Norfolk Southern Corp (NSC) 2012 Q3 法說會逐字稿

Greetings and welcome to the Norfolk Southern Corporation third-quarter 2012 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 now my pleasure to introduce your host, Mr. Michael Hostutler, Norfolk Southern Director of Investor Relations.

Thank you.

You may begin.

Thank you and good afternoon.

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

First, the slides of the presenters are available on our website, at NScorp.com in the Investors section.

Additionally, transcript and MP3 downloads of today's call will be posted on our website for your convenience.

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

Statements that are forward-looking can be identified by the use of 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, that is non-GAAP numbers, have been reconciled on our website in the Investors section.

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

Thank you Michael, and good afternoon everyone.

It is my pleasure to welcome you to our third-quarter 2012 earnings conference call.

With me today are several members of our senior team, including Don Seale, our Chief Marketing Officer, Mark Manion, our Chief Operating Officer, and John Rathbone, our Chief Financial Officer, all of whom you will hear from this afternoon.

In the third quarter, our company produced earnings per share of $1.24, which is 22% below last year.

As we discussed in our earnings pre-release, these results were driven by the continuing weakness in coal volumes, which were exacerbated by further declines in export coal shipments and coupled with sequential declines in merchandise volumes.

Revenues for the third quarter were $2.7 billion, a decrease of nearly $200 million or 7% from last year.

In addition to the 14% reduction in coal volumes, merchandise traffic declined 1% and fuel surcharge revenues were down 20%.

Don will provide you a breakdown of the revenue details in a few minutes.

On the service front, our network performed at a very high level with our Composite Service Index averaging above 83% for the quarter.

As all of you know, a more fluid network is a more efficient network.

For example, the trains we had to re-groove on line of road fell by 32% year-over-year.

Mark will provide you with all of the operations details, along with some other productivity numbers.

During the third quarter we were able to hold expenses to just over 0.5% increase compared to last year, while productivity related efficiency enabled us to do a good job of expense control as related to inflation.

The decrease in these expenses obviously could not offset the revenue declines.

John will give you all of those financial details a little later, but at this point, I'll turn the program over to Don and then the rest of the team, and I'll return with some closing remarks before we take your questions.

Don?

Thank you Wick.

Good afternoon everyone.

As a result of weaker fundamentals in our merchandise and coal markets coupled with negative year-over-year comparisons in fuel and mix, revenues for the third quarter was down $196 million or 7% versus third quarter last year.

$84 million of the revenue variance was due to negative mix and price and of this total negative mix amounted to $69 million.

Lower fuel surcharge revenue accounted for $72 million of the decline, and the remaining $40 million of the decrease was a result of weaker volumes.

Coal revenue decreased $198 million or 22% for the quarter.

Merchandise revenue was down $14 million, or 1%, and intermodal revenue set an all-time quarterly record of $567 million, up $16 million or 3% versus 2011.

Revenue per unit in the quarter was $1509, down $87 or 5%.

And total volume declined by 25,000 units, or 1%.

In terms of yield, overall revenue per unit for the quarter fell $87 or 5% versus 2011.

Negative mix, fuel and pricing for export coal were the key drivers of this decline.

Coal revenue per unit declined $205 or 9% from one year ago, due to material declines in the marketplace for export coal combined with negative length of haul impacts in coal.

Intermodal RPU decreased by $14 or 2% for the quarter, while merchandise RPU was up $14 or 1%.

Within the business groups, negative mix adversely impacted revenue per unit performance during the quarter.

For example, coal volumes declined by 57,000 loads with an average RPU of $2000, while intermodal volume increased by 40,000 loads at an average revenue per unit of $630.

Similar mix impacts were seen in metals and construction and agricultural commodities.

With respect to volume, total shipments for the quarter were down 1%.

Coal volume was down 14%, intermodal was up 5%, and merchandise declined 1% compared to last year.

On the plus side, intermodal volumes set a quarterly record high led by continued gains in highway conversions in our Domestic Intermodal segment.

Within merchandise, volumes of metals and construction and paper traffic were down 7% and 5% respectively, while agricultural volumes were flat compared to a year ago.

Chemicals volume increased 4%, and automotive traffic was up 7%.

In total, the month of September accounted for over 90% of the entire third quarter volume decline as both coal and merchandise volumes materially weakened at the beginning and through September.

This is a data point that I will return to in my comments on the outlook for the fourth quarter, as we expect our volumes ahead will somewhat reflect those that we saw in September.

Drilling down into our major markets starting with coal, revenue for the quarter of $701 million was down $198 million or 22%.

Coal revenue per unit was $2014, down 9%.

And volume was 348,000 units, down 14%, as I previously mentioned.

As we've seen in the last few quarters, competition from natural gas and weaker demand for electricity continued to impact our utility volumes.

Third-quarter utility shipments were down 15% versus last year, but up 10% sequentially from the second quarter.

Export volume decreased 7% for the quarter compared with last year, driven by reduced volume through Baltimore and Lamberts Point, which were down 15% and 6% respectively.

Export volumes fell 28% sequentially from the second quarter to the third quarter as the global met coal market weakened materially.

Also, our participation in the export thermal coal market weakened during the third quarter as well with export thermal shipments representing only 17% of our total export volume in the quarter versus 29% of our export volume in the second quarter.

Total export volumes, which were up a combined 5% in July and August, fell by 28% in the month of September.

And finally, in our domestic met coal market, volume declined by 17% in the quarter due to reduced volumes of iron ore as a result of the bankruptcy related closure of RG Steel at Warren, Ohio, as well as decelerating demand for domestic steel production.

Now, turning next to our Intermodal business, we achieved new quarterly records in this sector for both revenue and volume.

Revenue of $567 million was up 3% over third quarter last year, and volume reached 867,000 units, up 5%.

In keeping with recent quarters, our domestic Intermodal business again posted double-digit gains, up 11% over last year, due primarily to highway conversions.

Within our international segment, volumes were down 1% as reductions associated with the Maersk contract comp were largely offset by growth in other international business.

Excluding the negative comp, our comparison from last year, international volume was up 11% in the quarter.

Triple Crown volume declined 3% and premium volume was up 3% in the quarter.

During the quarter, we opened our new Memphis intermodal terminal along our Crescent Corridor.

This new terminal substantially increases our capacity to handle additional highway conversions over our Crescent Corridor and for East Coast import shipments.

In addition, we plan to open new terminals in Birmingham and Greencastle Pennsylvania in the fourth quarter and the first quarter.

These new Crescent Corridor terminals will set the stage to launch up to 34 new service lanes beginning in January and continuing through the first half of next year.

Now, wrapping up with our merchandise business for the quarter, revenue reached $1.4 billion, down $14 million or 1% versus last year due to a 1% volume decline and a 1% gain in revenue per unit.

