coast ports, for the first time we're seeing actual year-over-year declines, Los Angeles being case in point, which was down about 7% in August and haven't seen the number in September.

So that is the dynamic on the international business.

On the domestic truckload business, we're continuing to see a steady pace of conversion to intermodal in our local NS network.

But it was not strong enough to offset softness in the LTL market, as well as some of the domestic truckload traffic going back to the highway to protect current driver pools.

And they have worked hard to recruit drivers in certain pools, and with softness in that market, and they're trying to protect those as far as they can, and not let the people get away.

All right.

That simplified it.

Thank you.

And then can you talk about the Meridian Speedway then?

Is there -- is the traffic then slower over that corridor than you would have expected because of the drop in the West Coast traffic moving east?

We're seeing some slower patterns on international trade coming from the west, but we're very encouraged with respect to the domestic freight that is moving in that corridor.

I mentioned the Blue Streak service.

And we're now running six westbound trains per week, and five eastbound trains per week, with service better than 95% on time.

It is a very attractive product, fourth morning availability, in Atlanta, or back on the West Coast, and we feel very good about how we're positioned on that service.

Okay.

So just looking forward, you don't expect -- or I guess you do continue to expect some of that, on that last, you said the reverse to the highway, because of the truck pricing, I just want to get kind of a concept of how much you feel that it is really exposed to that, that trucking competition.

Well, you know, it depends on which segment we're talking about.

Certainly long haul freight is less susceptible to diversion than some of the shorter haul intermodal traffic.

Although we're continuing to see some of the truckload carriers, the large asset-based truckload carriers, do a good job of continuing to convert to intermodal.

So we don't see this pattern that we're seeing of excess trucking supply.

While we're seeing today, in today's economy, we certainly don't see it extending out for a protracted period of time.

Can you give a concept of as to how much is that short haul versus long haul traffic of the intermodal?

Well, as we convert transcontinental traffic, as the steam ship lines make the decision to come to the East Coast, a good example of that is our business is substantially up at the port of Savannah to Atlanta.

And that is a shorter haul than Memphis to Atlanta.

But we -- that is a profitable lane, it is a very heavy double stack lane and that is in the working parts of mix when you look at RPU and what we've reported in the third quarter.

I think to some extent the answer to your question is, is when you see shifts like we have seen third quarter over third quarter, in West Coast versus East Coast, and this is a very dynamic market for us now, and the ratio of long haul to short haul, or what we even consider to be short haul, the definitions are changing fairly rapidly.

Okay.

And then last question, if I can, just on the network, you had kind of started out your opening comments talking about the upgrade of the track, how much of it now is double stack capable particularly on that corridor that you were extending out?

Well, the Heartland Corridor project, which is the opening up of the clearances on our shortest routes, the shortest routes, between the port of Norfolk and the Midwest, aimed primarily at our new major intermodal terminal in Columbus, is just beginning.

We have a healthy container business out in the port of Norfolk today that we move via double stack, but we move it in a more circuitous route, either up through Harrisburg, Pennsylvania, and over, or over actually through Knoxville, Tennessee, and up through Cincinnati.

So what this project does is takes a day or more out of the transit time, and really makes it a much more attractive product, transportation product for people who want to bring their goods in through the port of Norfolk, which is growing very rapidly, and then move them into the Midwest.

The Heartland Corridor really though is, I would say, just about the last piece of the puzzle in terms of Norfolk Southern's routes, major routes in handling double stacked traffic.

Our next challenge, and this goes also to your question of the intermodal growth is that we've outlined initiatives like our Crescent Quarter, where we think there is a huge, to some extent, untapped long haul intermodal franchise that we can develop, as we put in new train service, and add capacity, and put more truck-like service in place, and we're working very hard right now on trying to develop that corridor as well.

One of the things that we look at in a time like this, is where are there new products, where are there new services that we can start to introduce, because quite frankly, over the past three or four years, we had our hands full of just handling the product in the lanes that we have, and I think we have some exciting new products that will be rolling out over the next year.

Great, thanks for the time.

Our next question comes from the line of Jason Seidl with Credit Suisse.

Hi, guys.

Jason Seidl, Credit Suisse.

