Norfolk Southern Corporation (NSC) Q4 2007 Earnings Report, Transcript and Summary

Greetings, and welcome to the Norfolk Southern Corporation Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Questions will be taken first from those in attendance at the meeting and then from those participating over the phone. [Operator Instructions]. It is now my pleasure to introduce Norfolk Southern Chairman, President, and CEO, Wick Moorman. Thank you. Mr. Moorman, you may now begin.

Thank you, and good morning. I am Wick Moorman, Chairman, President and Chief Executive Officer of Norfolk Southern Corporation, and it is my privilege to welcome you to our fourth quarter 2007 analyst meeting. We remind our listeners and Internet participants that slides of the presenters are available for your convenience on our website at nscorp.com in the Investors section, and additionally MP3 downloads of today's meeting will be available on our website for your convenience. As usual, transcripts of the meeting also will be posted on our website and will be available upon request from our Corporate Communications department. At the end of the prepared portion of today's meeting, we will conduct a question-and-answer session and invite those participating via teleconference to participate as well, time permitting. Please be advised that any forward-looking statements made during the course of this presentation represent our best, good faith judgment as to what may occur in the future. Statements that are forward-looking can be identified by the use of words such as believe, expect, anticipate, and project. Our actual results may differ materially from those projected and will be subject to a number of risks and uncertainties, some of which may be outside of our control. Please refer to our annual and quarterly reports filed with the SEC for discussions of those risks and uncertainties we view as most important. You may have noticed we have a slightly larger contingent of our management team represented today and an expanded set of presentation. Our goal this morning is to provide you with a comprehensive overview of our strategic operational and financial initiatives going forward. They’ll help us to do that. We have with us, Vice Chairman and Chief Operating Officer, Steve Tobias; Deb Butler, our Executive Vice President, Planning and CIO; Jim Hixon, our Executive Vice President, Law and Corporate Relations; Mark Manion, Executive Vice President, Operations; John Rathbone, Executive Vice President, Administration; Don Seale, our Executive Vice President and Chief Marketing Officer; and Jim Squires, our Executive Vice President of Finance and Chief Financial Officer. We are also joined by Rob Kesler, VP, Tax; Will Romig, Vice President and Treasurer; Marta Stewart, our Vice President and Controller; Frank Brown, Assistant Vice President, Corporate Communication; Maquiling Parkerson, General attorney, who's standing in for Leanne Marilley today; and Debbie Melvin, Jim Squires Assistant. And since we have a full plate for you this morning, let me move ahead by saying that I'm pleased to report that Norfolk Southern delivered a strong financial performance in the fourth quarter in the face of economic headwinds and higher fuel costs. The challenges were similar to those that we’ve seen for a number of preceding quarters, as volumes declined on a year-over-year basis. However, even though our volumes were down overall, we did have gains in several of our commodity segments, as Don will describe, and our results improved year-over-year including all-time record quarterly revenues of $2.5 billion, which were up 6% compared with the same period of last year. We also set a number of fourth quarter records, including income from railway operations, net income, and earnings per share. For the fourth quarter, net income was $399 million, an increase of 4% compared with the $385 million in the fourth quarter of 2006. And earnings per share were $1.02, an increase of 7% over the $0.95 per share we earned for the same period last year. Our fourth quarter results benefited from the resolution of a contract settlement that increased revenues by $26 million and diluted earnings per share by $0.04. Jim Squires will provide you with the full details of our financial results in just a moment. The fourth quarter operating ratio improved 1.5 percentage points to 72% compared with 73.5% for the same period of 2006. And as all of you know, lowering the operating ratio has always been and continues to be a primary goal for us, and we remain committed to further improvement in this very important metrics. For the full year, our 2007 results reflected solid levels of performance throughout our organization. During the year, we continued to sharpen our customer focus by investing in new capacity to handle business opportunities and developing and integrating new technologies to increase reliability, safety and efficiency. Our service continued to improve, as you'll see in Steve's presentation, and Steve will also describe how we are altering our incentive compensation plan to better try and improve service to compensation. Our 2007 railway operating revenues were the highest of any year in Norfolk Southern's history. We posted our best ever income from railway operations, earnings per share, and our lowest annual operating ratio since the integration of Conrail. And stockholders benefited from the sixth consecutive year dividend increases that together raised the dividend 41%. Despite lowering intermodal coal... intermodal and coal volumes for the year as well as continued weakness in the housing sector, the economy reproduced improvement in revenue yield and we were also able to control operating costs were appropriate given the business environment, and the result for 2007 was net income of about $1.46 billion or $3.68 per diluted share. As an indication of our confidence in the strategic direction of our company, the Board increased our quarterly dividend $0.03 per share yesterday, or 12%, and we repurchased 8.4 million shares of common stock in the fourth quarter for a total of 23.6 million shares in 2007. Naturally, I'm pleased to report these results, but more significantly I am pleased that our performance continues to showcase the strength and dedication of our people and our organization. We continue to handle historically strong business demands safely and efficiently, and we continue to produce good results that benefit customers and investors alike. I'm going to turn the podium over to the Don now who will provide additional details about our revenues, followed by Jim Squires who will review our financial results. In addition, I've asked Steve Tobias to talk with you about two subjects nearest… dearest to our hearts, service delivery and asset utilization, and finally Deb Butler will outline our 2008 capital plan. And I'll close with some comments before we take your question. Don?