Taking a look at the markets within merchandise, there were mixed results during the quarter.

Starting with the largest segment, Metals and Construction experienced a 7% volume decline for the quarter as weaker highway and commercial construction activity brought down aggregates volumes by 12% in the quarter.

Steel car loadings declined 4% in part as a result of the RG Steel closure at Sparrows Point, Maryland, coupled with a 1% decline in domestic steel production.

We also saw a 23% drop in volumes of materials to support natural gas drilling in the Marcellus and Utica Shale regions during the quarter due to fewer drilling rig counts after realizing nearly a 50% gain in our volume in this material in the first half year-over-year.

As you can see in the next slide, active drilling rig counts within our service region declined by 27% in the third quarter, as low natural gas prices prompted operators to reduce dry gas production.

The decline is most pronounced in Pennsylvania, which represents our largest market for Marcellus and Utica Shale, where rig counts fell by over 40%, or 56 rigs since the third quarter of 2011.

While this decline in activity is adversely impacting our sand and pipe business into this region, in the short run, it's a clear indicator of higher natural gas prices ahead, which we are beginning to see.

Third-quarter volumes within our next largest merchandise segment, agriculture, were even with last year as volume declines of ethanol and wheat were offset by higher shipments of soybeans and feed.

Long-haul corn shipments were also lower due to the drought in the Midwest and increased local sourcing in the Southeast where the crop was better.

Chemicals traffic was up 4% for the quarter due to new crude oil business from the Bakken and Canadian oil fields.

We are now handling crude oil to six refineries in our service territory.

And our automotive sector was up 7% for the quarter despite model changes and retooling activity at three Norfolk Southern served assembly plants.

As shown in the next slide, third-quarter auto volumes were impacted by the transfer of the Ford Escape sport utility vehicle from Kansas City to Louisville, which was only partially offset by increased F-150 pickup production at the Kansas City plant.

We also saw retooling at General Motors plants at Wentzville, Missouri, and Fort Wayne, Indiana.

These two plants have now largely completed most of this transitional work and we expect growing volumes at both in addition to other NS-served automotive plants, albeit against tougher year-over-year comps as the year progresses.

And finally, traffic levels with our Paper and Forest Products segment were down 5% for the quarter, due to lower volumes of pulp and municipal solid waste traffic.

These decreases were only partially offset by lumber which was up 10% in the quarter, as housing starts continue to improve in selected markets.

Now let's turn our attention to our business outlook.

Looking ahead, we expect weaker overall fundamentals in most of our markets through the rest of the year, and into the first half of 2013.

Continued competition from natural gas and reduced demand for electricity will continue to impact our utility coal volumes.

And dramatic changes in the export coal market due to weaker demand for both met and steam coal into Europe and Asia will continue to present a challenging environment for export volume of export pricing.

We expect domestic met coal to show only moderate strength ahead as demand for steel to support automotive production continues in the fourth quarter, but will be partially offset by weaker pipe markets.

Growth in this segment will be further tempered due to the bankruptcy related closure of RG Steel, which I've mentioned previously, and the unfavorable comp associated with that event.

The outlook for our domestic intermodal market remains positive with a favorable environment for highway conversions.

In particular, the launch of new Crescent Corridor Lane starting in January will support higher volumes ahead.

We also expect continued expansion in our international and premium market segments.

The outlook for our merchandise sector is mixed as project growth in crude oil, along with continued growth in the automotive industry, should create favorable conditions throughout the rest of the year for chemicals and automotive.

And declining materials associated with natural gas drilling along with the difficult agriculture market due to the Midwest drought this summer will moderate overall performance in our merchandise business segments.

In summary, as I stated earlier in my remarks, we expect that volume trends in the fourth quarter will be somewhat reflective of those we saw in September as we work our way through material softening in several of our key markets.

With respect to pricing, our commitment remains to price at levels above the rate of rail inflation over the long run.

Export coal markets made this a difficult task in the third quarter, and we expect those same headwinds over the next few quarters.

But based on our internal analysis, and excluding that negative effect of export coal, we met our objective of pricing above rail inflation in the third quarter, and we expect that positive trend to continue as we provide excellent service and value to our customers across our network.

Thank you.

And with respect to our service product, I'll now turn it over to Mark to go over our safety and service report.

Thanks Don.

Good afternoon everyone.

Starting with safety, we ended the quarter with an injury ratio of 0.77, a 1% improvement over the full third-quarter ratio last year.

Our employees continue to drive improvements and remain committed to safety and service and are on track to reach another record in safety performance.

Moving on to service performance, here measured by our composite service metric, we continue to show consistent improvement.

In fact, our network is operating at record velocity, helping to drive productivity improvements.

As a reminder, our service composite combines metrics for key service drivers, including train performance, connection performance and planned adherence.

In the third quarter, service composite was 83.3%, a 5.6% improvement over the same period last year.

For the first nine months of the year, the composite performance is 83%, a 9.6% improvement over the same period last year.

The gains are led by train performance which improved 24% over the first nine months of last year.

But all of the service components, train performance, connection performance, and plan adherence, continue to improve.

In fact, we set an all-time record in connection performance in the third quarter.

Train speed, one of the primary measures of network velocity, reflects a 2.7 mile an hour or 12.6% increase in the third quarter versus the same period last year.

In fact, train speed in the third quarter was the highest average quarterly train speed we have ever reported.

Similar improvements are seen in terminal dwell, the other component of network velocity.

For the third quarter, we achieved 21.3 hours, a reduction of 2.3 hours, or 9.5% from the third quarter last year.

This also matched our best-ever average quarterly terminal dwell.

As I mentioned earlier, operating performance and network velocity are critical to improving productivity, and these improvements are reflected in several key measures of that asset productivity.

In the third quarter, we saw that train and engine service over time was reduced to 20%.

Recrews were reduced sizable 32%.

Both over overtime and recrew improvement was the result of higher velocity operations.

Equipment rents overall have been reduced.

But importantly, the portion of equipment rents driven directly by velocity was reduced by 14%.

Locomotives in service were reduced by 3%.

Fuel consumption was reduced by 3% despite headwinds of an unfavorable fuel efficiency traffic mix change.

And finally, gross ton miles per train hour improved by 2%.

In terms of ongoing expense reductions, we'll continue to size our manpower and asset base to meet business levels along with controlling costs across the business.

We have furloughed 234 T&E employees, principally in our coal lanes.

We have another 200 employees that are working at a lower level of activity, and on a minimum guarantee basis, instead of being furloughed, this is in order to help retain crews during the soft period, we have approximately 200 locomotives in storage due to business declines, but also because of increased velocity.

Additionally, since the third quarter of 2011, we've returned 160 leased locomotives that we had retained in 2010 and 2011.

These were less fuel-efficient locomotives.

We have approximately 17,500 cars in storage.

