Good morning, ladies and gentlemen and welcome to the CSX Corporation first quarter 2013 earnings call. As a reminder, today's call is being recorded. During the call, all participants will be in a listen-only mode. For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Vice President of Capital Markets and Investor Relations for CSX Corporation.

Thank you, Marianne, and good morning, everyone, and again, welcome to CSX Corporation's first quarter 2013 earnings presentation. The presentation material that we will review this morning along with our quarterly financial report and our safety and service measurements are available on our website at csx.com under the Investors section. In addition, following the presentation this morning, a webcast and podcast replay will be available on that same website. Here, representing CSX Corporation this morning are Michael Ward, the company's Chairman, President and Chief Executive Officer, Clarence Gooden, Chief Sales and Marketing Officer, Oscar Munoz, Chief Operating Officer, and Fredrik Eliasson, Chief Financial Officer. Now before we begin the formal part of our program, let me remind everyone that the presentation and other statements made by the company contain forward-looking statements. You are encouraged to review the company's disclosure in the accompanying presentation on slide two. This disclosure identifies forward-looking statements as well as risks and uncertainties that could cause actual performance to 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. With 30 analysts covering the CSX, I would ask as a courtesy for everyone to please limit your enquiries 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?

Well, thank you, David and good morning everyone. Last evening CSX reported record first-quarter earnings per share of $0.45 with another excellent productivity performance by the team and a couple of unique items that helped the quarter. The underlying strength of our business continues even with the transition that is taking place in the domestic coal market. Looking at the top line, revenue was $3 billion essentially flat versus last year with gains in merchandise, intermodal and other revenue offsetting the declines in coal. The operating team is producing industry-leading results in safety and is driving excellent service and efficiency for our customers and you, our shareholders. Bottom line we set record first-quarter for operating income at $875 million and for operating ratio at 70.4%. We also issued new financial guidance reflecting our confidence in the future and rewarded shareholders with another increase in the quarterly dividend and a new share repurchase program. As the team walks you through the results this morning, I think you will see evidence of a company that is doing very well in the current environment and is well-positioned to achieve even greater results longer-term as the economy eventually accelerates, the domestic coal market begins to stabilize and the industry fundamentals continue to evolve. With that let me turn the presentation over to Clarence to review what we are seeing in the broader economy, how this relates to our top line results and more importantly what this means for the outlook ahead. Clarence?

Thank you, Michael, and good morning. Looking at the key economic indicators that continue to point to a slow steady growth in the U.S. economy. Starting on the left side of the chart, the purchasing manager's index registered a rating of 51.3 in March reflecting a modest expansion of U.S. manufacturing. At the same time, the customer's inventories index registered a rating of 47.5 indicating respondents believe their inventories are still slightly below normal levels. Looking at the right side of the chart, both GDP and IDP rates reflected expansion in the quarter. Forward projection show continued slow growth in the near-term with improved growth rates later in the year. Overall, transportation demand in the markets we serve was mixed in the first quarter, consistent with the broader economic environment. Now, let's look at overall revenue. Total first quarter revenue of nearly $3 billion was essentially flat compared to the prior year. Starting to the left, the combination of rate and mix was favorable by $28 million in the quarter. Here, core pricing gains and liquidated damages, which increased $32 million year-over-year, were partially offset by the unfavorable mix impact related to the growth in intermodal versus the decline in coal. Moving to the right, volume had an unfavorable impact of $39 million in the quarter as volume growth in chemicals and intermodal was more than offset by declines in coal and agricultural products. Finally, fuel recovery increased $3 million in the quarter as diesel fuel prices were relatively stable year-over-year. Now, let's turn to pricing. Core pricing on a same-store sales basis remained solid across nearly all markets. Recall that same-store sales are defined as shipments with the same customer, commodity and car type, and the same origin and destination. These shipments represented 76% of CSX's traffic base for…

