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CSX Corporation (NYSE:CSX)

Q4 2009 Earnings Call

January 20, 2010 8:30 am ET

Executives

David Baggs - Assistant Vice President, Investor Relations

Michael Ward - Chairman, President and Chief Executive Officer

Clarence Gooden - Chief Sales and Marketing Officer

David Brown - Chief Operating Officer

Oscar Munoz - Chief Financial Officer

Analysts

Tom Wadewitz – JPMC

William Greene – Morgan Stanley

Edward Wolfe – Wolfe Research

Ken Hoexter – Merrill Lynch

Matt Troy – Citigroup

Chris Seraso – Credit Suisse

Justin Yagerman – Deutsche Bank

Gary Chase – Barclays Capital

Ben Hartford – Robert W. Baird

Cherilyn Radbourne – Scotia Capital

John Larkin – Stifel, Nicolaus

Randy Cousins – BMO Capital Markets

John Mims – BB&T Capital Markets

Walter Spracklin – RBC Capital Markets

George Pickral – Stephens

Jeff Kaufmann - Sterne, Agee, Leach

Anthony Gallo – Wells Fargo

Operator

(Operator Instructions) Welcome to the CSX Corporation Fourth Quarter 2009 Earnings Call. For the opening remarks and introductions I would like to turn the call over to Mr. David Baggs, Assistant Vice President, Investor Relations for CSX Corporation.

David Baggs

Welcome to CSX Corporation’s Fourth Quarter 2009 Earnings Presentation. The presentation materials that we’ll be reviewing this morning along with our quarterly financial report and our safety and service measurements are available on our website at www.CSX.com under the investor section. In addition, following the presentation a webcast and podcast replay will be available on the website for your review.

Here representing CSX this morning are Michael Ward, the Company’s Chairman, President and Chief Executive Officer, David Brown, our Chief Operating Officer, Clarence Gooden, Chief Sales and Marketing Officer, and Oscar Munoz, Chief Financial Officer.

Before begin the formal part of our program this morning, let me remind everyone that the presentation and other statements made by the company contain forward looking statements and actual performance could differ materially from the results anticipated by these statements. In addition, let me also remind everyone that at the end of the presentation we will conduct a question and answer session with the research analysts this morning. With over 25 analysts covering CSX today I would ask, as a courtesy to everyone, to please limit your inquiries to one primary and one follow up question.

With that let me turn the presentation over to CSX Corporation’s Chairman, President, and Chief Executive Officer, Michael Ward.

Michael Ward

Last evening we reported fourth quarter earnings per share from continuing operations of $0.77 down 16% from the same period last year. The economy continued to show modest sequential improvement during the quarter, while volume was down 7% overall, in the period after Thanksgiving business levels were essentially flat with last year.

Still, revenues were down 13% as lower volume and fuel recoveries more then offset pricing gain of over 5% on a same store sale basis. These gains reflect the increasing value that our transportation service brings to out customers. The big story, however, continues to be our operating leverage, as our employees once again delivered strong safety and service levels while aggressively driving productivity in a still tough economy.

Turning to results for the year, 2009 represented both a challenge and an opportunity for CSX. The challenge was clearly the economy. We faced that challenge, making fundamental improvements in our operations, driving productivity, and positioning ourselves as a much stronger company. As a result of our efforts, we achieved all time record operating ratio of 74.7%.

This was driven by our strong performances in safety, service, and productivity, and our continued focus on yield management. These same efforts helped us achieve the second highest operating income and earnings per share in our history. For 2010 we anticipate better overall conditions and are looking forward to the opportunity for our operations to get even better under a different set of circumstances.

Before I turn the presentation over to Clarence, let me take this opportunity to once again personally thank Tony Ingram for his truly remarkable contribution that he made to our company and the railroad industry. If results are the truest demonstration of leadership, then Tony’s exceptional leadership is well proven.

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

With that, I’ll turn the presentation over to Clarence.

Clarence Gooden

In the fourth quarter of 2009 the economic impact moderated across many of the markets that we serve and we continue to see the evidence of a gradual and steady recovery. Inventory cycles are playing a significant role in the recovery as we have seen a slowing the rate of inventory reductions in several markets, yet some markets such as utility coal still have further reductions to be made.

As I will discuss later in my presentation, the macro economy which turned positive in the third quarter 2009, is expected to grow throughout 2010. At the same time we continue to deliver a safe and reliable service product and we remain focused on pricing our services to reflect the value we are providing to our customers.

Now let’s look at the change in revenue for the prior quarters on the next slide. CSX revenue declined 13% to $2.3 billion due to the continued impact of lower fuel prices and lower volumes. As you can see on the chart, the impact from fuel prices further reduced revenue $182 million in the quarter. This includes a negative fuel lag impact which Oscar will speak to later in the presentation. Also, revenue continued to be impacted by unfavorable volume. While volume declines moderated, they still resulted in $175 million less in year over year revenue.

Finally, as you look further to the right side of the chart, the combined net effect of rate and mix accounted for $3 million in year over year revenue growth. Yet as you look within this net $3 million impact it is important to note that core pricing vibrancy remains strong as pricing gains of $82 million were essentially offset by a negative mix impact in the quarter of $79 million. This mix impact can be more clearly understood on the next slide as we take a closer look at overall volume changes across the markets we serve.

Total volume in the quarter was nearly 1.5 million units, down 7% below the fourth quarter 2008. Looking at the top half of the slide, the bars show the progression of the year over year volume change for each of the major markets that we serve for each quarter in 2009. Looking at the green bars, which represent the fourth quarter change, you can see volume declines worsened in coal when compared to earlier in 2009.

At the same time, volume declines in merchandise moderated significantly from earlier in the year and volumes grew in intermodal and automotive during the fourth quarter. These volume changes have affected the overall mix of the markets that we serve.

Looking at the bottom half of the slide, you can see how our mix of traffic has changed between the first quarter and fourth quarter. Specifically, the share of coal versus our overall book of business has declined while the share of other markets has held steady or increased. This leads to the negative mix impact I discussed on the prior slide, as volume grew and lower revenue per unit markets like intermodal, while higher revenue for markets like coal declined.