While most are driven by volume declines, many are in storage because of velocity improvement.

Regardless of the reasons for the locomotives and cars in storage, we are modulating the maintenance costs associated with these assets as well.

At the same time, we will continue to minimize the overtime and recrews at the current significantly reduced levels.

And of course, going forward, in concert with other initiatives, we will continue to concentrate on further improving velocity which, as I've explained, reduces costs.

Now I will turn it over to John.

Thank you.

I'll now review our financial results for the third quarter.

As anticipated, our results are down this quarter compared with last year due primarily to the lower volumes in key markets, as Don described.

We also experienced revenue headwinds because of fuel.

Let's take a closer look at our results.

Railway operating revenues for the third quarter -- for the quarter were $2.7 billion, down $196 million or 7% compared to third quarter of last year.

Depressed coal volumes were the principal driver of this decline.

But in addition, fuel surcharge revenues were $72 million below last year, mostly due to the $73 million dip in fuel surcharge lag effect, $21 million unfavorable this year compared to $52 million favorable last year.

Slide 3 shows our total operating expenses which increased slightly for the quarter.

Income from railway operations totaled $731 million, with the $207 million decrease almost totally driven by lower revenues.

Our operating ratio was 72.9, or 8% higher than our third-quarter 2011 results.

Turning to our expense detail, this slide presents the major components of the $11 million change.

The materials in Other and Depreciation categories drove the overall increase, which largely reflects our continued focus on the quality of our assets through maintenance programs and capital spending.

Materials and Other also included higher property taxes and some miscellaneous expenses.

Purchase services and rents were flat, benefiting from lower equipment rents, the elimination of certain equipment leases, and reduced haulage expenses.

These savings were offset by increases in professional and consulting fees, intermodal operating costs and freight car repairs.

Fuel decreased $6 million or 2%.

As displayed on the following slide, reduced fuel consumption was partially offset by slightly higher prices.

Compensation and benefits displayed next reflects a $12 million decrease, down 2%.

The next slide details the components driving this change.

First, lower incentive and stock compensation reflects our softer operating results.

Second, volume related payroll was down $13 million, $9 million of which was related to reduced T&E labor and fewer T&E trainees.

Third, higher pay rates, largely July's increase for our contract employees, drove expenses up $13 million.

And lastly, pension and other postemployment costs were up $6 million.

Turning to our nonoperating items, the majority of our $27 million decrease is due to lower gains on property sales and reduced coal royalties which were partially offset by higher returns from Company-owned life insurance.

Interest expense on debt was up $10 million due to the increased net borrowings.

As illustrated on this slide, income from income tax decreased $244 million, or 28%, primarily due to lower operating income.

Income taxes totaled $238 million and the effective tax rate was 37.2%.

Income taxes last year were $330 million with an effective tax rate of 37.3%.

Our bottom-line results presented on the following slide reflect third-quarter net income of $402 million, a decrease of $152 million or 27% compared with last year.

Diluted earnings per share decreased $0.35 or 22% to $1.24.

Turning to our year-to-date cash flows, cash provided by operations cover property addition, free cash flow combined with $1.2 billion of new notes issued, supported our share repurchase activities, dividends and debt repayment.

In the third quarter, we purchased 4.2 million shares, bringing the total repurchase for the year to 16.5 million shares at a cost of $1.2 billion.

Our objective remains the same with regard to the share repurchase program.

Cash flow above property additions at dividends will be returned to shareholders, and we will use our balance sheet leverage to the extent we maintain our current bond rating.

We intend to go into the year-end with a strong cash balance because of the uncertainty surrounding the upcoming fiscal cliff.

Nonetheless, we will continue to repurchase shares in the fourth quarter, albeit at a moderated rate.

Thank you for your attention, and I'll turn the program back to Wick.

Thank you John.

As you heard, while we continue to operate at unprecedented levels of network velocity and efficiency, the combination of cheap natural gas, reduced demand for electricity and softening global economic conditions created significant headwinds for us in the third quarter.

As Don told you, while some of the weakness in our automotive business was short-term in nature, in general we look for these headwinds to continue largely unabated through the fourth quarter and into the first half of the year.

As Mark told you, we will continue to remain very focused on cost control, and making sure that we have the appropriate levels of resources employed to handle our business levels while maintaining a high level of network performance and efficiency, along with superior customer service.

Over the longer term, we remain very optimistic about our prospects.

As Don described, we are now opening two major new intermodal terminals as part of our Crescent Corridor initiative with one more to go this year, and we are excited about the new business that these will help bring to our franchise.

We have strong franchises in automotives and metals, which will continue to drive growth as well, along with exciting new opportunities in energy related projects.

Despite the current softness in our coal business, we have tremendous long-term strength in terms of our access to major coal deposits, our strong metallurgical coal franchise, and our export facility access, including our Lamberts Point terminal, the largest coal peer in North America.

In summary, while our outlook for the next few quarters is guarded, over the longer term, we feel confident that we can continue to deliver high levels of service to our customers and superior returns to our shareholders.

Thanks for your attention, and we will now open it up for your questions.

(Operator Instructions).

Chris Wetherbee, Citigroup.

Thanks, good afternoon.

Maybe a question just kind of on the scale of the business as we are looking at kind of a trend from a volume standpoint, obviously outlook is a little bit uncertain and maybe potentially weaker.

How do you think about measures or what are the measures you can take, particularly in the fourth quarter, as you start to adapt to this?

It sounds like the volume fall-off was a little later in the quarter.

But how should we be thinking about kind of the resource allocation in the fourth quarter in particular to try to offset some of this revenue decline?

Good afternoon, Chris.

As Mark outlined to you, we are very actively looking right now at our asset base and our personnel in terms of making sure that we don't have any more people or assets employed than we absolutely need to with the caveat that we are running the railroad at a very efficient level, and we are not going to do anything to slow down the network because we think that's going to cost us more money than it saves us.

In the third quarter, for example, we initially had set out to do a little more asset maintenance than we had in the first two quarters.

The numbers reflect that.

We have throttled that back and will continue to take a very hard look at all of those expenses.

And I can tell you also that, as we look out into next year and do our projections, we are doing expense -- a hard look at expenses in every category that we can.

So again, with the caveat that we are going to keep the railroad running at the velocity that it's currently running at, we're looking at every expense item, seeing what else we might be able to take out.

That's helpful.

Thank you.

Maybe a follow-up, when you think about the pace of export coal volumes in particular as you move into October, can you give us a sense roughly of whether or not the September decline that we saw either has accelerated, remained roughly the same, or just give us a little bit of parameters to how we should think about that for the fourth quarter?

That would be great.

Thank you.

This is Don.

The export volume run rate we are seeing right now is comparable to September.

We expect the quarter to be in line with that type of volume decline.

Okay, thank you.