Thank you, Clarence, and good morning everyone. I am pleased to please report again that CSX's operating results for the first quarter are very strong. Safety results remain at or near all-time record levels and service continues to improve and set new records. Additionally, resource adjustments and improved asset utilization in the first quarter provided a great start and we are now on a path to exceed $150 million of efficiency gains in 2013. Bottom line, with sustained high level of operating performance, CSX remains very well positioned to deliver a compelling service product for customers while ensuring value for shareowners. Now let's review the operating results for the first quarter. On the safety side, I am happy to report that CSX once again produced industry-leading results. Reviewing those measures on the left, the FRA personal injury rate was at a record first quarter level of 0.66, representing an 18% improvement year-over-year. The chart on the right shows the FRA train accident rate which improved 31% to 1.54% and represents a record level. Now, before moving on, and I think it's important to note that, and to thank our employees in the field at all levels for their truly outstanding and continued commitment to safety and that is evidenced by these great results. So, let's turn to next slide and review on-time performance. Here you can see on-time originations on the left and on-time arrivals on the right. Both measures were all-time high in the first quarter with on-time originations at 91% and on-time arrivals at 85%. Both on-time measures also represent sequential improvement, which is particularly meaningful given first quarter volumes higher and weather was more challenging than it was in the fourth quarter. These results represent strong collaboration between our customers, sales and marketing and the operating team.…

Thank you, Oscar, and good morning everyone. Looking at the top of the chart, revenue was essentially flat for the first quarter as declines in coal revenue were offset by gains in merchandise, intermodal and other revenue including the $32 million of liquidated damages year-over-year that Clarence mentioned earlier. Expenses improved 1% aided by a $20 million deferred gain, which I will speak to in a coming slide. Excluding this gain, expenses were slightly down versus last year as CSX was able to more than offset inflation and higher depreciation through improved efficiency. Operating income was $875 million, up 2%, versus the prior year. Looking below the line, interest expense was $147 million reflecting slightly higher debt levels year-over-year. Other income was negative $3 million and income taxes were $256 million in the quarter. While the effective tax rate was 36.7%, we continue to expect a 38% tax rate going forward. Overall, net earnings was $459 million, up 2%, versus last year and EPS was $0.45 per share, up 5%, reflecting growth in net earnings and the impact of last year's share repurchase program. As we turn to the next slide, let's briefly discuss how fuel lag benefited the quarter. On a year-over-year basis the effect of the lag in our fuel surcharge program was $10 million favorable. This reflects $5 million of negative in quarter lag during the first quarter of this year versus $50 million of negative in quarter lag for the same period last year. Turning to the next slide, let's review our expenses. Overall expenses were down 1% in the quarter. I will talk about the top three expense items in more detail on the next few slides but let me briefly speak to the last two on the chart. Depreciation was up 5% to $270…

Thank you, Fredrik. Over the last several years, CSX has consistently delivered strong results over a wide range of economic conditions. Producing record first-quarter earnings after experiencing yet another sharp decrease in coal revenue is emblematic of our ability and our resolve. While we know that our stakeholders are more interested in tomorrow than yesterday and the guidance in shareholder actions we outlined show our confidence in both the near and long-term. Over the next several months we envision a transition period where coal begins to stabilize at a lower level and more importantly where the 80% plus of our business that is not related coal provides opportunities for the team to deliver vibrant results. Our diverse portfolio, far-reaching network and dynamic operating platform will allow the company to optimize its performance and any momentum that would occur in the economy with increased opportunities further. Put another way, we believe that CSX has emerged from yet another period of multiple challenges even stronger than before just as it did after the global recession and in the quarter just completed. These achievements add to our confidence in this team's ability to produce double-digit earnings growth and a high 60s operating ratio by 2015 and a mid 60s operating ratio longer-term. CSX stands for how tomorrow moves and the employees of this company have once again quietly and diligently backed up that promise with excellent service product and consistently strong financial results. Thank you for your interest in CSX and we look forward to answering your questions at this time.

(Operator Instructions) Our first question comes from Ken Hoexter of Bank of America Merrill Lynch.

Good morning. Fredrik, if we could just follow-up on that outlook a bit, or Michael, looking at that 10% to 15% growth, the midpoint, it looks like a bit slower, if you include the full $0.45, as you mentioned. So maybe just talk about what are in the assumptions there? Are you looking at coal, maybe, being worse than targeted? Is the profit/loss from that just too great to overcome? Is pricing on export coal getting more aggressive? Maybe if you can just give us some parameters around what's in that 10% to 15% thought process?