Turning to slide nine, let’s look more closely at our pricing results. This slide shows that overall revenue per unit declined as continued core pricing growth was more then offset by reduced fuel surcharge revenues. The line on this chart highlights the year over year change in total revenue per unit which includes the impact of price, fuel, and mix.

On this basis, revenue per unit declined 7.1%. At the same time, the bars on the chart, which represent our same store sales price increases, were 5.3% for the quarter. Remember that these shipments represent approximately 75% of our total traffic base. Our improvements in price continue to reflect the value we are providing to our customers as well as the relative value of rail transportation.

Despite the impact of significantly higher fuel costs, rail customers are still paying roughly half of what they paid prior to de-regulation. Looking forward, in 2010 we expect price increases in the range of 4% to 5%. At this point, we have approximately 75% of our price negotiated which is normal for this point in the year and we have a good line of sight on the price environment for the remaining 25%. Longer term, we still expect price increases to exceed rail inflation on a sustainable basis

Now let’s look at each of the major markets that we serve, starting with coal. Coal had fourth quarter revenue of $641 million down 24% versus 2008 driven by 23% decline in volume and 3% lower revenue per unit. Lower domestic demand resulted from reduced electrical generation, high stockpiles, and declines in metallurgical coal, coke and iron ore due to weaker steel production. Volume also decline on weakness in global demand for exports and an especially tough comparison from 2008 when worldwide coal supply was extremely tight.

Finally, natural gas availability remained at high levels and prices remained relatively low, leading utilities to continue their shift of some electrical production away from coal and to natural gas. Looking forward, favorable coal volumes are expected to continue, influenced by several drivers. On the positive side, the export market is showing signs of substantial strengthening. Natural gas substitution has eased as gas prices have risen. Substitution may again be a factor should prices drop. On the negative side, the primary drivers will continue the weak domestic demand and coal inventory levels.

Turning to the next slide, let’s again take a closer look at coal inventories and their implications on coal moving forward. As we look at the Eastern Utility market, the gold line in the lower portion of the chart labeled Coal Consumption represents tons of inventory consumed each month in the Eastern US Power Sector. The dark blue line in the upper portion of the chart labeled, Coal Inventory, represents tons of inventory at utilities in the Eastern United States. As you can see, stockpile inventories are still at high levels and significantly greater then the month rate of consumption.

Also on this chart we’ve tried to depict a range for typical stockpile levels, as represented by the green shaded area and line. Although typical levels vary by utility, coal price, seasonal, and other factors, a rule of thumb that we have used here represents a 10 year historical monthly average for coal consumption. When coal inventories have exceeded this range, a correction period has usually followed.

As a result, we expect demand for utility coal shipments to remain weak until stockpiles return to these historical levels and until coal consumption increases. Reductions are projected to more then offset moderate improvements in electricity demand. In our opinion, this weakness in utility coal should persist for most of 2010.

Turning to the next slide, let’s review the results in merchandise. Merchandise had fourth quarter revenue of over $1.1 billion down 10% versus 2008 driven by a 5% decline in volume and 5% lower revenue per unit. We experienced the largest volume decline in forest products in emerging markets and food and consumer. Where continued housing and construction weakness led to lower volumes. Metals also experienced volume declines as steel production weakness continued.

Yet we experienced strength in the areas of phosphate and agricultural products due to domestic inventory replenishment, strong demand for exports, and growth in ethanol consumption. Once again, the unfavorable year over year change in revenue per unit was driven declines in fuel recovery. Looking forward to the first quarter, the ongoing economic recovery is expected to result in moderate growth across markets, led primarily by growth in phosphates and metals.

Turning to the next slide, automotive had a fourth quarter revenue of $176 million down 3% versus 2008 driven a 3% increase in volume and 6% lower revenue per unit. The increase in volume was driven by both inventory replenishment resulting from the sales during the third quarter related to the government’s “Cash for Clunkers” stimulus and by slightly improved vehicle sales during the quarter. The unfavorable revenue per unit change was driven by year over year declines in fuel recovery.

As we look forward, volume levels are expected to improve due to more normalized inventory replenishment and double digit increases in light vehicle production. At the same time, we continue to work closely with our customers to adapt to the many production changes that are taking place.

Now turning to our intermodal results, intermodal had a fourth quarter revenue of $340 million up 2% versus 2008 driven by a 5% increase in volume, which was offset by a 3% decline in revenue per unit. Overall, revenue per unit was down in the quarter on decreased fuel recovery and the impacts of a very competitive truck pricing environment.

While the international market continues to feel the effect of the goal economy, volumes improved sequentially due to a slight fall peak in advance of the holiday season. Domestic volumes were up due to continued over the road conversions, expanded service offerings, and an up tick from the peak shipping season.

As we look forward, we expect favorable year over year international revenue, reflecting stabilizing consumer demand, improving global trade, and easier prior year comparables. On the domestic side, we expect volumes to moderate on a year over year basis as well as continued pricing pressure from over the road truck competition due to the abundant truck capacity.

Now looking ahead, the macro economic recovery, which began in late 2009 is expected to continue throughout 2010 as reflected in the gross domestic product and industrial production forecasts shown in the chart. These forecasts project the macro and industrial economies to grow between 2% and 4%. As a result, linehaul revenue growth is expected across most markets with the exception of coal where we still face headwinds for much of 2010.

In closing, let me reiterate that we continue to deliver reliable service and to sell the value of rail transportation, especially as shippers look for the most cost effective and environmentally friendly business solutions. As a result, we continue to expect core pricing to increase above rail inflation on a long term and sustainable basis.

Thank you very much. Now let me turn the presentation over to David to review our operating results.

David Brown

It’s great to be here to talk about 2009 performance, the strength of our team, and our ability to handle future growth safely and efficiently. The operating team finished 2009 with another strong quarter. Our employees delivered another quarter of improvement in safety with a record performance in personal injury frequency.

The actions we took to control costs, adjust resource levels, and drive productivity contributed to record operating margins in a difficult environment. At the same time, we maintained high levels of service reliability for our customers. We remain committed to executing the plan and the network continues to run well with fewer resources.