Chris Ceraso, Credit Suisse.

Thank you.

Good evening.

So I had a question about the expenses.

And I understand that maybe the decline happened late in the quarter, so it was hard to adjust quick enough as volumes deteriorated.

But do you think you will be better able to match the decline in revenues with the decline in expenses in the fourth quarter?

Chris, we're going to do everything that we can to do -- can to help with that.

We are not going to be able to make those kinds of offsets in totality partially because the fall-off that we are seeing particularly on the export coal business is a profitable piece of our business, obviously, and a business that really doesn't have a very high percentage of variable cost attached to it.

So, we'll do obviously all we can in terms of reducing crews -- obviously not running trains, that will have some impact on fuel.

Mark mentioned the furloughs which we've already announced in the coal fields.

So, we'll pull every lever we have, but it's a very difficult thing to offset when you get into business like export coal.

Okay.

Then maybe just a follow-up, you mentioned that you're starting to a little bit more crude by rail.

Can you give us a little more quantification of how much you're doing now and what you think the growth trajectory is in that?

Where will it be a year or two from now?

How many cars a week or trains a week do you think you'll be moving?

We have a substantial opportunity in crude by rail as you probably know.

We serve multiple refineries in the Mid-Atlantic up into the Northeast as well as a few down into the Gulf as well.

So, as I mentioned in the remarks, we are already handling crude to six refineries that we serve.

I would rather not get into the volumes that we are handling, but I will tell you that it's ramping up in a significant way.

We think it's a very exciting opportunity, and in particular we think that the movements to East Coast refineries are very long-term rail plays, so we think is a great opportunity.

Okay, thank you.

Peter Nesvold, Jefferies & Co.

Good afternoon.

I guess if you could just elaborate a little bit for me.

Why is export coal such a high fixed cost business relative to other businesses that you run?

Because one thing that's been very pleasantly surprising about a lot of the Class 1 reports so far this year is the ability to reposition assets to counteract the downturn in volume.

So maybe if you could elaborate a little bit more on that, that would be helpful.

I'll contrast our coal business with our intermodal business where attached to every intermodal load you have things like lists, you have drage charges, in many cases you have a lot of variable cost attached to each load.

When you run a unit coal train from point A to point B, you essentially have crew costs and fuel costs.

The -- over the longer-term obviously, as Mark described, you can make significant improvements in things like asset ownership.

But those take a little bit longer to be reflected through the income statement unless you have something like locomotives to turn -- leased locomotives to turn in immediately.

It's just the nature of the business.

And as I also mentioned, as I think all of you know, export coal has been an important part of our business and a profitable part of our business for a long period of time.

It's more difficult to -- it's more difficult to offset those kinds of costs versus revenue.

Mark just handed me a note.

We currently, for example we have about 5700 coal cars stored.

Over the long-term, if this decline continues, we will be buying fewer coal cars.

And that reflects itself in depreciation and lower capital expense.

But it doesn't show up right away in the income statement.

As a follow-up, revenue is down about $200 million year-over-year.

Operating costs, including fuel, so it's admittedly very simplistic, but operating costs are kind of flat to slightly up.

$200 million kind of sounds like a productivity target for a year.

Does that suggest that, without volume gains, that it could take us up to three to four quarters to sort of claw our way out of this?

I think how quickly it takes to claw our way out of this depends on a lot of revenue side as well as the expense side.

But as I mentioned earlier, we've taken action, significant action.

We will continue to take it on the expense side to ensure that we are managing those expenses as well as we can.

And I point out that if you look at overall volumes for the quarter, they were down 1% sequentially.

So the impact was on the RPU side, as Don outlined, more so than on the volume side and the volume side really reflects the train operation.

Thank you.

William Greene, Morgan Stanley Smith Barney.

Thanks very much.

Wick, I wanted to kind of think through the export coal issues, because it seems to me like the fact that coal is kind of weak isn't really much of a surprise.

I feel like for some time people have looked at the export coal and said, gosh, that's actually quite high.

Even if we think it's a growth area, we could see a pretty big decline, and of course the nat gas stuff has been understood for some time on the utility side.

So I kind of look at this and say it seems to me that Norfolk has historically been more agile in adjusting to these things.

So did this really just sort of come sort of out of left field for you?

I don't quite understand why there wasn't a faster reaction, or maybe I am missing a piece.

This is Don.

A key data point in the quarter, as I mentioned, was that July and August in our export market, we were up 5% in volume clearing August, and then we saw September fall by 28%.

We have seen both our met coal and thermal coal position in Western Europe in particular with the debt crisis there and the economic recession that they are seeing, and the very softening that we are seeing in the Chinese economy take a big hit on US origin coal.

We've seen several of our met coal mines over the last 30 to 45 days shut our operations or cease operations, defer tonnage shipping, and the market is just not there and September was a big decline for us.

So it came rather quickly; all of this came to a head rather quickly.

Okay.

Then if we sort of switch topics a little bit from coal, I do think, in spite of the cold challenges this year, you were declared revenue adequate.

Does that at all change your ability to range raise price as you look at the regulatory environment?

We have been revenue adequate a few times before, as well as not revenue adequate in some years.

We are going to continue to do what we always do, which is price to the market.

And I will say, and I think this is an important point, that from the standpoint of customer satisfaction with our service levels, which is an important part in our pricing conversations, I have never seen our customers happier with the level of rail service we are providing.

And I go out and meet a lot of customers, obviously, and Don meets more, and they are effusive in their praise for what we are doing right now.

That's important.

We're going to keep that up and that will be a component of the pricing equation as well.

Yes, no, I understand.

I guess our hope would just be more rate cases.

But thank you for the time.

Scott Group, Wolfe Trahan.

Thanks, good afternoon guys.

So I just want to follow up on that last question, because I'm not sure if the message is things happened really suddenly in September and we didn't have time to adjust, or that, hey, this is export coal business and pricing really fell off and there's not much we can do because it's a variable cost model and until volume and pricing come back, there's not so much that we can do.

You know, there are elements of both.

It is certainly true that the export coal, because it's just one segment of our business, presents issues for us in terms of overall cost reduction because you cannot go out and take significant cost out of a lot of the network.

You take cost out of very isolated parts of the network to react, and that's exactly what we are doing, as Mark outlined.

But it is also true, and Don emphasized this and I will emphasize it again that, while as someone pointed out earlier, coal has been soft all year, that comes as no surprise.

We saw things happening in September that we and I think some other folks out in the industry did not anticipate in any way, shape or form.

And it's not -- we don't have a clear line of sight as to when those conditions improve.

That's fair, Wick.

If I think about the change didn't happen until September.

If we are dealing with a full quarter of these kind of big declines in volume and pricing on the export side, even with some changes that you're doing in the network, could the overall revenue and margin or earnings impact be worse from export coal in fourth quarter than third quarter?