Thank you Wick, and good morning everyone. Well, despite well-documented softness in the economy and excess freight trucking capacity, as Wick indicated we were able to generate record fourth-quarter revenues of $2.54 billion, an increase of $135 million or 6% over the fourth quarter of 2006. The two primary drivers for the increase were higher pricing and fuel. Merchandise revenue increased by $123 million or 10% in the quarter, as record revenues were attained in agricultural and chemicals. Automotive revenue was up 20% or $46 million for the quarter due to a contract volume shortfall payment of $26 million and other revenue gains in the automotive segment. For the full year, merchandise revenue increased by $90 million or 2%. Coal revenue in the quarter was up $9 million over last year, an increase of 2% and a new quarterly record. For the year, coal revenue declined by 1%. And revenues were up 1% in the quarter for intermodal despite a less than robust marketplace, while revenue declined by 3% for the full year. With respect to pricing and yield, the fourth quarter represented our 21st consecutive quarter of revenue per unit growth. Each of our seven primary business segments produced record revenue per unit for both the quarter and the year. RPU reached an all-time high of $1313 per unit for the quarter and $1242 for the year, an increase of 9% and 4% respectively. Of the 9% RPU growth in the fourth quarter, 1% was due to the automotive contract settlement that I just mentioned and the remaining 8% was roughly half price and half fuel and mix. Going forward, as discussed in previous quarters, we expect an average of 4% pricing yield independent of fuel and mix. Now, looking at volumes, despite unfavorable economic headwinds, four of our seven business segments realized higher shipment levels in the quarter. As you can see here, shortfalls in coal, intermodal, and paper offset gains in other merchandise traffic, resulting in a 3% overall decline in volume versus last year's fourth quarter. Volume for the full year was down 4% compared to 2006. Now, turning to our individual markets for the quarter, record agricultural revenues was up $36 million or 14%. Shipments increased by 3%. Pricing gains along with strong export and domestic corn shipments, which were up 10%, drove the growth. The integrated agro fuels market comprised of biodiesel, ethanol, and related feedstocks including fertilizers was up over 4000 carloads or 30% in the quarter. In chemicals, we recorded our 18th consecutive quarter of year-over-year revenue gains, as strong pricing and higher volumes drove revenues up 12% to a new quarterly record. Volume was up 1% in the quarter due to increased plastics traffic as well as higher sulfuric acid and soda ash carloads. Online plant expansions for plastics production and a new asphalt terminal in Georgia added to volumes in the quarter as well. As mentioned earlier, automotive revenue in the quarter was up 20% or $46 million. $26 million of the increase consisted of a volume shortfall payment in one of our automotive contracts, while improved pricing and higher traffic volume with other automotive customers generated the remaining $20 million gain in the quarter. Volume rose 1% for the quarter, driven by higher shipments for the new domestics, Toyota, BMW, Honda, etcetera, and General Motors. Turning to metals and construction, metals and construction revenue increased by 7% or $20 million in the quarter, while volume rose by 2%. The volume gain on the quarter was partially driven by new coil steel business to Detroit as well as new business diverted from barge at Hennepin, Illinois. Construction materials volume fell 3% in the quarter due to continued softness in the housing sector. Paper and forest products revenue fell $11 million or 5% in the quarter, while volume declined by 9%. In the fourth quarter and throughout the year, lumber shipments were weak due to the housing market. Shale [ph] and clay volumes were impacted by competition from Brazil and the loss of some short-haul export business. And our conventional market... paper market continue to be impacted by increased truck availability throughout the southeastern market. In our coal business, despite a soft utility and domestic met coal market, we produced the highest revenue quarter ever at $601 million, an increase of 2% over the same period of 2006. Revenue per car reached $1441, an increase of 7% over fourth-quarter 2006. The revenue per car growth resulted from higher rates, increased fuel surcharges, and more favorable traffic mix. Now, with respect to volume for coal, in the quarter a 23% increase in export coal shipments were offset by weakness in the utility and domestic met markets. Export demand to Europe remained strong, driven by the weak dollar and Australian port congestion. Our utility stockpiles, primarily in the southeast along with mine outages and weaker domestic coke demand, depressed volume in the utility and domestic met markets. In the near-term, reports indicate that Consol’s Buchanan, Virginia mine will reopen during the first quarter. Annual production at this mine represents approximately 5 million tons of low-vol coal, which is currently in great demand in the U.S. and world markets. Turning to intermodal now, revenue for the quarter of $496 million was up $3 million or 1% over fourth-quarter 2006. Fourth quarter revenue per unit was an all-time high, reaching $640. Contractual rate increases for several major customers and expanded fuel application contributed to the gains. We also re-priced approximately 30% of our international business during the quarter, which bodes well for 2008. Intermodal volumes in the quarter fell 4%, as continued excess trucking capacity and economic softness impacted shipments. Looking at the intermodal segments, our international business continued to see the impact of restructuring of trade flows by ocean carriers from West Coast ports to the East, as well as lower overall imported traffic. NS volumes moving through East Coast ports grew 23% for the quarter, while volumes moving through the West Coast fell 13%. Domestic volumes in intermodal were impacted by increased over-the-road competition in the face of softer demand. Premium traffic was up, primarily as a result of increased business with United Parcel Service. And Triple Crown volume was impacted by excess trucking capacity and cuts in automotive production. Now, looking ahead, 2008 will continue to be a difficult environment, as soft economic conditions are expected to remain. That’s no surprise to any of us. A weak housing market and higher oil prices will make the first half of 2008 challenging for both consumer and business activity. But the weak dollar and strong global demand should bolster exports, partially offsetting the slowdown in domestic demand. Despite these economic headwinds, we expect both volume and revenues to improve in '08 versus 2007. Strong project growth in new business are expected to generate increased traffic in most of our business groups in 2008. Also, we anticipate continued pricing gains averaging 4% over the year, as ongoing improvements in our service increase the value of our product. Thank you. And now, Jim Squires will walk you through our financial report. Jim?