Now let’s look at some of the details. Slide 18 shows the significant improvement in both personal injury and train accident frequency we delivered over the last four years. The FRA Personal Injury Rate improved nearly 17% to 0.99 in the fourth quarter. This is record quarterly performance. Most importantly, 27 fewer employees were injured on the job compared to prior year. The full year 2009 injury rate of 1.19 represents another CSX record.

The fourth quarter Train Accident Rate improved by 5% to 2.65 compared to last year, the full year rate also improved by 5% to 2.77. These results continued the compelling story here at CSX. Our strong safety performance is the direct result of effective leadership and sustained effort by all of our employees. I thank them for their continued resolve and while the results are very positive, we are committed to continuous improvement. We will make a safe environment even safer for all stakeholders, our employees, our customers, and the public.

Let’s turn to productivity and cost management, this chart shows the change in carload and road crew starts versus 2008. You can see that through the first three quarters of 2009 the changes in volume and road crew starts generally moved together as we worked to align our train network to lower business levels.

In the fourth quarter, the two lines separate. Volume increased 2% sequentially and year over year comparisons eased. At the same time, we held the train network stable and handled the growth in existing train service. As a result, road crew starts were down 16% in the fourth quarter with volume down only 7% compared to prior year. This results in increased train productivity and creates operating leverage.

Turning to the next slide, as you can see, the number of active T&E employees and locomotives are down sharply compared to prior year. As I illustrated on the last slide, we actively managed the size of our train network through 2009. This more streamlined network requires fewer resources. The number of active employees was 15% lower in the quarter while the active locomotive fleet was 16% smaller. You can see that resource levels remained stable in Q4 even as volume grew sequentially.

Looking forward, as volume continues to grow; we will manage our resource levels to meet the needs of our customers. That said, we will not be adding back resources on a one for one basis.

Now let’s look at service performance on slide 21. As we aggressively lowered costs and increased productivity in 2009 we continued to executive the plan and protect service reliability. While train originations declined to 79% for the quarter they remained at historically high levels. At the same time, train arrivals improved to 79% in the quarter matching originations. This improvement was aided by an increase in velocity which as you can see on the right side of the chart, improved to 22 miles per hour. Trains are getting across the line of road faster, arriving on time more frequently and making their connections.

Average terminal dwell increased to 24.3 hours in the quarter and remained stable across 2009. Terminal dwell is largely a function of the train plan. As the scheduled train network was adjusted lower, planned dwell increased. With fewer scheduled train, cars have fewer opportunities to make connections and depart terminals. Given the current surplus of rail cars we are making the appropriate tradeoff between dwell and the size of our train network. Overall, the network is running well and remains stable and fluid.

Turning to the next side, as we entered 2009 we faced an extremely challenging business environment. The operating team responded decisively to sharp volume declines and helped deliver a record operating ratio of 74.7%. Looking forward, the challenge will be somewhat different. As the economy recovers and our volumes grow, we will handle growth more productively and push incremental revenues to the bottom line.

Although the challenge is different, we will employ some similar approaches to improving financial performance. We will use our one planned processes to adjust our scheduled train network to business conditions and build productivity gains into our operating plan. Resources will be closely managed and added back only when necessary. Growth gives us a clear opportunity to increase productivity and capture operating leverage. Finally, our structured productivity initiatives will continue to help offset inflation.

Moving to the next slide, the table on the left summarizes the significant number of resources that are idle as we begin 2010. While this is not an ideal situation, it does position us to respond quickly to growing demand. We currently have nearly 1,900 train and engine employees furloughed and most are ready to return to work within a few weeks.

We will be calling furloughed employees back to work as ongoing attrition reduces the active workforce. Further, we anticipate hiring new employees at specific locations towards the end of 2010 to meet demand in the summer of 2011. Finally, there are currently 564 serviceable locomotives and over 23,000 freight cars in storage. These assets can return to service quickly to meet demand. As I stated earlier, we will continue to take a disciplined approach and activate available resources only when necessary.

Let’s wrap up on the final slide. In summary, we delivered record safety performance in 2009 and will remain a leader in one of America’s safest industries. We will continue to drive productivity, control costs, and manage resource levels as business conditions improve. The network is running well and we remain focused on meeting the needs of our customers with consistent, reliable service.

Our motto of leadership, discipline and execution, delivered results in a very challenging year. This same motto will deliver results as the economy, our customers, and our volumes recover and grow.

Now let me turn the presentation over to Oscar to review the financials.

Oscar Munoz

Let me start with an overview of the quarter’s results, starting at the top of slide 26. Revenue fell 13% to $2.3 billion. Key drivers were a 7% decline in volume and the cycling of significant prior year fuel lag benefit. Expenses declined 12% to $1.7 billion. About a third of this change was due to lower fuel expense with the remainder being driven by continued productivity and cost management initiatives.

Operating income declined 16% to $583 million as our continued cost discipline helped partially offset revenue losses. As we move below the line, one thing to note is that the $155 million of income tax expense in the fourth quarter included a $15 million benefit primarily related to a change in the apportionment of state taxes.

All in, we finished the quarter with EPS from continuing operations of $0.77, also a 16% decline versus last year. Which, in summary reflects the lower volume, solid pricing, continued productivity as well as a fuel lag impact which we will look in more detail on the next slide.

As we have discussed in prior quarters the lag in our fuel surcharge program produces a favorable earnings impact and times of falling fuel prices and a headwind in periods of rising prices. Looking at the left side of slide 27 you can see that fuel prices declined rapidly in the fourth quarter 2008 resulting in approximately $150 million of fuel lag timing benefit. Beginning in the second quarter 2009 fuel prices began to recover, resulting in a fuel lag headwind for much of last year including a $12 million unfavorable impact in this fourth quarter.

Using the forward curve, the lag impact is expected to continue to moderate in the first quarter 2010 as the projected change in fuel price should result in a neutral to slightly negative impact. If I could return to the fourth quarter for a moment, it is important to note the $162 million year over year headwind was a key driver behind our operating income decline of only $109 million. Said differently, absent the lag impact in the quarter we would have experienced positive year over year operating income and growth.

That concludes my high levels remarks for the quarter. Now let’s look at the expenses in more detail and we’ll start with labor on slide 28. Labor costs decreased 9% or $63 million from last year. The majority of this variance is driven by labor production savings of $103 million reflecting lower overtime hours and a decrease in headcount that David Brown discussed earlier.