You know, that obviously remains to be seen but -- and we don't predict, but that is certainly one thing that could happen.

Don, you might comment on the not only volume but the pricing environment right now.

I think, as everybody is aware, we have seen metallurgical coal prices in the world market drop precipitously since last year from a high of $330 per metric ton a current range of $160 to $170.

That has left US met coal in a soft world market with very little headroom with respect to marketing its coal in the world market today.

We've also seen the thermal market drop in a similar fashion into Western Europe, as the API 2 index is running at about between $90 and $93, which just doesn't leave a lot of room for central App coal or even northern App coal to compete in the Western European market.

So as those coal prices have dropped, we have seen our position in the market come down, and it has eroded pricing.

We've mentioned in the previous quarters that we did not contract for a year at this time because of the weak market conditions after April 1. So, we have been pricing essentially on a spot basis.

And on a spot basis, prices have materially declined to the point that some US producers just aren't in a position to compete in the world market.

So until we can get prices turned around on coal prices worldwide, and demand starting to come back up, we're going to see this condition continue.

With respect to the question on the fourth quarter, I would just point to the fact that our export volume in the third quarter was down 7%, but I mentioned that our export volume in September was down 28%.

And if we have comparable volumes in the fourth quarter, we will see degradation in that revenue level.

Okay.

That's helpful.

Just the last thing just following up on that, Don, you talked about the price of coal that is down significantly.

Can you give us a sense of how much your export rates are down and then if you are seeing -- continuing to see utility coal pricing domestically above inflation, or if that is starting to see some pressure?

In terms of our pricing, we had material price improvement last year.

We've seen a lot of that reversed this year in terms of the overall percentage.

And I will tell you that it is somewhere, anywhere between 20% and 30%.

Cool.

And on the utility business, most of our utility business, which is about 68%, 69% of our book of coal, continues to be under contract.

We have one major contract, utility contract, where we are renegotiating for 2013 as we speak, but other than that, our book of business for domestic utilities continues to be under contract.

I will tell you, though, as the numbers show, with electricity generation rates down and demand down for electricity and the coal share of electricity generation down from about 45% to about 35%, we've seen material declines year-over-year in utility coal even though we did see a 10% improvement sequentially from the second quarter to the third quarter.

So we are beginning to see utility coal actually start to improve a little bit coming off the summer.

Thanks a lot for the time.

I appreciate it.

Tom Wadewitz, JPMorgan.

Good afternoon.

Surprisingly, I have a question for you on export coal.

I guess it's probably hard to have much visibility looking very far forward, but Wick and Don, do you think this is just going to be -- we should look to the difficult periods that you've had in the past where export coal is running at -- I don't know what the low was for you guys.

It was 12 million or 15 million tons.

Do you think it's maybe because that when we look to 2013 we should just say all right, it's a difficult time frame and we ought to take out the earnings from export coal to kind of a historical trough level?

Or do you have some kind of scenario that can be a much more optimistic look than that and say, well, maybe there was a really hard hit in second half of 2012, but you see it bounce back at least somewhat in 2013.

This is Don.

I think that when we look into our crystal ball, if we have an answer to the European debt crisis and a recovery in that economic scenario in Western Europe, and if we see the stimulus plan in China and in Brazil actually work, and we see demand for world metallurgical coal go up as a result of those improvements, I would say that we are probably at a trough level on met coal and we can see met coal start to recover.

But as you will note, I'm giving you a lot of ifs.

And I think most of us lack visibility on when those events are going to occur.

That's what's going to have to happen to stimulate the export met coal market.

With respect to steam coal, the cost of production for a lot of steam coal in the US, exclusive of northern App, the Illinois Basin and PRB, I'm talking about central App, cost of producing thermal coal and shipping it into the Western European market right now, which is the traditional larger steam coal market with China and India developing, those prices will have to go up beyond the current API 2 level to allow US coals to compete.

Does that get at your question?

Yes, I think --

You asked about an optimistic scenario, and Don gave it to you.

But not only did he give you if's, he gave you big if's.

So --

Right.

Okay.

That's what it takes.

Okay, sure.

Look, there's a lot of moving parts in the export coal market, so it's hard to get your arms around that.

One of the other things you mentioned that was a big headwind was this decline in merchandise, the manifest traffic that you know, you showed some significant operating leverage on that, run shorter trains and so forth.

Do you think there's opportunity to rework the train schedule?

You guys have good IT systems, and you've historically I think shown good ability to do that.

Is that something that, if the weakness in metals and construction and paper and so forth continue, that you can kind of rework the train starts and bring that number down and bring maybe bring the headcount number down in fourth quarter, or is that kind of a tough thing to do?

No, that's absolutely -- that is what we do.

Fortunately, we've got the technology and the IT tools these days to do it.

So sizing the operating plan and being able to respond to it pretty quickly works in our favor.

And when you size that plan down, obviously that has the effect on reducing crews, it has the effect on as you reduce the number of operations, you're reducing the number of locomotives you are operating, you're reducing your fuel spend.

And as we do that, we are just really judicious about doing it in a way where we keep the velocity level up because that in itself has a profound effect on reducing costs.

The other point I would make there too is Mark is exactly right.

But in the third quarter, year-over-year, our merchandise volumes were only down 1.5%, which to some extent limits your ability to go in and make major structural changes in the network without slowing down the velocity.

And I'd also say that while we are certainly not particularly buoyant about merchandise prospects, as you heard, we had some things that happened in the third quarter that were a little out of the ordinary in our auto network.

We are seeing the frac sand and other related products slow down a little bit, but on the other hand, we're excited about the prospects for crude oil.

So we are not necessarily thinking that the merchandise network per se is in for any kind of prolonged swoon.

And so we've got to make sure that when we make any changes in the merchandise network, we can accommodate volumes that rise.

Right.

Okay, makes sense.

Thank you for the time.

Keith Schoonmaker, Morningstar.

(technical difficulty) management given the possibility of the fiscal cliff, interested to know to where do you anticipate the Norfolk franchise could realize a negative impact if this proceeds unchecked into sort of a bear case outcome?

Everywhere.

2% off GDP.

Well, yes, 2% off GDP would be -- we would see that impact I would think across almost all of our revenue base there.

You can always pick out things that might happen which would be outliers.

But I cannot imagine that we are going to go over that cliff, but I think the impacts on us and everyone else would be profound.

Okay, thanks.

I guess one other quick one, some impressive performance in train speed and terminal dwell.

I don't think you shared train starts versus car loads or volume.

Would you be willing to share train starts?

Engine --

Yes.

Train starts -- volume was down --

1%.

-- about 1%, and train starts were down about the same.

Okay.

They moved in line.

Yes.

Thank you.

Justin Yagerman, Deutsche Bank.

Thanks for taking my call.

Was curious.