A couple quick questions.

You talked a little bit about some of the changes in revenue per unit, and alluded to where you might be on price excluding some of the puts and takes via Tom's comments.

Where are you weakest in terms of the pricing market?

Is it in the housing related and truck competitive business?

Jason, good morning.

Don.

Hey, Don.

Our RPU message here this morning, there are three components to it, the first is timing of repricing, particularly in merchandise, as well as coal.

It is all about having the price instruments, contracts, quotes, et cetera, available for repricing.

That's a timing issue.

The second thing is reduced fuel surcharge in the quarter.

As I pointed out earlier, we actually it an effective lower WTI average in the quarter.

Plus last year, we were still ramping up fuel surcharge coverage, and now we're at 93% and we're pretty much flat with respect to gaining any additional leverage in fuel until we have contracts roll over, legacy contracts.

And then the third thing is the mix.

And we did -- we continue to have a lot of change in mix.

We mentioned the mix in intermodal, the shifting of port traffic, et cetera.

A lot of change in mix on coal for the quarter.

River coal versus long haul Central App to the south coal.

As well as we had -- I mentioned in the comments the Chesapeake Energy plant in Chesapeake, Virginia, which is about 1.9 million tons on an annual basis, converted from Central App coal to imported coal from Venezuela.

And that is having an impact on our RPU as well.

And I also mentioned that import coal, in one of the first slides I showed, import coal is actually down in the quarter for us as well.

And that impacted RPU.

In relation to the fuel surcharge, one of your competitors out there said it takes about two months to recover on a lag.

Are you guys on a two-month lag as well.

We have a 60-day lag in our program to allow customers to adjust their databases for it.

Okay.

Great.

And one last question, can you give us an update on the Mersk port and when we should start seeing volumes flow into your network?

The new Mersk terminal in Portsmouth, Virginia here in Norfolk at the Port of Hampton roads opened officially in September.

They are beginning to rotate vessels through that facility.

We're beginning to handle traffic through it.

And it is in the process of ramping up.

Okay.

Gentlemen, thank you for the time as always.

Our next question comes from Scott Flower with Banc of America securities.

Good morning, all.

Good morning.

Just a couple of questions, one is, and I know that you all have been very clear over time that about half of your book rolls every year, but how much in the way as we look toward '08 will actually be legacy contracts or contracts that really haven't seen the light of day for several years?

Scott, as we've explained, I think in the previous quarters, we are getting down to the point where we have very few legacy contracts, the so-called legacy contracts left, that have not been treated within the last three to five years.

We have been moving toward a shorter duration of contracts for a number of years.

We still do have several large contracts like one in the automotive sector, another one or two in coal, and then a couple in merchandise that are longer term in nature that will take some time to get through.

But it does not represent the majority of our business.

It represents the minority of it.

But will any of those occur in '08?

Or are those further out?

They're further out.

Okay.

One other thing, I guess, on the marketing side, you noted and this is just a note, but you mentioned it, obviously you talked about the peak days and generation, and then you talked about coal generation being at a lower percentage, are you actually seeing any fuel shifting or why would coal generation be at a lower rate than electricity generation growth in your territory?

I'm just curious about that.

When you look back, when you look back over what has taken place this year in the weather patterns for utility coal, for utility and electrical generation, we have seen a lot of spikes in cold weather, when you look at the first quarter, very mild January, February, and then about the middle of March, we had a cold spell, a spike-up in cold weather.

And then it lasted for about four or five weeks, and then back down into more modest weather.

With the price of natural gas running $5, $4.50, $5, $5.50, we've seen gas used at peaking plants to take up the slack with respect to peaks in demand for electrical generation.

So we've seen some gas competition during that time.

Okay.

And then two other quick questions, one for you, Don, and I guess one for Jim.

You talked a little bit about obviously some of the shifting dynamics in the import/export market.

Are you indifferent from a contribution standpoint of whether import/export boxes, primarily imports, come to you from western gateways versus eastern gateways?

Because obviously you mentioned Savannah picking up versus where you may have seen in Memphis and there is a length of haul delta.

And I'm just trying to get a sense from a different standpoint is it indifference or is there favorability one way or another from all-in contribution standpoint?