Looking at the chart on the left, average headcount for the quarter declined by nearly 4,000 people or 12% reflecting our continued necessary focus on adjusting our workforce to current business levels. These gains were partially offset by the unfavorable impacts of inflation which increased expenses $18 million and in addition to several smaller items totaling $22 million tended to be more unique to the quarter.

Looking forward, we will continue to aggressively monitor our staffing need in relation to business levels. That said, CSX and the industry as a whole will face significant inflationary pressure in 2010 related to rising health and welfare costs and union wage increases that are expected to add around $40 million in additional expense per quarter for our company. It also underscores the importance of controlling our volume related costs and generating the operating leverage that David Brown mentioned earlier.

Let’s continue our expense review on the next slide 29. MS&O expense declined 19% or $105 million versus last year. Consistent with my comments last quarter on this line item being roughly 50% volume variable, we were able to realize $47 million in volume related savings in areas such as locomotive and freight car repair and intermodal terminal expense.

Next, and as a reminder, our casualty reserves which include both personal injury as well as occupational injuries are regularly reviewed every second in fourth quarters by management and independent experts. A decrease in the number of occupational injury claims was the primary driver of this quarter’s net $25 million favorable casualty reserve adjustment.

If we keep moving down the slide, a reduction in our bad debt expense yielded a $10 million benefit in the quarter due to improved collections and a stabilizing economic environment. Finally, the remaining $23 million variance represents a collection of several smaller items including the $7 million ongoing benefit from the casualty reserve reductions taken in the second and fourth quarters of this year.

Now let’s move on to fuel on the next slide. Total fuel costs declined $81 million or 24% versus last year. Looking at the table to the right, the decrease in volume accounted for $31 million of fuel expense savings. Fuel price continued to drive results, although the impact is moderated versus the trends seen earlier in the year. For the fourth quarter, CSX average cost per gallon fell 9% or $0.19 yielding $20 million of favorability.

Fuel efficiency, as measured by gallons per thousand gross ton miles, drove $17 million of year over year savings due to a 6% improvement as can be seen on the chart on the left. Finally, the remaining variance was due to a $13 million decrease in non-locomotive fuel expense primarily driven by lower fuel prices.

Moving to the next slide, let’s review the remaining expenses. All other expenses collectively increased 1% or $4 million versus last year. This variance was primarily driven by higher inland transportation expense of $13 million due to a significant increase in off-core intermodal volume. Those costs were partially offset by lower rents, which decreased $8 million let by cost savings associated with improved asset utilization and the decline in volume. Deprecation was also slightly favorable as the net increase in our asset base was more then offset by lower deprecation rates from life studies completed in this fourth quarter 2009.

Now that we have reviewed our expense items in detail, I’d like to update you once again on our cost reduction scorecard as we move to slide 32. Although the economy is strengthening it is still critically important that we continue to manage our costs in response to changing volume levels. As we’ve discussed, we will not bring back resources on a one for one basis and we will continue to be transparent with our performance as volume builds.

With that, let’s review the results within each cost category on the right hand side of the chart. First, we were able to realize a 15% reduction in short-term variable expenses versus last year, significantly exceeding our volume decline of 7%. Next, our long-term variable expenses where operating leverage is most evident declined 16% driven primarily by the reduction in headcount and overtime in our terminals and scheduled network. Finally, our fixed and indirect expenses decreased 9% aided by the favorable casualty reserve adjustment I mentioned earlier.

Finishing out the slide, collectively we were able to reduce our expenses by 12% and when normalizing for the impact of fuel price, total operating expenses declined 11% in the quarter.

I’d like to put this quarter’s performance in a broader perspective with our previous results over the course of the year. This chart on slide 33 depicts the sequential view of the cost reductions produced during each quarter of 2009. For the purpose of simplicity, we have combined the short-term and long-term variable expenses into one variable cost bar. The darker bars on the chart represent fixed costs and our variable and total costs adjusted for fuel price changes, while the lighter shaded portion of the blue and grey bars show the unadjusted variable and total costs.

As seen on the chart, we have made consistent improvement each quarter towards our goal of variablizing as much of our cost structure as possible. In the fourth quarter even more so then the third, success is again evident in the fact that cost savings have exceeded volume declines in all our cost categories even after adjusting for declines in fuel prices.

This performance has been accomplished through quick and decisive actions taken to adjust all our key resources, the changes in volume. Looking forward, we will begin to cycle some of the initiatives put in place during 2009 but we remain committed to controlling costs and achieving operating leverage as volume continues to return.

This concludes our review of the quarter. Now let’s turn to slide 34 and quickly review our performance on a full year basis. Our safety and productivity initiatives coupled with strong service and continued commitment to inflation plus pricing has resulted in solid 2009 earnings. On the right side of the chart you can see that both operating income and EPS from continuing operations experienced double digit declines versus 2008. However, these results still represent the second best performance for the measures in our company’s history and were achieved despite a 15% year over year volume decline.

Additionally, as Michael discussed earlier, our full year operating ratio was an all time record of 74.7% a year over year improvement of 70 basis points. Going forward, the actions taken to achieve these results position us well for continued success in 2010 and beyond.

Moving to the next slide, let’s review our free cash flow performance. Solid 2009 earnings also produced significant positive free cash flow of $670 million for the year. While down from 2008 levels, free cash generation supported a $250 million contribution to strengthen our pension plan and allowed us to maintain the strong level of investment of $1.6 billion which will benefit customers and investors in the near and long term.

Our continued ability to generate cash also supports our investment grade bond rating and strong levels of liquidity. As we’ve discussed in the past, we remain committed to deploying capital in a balanced manner for our shareholders. That balance begins with investments in the business.

Let’s take a look at our 2010 capital budget on slide 36. Barring regulatory changes that reduced our earning potential and force us to reduce capital spending, we are expecting to invest $1.7 billion in our network for the upcoming year. In the chart on the left you can see the bulk of our capital spending will be used to maintain our infrastructure base, helping to ensure our network runs fluid. Roughly 10% of our spending this year will be strategic in nature and will be driven mainly by our National Gateway initiative, a project that will connect mid-Atlantic ports with Midwestern markets.