Sure, Ken. So, well obviously now we have a detailed plan after we have reviewed it with our board that is behind this guidance. Clearly, as you know, seldom does long-term plan exactly end up as the way that you expect them to when you put them in place. So we are going to have to continue to be flexible and adapt, just like we have over the last couple years to produce these sort of results through whatever economic environment that we are seeing. I would say, overall, underlying those assumptions, is essentially a flat coal environment versus what we are seeing basically between export and domestic an overall flat environment. On the overall economy, I would say the same thing we are going to see slowly a recovering economy. Nothing more than what we have seen here over the last year or so. You couple that with continued inflation plus pricing and the productivity focus that we have shown here over the last two years, that is really the foundation for our long-term guidance. So we know that we are going to continue to be flexible and adapt to whatever environment we have and then continue to push the same sort of leverage that we have over the last few years.

Our next question comes from Brandon Oglenski of Barclays Capital.

Fredrik, maybe if I can just follow-up on that. So just to be clear, you guys are assuming that coal demand flattens out in the 2014, 2015 period?

Over this period of time, between domestic and export, clearly there could be periods where one is up but one is down but overall, I would say that our view is that between the two it will be flattish during this period of time

And that's coming off of the negative guidance you have for '13, right?

That's correct.

Okay. Then if I just ask one on the energy markets for Clarence. What are some of the opportunities or where do you have facilities on your network today that can accept crude oil, and are you willing to put out some growth targets potentially for this segment of business?

Well, thanks, Brandon. We have about four different facilities right now in the East that we have the capability of serving directly, and we are currently doing that through the average of about seven and nine trains a week. The limiting factor on what the long-term growth of that will be as you are aware is the production capabilities, particularly in the Bakken in the eastern market. So it's, for us is going to be driven by what the production capabilities are, not by what the demand is.

Our next question is from Chris Wetherbee of Citi Research.

Thanks. It's a question on coal yield as I think sequentially in the second quarter through the fourth quarter, Clarence, how should we be thinking about the coal yield. Are you still looking for kind of flattish yields on a full year basis for 2013? Should they be getting better I guess sequentially?

Chris, we are looking for those coal yields to be flat on a basis going forward and that's subject to any fluctuation that we could have in the fuel surcharge application that’s' coming in.

Okay. Then just a quick follow-up to that, when you think about the met coal settlements for the second quarter coming in a little bit higher than where they were in the first quarter, does that give you some support to potentially bring that number up a little bit or does it at least provide you some downside support, so there is no further decline. Just want to get a sense of kind of how much flexibility you have within that.

I think it's the latter. It provides us support against any further downward movement. Those prices that it's just been announced at Queensland, an effort by the producers to push the rates up what actually settles in the market traditionally has been slightly lower number.

Okay. That that's helpful thank you.

Our next question is from Chris Ceraso of Credit Suisse.

Thank you. Good morning. There was a comment on slide number 10 about stronger domestic pricing coal. Was that just from inflation adjustment on existing contracts or we are successful in getting price increases on anything that may have turned over in the quarter?

It's both.

Okay. Then just as a follow-up, I think you have kind of spoken to this. The guidance for domestic coal for the rest of the year of down 5 to 10 suggest that things are down only small single-digit for the rest of the year. Is that just the effect of comps getting easier or are you actually seeing increased demand because of where gas prices are?

The comps in the second quarter are actually better, because we had a terrible second quarter last year in domestic coal. The third and fourth quarters tend to even out a little bit more.

But are you seeing any sort of response, any kind of demand response to where gas prices are or are you still eating into existing inventories?

In the North, we've seen some response to the gas prices, particularly where Powder River basin and Northern Appalachian coals are being used. In the South, the inventory levels are still at persistently high levels, and so that's going to be determined mainly by the weather and by the price of natural gas, but we expect those stockpiles to stay fairly high throughout the year.

Our next question is from Justin Yagerman of Deutsche Bank.

Good morning, guys. It's Rob on for Justin. Clarence, you had sounded little more cautious on the export thermal coal outlook on coal. Are you implying that that 2013 outlook is now below that the 20 million tons you've been talking to in Q4, or are you just highlight that year-over-year comps are growing more challenging as we move out to the second quarter?

It's the latter that the year-over-year comps are growing a little bit more challenging as we go forward. It is a fact that the API 2 index numbers as you are aware come down, but we think they are starting to stabilize and actually the forward curve on the API 2 through the second, third, fourth quarters and through 2014 is actually increasing.