Thank you, Don, and good morning everyone. I'll now provide a review of our overall financial results for the fourth quarter as well as free cash flow and capital structure review. Net income for the quarter was $399 million, an increase of $14 million or 4% compared with $385 million. Diluted earnings per share for the quarter were $1.02, which was $0.07 or 7% more than last year. Looking at our operating results, both revenues and profits from railway operations set fourth quarter records. The 6% increase in revenues Don described combined with only a 4% rise in expenses resulted in a $72 million or 12% increase in income from railway operations. The railway operating ratio improved 1.5 percentage points to 72.0 percentage points in fourth quarter of 2007. Before we review our operating expenses in detail, I would like to update you on some reclassifications in our income statement line items. The new income statement line items including reclassifications are shown here. The most notable reclassification relates to fuel. As you are aware, beginning with the fourth quarter of 2007, the STB will require railroads to provide certain information regarding fuel such as surcharge revenue, fuel expense, and gallons consumed. Previously, our income statement line item entitled Diesel Fuel included only those expenses related to the diesel fuel consumed by locomotives. In connection with the reporting requirements to the STB, we will now include all costs related to all fuel used in railroad operations in our line item, Fuel. This includes items such as fuel used by our vehicle fleet and our roadway machines. In addition, we've made a couple of other reclassifications to provide for smaller groupings on the income statement. Please note that all of the components are still available in the detail in the back of the quarterly analyst book. Turning to our expense detail, the largest increase was fuel, which rose $97 million or 38%. Higher prices resulted in an additional $103 million of costs. Our average cost per gallon was $2.56, a 43% increase compared with 2006. Locomotive fuel consumption declined $6 million or 3%, commensurate with the 3% decrease in traffic volume. Depreciation expense rose by $10 million or 5%, reflecting continuing investment in our network and equipment. Compensation and benefits decreased $32 million or 5% in the fourth quarter compared with last year. Stock-based compensation declined $15 million in the quarter, due almost entirely to the combination of last year's $6.24 per share of quarterly stock price increase and this year’s $1.47 per share decrease. Next, the accrual for incentive compensation was $13 million lower, reflecting the higher bar set for our bonus calculation. And finally, other items combined to contribute $4 million to the decline, as lower volume related payroll more than offset the effects of higher wages and benefits costs. Materials and other decreased $7 million or 3%, reflecting lower derailment and personal injury expenses, which are included in this line item along with other components of what was previously casualties and other claims. Purchase services and rents declined $5 million or 1%, primarily due to lower volume related equipment rents. Now, let's turn to our non-operating items. Other income net for the quarter was $34 million compared with $40 million last year, a decline of $6 million. Equity in Conrail earnings increased $20 million from last year, primarily due to favorable adjustments related to the settlement of a federal tax audit. Returns from corporate-owned life insurance decreased $14 million and interest income decreased $8 million as a result of lower cash balances. Interest expense on debt was $7 million lower than last year, largely due to less outstanding debt. Now, for the last time I would like to provide some details concerning our synthetic fuel investments. This slide shows amounts recognized during the fourth quarter related to our synthetic fuel investments, which as you now have a pretax and an after-tax component. As of the end of the year, the tax credit phase-out was expected to be 66%. Because of this high phase-out, the quarter reflects a $7 million loss on these investments compared with a $7 million benefit last year. As you are aware, this was the last year of Section 29 credits. For the full year, we had a net benefit of $13 million compared to an $18 million benefit in 2006. Total taxes for the fourth quarter were $213 million compared with a $154 million last year. The much higher effective rate of 35% compared with a rate of 29% in 2006 was driven primarily by the phase-out of the synthetic fuel credits. While fourth-quarter net income was 4% above last year, full year results were $17 million or 1% below 2006. Diluted earnings per share for 2007 were $3.68, which is $0.11 per share or 3% more than 2006. Now, I would like to update you on our free cash flow and capital structure. For the third consecutive year, our cash provided by operating activities was over $2 billion. As you can see, capital expenditures have increased over the same period. In a few minutes, Deb Butler will update you with regard to our capital plans for 2008. Free cash flow, which is after capital expenditures, was approximately $1 billion in each of the past three years, well above our historical free cash flow. These levels of profitability have enabled us to increase our dividend as well as make significant share repurchases in the last two years. The dividend has risen at a compound annual rate of 41% over the past two years, from $0.48 per share to $0.96 per share. Yesterday, our Board voted to further raise the dividend by 12% to $0.29 per share for the quarter, which is 32% above the $0.22 paid a year ago. These dividend increases are supported by the strong cash flow generation of our business and demonstrate management's commitment to achieve a payout ratio of approximately one-third of net income. In 2007, Norfolk Southern paid 26% of its net income as dividends. Recent market volatility in combination with consistent dividend increases has resulted in an indicated yield for NS of approximately 2.5%, a significant premium compared with 1.5% for the other U.S. Class I railroads and about 2% for the S&P 500. This slide shows our share repurchase activity for the past two years. During 2006, we purchased 21.7 million shares at a total cost of $1 billion. During the fourth quarter of 2007, we bought back 8.4 million shares of stock at a cost of $428 million. This brings our total purchases for 2007 to $23.6 million shares at a total cost of $1.2 billion. Provided the economy cooperates, we expect to continue to generate significant free cash flow. This along with debt issuances is expected to provide the resources necessary to continue along this path. As a result, subject to economic and market conditions, we expect to repurchase a similar amount of shares in 2008. Thank you for your attention, and now for an operations update I'll turn the program over to the railroader of the year, Steve Tobias.