We will also continue to invest in our equipment base this year in an effort to maintain capacity by offsetting asset retirements but at the same time driving productivity gains through newer and more efficient equipment.

Finally, regulatory requirements will account for a full 12% of our 2010 capital spending. This represents various regulatory driven projects including $170 million for positive train control and unfunded mandate that must be operational by the end of 2015. Our estimates suggest the total cost of PTC implementation will exceed $750 million for CSX and will drive a substantial multi-billion dollar expenditure for the industry as a whole. It is important to note that as this regulatory spending ramps up it will continue to displace other important capital projects.

Let me wrap up on slide 37. Looking ahead to 2010 we will maintain our focus on running a great business. The drivers of our success in 2010 are in place and will continue to produce solid results. As we discussed, we do expect utility coal, one of our more profitable segments, to be a headwind for most of this year. At the same time, we project steady growth in our other commodities. While this mix change will put pressure on margin, we will remain focused on mitigating part of this impact through two main drivers.

First, by maintaining our strong service products, our sales and marketing team will be able to capitalize on a pricing environment and continues to reflect the favorable value of rail transportation. Secondly, by being even more productive we will generate operating leverage as volume builds.

Collectively our sustained improvements in safety, our ability to manage with an appropriate level of resources, the superior value we provide to our customers, underlie the strength in our earnings margins. Our actions have allowed us to emerge from the recent recession as an even stronger company but will now allow us to leverage the benefits of an improving economy.

With that, let me turn the presentation back to Michael for his remarks.

Michael Ward

Once again, CSX has demonstrated its operating ability, withstanding the worst economic period of our time, while further improving the fundamentals of our business. We are emerging from this recession as a stronger company and ready for growth. At the same time, we’re making substantial investments in America’s rail system, rail investments that mean infrastructure, traffic relief, environmental improvements and jobs.

At this critical time we’re pleased to see that the Federal Government affirms the fundamental importance of freight railroads to the US economy. The Federal Railroad Administration’s October 2009 preliminary national rail plan acknowledges that freight railroads, unlike all other modes of transportation must pay their own way. The report also acknowledged that railroads have a responsibility to generate income for their shareholders. These words are absolutely true but we need Congress to make policy that is consistent with that reality.

Today, we’re concerned about actual and threatened Federal regulations and mandates that will without a doubt cut investment in critical freight rail systems. As Oscar mentioned, $200 million of our capital expenditures in 2010 will be diverted from other worthy capital improvements in order to meet unfunded Federal mandates including the implementation of positive train control. We will comply with the PTC mandate and are committed to its implementation.

At the same time, we see other substantial Federal demands on the horizon which could impact the financial health of the industry and will discourage rail investment. The Senate’s current version of the STB reauthorization bill is not balanced. It contains dramatic and negative changes and laws that were designed to allow freight rail to be sustained.

The bill, as currently written, fundamentally changes the Government’s approach to freight rail access and pricing by adding requirements at increasing government involvement in the day to day operations of trains. That is a recipe for real problems and many requirements are not yet fully defined.

Let me be clear, we will continue to work diligently with the Senate to forge a balanced regulatory approach. As the bill is written today we have serious concerns. The rails have a mission, to bring real benefit to customers, the environment, the public and our investors. The proposed legislation would sharply undercut our ability to achieve those missions. CSX is going to remain engaged in assuring that the value of rail success will be reflected in Congressional policy.

Absent potential longer term headwinds that could be created by government policy, 2010 is a year of opportunity for CSX. It’s what we’ve been preparing for over the past several months. As I said before, we are a stronger company today. Our 30,000 employees will respond to the opportunities of a better economic environment with the same rigor and innovation they used to overcome the challenges of 2009.

With that, we’d be delighted to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tom Wadewitz – JPMC

Tom Wadewitz – JPMC

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

Clarence Gooden

The answer to that is yes. As you know, the same store sales price increases measure both same origin, same destination, same commodity type and same car type. As that coal volume declined it impacted how much of the same store sales price increases that we got.

Tom Wadewitz – JPMC

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

Clarence Gooden

There are a couple of factors there. Number one, we mentioned in the presentation we’ve got 75% of our contracts give or take already negotiated. We have about 25% left to go; we’ve got a pretty good line of sight on that. Number two factor in that is that we have virtually no legacy contracts now coming up for renewal.

The third factor is that some of these contracts now we’ve touched three, four, five times since the 2004 pricing vibrancy in the rail industry came in and its difficult to continue to get some of those rate increases that we have. The final fact is we’re in an economic downturn now and capacity is readily available and multiple modes competing with us and capacity is the enemy of price.

Operator

Your next question comes from William Greene – Morgan Stanley

William Greene – Morgan Stanley

Does the same store sales metric that you guys report include an assumption about escalators or RCAP or something like that in the 2010 4% to 5%?

Clarence Gooden

Yes it does.

William Greene – Morgan Stanley

What assumption can you use for an escalation; do you know what that inflation looks like now?

Clarence Gooden

For 2010?

William Greene – Morgan Stanley

Yes

Clarence Gooden

I think its 3% that we’ve got in there for 2010 on rail inflation.

William Greene – Morgan Stanley

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

Clarence Gooden

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

William Greene – Morgan Stanley

You’re not cutting price to win that business, that’s a decision made by your partners.

Clarence Gooden

That’s correct.

William Greene – Morgan Stanley

If you look at the other rail revenue it dropped quite a bit in the fourth quarter, it hadn’t for the other quarters in the year. I don’t know if that’s the right run rate of roughly $51 million to use as we think about 2010?

Oscar Munoz

No, I would go back to the average you’ve seen over the last few quarters, I think roughly $60 million. I would use that going forward. That line item includes both the subsidiary rail revenue which has been declining volume obviously and a hose of ancillary items and there was some minor adjustment for those in this quarter and the cycling of prior year. It was more unique to the quarter. I’d go back to the average for your modeling purpose.

Operator

Your next question comes from Edward Wolfe – Wolfe Research

Edward Wolfe – Wolfe Research

When you look at the same store pricing go from 6.3 in third quarter to 5.3 in fourth quarter can you talk specifically about that point. Directionally that point sequentially things decelerated by, how much of that is a legacy contract, that grandfathered, how much of that is coal, how much of that is the environment slowdown, all the points you made that we’re seeing in the marketplace.