I guess, Clarence, while we are talking about the API 2, could you discuss a little bit in more detail about your export thermal coal contracts? How much of that book of business is linked to metrics like the API 2 in terms of the contracts and I guess you know what percentage of that book again is tied to a take-or-pay commitment volume?

Well not all, but a [part of is] [ph] of the thermal exports, particularly in to Europe, are tied to the API 2 index. Our rates don't go up as fast nor do they go down as fast as the API 2 index does. A large percentage of our contracts would be on a take-or-pay basis although there is a certain amount of those thermal contracts that are on a spot market basis.

Our next question is from Thomas Kim of Goldman Sachs.

If I could ask Clarence just with regards to the intermodal side, you mentioned that there is a 9 million truckload opportunity. I was wondering if you could perhaps give us the path towards that's opportunity being realized?

Well, we have the highway initiative called highway to rail conversion, in which we go out with a specialized sales force that we have to the beneficial cargo owners and through our other intermediary channels and we discuss with him our profits, our opportunities. We have an optimizer that can take their freight and determine what is best suited for either long-term, short-term, rail - term being to find the distance. So we are doing that initiative. We are opening up new markets, the Montréal market that we discussed on the call, will be we think a very lucrative market for us on the domestic side serving over 7 million people. Our expansion at Fairburn has been indicative of what we see happening in our domestic growth. We will be opening a new terminal in Winter Haven, Florida, here before long that will expand further in that central and lower central Florida market which is very fast-growing. We have got new construction happening now in Baltimore, as we speak. We have expansions in Columbus that we just completed. New terminal in Louisville, Kentucky that we just completed, which I am pleased to announce is almost at capacity and has been wildly successful for us. So a combination of all those factors leads us to believe that we are going to have a good continued growth in our intermodal market.

Great, and if I can just ask a separate question. Thus far, we have only heard a few companies talk about the sequester impacting transport companies and they happen to be within the airline space. But I noticed in your outlook that you had commented that this sequester could have some impact. Now I was just wondering if you might be able to provide a little bit of color in terms of what the impact might be?

I don’t remember saying anything about the sequestration. We haven't seen any impact from it that I am aware of.

Okay, sorry I guess I should clarify. It was on page 13 where you said comments with regard to budget uncertainty impacting military shipments. I apologize with the terminology.

Our military shipments have been down. This is second, almost third year in row, that our military shipments have been down. They are mainly being impacted, on a year-over-year basis, by the war material that we were sending overseas. Unfortunately because of the, say fortunately, it depends on your perspective, but from mine, as an American, bringing down our troops abroad has been a positive thing for the country and but negatively impacted our numbers.

So it's not much a sequestration as to a war.

As the war effort.

Your next question is from Thomas Wadewitz of JPMorgan.

Clarence, I have got one for you, and then one Fredrik as well. You mentioned, four terminals that you are now can serve in the East that are online or coming online for crude by rail and you are doing about seven to nine trains a day. What do you think is the most realistic expectation for second half? Would you think that you can get to two rails a day versus roughly one now? How do you view as the likely ramping crude by rail in second half of this year?

Tom, first, good morning. It is good to talk with you. Number two is, we are not having seven to nine a day. Its seven to nine a week.

Sorry about that. That’s yes.

I would like to handle seven to nine a day.

I misspoke, right, clearly. So roughly one train a day. But how would that look in second half, you think?

I think that it will increase in the second half. We feel very positive about it with the discussions that we have but as I pointed out earlier, at the end of the day, the production levels in the Williston basin the Bakken is going to determine what we have. And the sort of a joke we have internally if everybody got to two trains a day that they won't. I mean, the numbers will be out the roof and it's just unrealistic to expect, so I would think of it more in terms of the Bakken producing the 700,000 barrels a day that they producing is 70,000 barrels a day the train itself can hull sort of back into what you think the potential numbers are going to be given the fact that all of that oil is not going to come east. That makes sense to you?

Yes. It does. I mean, I guess, we will see as it plays out there will be some meaningful growth and we will kind of see as it happen how large it is and what production does. So, thank you for that. Then Fredrik, your share buyback essentially $500 million a year for the next two years, if I look at that in historical context, so if I take out 2009 and look at the prior five years you did on average $1.5 billion a year of buyback, and I am just trying to get my arms around why the number you have the next two years is quite a bit smaller than that. Obviously your coal franchises is very different today than it was, but it also seems like you are seeing some stability in that and especially when you look beyond 2013. So, is that temporarily conservative and improved credit little bit or is it just the capability for share buyback a lot less than it was in the past? How would you frame that and why such a conservative approach on buyback?