Thank you, Jim. Good morning. I appreciate you being here with us today. As we began 2007, our operations were impacted by severe weather in both the Midwest and the Southeast regions of our operations. However, as you will see, we quickly recovered from these conditions and finished the year very strong. Our network is fluid and operations remain strong as we continue to emphasize improvements in service and safety. Our performance measures continue to show improving trends as we increase focus on consistency of operations and service delivery. Before I get into service performance, let me briefly tell you about our unit-train service initiatives. In our October meeting, Don Seale briefly mentioned the benefits of one of our initiatives, the 75-car unit trains. But allow me to give you a more detail. As we've gotten further along in analyzing our operating plan, we determined the network scheduling of unit trains was a key element in reducing variation in the day-to-day operations of the network, with benefits to be had in both the unit train side as well as the rest of the network. Under our traditional approach, unit trains were essentially treated as a separate network and train schedules were controlled by our divisions, initiating to train and operate it without much consideration for the overall network impact. Scheduling unit trains to run in defined slots enhances capacity and better utilizes train crews and locomotives by integrating the units trains into the overall network operations however generally remains with the train in order to facilitate expeditious movement, return of empties, and completion of the cycle time. Where service has been initiated, some benefits we've seen including improved cycle times saw just an 18% reduction in loaded transit times and a 40% reduction in the time loaded units [inaudible]. In addition, reduced transit cycles have improved asset utilization allowing us to store 4500 cars since July of ' 07 and reducing '08 car orders by 800 units. Although a much smaller network, we are seeing similar improvements in unit grain operation. So far, cycle time improvements have allowed us to turn in 210 leased grain cars. Now, looking at our service performance, all measures clearly point to continued improvement. However, going forward, keeping the lead in service means higher expectations in service delivery. In the next few minutes, I'll review some of our traditional metrics. I'll also introduce to you some new internal metrics… new internal measures we're using in our effort to raise the bar on service delivery, including our plan to tie service performance to incentive compensation. First, let's look at the measurements you're familiar with. This slide shows our daily cars online since 1999. The orange line shows a 12-week moving average. Horizontal line represents the active cars on Norfolk Southern, including both loads and empties. Fluctuation in cars online can be influenced by several factors, including business levels and weather, what is generally a good indicator of network fluidity. This slide shows the weekly average system train speed since 1999. This measures represents the average transit speed between terminals, and combined with terminal dwell reflects two major components of service delivery. Average train speed for the fourth quarter was 22 miles per hour, just slightly below fourth quarter of '06. Train speed can be impacted by changes in traffic mix and traffic volumes. For example, lower automotive volume, which moves in faster train service normally, relative to other bulk commodity trains, which moves in heavier slower trains, can impact average overall speed. In '07, train speed was 21.59 versus 21.71, primarily due to flooding in the Midwest and fires in Georgia and North Florida in the first half of the year. This slide shows continuing improvement in terminal dwell, the second major component of service delivery. Terminal dwell represents the average time a railcar spends in a terminal. In the fourth quarter of 2007, average terminal dwell was 21.3 hours, an improvement of 2.6% over the fourth quarter of '06 and almost 11% below the same period in 2005. Improvements in terminal dwell are success story for NS due to our focus on terminal operations and connection performance. This graph provides more detail on the improvements in connection performance. Connection performance measures the percentage of railcars making their scheduled connections and is one of the primary internal measurements we use in evaluating our overall service delivery. The measurement covers nearly all connections made at 284 locations across the network. Improvement over the last three years is evident by the trend line shown in red, with reduced variation particularly in the later half of '07. At the end of '07, our connection performance stood at 92%. TOP adherence measure is a percentage of scheduled work events, pickups, and settles if you will, executed by road trains. It's another one of our primary internal measurements used in monitoring our service delivery. The execution of work events is a critical component of service delivery, since failure to execute scheduled events can result in shipment delays and slower shipment cycles. The improvement over the last three years and the declining variation trend in '07 is shown in red, reflects improved consistency of top plan and scheduled hearings. Train performance, train performance is an obvious and traditional measure of service delivery. Beginning this year, we're significantly raising the bar on this measurement by expanding in scope and redefining what it means to be on time. This is part of our broader goal of reducing variation. In order to better measure variation in train performance and improve the measure to include a broader view of the network, we are changing the train performance measurement to include more trains, in fact all schedule trains. The additions include Amtrak and the newly scheduled coal trains, grain, and other bulk commodity trains. In addition, the measurement is now bounded both by the early and late side for the first time and clearly establishes early trains as a defect to service delivery. The two graphs illustrate the defining windows of on-time performance under the old and new measures. As shown under the old measure, all early trains were considered on time shown in green regardless of how early they arrived at final destinations. Under the redefined measurement, excessively early trains shown in blue are no longer considered on time. We believe this will be the most rigorous internal measurement criteria in this industry. The three component measurements I have mentioned, connection performance, TOP adherence, and train performance, are now part of a new composite measurement. The intent of the composite metric is to provide a single direct measurement of service delivery that is comprehensive, plan driven, accurate, robust, transparent, easily understood, and actionable. In short, our employees will be able to positively impact [ph] these measurements on a daily basis. In 2008, this new measurement will be tied directly to compensation as a part of our bonus calculation along with pretax net income and operating ratio. The composite metric will represent 20% of the incentive compensation calculation. In order to achieve a comprehensive measurement, the composite performance measure combines the three components into a composite measurement. The components are weighted in order to provide a more balanced view of all the traffic. Since many intermodal and bulk commodity and unit trains are point-to-point in nature and therefore not fully represented in the adherence in connection performance measurement, train performance is weighted heavier at 40% of the total. It goes without saying that the focus of these initiatives is the improvement of consistency and service. Consistency of service delivery yields both higher customer satisfaction and more efficient operations. Along with safety of operations, they remain our highest priorities. Thank you, and I'll turn the floor over to Deb Butler with pleasure.