Clarence Gooden

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

Edward Wolfe – Wolfe Research

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

Clarence Gooden

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

Edward Wolfe – Wolfe Research

The year over year in first quarter relative to year over year in fourth quarter should these trends of year over year improvement continue?

Clarence Gooden

We think our profitability will continue to improve in intermodal.

Operator

Your next question comes from Ken Hoexter – Merrill Lynch

Ken Hoexter – Merrill Lynch

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

Oscar Munoz

Ask that question again.

Ken Hoexter – Merrill Lynch

As the mix continues to change, as you get more intermodal and auto business and coal stays down throughout 2010 as Clarence talked about, I’m wondering how should we see that impact on the velocity and cost going forward. Obviously we’ll see the velocity numbers each week; I want to see what we should expect as those volumes come back. What kinds of impacts we should see on the cost structure; obviously we’re seeing the operating ratio at the rail decline now because of the mix change. I want to see what your thoughts are going forward on that.

David Brown

What we see, as we bring more intermodal volume on we probably have the greatest amount of capacity to bring into our existing train network without additional train starts. We see pretty good upside in terms of growth without additional costs. Relative to say like our unit train network where coal is a trainload on, a trainload off type change in volume. We think it’s favorable as intermodal grows.

Michael Ward

The operating ratio on the rail side don’t forget that fuel surcharge lag made a significant impact on what that operating ratio was between the two quarters. It was both the mix of traffic but also the effect of the fuel surcharges year over year.

Ken Hoexter – Merrill Lynch

On the velocity or operating side?

David Brown

Velocity, continuing to operate the network relatively flat in terms of train starts our initiatives around velocity what we believe are sustainable they’re not just related to volume. We believe strongly that we’ll sustain the gains that we’ve made in velocity and continue to improve that.

Ken Hoexter – Merrill Lynch

On the coal side, maybe you could talk a little bit about what you’re seeing now. Obviously with these extreme coal temperatures that we just went through are you seeing any production cuts from the coal producers. I’m wondering how quickly we could continue to see some rebound in some of the utility demand that could maybe fix some of that extra inventory supply.

Clarence Gooden

If I understood you correctly you asked two questions, one was the producer, if we had any impact on producers for coal. The other was on the demand side of it, did we see the stockpile decline, is that correct?

Ken Hoexter – Merrill Lynch

Yes.

Clarence Gooden

On the producer side there for about a two or three week period when it was extremely cold in the central and northern Appalachian coal fields, particularly in the surface mining we did see an impact on the production level both from the inability of the producers to mine the coal as well as once the coal got into the cars even being weather treated we had frozen coal. That impacted us for a very short period of time.

On the consumption side of the house, as you saw on some of the slides that we showed, the inventories are extremely high for this time of the year, number one. Number two, with demand itself being down on the industrial side and the commercial side of the house we’re not seeing the electrical generation we’d like to see. Although we’ve had extreme cold weather in the East it really impacts us mostly south of the Ohio River where we have electric heat pumps as opposed to north of the Ohio River. We so far have not seen any impact of the coal inventories at the utilities.

Operator

Your next question comes from Matt Troy – Citigroup

Matt Troy – Citigroup

You ended the year with more cash then I think I can recall CSX ever having. I know you talked about a balanced approach to capital deployment, there are a couple of variable this year that may not be as prominent in past years, things like pension, PTC. Could you talk about the dashboard or metrics you use when you think about deploying that billion plus in cash in terms of prioritization? If we think about the economy stabilizing, how much cash do you need to run with on the balance sheet at any given time?

Oscar Munoz

As we said before, we do follow this balanced deployment. The general priority that we do is obviously first and foremost reinvestment in the business. Second being the dividend policy that we’ve established, then of course the repurchase of shares. I agree with you that the economy has stabilized and is slightly improving. I think what we’ve said historically is we will monitor that situation very closely and make our decisions based upon that.

As far as your last question, with regards to how much cash we need. I don’t think we’ve been public necessarily about that but I would tell you obviously that it’s probably significantly less then where we are today.

Matt Troy – Citigroup

You talked before, rather frankly which I appreciate, about some of your concerns with the STB reauthorization act. I was wondering if you could perhaps just take us a step further into your mindset as you look at what’s been proposed. Is there a short list of one, two, or three items which have you scratching your heads or which give you fit or is it really more broadly that the mentality change. As we watch this work its way through the Congress what are the, let’s call it the short list, of items that the rail industry, from your perspective sees as problematic as proposed.

Michael Ward

There are a lot of elements to that bill that we find to be not so attractive. The major ones would be impact potentially on our revenue which obviously would impact our ability to investor for the future with some of the provisions. Secondly, the increase in the day to day operational involvement of the STB around service levels and those sorts of things.

Finally, we still have not seen any language on anti-trust basis which clearly could be troublesome, dual regulatory environment both STB and DOJ and states attorney generals potentially. Those three would be primary but there are other concerns we have as well. As I said, we continue to try to work with the Senate staff to come up with something balanced. What’s there now is not balanced.

Operator

Your next question comes from Chris Seraso – Credit Suisse

Chris Seraso – Credit Suisse

As a follow up to that, do you have a ballpark estimate of what you think, as written, the restraint on your pricing or your revenue growth might be.

Michael Ward

I don’t think that’s really possible at this time because if you think about it, many of the aspects they refer to the service transportation board for their rule making on it. Until we get some better specificity from them I think it’s difficult to gauge that. Clearly it will have a negative impact on revenues as written, the question is how negative would that be.

Again, we’re concerned that it’s going to restrict our ability to give the returns to our shareholders and invest for our infrastructure for the future of our company and country. A lot of it will be in the detail at the STB eventually gets these things. Clearly it’s not going to be a positive one on the revenue side.

Chris Seraso – Credit Suisse

Looking a the performance in the quarter with train starts down about twice as much as your volume I would have expected to see more leverage. You talked pretty clearly about the impact from fuel. Is it fair say that ex the fuel your operating ratio would have been closer to 70% and then how do we think about that with regard to your comments about the operating ratio in 2010 is it going to be net, net better or worse then your margin in ’09?