Thomas, you know that our prioritization is pretty straight forward. First it's about investing in our business. Second is the dividend and third is our share repurchase program. And based on available cash flow that we have, we think we are going to have coupled with some use of our balance sheet within the context of improving credit profile. That's how we determine the amount of share buyback that we will do. When we look at the next few years, we see two things that is impacting the sizing of the program specifically, first of all is the fact that our PTC spending is ramping up a little bit more and that is impacting the size of the program and then second we are also are seeing the reversal starting to happen, because the last couple of years for bonus depreciation. So, bonus depreciation has been a wonderful tailwind for the last couple years in terms of free cash flow and we are now getting to the point where we are starting to see that minimizing the impact of the positive impact of that. In fact as we get into '14 and '15 are going to see the negative impact from that, so that is considered in that sizing of that program.

Okay. Great. Thanks for the time.

Our next question is from Bill Greene of Morgan Stanley.

Hi, there. Good morning. I just wanted to back to some of the underlying assumptions on the long-term guidance and I want to sort of ask Oscar about the cost side of it, because you've done a great job in the last few quarters on getting these costs out particularly on looking at the labor numbers, but even MS&O and stuff like this. It's been very impressive, so what we've seen at some of the other rails over time is they sort of come at the cost in a very aggressive way and they have gotten them out in a way that essentially says no matter what the macro hands us, we are going to get these operating ratios lower, and I was wondering if you can sort of talk about your ability to flex up on that if these macro assumptions that Fredrick outlined don't payout like that. Is a lot of this is in your control even beyond the macro that we get these numbers through cost alone if we need to?

Bill, so you've said a lot and I think that the heart of your question is that are we going to increase our productivity targets by year?

Yes. And really like I guess I kind of look at this and say you've demonstrated an ability to get out a lot when the macro is not helpful. Fredrik outlined the macro that's kind of neutral. But it's not that good, can you still get at these numbers through productivity anyway?

Absolutely. I mean if you think of the way we've been getting at these numbers, I mean we get them through asset utilization, technology improvements, resource planning sort of dynamic communication tools that allow us to sort of literally use a lot less resources in the critical first and last mile with our customers and we think there is ample opportunity there within our existing structure regardless of what happens in the macro environment, so that our future view on our productivity targets is very solid and will continue.

All right, and then just one follow-up for Clarence on the competitive dynamics, can you help us understand sort of how it's playing out right now in the East? It feels a little bit like the growth rates by you and your competitor are a little bit different on volume. Is that because there is some much more aggressive pricing environment that you seem to be seeing in recent years or do you feel like that’s just some of the geographies playing out and not too much to pay attention to?

Well, first I think it's great to see that the rail industry in general is doing well. That's a positive thing for all of us. If you look in the East, what you will essentially see between the two carriers is that we have some issues in our coal franchise versus NS and their intermodal growth rates have been higher than ours. As I outlined to you earlier, we have terminal expansions in place. We will have over 90% of our network doublestack cleared here very soon. So we feel very positive about what our growth rates are. I think with the 9 million truckload opportunity in the East, there is a lot of business out there for everybody.

Our next question is from Scott Group of Wolfe Trahan.

So just want to clarify a couple of things on the export side, particularly met. So the guidance of a 40 million tons, I think if I remember from last quarter, it was split relatively pretty equally between met and thermal on the export side. So we were a good amount above that run rate for met in first quarter. Does that suggest that there is upside to the 40 million tons or that that 7 million run rate for med in first quarter isn’t sustainable? Then just longer-term, the high 60s OR target for '15, do we need export to stay above 40, at or above 40 million tons or is there some cushion if that starts dropping below 40? I know there are a couple of things there.

Okay, Scott, I will go first and Fredrik will go second. On the export tons, as we mentioned earlier, we expect it still to be about 40 million. We told you originally, that the split will be about 50-50. It came in this quarter about 57-43. As we forecast throughout the year, we expect it to be somewhere in the 50-50 range, if its anything it could tend towards being more favorable to the met.