When I look at -- first of all, on the export side, I wanted to clarify something.

It sounded like not only on the met side but on the thermal you're pricing spot and so I'm assuming that's all rolling quarterly right now.

And then was trying to get a sense of the percent of the utility book that's rolling in 2013 as we think about coal.

This is Don.

On the utility coal, as I mentioned, we have one contract which is about maybe in the range of 5% of our utility business that we are addressing currently.

That won't be completed, though, until January 1, 2013.

Is that it on the utility side for 2013?

That is it.

Okay.

And then I was right on the thermal export?

That's also pricing quarterly?

We have started to price quarterly in the fourth quarter, and in the third quarter, we were pricing actually month-to-month.

Okay, that's helpful.

And then I guess just conceptually thinking about the export coal business here, obviously it was a big drag and expected to be for the next few quarters.

How do we think about -- you've got this business that's taking pricing down below rail and inflation, if you include it in core pricing.

But it's obviously economically profitable if you guys are continuing to do it.

So, when I think about the pricing and volume levers here, how much wiggle room do you guys have on pricing to actually either, A, spur more volumes, or B, how bad do volumes have to get before you find yourself in a situation where you say, look, this just isn't a tenable business, it adds too much volatility to our network, and we've got to think about a different way to approach this?

You're making a good point.

As the volatility increases, obviously we continue to pursue this business because it remains good business.

But what we are finding is that we are only a component of the overall supply chain to market US coals into the world market.

And we are not the market maker per se.

We are a participant in the supply chain, but we can't help stimulate volumes over and above a certain level.

So while we would like to handle more volume, we are not -- we don't really have that capability to actually make the market.

Right.

And so I guess so the answer is that to the extent that you can't pull pricing, you just won't move the business?

So is that the right way to think about it?

No, really, what I am saying is that we will handle the business at a certain price if the total cost of the landed cost the US coal into a given international market is viable.

If it's not a viable, then the coal is not sold.

Got it.

Okay.

And then lastly on the domestic intermodal, I was curious in terms of putting into context you guys talked about those 34 service lanes that are opening up as a result of your terminal initiatives.

How do I think about that relative to the size of the network?

Was is that 34 number as a percentage of service lanes that you guys offer?

I don't have a percentage of the total lanes, Justin, off the top of my head.

But I will tell you that these are substantial significant new long-haul lanes, Memphis to Harrisburg, Memphis to Rutherford for example, where it will increase our capability for highway conversion, and also to and from Mexico, to and from the West over Birmingham into the Crescent Corridor back up to Greencastle as well as Harrisburg.

So I don't have a percentage to give you of the total, but it's an appreciable step forward in terms of our capability.

Okay.

And just last one, following up on your comments on the export coal side, obviously a little intriguing in that you obviously don't have the control in terms of how the pricing lever completely affects the demand for the absolute product.

But you have more influence on the domestic utility side.

As you guys look out at this year, is that something in the face of obviously continued low nat gas prices that you'd consider, or I mean is that still a business where the absolute ultimatum is we need to continue to take pricing up?

At this point, we have contracts in place, we have current prices and we price to the market.

And at the time those contracts change, we will be looking at the market that is in place at that time.

So, it's not our intent to discount pricing for domestic utility coal.

Fair enough, thanks a lot.

I appreciate the time as always.

Walter Spracklin, RBC Capital Markets.

Thank you very much.

Good afternoon everyone.

Just first question here is for Mark.

You mentioned you gave us the stats on the amount of furloughed workers and cars and stores and so on.

You mentioned that was mostly coal.

Can you give us a sense of just how much of that are we talking?

50% or 60%?

How much of all the furloughed stuff in storage that you've done is actually specifically coal-related?

With regard to the furloughs, nearly all of those people are in the coal lanes.

And that's the area where the business has changed enough that it's apparent that those people are not coming back to work anytime soon.

So, we have done a more permanent thing, which is furlough those people.

Now, if you look across the rest of the system, the volumes just aren't down that badly.

And where they are down forecast, maybe that we will see them coming back up within the next several months, so we've got another several hundred people out there right now that we have applied what we call a guarantee to a minimum guarantee.

And this is similar to what the other railroads have done.

We're just using a bit different model for it.

We are using these guaranteed extra boards to give them some level of compensation and keep them out there and avoid furloughing at this point.

And if the volumes drop off to the point where we need to, we can always furlough those people.

But right now, it is in our best interest to keep those people available.

As you know, when you furlough people, you run the risk of those people leaving the railroad, then you're back into a cycle where you have to hire, you have to train, you run the risk of not having the people available when you need them.

So, that's the tact we are taking at this point.

That make sense.

Just curious.

I know last -- I know it's never easy to furlough anyone, but during the last cycle, the depth of the recession that we were in I think made it more of an easy argument to make.

Do you have any impediments right now, union or otherwise, that make it more difficult to furlough someone in this current environment compared to, say, '08, '09?

No, we do not.

Okay.

Just a second question here now for Don.

Outside of the coal market, when you look at perhaps your -- if you could characterize going into 2013 just roughly and broadly here your two best segments going into 2013 and your two worst segments outside of the coal, how would you characterize those?

Certainly two of the best or two or three of the best -- domestic intermodal, and also international intermodal continues to grow ex the Maersk comp.

So they were both up 11% in the quarter if we take out Maersk and set it aside.

So that looks good.

Automotive production and sales continues to look positive.

And we expect our franchise -- we serve 26 assembly plants -- we expect that franchise to produce growth.

The metals and construction area, while we are seeing headwinds right now in the frac sand area, which was down 23% as I mentioned in the third quarter, we've got a great steel franchise.

And if automotive does well, as we think it will, we think the steel side of that business will do well.

Just interrupt you for a moment, you don't see tough comps as playing in on your intermodal or auto business at all?

Well, the tough comps, as I mentioned, instead of being up 18% in autos, we will be up maybe single-digit, mid single-digit to low double-digit, but the comps are getting tougher on automotive -- there's no doubt about that -- as we lap it.

But we expect that to be positive.

And then we mentioned in chemicals, natural gas prices are low.

It is reenergizing our domestic chemical industry, so we think plastics will be fine.

And also the crude oil segment that we mentioned is ramping up at a fairly significant rate.

And that should be okay.

On the Paper and Forest Products side, it's going to be mixed, lumber up a little bit from a small base.

Our paper traffic will continue to be fairly soft.

And then the agricultural market with the poor crop, both on corn and soybeans, it's going to be very difficult market for that until the new crop comes in in September of 2013.

That's great color.

Appreciate it, Don.

Jason Seidl, Dahlman Rose.

Good afternoon guys.

If I could touch on the Intermodal a little bit, it looks like if you remove the Maersk business, over 80% of your business is growing double digits.