Thank you, Steve, and good morning. I'd like to spend a few minutes describing Norfolk Southern's 2008 capital expenditure plans, with the particular focus on infrastructure investments. Norfolk Southern manages our capital investments to support our business strategy. Our 2008 budget includes investments, both to maintain the safety and quality of our existing franchise and to support the business growth we expect in future years. We will continue to invest in core rail programs and in rolling stocks. Investments in service quality and performance, especially in the intermodal market area, has been and will remain key drivers of growth. And we will continue to look toward public/private partnerships as one method to help finance these improvements. In 2008, Norfolk Southern plans to spend $1.425 billion on capital investments. This represents an increase of $84 million or 6% versus 2007 expenditures. Each year, a significant portion of our capital expenditures is invested to maintain our franchise, including maintaining our right-of-way, equipment replacements, and safety and regulatory requirements. Approximately 71% of our 2008 capital expenditures will be spend on maintaining our railroad for continued safe and reliable operations. The remaining 29% of our budget is related to the growth and productivity of our franchise. These projects include infrastructure and terminal expansion investments, strategic opportunities, and projects that improve our productivity and efficiency. The categories of capital expenditures we plan to make in 2008 are highlighted here. I'll provide some detail for each of these types of investments on the next few slides. I mentioned earlier that a large part of our budget is spend to maintain our existing franchise, and a significant portion of that is needed to maintain our right-of-way. Maintenance-of-way spending in 2008 is budgeted to be $613 million or 43% of our total capital budget. Norfolk Southern has a strong history of maintaining our track network at levels that allow us to operate train safely and efficiently and to meet our customer service standards. Our 2008 budget contains funding for the normalized replacement of rail ties in Dallas as well as the continued improvement or replacements of bridges located throughout our system. Locomotives and freight car acquisitions and improvements will total $264 million or 19% of our expected capital expenditures this year. We will continue a multi-year program that began in 2007 to replace our coal car fleet with more efficient cars, as our existing fleet becomes unsuitable for service due to age and condition. Domain [ph] capacity in certain high-demand freight cars fleets, we plan to buy out the leases of 321 freight cars as their leases expire in 2008. 163 new multilevel automobile racks will be built to handle existing traffic. We also continue to make capital improvements to our multilevel fleet to keep the cars at the high quality levels that our automotive customers expect. I mentioned in June that we expect the spending on locomotives to be lower for the next few years, due partly to aggressive spending in previous years and partly to the asset utilization improvements Steve just described. We'll take delivery of 15 new locomotives in early 2008 and we’ll continue to make capital improvements to the fleet to improve the efficiency reliability. Investments and facilities in terminals throughout our network will total a $143 million or 10% of our total planned capital expenditures. We believe that intermodal will continue to be a high growth market on our network over the long-term. So we are still investing in terminal capacity to handle the expected growth. Major projects include the construction or expansion of facilities in Columbus and Maple Heights, Ohio. Investments in bulk transfer facilities will support the growing ethanol market, as well as other commodities. Significant facility investments are also budgeted for non-commercial activities. These include our new freight car repair shop in Portsmouth, Ohio, upgrades to locomotive service facility, and new or upgraded wastewater treatment plants. Investments in computers and technology are budgeted to be $66 million or 5% of our total capital expenditures. We believe strongly that investments in technology enhance safety, improve operational efficiency, and equipment utilization, and give us the tools to better plan and manage our network and processes. Accordingly, we're investing in hardware and software to support a number of technology initiatives in 2008. A few examples of the projects that we'll be funding next year include LEADER, a locomotive engineer coaching system, that's proving to yield fuel savings and reduce train and track wear and tear as a result of better train handling. Optimized Train Control, Norfolk Southern's version of positive train control, and we'll also invest in several new or improved systems that will take advantage of increased availability of GPS and other onboard communication devices on our locomotives. Projects that fall outside of the categories I previously described total $339 million or 24% of our planned capital expenditures in 2008. We classify these as infrastructure and other. This category is primarily comprised of investments in infrastructure and expansion, although I should point out that some projects that also provide for expansion in growth are already included in other categories such as terminals or technology. Most of the infrastructure investments are projects to increase mainline capacity, track upgrades and expansions to accommodate new customers in traffic, and large networks, public/private partnership investments such as the Heartland and Crescent corridors, and the Chicago CREATE project. Core investments such as communications and signal projects, replacement and maintenance-of-way machinery, and public improvements such as grade crossing separations are also included in this category. Our infrastructure investments are critical to our capacity to support future growth. So I'll provide a little more detail about them on the next few slides. Before I describe our 2008 spending plans, I thinks it's important to highlight the infrastructure investments that were made in 2006 and 2007. Investing to accommodate growth on our southern gateways has been a priority. Investments in the Memphis and Meridian gateways support growth in interline business with our western partners. Growing volumes on our routes to Florida, including Jacksonville gateway with FEC, has led to spending in that area of the Southeast as well. We've also invested to improve operations in two key areas outside the Southeast, on our route between Cincinnati and Columbus Ohio and at our Harrisburg intermodal hub. NS has made several targeted investments to improve the efficiency of its coal network. And we've also had success in building partnerships with the states of Georgia, North Carolina, and Pennsylvania to facilitate $118 million of investment on Norfolk Southern lines. Overall, Norfolk Southern authorized $120 million for strategic capacity improvements on our lines in 2006 and 2007, not including the Heartland and Crescent corridors. The investments shown here as well as infrastructure spending prior to 2006 have already had positive impact on network fluidity and service reliability. Let me quickly highlight our two major capacity expansion initiatives. The Heartland Corridor project will give us a new double-stack gateway for container traffic from the East Coast to the Midwest, reducing transit time from the Hampton Roads ports to the Ohio Valley by 24 hours. This is a complex engineering project that will raise clearances in 28 tunnels, and it's not only the engineering that's complex. An enormous amount of work has gone into redesigning service to existing customers to allow trains to operate around the construction windows. The first tunnel work began in October of last year, and the entire project is expected to be complete by 2010. As you'll recall, this is a $150 million public/private partnership involving contributions totaling $95 million from the federal government, Virginia, West Virginia, and Ohio. As we announced in June, the Crescent Corridor project will link key markets in the Northeast, Mid-Atlantic, and Central Southeast with high-quality rail intermodal service. Most of the investments will be targeted to expand existing facilities or markets along the Norfolk Southern network and to make line-of-road improvements to handle the increase in traffic. The remaining investments for the Crescent Corridor will include locomotives, railcars, and intermodal equipments such as containers and chassis. The total cost for the corridor is in excess of $2 billion and will take several years to complete. As with the Heartland corridor, Norfolk Southern will invest to the extent that we expect to earn a reasonable return on our investments. In fact, the couple of projects in our 2008 infrastructure plan will directly support Crescent and are the result of a public/private partnership with the Commonwealth of Virginia. But the availability of additional public funding will be a critical component of the success of this project. Apart from Heartland and Crescent and based on the market expectations we have today, over the next three years infrastructure investment on Norfolk Southern is expected to be concentrated in two major areas, the lines east of Chicago and the Southeast. The Chicago East projects have largely been identified and will be built out in stages over the next two to three years. Significant investments in facilities in track capacity are also planned in the Atlanta and Birmingham areas. So let me end where I began. As has always been our practice, Norfolk Southern's capital plan is designed to support and closely align with our business strategy. Clearly, that strategy anticipates solid prospects for long-term growth, but our plan is also flexible or not to allow us to adjust spending if market or regulatory conditions change. Thank you, and I'll turn the program back over to Wick.