Scott, in regards to coal and what expectations are, I outlined earlier that we think that it's going to be flattish overall, clearly, from where we are here in 2013 and the guidance we have provided. But we also said seldom do the plans actually work out exactly that you expect. So we are going to continue to be flexible and if one of those markets are a little bit weaker, we will have to find other opportunities either on the top line or on the cost side to try to offset that.

Okay, that’s great and just one follow-up on crude by rail. As the business really starts to ramp up on the next year or so, should we be thinking about a big positive mix impact on yields, like we have seen with some of the other rails. I guess I am just not sure how to think about the pricing necessarily in the East and some of the refineries are a little bit more competitive between the rails. How do we think that and just the impact of that maybe the brent and WTI spread tightening a bit on pricing?

I would tell you, first off on the brent and WTI and the Bakken spreads that are all pretty tightening up. That’s a commodity-based number that’s going to do what its going to do on a worldwide global basis. So its just very difficult to predict that that’s going to be. On the profit margins for the crude, it is very profitable for us. It's probably not what a lot of people think. Its not coal, if that's the question that you're asking but it is a very profitable part of our business for us.

Our next question is from Jason Seidl of Cowen Securities.

A couple of questions. I guess I will focus on the pricing side. One, you obviously mentioned a little bit of weakness on the export side. I don’t think that’s of any surprise. I don’t know if you could split out some comments between thermal and met. Two, just to clarify one of the question, I think Bill asked about some of the pricing dynamic in the East. It just doesn't seem, at least from your results, that there is any aggressive pricing between you and the NS going along right now. I just wanted to make sure that that is the case.

What do you mean by aggressive pricing between us and the NS?

I am saying aggressive, are you guys getting more one aggressive with trying to steal freight from one and other. I think that was sort of the crux of those questions.

Absolutely not. As we've told you earlier, we're going to price above rail inflation. We're going to going to price above it, because, one, we think we've got a product that offers a significant value and secondly because it's necessary for us to invest in our infrastructure we've had a solid plan and worked over the last two years now nearly in which we've wanted to work on our pricing and that's what we are going to continue to do. What was the second part of your question? Met versus thermal?

Met versus thermal in terms of export pricing, I mean, you talked about pricing in general. I was wondering if you could parse out both of them.

Well, the met obviously goes at a higher rate than the thermal does, pricing right? Because the commodity type and what demand in the marketplace in there. As you know, we've seen downward pressure on both and I would say that downward pressure has been equally between the two markets just at a different level.

Okay. And my follow up question, you talked about sort of your new intermodal program. It sounds like that's going more direct marketing. Is that the case?

Now, it's not going more direct marketing, but is going more direct to the customers themselves. We do that jointly with our intermediaries, but we want to make sure that the bit ultimate beneficial cargo owners are very cognizant of what our capabilities are, or values that we could offer to those customers and how we can best serve them and in what markets.

Okay. I appreciate the clarifications. Thanks for the time as always, guys.

Our next question is from Ben Hartford of Robert W. Baird.

Good morning, guys. Fredrik, can you clarify or remind us what the incentive comp headwind by quarter for the next three quarters is going to be?

So here, in the first quarter incentive comp headwind was about $7 million year-over-year. And as outlined in my comments, we think it's going to be about 15 in the second quarter to reset the targets and we now have the broader application of the bonuses to include a larger portion of our union employees as well. As we look at the second half, they will be probably little bit more than that, probably closer to the 20 on average.

Okay. That's helpful. Then a follow-up related to crew starts were down 16% in coal with volume were down 10%-ish. What's driving, I guess, the longer train length? Is it just mix of greater percentage of export coal volumes or are you seeing more activity from bigger customers at the expense of smaller customers that that may not be generating at full capacity? Can you talk a little bit about that dynamic?

Yes. This is Oscar, Ben. I think it's a mixture of several things. Our southern utility coal normal longer haul is where our volume declined or as you think that would be shrinking, but we've got increases in export coal in Newport News, which is affecting that mix, we've got a high percentage of stuff coming from the Illinois basin which has a little bit longer haul and then in the Northeast where we are growing we have lesser declines in the Northeast in the mid-Atlantic utilities which kind of contribute to the longer haul. So, mix of all of those factors it's just traffic mix. It's nothing more sort of broader oriented development.

That's helpful. Thanks.

Our next question comes from David Vernon of Sanford Bernstein.

Good morning. With the liquidated damages of $32 million in the quarter is that the number we should expect more [board] or is this kind of dated as far as what's on the radar screen right now?