Half of our business now is import East Coast.

Our international import, our container business including exports, half is East Coast and half is West Coast.

And we certainly are indifferent.

Others make decisions with respect to which ports are used.

Last question is, Jim, obviously, you know, things are a little bit uneven in the economy, and you all are very long-term in nature, but yet obviously, the stock is is decent in the quarter but still probably not to the levels we've seen in the last few years and are you delevering.

I'm just wondering whether you had any thoughts about the share repurchase program, and obviously, you're generating cash, whether you might be more aggressive with that.

I know that you mentioned on your analyst day over the next several years you would contemplate perhaps adding more leverage.

I'm just trying to get a sense of how you think about that.

Sure.

As we outlined at our investor day in June, we do think that there is room for meaningful additional leverage while maintaining our strong investment grade status.

So kind of over the next few years, yes, I think you will see a net addition to leverage in our capital structure.

And that is likely to go toward share repurchases.

We've been pretty aggressive with the program and we've tried to be opportunistic with the program, and have targeted periods when we think that we can add the most shareholder value through share repurchases and we will continue to pursue that approach for the next couple of years.

Thanks, all very much.

Thanks, Scott.

Our next question comes from the line of Edward Wolfe with Bear Stearns.

Good morning.

I know this has been asked but I don't think it's really has been answered, the 2.5% yield, can you break that down by price mix and fuel?

Ed, this is Don.

We do not break it out that way.

And we haven't in the past.

But I will reiterate that flat fuel, or slightly decline in fuel, heavy, heavy mix impact, with respect to coal, and metals and construction, in particular, some in intermodal as well, and then also a quarter with relatively quiet opportunities for repricing, because of the timing of contracts.

Okay, but outside of repricing, same stores kind of sales, you had talked about being in that 4% range, I thought in prior quarters.

Where are you relative to that?

It feels like it is a little less good, probably.

Is that fair?

I would be comfortable saying that we're in that range.

Okay.

You just mentioned, Don, that East and West was about half of your business.

Is that revenue or volume?

The East/West revenue split is what we're talking about.

And as far as you're concerned, the profitability on a move is fairly similar?

We are indifferent with respect to the coast.

To the ports.

The steam ship lines are making those decisions, Ed, with respect to vessel rotations and vessel utilization, and being partners with that industry, we work with them to support them.

Okay.

You mentioned that you talked about a change in the coal business toward shorter haul, what is driving that?

I think part of that is just certain contracts that have been increased.

The Ohio river coal certainly is very active.

Scrubber installation may be coming into play for some of this, as well.

But I think also the fact that stockpiles in the South generally have been higher over the past 12 months, a little lower in the North, so our utility coal in the North from Pittsburgh 8 actually is looking pretty good,and it was up in the quarter, while our utility coal from Central App to the South was down 10%.

That is a big spread and a big hit on RPU with respect to mix effect.

That's good color.

Thank you.

The head count again, up 0.4 year-over-year.

I would think by attrition, now that you have three quarters of negative 4% volume under your belt, if you wanted to by attrition, how quickly could you go from positive 0.4 to negative 4.

Negative.

Well I don't know how fast you go to a particular negative number, but I think that as I mentioned earlier the fact that we have slowed down our hiring is going to continue to take our numbers down as we look at attrition.

As I talked about before, we have a work force in general where the demographics are such that all we have to do is take our hand off the hiring lever a little bit, and it doesn't take too long before our numbers start to come down.

And that's what you're seeing, and I think that's what you will continue to see.

4% would be about 1,200 jobs.

I'm guessing that doesn't take too many quarters, does it?

You know, it just depends on how much we, if any, we continue to hire.

So it also depends on business conditions and where we need people.

One place that we have continued, I will point out, and this is part of the numbers you see, and this is another challenge that we talked about, one place that we continue to look at our demographics, and we look at our head count, and we look at our plans, and we have not slacked off, and that is in trying to bring in people into our supervisory work force, particularly at entry levels because we have a big demographic shift coming up in this Company in the next five years, and we think to not get ready for that, and to keep the pump primed with new training and new entry level supervisors would be an imprudent thing to do.