And if I am reading sort of your commentary right on Triple Crown, it seems like you just got some retooling automotive plants and some soft retail but retail seems to be picking up a bit.

As we approach 2013, how should we think about sort of the growth in Intermodal?

Do think high single digits?

Is that out of the question considering what we are seeing this year and also that you're lapping Maersk?

I would say that high single digits would be a meaningful realistic number.

Okay, fair enough.

Guys, also, looking at your utility contract, you said you only had really one that's coming up.

Is there an ability to do something with price, maybe even revisit other contracts for sort of potentially like guaranteed volumes?

Is that something that's possible?

Is it something that you guys at NSC have thought about?

We certainly have thought about that, and we are constantly talking to our utilities who, as you know, pay the transportation price for coal, for the delivery of coal.

And we're exploring all options that we feel are realistic that would actually stimulate the market.

I think, until we see economic activity pick up and improve domestically, and see the demand for electricity through improved housing and economic activity, we are not certain that we can stimulate a market that is weak to start with.

And also we are seeing natural gas prices continue to firm up in October sales.

They're $3.50 per million BTU and on the futures market, it's closer to $4 dollars per million BTU.

And if the rig counts, the drill rig counts, continue to fall as they have been for dry gas production in our shale gas fields, we're going to work down eventually the excess storage of gas, and we will see prices firm up even more.

You mentioned the firming of natural gas prices.

Does that sort of curtail sort of the rebound on the domestic chemicals market?

Not on the crude oil side.

The crude oil is -- that's independent of natural gas.

We think, as Wick mentioned, that's a longer-term growth play for rail transportation.

We will be the pipeline for Bakken and to a lesser extent possibly Alberta crude oil coming back into the Mid-Atlantic refineries.

With respect to natural gas chemical feedstocks, if natural gas is at $5, coal dispatches fully but yet our chemical industry has a lower cost feedstock than they have had for the past decade.

I think Don is exactly right.

When you talk to the folks in the chemical business, as compared to where they were five or six years ago when they were talking about closing plants and moving offshore, they were worried a lot about price, but they were also worried about supply and in particular the variability of the price.

If we reach what most of the people we talk to believe we are going to reach, which is a very stable and ample supply of gas that trades in the $4 to $6 range, I think the chemical producers, the plastics people and folks like that are going to be -- continue to be very bullish on producing product in North America.

Gentlemen, I appreciate the time as always.

Matt Troy, Susquehanna.

Thanks.

Instead of focusing on all of the variables, which are essentially unknowable into next year, I'd like to kind of drill down on some of the more academic things which can be forecast with some reliability, specifically RCAF.

If you just do the math on RCAF, obviously the hurdle for rail inflation has come in, by a lot of calculations, cut in almost half.

I'm just curious.

As a percentage of your book of business, whether we're using RCAF, RCAF ex fuel directly embedded in a contract or agreement or indirectly as kind of the look on inflation when you talk to customers, how much of your book of business is tied to that metric as the measure of rail inflation against which you price?

This is Don.

In our book of business, we have moved away significantly from RCAF as an escalator in our contracts.

Most of our contracts today have all-inclusive less fuel.

Right.

That's what I'm talking about.

Yes, so RCAF is de minimis with respect to our escalator application.

With respect to the cost of rail inflation, as you know, if you look at RCAF this year, in fact if you look at it this quarter, it's actually down about 1.9%.

And then the all-inclusive less fuel escalator is about 2%.

So, the cost of rail inflation, we are looking at that in the range of 2% currently.

And when I say RCAF that's just the Cliff Notes version for the all-inclusive ex-fuel.

I'm asking how much of the contract base is tied to that metric?

I know RCAF the legacy anachronistic metric has been faded out, but in terms of that modified metric that emerged five, six years ago, roughly is it a third?

Is it a quarter,?

Is it half?

Can you help me understand directionally where the look is?

Here's a couple of data points that hopefully will help answer that question.

About 70% of our revenue moves under contracts.

And we have a mix of escalators in those contracts, some of which are fixed percentage.

Then the balance would have the all-inclusive less fuel.

Roughly in terms of the percentage, I cannot give that to you off the top of my head.

Okay.

Maybe --

But we've got those -- we've got a distribution of those two types of escalators, all-inclusive less fuel, and then a series of fixed escalators with a fixed percentage increase.

I may follow-up and triangulate.

I guess my follow-up question then would be simply the -- you've seen weakness in the truckload market, or at least sequential something in the truckload market, pretty much since mid-summer.

My understanding is that most of the intermodal business is priced on a wholesale basis, it's not very sensitive week-to-week or even month-to-month to truckload spot pricing, and the majority of it anyway.

Have you seen the decline in spot rate pricing that we've seen in the recent months at all chew into the Intermodal pricing you've enjoyed in the market, or even the discussions or are we really talking apples to oranges and it would take a much longer or sustained decline in truckload pricing to really impact that?

That's all I've got today.

Thanks.

It's the latter.

I think spot pricing has not -- and trucking has not cheated into intermodal pricing at this point.

In fact, over the road truck load prices are still up for the year, up in the third quarter.

What we're seeing is fuel impacts within our Intermodal RPU for the quarter.

But truckload pricing has continued to be positive throughout the year.

Spot -- some spot pricing is not positive, but it hasn't had the effect of eroding Intermodal prices.

Great, thanks guys.

Brandon Oglenski, Barclays.

Good evening everyone.

I know this call is going long here.

Just wanted to ask, Don, on coal RPU, with export mix, I think you're saying that we are going to see the mix come off even more here in the fourth quarter.

Does that mean that RPU is sequentially going to be challenged in the fourth quarter?

Yes.

I think this is where a lot of people are getting hung up.

Maybe we've just mis-calibrated on how much incremental contribution that export traffic areas.

Is there any way you can help us understand domestic pricing versus export pricing and the differential between them?

That is something that is contained in confidential contracts with our customers, and because of that, we just can't get into differentials of price in export met coal versus export thermal coal versus domestic utility coal, or even domestic met coal.

But I guess with coal only being down about 1% sequentially on a tonnage basis, there's quite a large differential in the export market then.

Is that correct?

There is a differential in the export market, but there's also mix effects that are reflected sequentially from the second quarter to the third quarter.

2.5 million tons less export coal from the second quarter to the third quarter, 2.5 million tons of export coal which is longer haul, higher RPU and a good margin associated with it.

Also, an increase in the third quarter versus the second quarter sequentially of shorter haul coal moving to the river for export out of the Illinois Basin as well as some Central App export in domestic coal going to the river, domestic met.

All right, thanks.

Just a point of clarification.

It sounded like you said domestic volumes could actually be improving sequentially, but obviously down year-on-year.

Is that the right read?

The utility volume sequentially from the second quarter to the third quarter improved by about 2 million tons or 10%.

We had a hot summer.