This is Fredrik. I think that we have seen the vast majority of the liquidated damage that we expect for the year in the first quarter, so I wouldn't expect to or there's no need to really build in a lot more after this. We will certainly update you and being transparent as we do get them going forward just as we have in the past.

And on the revenue, would that be sort of in that $80 million, $70 million to $80 million range then?

Yes. I think that's the best place. If you look back over the last few years that seems to be the place where it normal normalizes.

Okay. Great. Then just one last follow-up for Clarence, are you guys starting to see any type of pickup in demand for drilling materials into the Marcellus with gas prices start coming back up?

So far we have not seen any additional pickup for the drill count and sales. We are seeing an increase in the amount frac sand that we are moving into the Marcellus.

Our next question is from John Larkin with Stifel, Nicolaus.

Good morning. Thanks for taking my question. Just on the broader issue of seasonality, for many decades, usually the first quarter is your weakest quarter in transportation across most modes. Your guidance kind of implies that maybe there's less seasonality this year than there might be in a normal year or is it just the way that the one-time items flows. Could you perhaps illuminate us on that point?

Well, I am not going to get into quarterly guidance but based on what we said here earlier, we had about $52 million between the liquidated damages and the close agreement associated with the conveyance of our formerly owned subsidiary that impacted us favorably this quarter. So if you adjust for that, you get to a different run rate and then as you have seen, I guess, a little bit in regards to what you are alluding to, the seasonality is perhaps not as strong as it has been in the past, but there is still seasonality especially in the second quarter and the third quarter. We know third quarter with the automotive shut down and some of the coal holidays and so forth. So there is still seasonality there but I do think you need to change the starting point and once you do that I think it makes more sense versus the historical pattern.

Thank you for that, and then maybe as a second question, one of the other hot topics amongst investors has been activity into and out of Mexico and while you don't touch Mexico directly, with your partner railroads, you can do business into and out of that country. Do you see that as a major opportunity that might ultimately be as big crude by rail?

Well, John, one, we see it as a major opportunity for us. We do a lot of business today in and out of Mexico, both container riseable as well as a boxcar freight and automotive businesses in and out of the Mexico. I haven’t really thought about it terms of comparables but as crude by rail, the Mexican market, for us, is a very large market and I hope that crude by rail grows as fast as Mexico has.

Our next question is from Jeff Kauffman of Sterne, Agee. Jeff Kauffman - Sterne, Agee & Leach: Just wanted to follow up on Tom Wadewitz' question. I see the point where you paid down about $400 million of debt in the first quarter, no share repurchases. I hear what's Fred saying as we want to keep our cash level and neutral and that's what the share repurchase is based on but it seems like you are delevering here and I would guess share repurchase would be more accretive to earnings than a debt pay down at these levels of interest rates. Can you guide me through the thinking on that?

Just a very brief answer to that. Our intent is not to delever during this period of time. Jeff Kauffman - Sterne, Agee & Leach: Okay, so in other words, we are open-ended but we are just being conservative given the environment and matching our cash flows?

Well, we are going to continue to make sure that we approach it the same way we have approached it the last couple years in regards to the balanced approach and we are going to size the share repurchase program based on whatever free cash flow that we have available including using whatever debt capacity we have and clearly as you know we also had to go into the year a significant amount of pre-funding done on our balance sheet because of taking advantage of some attractive rates last fall. So our cash balances are relatively high going into the year. Jeff Kauffman - Sterne, Agee & Leach: Okay, and one detail question. Fred, you said the bonus depreciation traversing, does that mean that your GAAP depreciation expense levels out in 2014, 2015? Or am I thinking about that wrong?

I think you should really just think about it from the relationship between deferred taxes and our GAAP taxes. So it doesn’t really impact whatever you see on the P&L side. It really does impacts the ability to continue to defer some of our taxes.

Our next question is from Anthony Gallo of Wells Fargo.

As I understand, the export coal pricing from you is going to vary with the underlying commodity price change. Are there any other commodities on your network that had a similar dynamic? And I guess more specifically could you clarify the comment on crude? So will crude pricing by you vary as the differentials vary?

Anthony, this is Clarence. We don’t have any other commodities that we specifically tied in other lines of business. We specifically have tied to commodity prices. And on the crude pricing it will not follow the spreads.