Thank you, Deb. Let me try just very briefly to sum up all of this in terms of our results for 2007 and our outlook for 2008 and beyond. And I reflect that beginning in about 2004, one of the recurring questions that all of us have had… all of you had for us is how deep and long-lasting are the changes in the transportation marketplace that have been driving our improved financial performance as well as the improved financial performance of the industry. And my response has usually been that they seem to be here to stay, but we really wouldn’t know until we saw a business downturn. Well, in 2007 we saw that downturn and in the face of it Norfolk Southern, which as you know was an industry leader in volume growth and pricing from 2002 through 2006, still posted improved year-over-over financial results and a lower operating ratio. While down year-over-year, our volumes remained at historically high levels and as you’ve heard this morning we continue to take a long-term perspective as we plan new traffic corridors, improved technology, and support our operations with the tools necessary to provide both superior service and drive profitable volume growth. 2008 obviously presents hurdles similar to those that we tackled in 2007 and for that matter have tackled for a number of years, including cost pressures in the form of increased wages and health and welfare benefits and continuing high diesel fuel prices. In the near term, we obviously continue to keep a close eye on the economy. In January, we see continued pressure on overall carloading, especially in the automotive and housing sectors, and we do expect as Don mentioned to see that pressure continue for the next several months. As all of you know we never take our eyes off of the cost side of our company and our commitment to improve our operating ratio and we’ll react to changes in revenues accordingly. However, right now we do plan to continue our locomotive and car overhaul programs to ensure that we can continue to respond to our customer service demand. And as Deb discussed, we are continuing to invest for future growth in traffic flows, and in short we remain very optimistic about our future prospects. Thank you very much. Question and Answer

And we'll now take questions first from those of you who are here in the audience and then we'll turn it over to our telephone participants to the extent we have time available. And as always, I'd ask you to identify yourself before you ask a question. And we'll start on the right and work to the left.

Yes, good morning. It’s Tom Wadewitz from JPMorgan. I wonder if you could give a sense of… that some drivers of the significant change in yield growth in fourth quarter versus third, you talked about it a little bit, but it’s tough to figure out how to forecast ’08 when you had the 2.5% growth in third and 8% in fourth. I’m just talking about reported yields year-over-year? So I’m wondering if you could give a little… further thoughts on that and perhaps how we should look at yield growth in ’08?

Let me ask Don to come up to maybe give some color, but I think the important thing to understand is that as we… and we’ve talked about this before and we talked about it in light of the third quarter in particular, is that our yield growth is to some extent dependent upon when we have contracts come up and the re-pricing of those contracts, and that is not really ratable necessarily on a quarter-to-quarter basis. On an annual basis, as Don mentioned, I think we have a pretty good idea of what's going to happen. But in any particular quarter, it can be problematic depending on the number of contracts that we have come up. Good examples, Don, I guess is the fact that in the fourth quarter we saw 30% of our international intermodal contracts being renewed.

Wick, you’ve pretty much answered the question.

Well, I know it's... I sure Tom has another question for you.

Tom, I'd like to just reiterate that it's not linear. Timing… as we have indicated in past quarters, timing of re-pricing comes into play. Certainly, fuel comes into play as well, and mix comes into play. In the fourth quarter, we had a slightly favorable mix, we had higher fuel, and as I mentioned the 8% gain in RPU after you back off the 1% for the automotive settlement. Of the 8%, half was price yield, fuel price, the other half was mix and fuel. And looking ahead, 4% is what we see as an average over '08 as we go forward. It won’t necessarily be ratable in each quarter, it could fluctuate a little bit quarter-to-quarter, but we think that's a good solid number for the year.

Right. And I understand that fuel is a significant driver in reported yields. But in terms of mix, you had some significant mix unfavorables in third quarter and it sounds like slightly favorable in fourth. And I'm concluding from what you're saying that the fourth quarter is more representative on what your '08 run rate would look like. Is that--?

Yes. As you may recall, in the second and the third quarters, we tried to make this rather explicit. It was that we had a very quiet period in both of those quarters on re-pricing from a timing standpoint. And I've mentioned in the second and third quarters that that would start to change in the fourth quarter and we would see some re-pricing in the fourth quarter that would have a favorable… more favorable impact going into '08. And that continues to be the situation.

Okay. I've got maybe one more for you Don and one for Wick. I'll just give you both at the same time. Your primary competitor, CSX, yesterday had some pretty optimistic comments on export coal, saying they thought it would be up 50% in '08 versus '07. I'm wondering if you can give a sense of whether you could realize a similar magnitude type of improvement or is there port constraints or anything else to consider there? And then for Wick, in terms of operating ratio, you didn't really talk about how we might think about OR in '08 versus '07. You said, volume is probably up a little, pricing up 4%. You didn’t comment at all on cost side opportunity or OR, so if you could give any presumably high-level comments on that? Thank you.