We saw our coal and our utility plants come down to about 34 days of inventory versus 38 days previously.

So, we've seen some small uptick in utility coal sequentially second quarter to third quarter.

But do you expect that run rate to continue now, or is the going to be incremental pressure looking ahead?

I think if we see a normalized winter, which is a very hard thing obviously to forecast, but if we see winter weather that is unlike last year, we'll see some demand on utility coal and we'll see most likely natural gas prices continue to rise as well.

Anthony Gallo, Wells Fargo.

Just a couple of questions, if I can, and one in particular on housekeeping.

I thought you said that most of the volume decline in the quarter happened in September and September run rate might be a good proxy for the fourth quarter.

Are you talking about overall carloads for September on a monthly basis representing what we could see in the fourth quarter?

Because by my math, that could be a sequential decline of 8% to 9%.

Is that what I heard or am I mis-hearing that?

This is Don.

What we were talking about was, on coal, September certainly will be reflective -- September volumes will be reflective of our fourth-quarter expectations.

With respect to the merchandise traffic, we do expect our auto traffic to come back up off the retooling effect that we had in the third quarter.

And I will tell you the retooling affect was somewhere in the range of 5000 cars.

Okay, but it was primarily coal from a run rate that we were (multiple speakers)

Correct.

Okay.

And then somewhat unrelated coal question.

If I look at export coal tonnage this quarter versus the third quarter of 2010, it's up about 19%.

Coal revenue over those comparable periods is about the same, but operating margin is about 300 basis points lower.

So, it's not just export coal.

It has to be the other issues that you mentioned with respect to merchandise and maybe Intermodal.

Am I drawing the wrong conclusions?

You're referring to the third quarter year-over-year or third quarter compared to previous years?

Yes, so third-quarter 2012 export tonnage versus third quarter of 2010, you're actually up about 19% over those two periods.

Coal revenue in those two periods is about the same, $701 million versus $709 million.

And yet you had about 300 basis points better margin in the third quarter of '10.

I think you have to put '11 in the middle of that.

In our third quarter 2011, our coal revenues were up $190 million.

And as we have just discussed, our third-quarter 2012 coal revenue numbers are down $198 million.

We have a 14% volume decline, and also degradation in margins with respect to export pricing.

When you say margin, are you talking about -- you're not talking about coal margin, you're talking about operating ratio?

Yes, correct.

We'd have to go back, look at the analysis.

We'd have to understand the fuel impacts --

And mix.

-- and mix impacts to kind of have a better informed view of that.

But we'll follow up on it.

Okay.

Thank you.

Kevin Crissey, UBS.

Your fuel surcharge program versus others, can you talk about why it shows more volatility, and your thoughts on Q4 potential impact?

Thanks.

Well, we have a fuel surcharge program.

It has a certain amount of volatility baked in.

I will tell you we don't really have any understanding at all of anyone else's fuel surcharge program, so I don't know that I can give you a comment on why theirs might be less volatile or more volatile or whatever the case is than ours.

Okay.

How about Q4, your thoughts if things were to state where they are today?

Q4 on the fuel surcharge line?

Sure, yes, on a year-over-year -- it was a headwind to you pretty significantly in Q3, and how would look in Q4?

You should get some of that back I would imagine.

Right?

John?

Yes, we should.

On the fuel -- you're talking about the fuel lag?

Correct.

That assumes -- let's assume a $90 -- it's lower than that today.

We would expect probably a favorable lag of $10 million to $20 million, something in that range.

Now, granted, listen.

If I say that, you've got to remember that this is projecting it from right now and --

Sure.

(multiple speakers) changes, but that's making some assumptions about what the price is going to be.

Thank you.

Jeff Kauffman, Sterne Agee.

Good afternoon.

Just a clarification.

You said earlier that your export coal volume was down 28% year-over-year in September.

Just trying to get a sense for what the progression through the quarter was.

What was July and August?

Did you provide that?

We were up 5% in July and August combined.

And then we were down 28% in September for a decline of 7% for the quarter.

Okay.

And then in response to a question, I think you said that the coal, the September coal volumes will be reflective of your overall 4Q coal volumes.

Did I hear that right?

Is that overall or just export?

I think the September volumes that we're talking about for coal will be reflected in our fourth-quarter coal, total coal volumes.

What was total coal volume down in September if you don't mind?

I don't have that here in front of me, but let me see if I can get it.

It's down 15%

Down 15%.

And then one other question.

If I look at your overall decline in revenue per car load in coal of 9.3%, if I try to isolate the utility coal -- or rather I'm sorry the export coal pricing there, the export coal pricing weakness, how many percentage points of that 9.3% is attributable to the export coal weakness?

We don't break it out that way for the call.

Okay, just -- I guess if I ask it a different way, what was your I guess pricing down on a year-over-year basis, pure pricing, in your export coal?

Again, we don't divulge that type of information in our calls.

I understand.

Thank you very much.

David Vernon, Alliance Bernstein.

Thanks.

Just to clarify, Don, in response to an earlier question, I think you had said that the rate of exports was down 20% to 30%.

I hear that right or was that not right?

I was saying that could be a range.

Fair enough.

-- on what type of traffic we're talking about.

I understand the sensitivity here.

I'm not pushing you on it.

I just wonder, would that be a year-over-year range or a sequential range?

Year-over-year.

Fantastic.

And then for RG Steel, with that bankruptcy, how much volume will come out of the domestic met market with that?

RG Steel in combination, and we had iron ore, domestic met coal and metals, and for the third quarter of 2011, it represented 10,000 carloads.

10,000 carloads.

We will be facing that negative comp until the second quarter of 2013l not at 10,000 cars because the run rate didn't average that in every quarter, but the third quarter 2011 was 10,000 loads.

Fantastic.

Thank you very much.

Wilson Chen, Bank of America Merrill Lynch.

Good afternoon.

I think most my questions have been answered, but if I could get a sense for where utility stockpiles are among I guess you customers in your network so we get a sense for if there is some sequential strength in kind of utility volumes.

How -- where can they go in terms of the magnitude?

Thank you.

The utilities that report to us share with us their stockpile information.

Their inventories are currently at 34 days in their stockpile, 34 days of burn based on the burn capacity of their plants.

And how many days above normal would that typically be if you were to look at it on a normalized basis?

The 34 days is a composite, so we have some plants that would be above norm in inventory, and some that are at target and some slightly below target.

So the 34 is an overall average.

I will tell you that's come down from 38 days as recently as the second quarter.

So, I would term the 34 days in our utility network as being slightly above target but not appreciably above target.

Got you, thank you.

Ladies and gentlemen, the question-and-answer session has concluded.

I would like to turn the floor back over to management for any additional or closing remarks.

Thanks for your patience, everyone, and your questions, and we look forward to talking with you in the future.

Thanks very much.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.