Our next question comes from Peter Nesvold of Jefferies.

Good morning. Just a follow-up on liquidated damages, can you just maybe talk a little about how the liquidated damages provision are changing with coal industry given the underlying changes within the industry itself? Are these becoming harder to implement? Are there different ways that these provisions are being put into contracts etcetera?

Well, I think that clearly the liquidated damages that we have in context today are different than they were a few years ago when we essentially had both min and max as sort of in contrast and that the liquidated damages today are a lot smaller than they used to be. I think that's a trend that we expect to continue going forward as well.

Okay. Is that sort of a gradual evolution or is it given the significant downturn that we saw in coal volumes in 2012? Are there sort of step changes that are occurring in those provisions as you implement them now?

This has been occurring over last couple years. We expect that to continue going forward.

Our next question is from Keith Schoonmaker of Morningstar.

I think, to ask about coal inventory, you indicated utility inventories are high. Can you compare the levels in the past year and related just comment on maybe unique attribute of your franchise? Do you consider your ground storage capability more advantageous during periods like the present?

Keith, this is Clarence. The coal inventories as I mentioned earlier in the North had pretty much gotten down to what would be considered historically normal levels. That's been driven by the colder winter I think we had like six more weeks colder weather than we normally had. It's also been driven by natural gas prices slightly going up and a lot of that coal that moves into that area, which is both, Powder River basin and Northern App has a lower ratio right between coal and natural gas than it does in the South. In the South, the utilities have the tendency to burn a lot more gas. Even though electrical consumption is have a lot more gas capacity and as a result of that they went into the year again with excessively high inventories and they have stayed fairly high throughout this period. Now there are isolated cases where some utilities actually dropped and there's also isolated cases where in utilities have increased. What was the second part of your question? Ground storage related to export?

Yes.

We think it gives CSX a competitive advantage. We have ground storage at all three of our major exporting terminals that allows our customers to blend the coal if they have the coal there available for immediate loading as well as the asset utilization.

Our final question comes from Walter Spracklin of RBC Capital Markets

I guess my question is on the intermodal. I know Fredrik, you gave some color on coal assumptions going up there, but on the little brighter note here your truck-to-rail conversion is probably a more systemic and longer-term evolution and I am just curious as to what level of intermodal volumes are you assuming above your average levels for the rest of your business for intermodal going out to your target?

I think as you've seen here over the last few years, we continue to have great success in intermodal conversion in intermodal space and we certainly expect that during this period as well.

At a rate above the average, I guess

I would say above average. Yes.

When you look at the profitability of your intermodal, I know all the railroads was sort of termed the profitability of intermodal as average with the group, but clearly as you get growth in that segment your you train lengths become more optimal. Intuitively it would lead you to want to assume that this will be an above average growth level. Is there a certain level of volumes that you see as being a key volume level you can term that in with regards to your market share versus the truck, so the $9 million talking about or is there volume level you can point to within your own [kernel] statistics that would say, okay at this level we really start to get some good economies of scale here and get profitability above the average.

Well, I do think that you're right. I think that as we continue to grow that business we do see a economies of scale that is going to be helpful. At the same time though, intermodal also is the toughest part of the business because of pricing. So you are very much dependent on making sure that you create that leverage as you move forward. As we said, intermodal is a profitable business to us. It is with par with most of our merchandise market and we want to grow as much as we possibly can. So we are excited about the opportunity. We are excited by the 9 million loads and we are going to continue to grow that market at a faster rate than the overall economy.

That’s great. Thank you. I just have a housekeeping question for Oscar. Your employee base has come down quite a bit quite nicely here. How should we look at employee count going forward in terms a more flattish volume growth after the decline in coal volumes. Is this something that stabilizes or starts ticking back up now as you see that stability in coal and perhaps some growth in your merchandise in the intermodal business?

This is Fredrik. We are going to continue to make sure that we are responsive to whatever market conditions we are seeing. So in a flattish environment, we expect our headcount to remain flattish. Obviously, we are going to see what we can do on the productivity side but then if we see a ramp up in volume here in the second and third and fourth quarter we are going to see some adjustments to our headcount but hopefully not a one-to-one ratio.

I will now turn it back to the speakers for closing remarks.

Thank you for your attention and we will look forward to seeing you next quarter.

This concludes today's teleconference. Thank you for your participation in today's call. You may disconnect your line.