Tom, with respect to export coal, the weak dollar… the weak U.S. dollar and the port congestion, bunker fuel rates, European demand, all of that adds up to good strong demand in Europe for not only metallurgical coal, which as you know has been our traditional market in Europe, but also steam coal. And steam coals are being booked into Europe at levels that certainly was unanticipated a year ago. So it comes back down to… our business was up 23% in the fourth quarter on export, it's been up all year. We forecast a continuation of those types of increases in export, but utility coal is… or steam coal is entering into the picture. The unknown here is how the domestic utilities… the U.S. domestic utilities will come back into the market for steam coal this year as stockpiles start to move. We still have above target stockpiles we're being told by the utilities in the Southeast, but the coal burn is up and the coal volume is not moving to the extent that it could replenish that. So in short, we think stockpiles have to come down, and when that happens the domestic utilities are going to be back in the marketplace. And they'll be competing for that same coal in terms of some of the coal that's going for export market.

For all of the reasons Don mentioned, we are... we think it's going to be a very good year for export coal. But I think our uncertainty is we think there may be some things happening in the market, particularly in the second half, that mat tilt the balance one way or the other, which really don't have much to do with where we... with anything we do. I think the good news for us is that whether it moves export or moves utility it's moving by rail and that's a positive thing.

And Tom one other comment I mentioned, Consol’s mine at Buchanan, as you know, that's low-volatile coal, high-quality metallurgical coal, which traditionally has flowed to the export market. If that mine does indeed come back in the first quarter, and we have reports to indicate that it just might, that will be favorable in terms of our export flow as well.

Tom, you did noticed that I didn't make any comments about the OR going forward. As you know, we just don't other than to say that we... I will tell you that we think we can drive the OR lower in our company and we have a lot of initiatives underway and a lot of what's being talked about in terms of asset utilization. So we are not going to make a prediction, but we are committed to driving it on down, and we think we can with the kind of year that Don outlined in terms of volume and revenue growth.

Thanks, Wick. It’s Tony Hatch [ph]. I just first wanted to thank you for providing a lot of information today. And I just have three quick questions about some of the stuff you talked about. The first is, when would we expect to see a Heartlander or specifically Rickenbacker begin to contribute? The second for Steve really is, given this focus, which I found really interesting on integrating unit trains better and whatnot, does that allow you to accelerate putting in ECB or PTC into the system? And the last one for you is, among your compensation plans, I know you’ve just added what Steve talked about today, is I didn't know you guys were going reasonably quickly. Do you have anything in there for any kind of return, whether it’d be on invested capital, replacement costs, or whatever? Is there a return component to your bonus compensation?

Let me... Steve will come on up to get the last one. Starting with the compensation, the bonus computation we are talking about, the calculation is what effects us, the annual bonus program that we have, which applies to not only all of our non-agreement workforce, but our locomotive engineers and our dispatchers as well, and that computation works the same way for everyone in the company. And we think that's an important thing because as… particularly our operating supervision and engineers and dispatchers look at this new component, they understand it already because they see the statistics and they will understand on a daily basis what they can do to impact it, unlike the other two components which they have an impact on, but it's not immediately visible, which are operating ratio and pretax net. We have other long-term incentive compensation programs, which are stock-based for a significant portion of our management, but not all, which have a strong return component in performance shares in particular. So I think if you look across, and this is all outlined in our proxy, I think you'll see that in terms of aligning our compensation with all of the key drivers of shareholder value, I think we have some really strong compensation programs to do that. Steve, why don't you… and Tony remind me, what was the first thing you asked?

Rickenbacker?

Rickenbacker opens hopefully next month, the terminal itself, and obviously we have service to it today. It's the Heartland… what the Heartland does is take a considerable amount of time off of it. The new APM Moller-Maersk terminal, and Norfolk has now opened although it's ramping... it will ramp up slowly as well, and we should see more and more Maersk traffic and other traffic be driven out of that terminal during the course of 2008. And our projections right now for Northfolk is that we'll just continue over the next two to three years to see steady intermodal volume growth, as more and more steamship carriers come in to Northfolk, which obviously the Port of Hampton Roads is a great port, natural port, and has a lot of advantages. Don has mentioned to you this ongoing shift that we see of West Coast to East Coast steamship business. Northfolk is clearly a major player in that as well. And so you won’t… it is not a step function. It'll just be increasing growth out of the port. Steve?

You all are familiar with many of the things that we've done in our merchandise side of the business from the standpoint of cycle time and taking handlings out of what we do. It's a natural progression to apply those concepts into our unit-train application and have them fit better… and in intermodal as well, because they are essentially point-to-point operations, and have them fit better into the overall network of how we do business functionally as a railroad. As your question relates to UTCS and PTC, certainly we are rolling those processes as fast as we can roll them as we are LEADER, which I know Tony you are familiar with, and its application across our systems. It will help facilitate those processes as we put greater regularity into what we do. The real upside in the unit train piece of this is we've made the commitment to apply the resource and the asset to standardize the requirement for the performance necessitated for these unit trains. That puts a whole different parameter around what our customer base, both the receiver and the supplier, can look to as a standard to begin to find ways to take costs out of what they do, which will help us do a better job of cycling and also impact lifestyle, which is an important part of what we're trying to do also as a railroad. In short, we're applying the KISS principle. We want to make this very simple, and we think there is enough upside here that everyone will benefit in a very significant way.

You might mention though, the ECP, which is a good--.

ECP, obviously as we migrated electronically controlled pneumatic brakes, is a... one of the greater technology applications. We have two trains running with ECP and it lends itself to coal, it lends itself to intermodal probably, and the migration in the merchandise as you have some understanding. The merchandise network will take a bit longer because of the myriad types of equipment. But it is a natural progression. The benefits there are more than significant. Of course there will be some cost associated with it, and as Debbie pointed out we'll balance our capital dollars against the requirement and make the right decision for NS.