Oscar Munoz

Can you restate your logic on the 70% operating ratio, that caught my attention?

Chris Seraso – Credit Suisse

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

Oscar Munoz

The logic is great, probably a little too extreme. I would say there are probably a point or point and a half of operating ratio that’s fuel related. I don’t know that that’d go all the way down to 70%.

Chris Seraso – Credit Suisse

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

Oscar Munoz

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

Operator

Your next question comes from Justin Yagerman – Deutsche Bank

Justin Yagerman – Deutsche Bank

Following up on the comments you just made, is it possible if coal remains as material a headwind as it is now for OR to improve this year?

Oscar Munoz

State your question again, I apologize.

Justin Yagerman – Deutsche Bank

If coal remains as material a headwind as it is right now can you find the positive operating leverage in the other segments in order to overcome that?

Oscar Munoz

It’s a bit of a hypothetical question. I think we manage all our resources across all our business commodities as well as possible and that’s certainly what we’ll attempt to do. We hope to walk you through that as the year goes on. We don’t normally predict what our OR will be for the coming year.

Justin Yagerman – Deutsche Bank

On pricing, curious when you look at your book of business at any given time how much of the business is sensitive on a real time basis to competitive dynamics. You had mentioned at one point that the weaker overall environment played a role in the moderation of pricing from Q3 to Q4.

Clarence Gooden

Normally we don’t give that type of competitive information out. I will tell you that about 50% of our total business is re-priced on a yearly basis.

Operator

Your next question comes from Gary Chase – Barclays Capital

Gary Chase – Barclays Capital

On the coal side as you were discussing that in response to a question a minute ago, is there any reason to believe that’s going to be incremental headwind or is the issue you just don’t see that getting better?

Oscar Munoz

Which portion again?

Gary Chase – Barclays Capital

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

Oscar Munoz

Our expectation would be that the coal headwind that we see will probably be similar to what we saw in the fourth quarter throughout the year as they work the inventories down. The other markets we would expect to see over the course of the year, improvement as the economy continues to recover.

Gary Chase – Barclays Capital

Year on year you are expecting some definite incremental negative from coal?

Oscar Munoz

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

Gary Chase – Barclays Capital

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

Oscar Munoz

I’ll stay to the comments that I made during the script reading. We do expect inflationary impacts and as you heard David Brown said we’re not going to bring back assets on a one for one basis so we’re going to manage that variable portion. The inflationary impacts that we talked about will definitely impact those areas.

Gary Chase – Barclays Capital

Beyond normal inflation is there anything that would move that fixed and indirect bucket?

Oscar Munoz

Nothing beyond normal inflation.

Operator

Your next question comes from Ben Hartford – Robert W. Baird

Ben Hartford – Robert W. Baird

On operating income seasonality in 4Q when you look at it relative to 3Q historically it’s been up, at least over the last five years or so. This quarter it was down about 3%. Can you explain that, is it all mix, is it mix related, the fact that we had volumes coming back in the quarter is it attributable to that or pricing? Can you talk about the thought process there?

Oscar Munoz

As you think of the sequential decline there I’d attribute a large portion of it to the mix impact that we’ve been talking about. There are seasonal cost increases and to the later part of the year the weather has an impact. Certainly vacations are taken into account. For us, in this fourth quarter, it was clearly that coal swing and mix that had the most drastic impact. Again, don’t forget there was some fuel going from 3Q to 4Q that also had a pretty noticeable impact.

Ben Hartford – Robert W. Baird

On the intermodal side, specifically domestic being up a good amount year over year, how much of that is all east coast versus transcon?

Clarence Gooden

How much of that is what?

Ben Hartford – Robert W. Baird

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

Clarence Gooden

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

Operator

Your next question comes from Cherilyn Radbourne – Scotia Capital

Cherilyn Radbourne – Scotia Capital

With respect to PTC specifically whether you have any comments in reaction to the FRA’s final implementation rule and whether you could comment on your level of optimism that you may be able to convince the government to provide some sort of funding such as a tax credit.

Michael Ward

On the final interim rules the FRA did note that originally it was a $10 billion cost for the industry for $600 million of benefits which is a 15:1 negative cost benefit. That’s actually changed to 22:1 under the final rule. There are still concerns we have with that especially as far as a few of the key items in there. We are reviewing the potential impact of that on the scope timeline etc. We expect the industry will respond within the allotted timeframe asking for some reconsideration of some of those.

We continue to work with Congress to see whether there’s some sort of investment tax credit or some other relief. While there’s some sympathy for that I think with the current situation with the federal budget I think there’s some hesitancy on the part of people even though it’s an unfunded mandate to do another thing that would further increase the federal deficit. We’ll continue to push forward.

Cherilyn Radbourne – Scotia Capital

Can you talk about the average duration of the furlough for the people that now will be lapping almost a year since some of these furloughs began? Is the duration of those furloughs a concern as you call people back?

David Brown

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

Michael Ward

We’re anxious to bring the people and we hope the economy comes back such that we’re allowed to. In many cases the railroad is a good paying job and its unlikely the found a better paying job in the interim.

Operator

Your next question comes from John Larkin – Stifel, Nicolaus

John Larkin – Stifel, Nicolaus

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

Michael Ward

I think it would fall largely in four areas. As you the National Gateway we’re committed to that and we are continuing to fund that because we think it’s a great long term initiative for the company. I’d say the four areas that would be impacted; one is upgrading our car fleets, secondly modernizing the technology throughout our network, thirdly increasing capacity of line of road and terminals, and purchasing locomotives.

Given today’s environment purchasing a locomotive is not so detrimental, we have 560 parked but certainly on the long term ongoing basis that’s a cause for concern. All of our key places we would make investments we have to displace to do the PTC.

John Larkin – Stifel, Nicolaus

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

Michael Ward

We’d love that world. Sign us up. More revenue and more profit and we will invest more as long as the regulatory framework stays in a good spot.