What do you think the timing is for volumes to be better than the minus 4 range that we are still in through last week at this point?

Do you think, you look out a couple of quarters, and you expect them to flatten out at some point?

What's your timing?

At a certain point, you look at -- you get to the point where you're looking at your comps, but I have learned that every time I think I have a clear insight on where volumes are going, I'm wrong.

So we just try not to make predictions on that.

I think that we, along with everyone else that you read, thinks that this economy has been impacted by the housing slowdown, and that that's something that is going to continue, and the housing market has an impact on transportation volumes in this country.

All of the rails and the trucking industry as well.

Okay.

Thanks guys, for the time.

I appreciate it.

Our next question comes from the line of David Feinberg with Goldman Sachs.

Good morning, gentlemen.

Good morning.

Two questions.

One housekeeping.

Just want to confirm, the other income and the tax benefit that you get from synthetic fuel, that disappears in 2008, the fourth quarter is the last quarter we should see that, correct?

Yes, that's correct.

And then your comments regarding shipper vessel rotation, in terms of going in all water passage through the East Coast, do you view that as a secular change or a temporary change based solely on the weak demand environment and if and when the economy heats back up, the shippers will look to turn their assets quicker and go back to a higher -- or higher mix in West Coast -- a higher mix of West Coast ports relative to East Coast.

We see it as an indication, a manifestation most likely of a trend that will continue.

Mersk was mentioned earlier.

They have made a rather substantial financial investment in a private terminal at the Port of Hampton roads, and that terminal can accommodate very, very large vessels, the largest vessel that they operate.

So I would fully expect them to continue to use the East Coast and I certainly don't -- I am not saying that the West Coast ports will not continue to be high volume, they will.

But I think both coasts, both ports are going to be -- or both coasts are going to be used to optimize vessel rotations, and to optimize supply chains.

Thank you.

Our next question comes from the line of John Larkin with Stifel Nicolaus & Company.

Good morning, gentlemen.

I'm fascinated by the traffic growth you've seen in the Savannah to Atlanta market especially with maybe some excess trucks available in this sloppy market.

It is about a 250-mile length of haul.

Historically intermodal economics begin to break down somewhere around 500 miles.

Could you talk about what has made that particular traffic lane profitable.

I think you said it was rather profitable.

I would just like to understand the economics better if it is possible.

It is Don.

It is all about double stack capability and running dense traffic and getting good utilization in the lane and we're seeing both of those.

Can you apply that same kind of operating philosophy to markets like say Charleston to Charlotte and other such short haul markets.

Do you think that theory is applicable to other markets?

One of the things that we're looking at very closely.

Wick mentioned the crescent corridor, of course there are longer haul segments in the crescent corridor and then there are shorter haul segments in the crescent corridor, we think the goal, the goal posts are removing with respect to length of haul assumptions that used to be out there.

And I think they will continue to evolve and change over time, as highway congestion, highway costs, driver availability, and all of the things we generally look at continue to evolve and change.

So double stack technology brings a very efficient mode of transportation to a market, but it is all about creating velocity in that lane, and running full heavy trains, which the lane from Savannah to Atlanta certainly reflects.

Good answer.

Thank you very much.

And turning the page a bit to export coal, up very nicely in the quarter.

The dollar looks like it is getting weaker.

The Chinese continue to sap some of coal supplies from elsewhere in the world.

Is this the time when the export coal market can kind of return to its heyday of 10 and 20 years ago?

Let me say before Don says anything, we would enjoy that.

[ Laughter ]

I'm sure that's right.

We certainly would.

But we don't see the world market today being anywhere near the same as it was in the early '80s or even the early '90s and we don't see a return to the level of U.S.

coals certainly in Asia, because the Australians still have that market, the proximity advantage.

But in Europe, U.S.

coals are more than competitive in the face of a weaker dollar, and we're seeing the Australians have a much more difficult time from a cost standpoint, with bulk vessel costs from Australia all the way to Europe, as well as port congestion, and just being able to meet overall demand.

So U.S.

coals with the weaker dollar in Europe are certainly well positioned and our volumes reflect that.

Okay.