John Larkin – Stifel, Nicolaus

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

Clarence Gooden

I don’t think so. J.B. Hunt who you’re referring to had been a long time user of Norfolk Southern services. They remain on Norfolk Southern. We do quite a bit of business with J.B. Hunt, particularly into the Atlanta market and New England markets and other places. With our other truckload partners we’re out trying to grow our business and do highway conversions everyday of our life.

John Larkin – Stifel, Nicolaus

No substantial change in the market share distribution between the two Eastern railroads?

Clarence Gooden

I don’t think so.

Operator

Your next question comes from Randy Cousins – BMO Capital Markets

Randy Cousins – BMO Capital Markets

Did you say that labor costs are going to go up $40 million a quarter in 2010? If you came out of this quarter at $660 million that means we should be modeling $700 million as labor costs as a run rate?

Oscar Munoz

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

Randy Cousins – BMO Capital Markets

With reference to the reserve adjustments, you booked a number of reserve adjustments in 2009. You continue to make headway on your safety performance. Is the reserve adjustment for 2010 versus 2009 is that looking like its going to be a headwind or are you going to be able to put again incremental adjustments? How should we think about the reserve adjustment benefit that we saw in ’09 versus 2010?

Oscar Munoz

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

Operator

Your next question comes from John Mims – BB&T Capital Markets

John Mims – BB&T Capital Markets

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

Clarence Gooden

The preponderance of those are either coal, automotive, or metals, metals being both for scrap and finished steel products. The rest are a hodgepodge of box cars, center being lumber cars, all those usual suspects you would imagine.

John Mims – BB&T Capital Markets

If you look at the equipment part of the CapEx budget for next year, can you give more color on how that’s split out as far as what equipment you’d be buying first if its locomotives or intermodal well cars or how that’s split up.

Oscar Munoz

We’ve not usually shared that level of detail for a couple different reasons. It’s across the board in the areas that you’d expect us to be doing it.

Operator

Your next question comes from Walter Spracklin – RBC Capital Markets

Walter Spracklin – RBC Capital Markets

When we’re talking about operating leverage obviously when you’re getting higher volumes you’re looking for some good returns as those volumes come back on. I wanted to get a better sense of where the startup costs or the most significant startup costs might be. My question is would it be in pulling some of those cars or locomotives out of storage, getting them up and running again or is it bringing back furloughed workers? Where could we see and is it a material cost to get that startup cost going again?

David Brown

There’s not really a huge cost in starting those resources back. We have locomotives in position to bring back fairly quickly. We have lower level maintenance that we do so we have them in serviceable condition. Calling back furloughed employees also happens relatively quickly. Like Michael mentioned, railroad jobs generally are very good jobs, in the job market people want to come back to work on the railroad.

It does take a few weeks of additional training, bring them up to date with some of the certification requirements and that sort of thing, and make sure they’re ready to work safely. Then we bring them back relatively quickly at a fairly low cost, it’s not a big number for us to handle either one of those resources that way.

Walter Spracklin – RBC Capital Markets

The color you provided on the rail bill, when you look at going forward you said that if there are no changes in this rail bill you have concerns. What’s your take on your ability and the railroad’s ability to affect change and lobby Congress and lobby the Senate to affect that change and how would that compare to perhaps six months ago given some of the changes that have happened recently and we’re looking at an election year and the change in Massachusetts as well.

Michael Ward

I think that there’s a growing recognition of the importance of rail and the infrastructure we provide for this country, relieving highway congestion, environment and fuel efficiency benefits. We’re going to continue to press with key policymakers in the Senate and eventually in the House. Let’s make sure we continue to have that ability to invest and I think there is a great recognition of that need.

I think we will have a number of people that will want to listen to our concerns and hopefully come up with something balanced. We’re going to continue active involvement as I’m sure all the other Class 1 railroads will. Again, we’re going to keep working and if we can’t find balance we’re going to do whatever we can to make it better.

Walter Spracklin – RBC Capital Markets

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

Michael Ward

It’s pretty wide open right now. A lot of the conversation in the Senate is around the Healthcare bill and I think that’s where a lot of the attention is going to be at this point. I think that’ll have to clear the deck before they really, I don’t think rail is on the top of the agenda of the current Congress.

Operator

Your next question comes from George Pickral – Stephens

George Pickral – Stephens

On slide 11 where you broke down coal stockpiles versus consumption it only goes back to 2001. Can you remember when the discrepancy was this large? After that, how quickly that changed and what made it get back to equilibrium?

Michael Ward

In my years I don’t remember the gap being that large ever. You’ll notice from the chart, on the smaller peaks earlier on it usually takes a number of quarters for them to bring those inventory levels down to where they like to see them. To my recollection, I’ve been here 32 years now I don’t ever remember seeing the inventory overhand being as large as it is at this point.

Operator

Your next question comes from Jeff Kaufmann - Sterne, Agee, Leach

Jeff Kaufmann - Sterne, Agee, Leach

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

Michael Ward

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

Jeff Kaufmann - Sterne, Agee, Leach

I was looking more to the 2000’s but I understand what you’re saying. There were some smaller items that were more transient that affected fourth quarter accruals. You mentioned the casualty reduction and the depreciation asset change in terms of life. Can you give us a sense for whether the weather impacted the quarter, maybe year end bonus accruals and just a sense of what the depreciation run rate going forward should be?

Oscar Munoz

Let’s start with depreciation going forward, with the asset base it’s probably going to be around five or so per quarter you should expect going up into 2010. What were your other items, you listed a whole host?

Jeff Kaufmann - Sterne, Agee, Leach

Weather and maybe bonus accruals fourth quarter year on year how different they were.

Oscar Munoz

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

Operator

Your next question comes from Anthony Gallo – Wells Fargo

Anthony Gallo – Wells Fargo

Are reserves affected at all by volumes? To try to tie together some furlough questions, assets and employees being brought back onto the system are they more expensive or less expensive in what’s already operating in the network?

Michael Ward

The assets that are parked and we would re-deploy as the volumes increase are no more or less expensive then our current assets. The reserves question, I don’t think the reserves are volume dependent, it more activity related, say things like the occupational personal injury it’s on the rate of incidences more than on the volumes.

Operator

This concludes today’s teleconference. Thank you for your participation in today’s call. You may disconnect at this time.

Michael Ward

Thank you for your attention and your time.

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