Then just one final question, on operations, the last one railroad that had the best improvement in operating ratio I believe reduced train storage by about 5% on a 1% increase in volume.

Clearly your volume is not quite that strong in a tough environment, but are there operational tweaks to the operating plan that could begin to achieve the kind of benefits that the particular western railroad I'm talking about achieved through reducing trade storage?

This is Steve.

There is a bit of difference in comparing east and west, of course.

But in general, as Wick spoke to a number of different product opportunities, which we are working on and have worked on, our opportunity to work both with origin destination point payers and even within commodity groups, to reduce cycle time, reduce costs, improve our opportunities across the spectrum of the sales packages that we offer and products that we offer to our customer base, is an ongoing living every day exercise.

And yes, there are opportunities for us to continue to reduce those cycle times, take costs out, improve our equipment flows and better serve our customers.

That's all I had.

Thank you, Steve.

Our last question comes from the line of John Barnes with BB&T Capital Markets.

Good morning, guys.

Don, and Steve, I guess, to your answers on this East Coast versus West Coast intermodal lane, if this is a more permanent shift, Don, you can give us an idea of two or three year out, what is the revenue mix going to look like?

If it is 50/50 today, does it become more heavily weighted towards East Coast revenue generation from the intermodal?

And then I guess towards Steve how that shift, how does it change your CapEx outlook for your intermodal franchise?

Is there some more opportunity for Heartland Corridor type investment or is it just kind of more of the -- kind of continuing to invest where have you been investing?

Well, the crystal ball is a little bit cloudy in terms of how it is going to continually evolve and whether that 50/50 percentage will continue to change.

I think you will see, with the advent of the Heartland Corridor, the opening of Rickenbacker, you will see our mix of traffic coming through the East Coast ports continue to change.

Norfolk up to the Columbus, Ohio Valley, Detroit, and back to Chicago, is very good long-haul traffic, and we have the infrastructure in place, we already have the railroad capacity, when we clear the tunnels, the reason we're clearing the tunnels is to tap that additional capacity.

We will have an overnight service to Chicago to the Ohio Valley, which will enhance asset turns, asset utilization, and better customer service.

And that's just one example.

We will also see traffic from the southeastern ports possibly go back to the gateways.

So there are a lot of moving parts to this, a lot of it is still not totally visible.

But as we visit with the Asian steamship lines, they clearly outline to us their long-term plans to use both coasts in a prudent manner to optimize their overall service.

John, Steve.

Much like the capacity we're adding in the Heartland Corridor, and in the Crescent Corridor concepts, as opportunity presents itself, at the ports, I can assure you that we are presently adding and will add capacity if the business case justifies it.

Okay.

Very good.

And in the Savannah to Atlanta corridor, we have several initiatives ongoing both in the city of Savannah and on Atlanta road, to improve capacity and improve and increase through-put.

And Steve, the facilities being built in the Southeast, I was recently in Charleston, they were talking about the development of an intermodal facility in Orangeburg, South Carolina, still a lot of discussion about the joint facility on the Savannah river in Jasper county, and as you look at those two facilities, are those going to be jointly served by both eastern rails, or are those facilities being built on one particular rail or the other?

John, in reference to the previous question, in response, I will look in my crystal ball and it is now becoming cloudy.

There is an unknown element here that I really can't speak to, but to the extent that we can participate where we would not normally have an opportunity to, we would certainly be willing to entertain it.

Okay.

All right.

And then last question, for you, on equipment, there has been some discussion this quarter about various levels of equipment currently in storage, both locomotives and cars, given your current traffic level, could you give us an idea, do you have any equipment stored, mothballed, that kind of thing?

We do in fact have some rolling stock cars in storage.

I don't have very many locomotives in storage.

Can you give us magnitude of cars?

Six to 7,000.

Very good.

Thank you, guys.

There are no further questions at this time.

I would like to turn the floor back to Management for concluding remarks.

Well, in conclusion, thanks very much for your time.

As always, we appreciate the chance to talk with you.

And as I mentioned earlier, let us know what you think of this format.

And we look forward to talking to you again.

Thanks.

Ladies and gentlemen, this concludes today's teleconference.

Thank you all for your participation.