Hi, Ken Hoexter from Merrill Lynch. You talked earlier about… 30% of your intermodal volume was re-priced during the quarter, I think was said earlier--.

The international contracts, not the total volume.

Okay, international contracts. Can you talk about the length of those contract renewals, how the market is right now, particularly in light of the large shift that we're seeing of freight moving to the all-water East Coast?

I’ll let Don--.

Good morning, Ken. With respect to the international business, which as you know is about half of our total intermodal book of business, 30% of that was renegotiated in the fourth quarter and the term of those renegotiated contracts range from three years to five years. It's a mix of terms. And as far as the shift in traffic, this is something that… as we've made our trips to Asia over the past five, six, seven years, the shipping community has told us very clearly that plans to increase usage of the Suez Canal, the Panama Canal, all-water service to the East Coast as trade patterns continue to develop and change, that's been a very clear message in terms of strategy, which in turn led us to the Heartland Corridor planning, the Rickenbacker development. All of that was part of what the shipping community has been telling us over the past five years or six years. It is accelerating as we speak, and I think I've shared this with you in the past. If you go back five years ago, 20% of our international cargo, international container traffic, was coming in over the East Coast ports. At the end of 2007, 50% of our import container business came out over the East Coast. So the shift is now and it’s happening and it will continue to happen in our view.

So if I understand it right, about 60% of all freight that hits the ports goes by trucking because it's more local in nature. Has that changed that all or is that the goal with the network investments? I’m just trying to understand if you're seeing particularly with truck prices as… where they are? Are you seeing more and more of those goods moved by truck?

We're seeing double-stack economics compete very favorably with truck from the ports. Now, if a ship lands in New York for all-water, obviously that is a local distribution. So instead of a Chicago to New York haul, it would be local trucking. But if a ship comes to Norfolk and it goes to the Ohio Valley, that is a great haul for us from Norfolk all the way to the Columbus area as opposed to Chicago to Columbus today. So there is a netouts here that are very favorable even in some of the shorter haul lanes like Savannah to Atlanta. The Port of Savannah is seeing increased activity with all-water. We have focused on that quarter, we're running heavy dense, long double-stake trains between Savannah and Atlanta, and we are competing quite well and the margins are very good as well.

Helpful. And then on the... I guess more a Jim question. On the investment… or maybe it's Wick big picture question, on investment tax credit proposal in Congress, how would that shift… just to get a great detail and breakdown of your CapEx plans, how would that shift your thinking on CapEx? Would you likely want to make larger investments in the near-term or would that shift your thinking it all?

Well, depending on... it depends on the flavor obviously, but I would say that was the right trends of investment tax credits, for example something that looks like the bill that the rails have introduced already with the 25% tax credit, where we see opportunities where we know we're going to have ongoing infrastructure investments into our network, and Deb’s team... we have big process we detailed to you before in terms of looking at our infrastructure and our need, not just for 2008 but for the next five years, and if there is a program that's put in place that makes those... makes it economically attractive to go ahead and accelerate those investments and increase our capital spending in the short-term knowing that we're saving money by doing that, we'll jump in that game. And I think that would be not only beneficial to the railroads, but as we keep talking about with this legislation as you know, I think it will be great public policy as well. So it's something we are watching. I called Rob Kesler and asked him about it, and the AAR is looking at how that can be done too. It would have an impact if it's the right kind of tax credit and what we think about over 2008 and 2009 for maybe some increased infrastructure investments.

Right, and just a technical numbers question for Jim. It seems like if you to take the $353 million of fuel expense and divide by the gallons you get more like a $283 million cost as opposed to $256 million. Is that because of the shift of added expenses that you’d mentioned earlier of other diesel costs being thrown --?

Right, exactly. Because of the reclassification, we added fuel related expenses to the new fuel line item and that took it up roughly 10% off of what would have been pure locomotive diesel fuels.

So is there any… going forward, are you going to relate what it is again on a consistent basis for the locomotive diesel or are we just going to go by that? Are you going to continue to report the cost that you've to spend for--?

We'll continue to report that along with gallons consumed.

Okay. And then just finally, if I look at your balance sheet your debt-to-cap ratio over the next year or two years, again it's just holding results improving on the same pace would drop down about three points, which means you have about $1 billion of capacity to increase buybacks over the next year and then other $2 billion in two years. Just wondering, what would get you to be more aggressive on a stock buyback at this point, just conceptually?

Well, we said that we feel we have room for incremental leverage, certainly within our capital structure while maintaining strong investment grade ratings, and that is our overall objective, but within that... sort of within that parameter we have room for significant additional debt and we've said this morning that we expect to do somewhere... something like the amount of share repurchases we did in '07 and '06 and '08. So I think that's going to be the plan. We will have to see how things go. Stock price is a factor, credit markets are a factor, the economy is a factor, cash flow generation are all factors.

Thanks again for the white [ph] slides.

Yes, Scott Flower. Just a couple of questions, obviously you gave us great detail in the CapEx and we appreciate that. I wonder maybe if either you or Jim could give us some color. How do you look at the balancing of… obviously, I guess I’m not used to seeing up CapEx in what is a choppy volume environment, at least near-term. So maybe you could give us some perspective how you see the balancing of core investing for what you see is eventual volume rebound versus the regulatory environment perspectives and how you get that timing right so that you are not too early relative to volume recovery versus obviously the broader perspective that you may see in the industry? And I had a couple of other follow-ups for Don.

Okay. That's obviously a great question because we want to invest as close as we can to a just-in-time basis, and we remain as I've said earlier very optimistic about our prospects for volume growth when the economy starts to get a little better. And to the question as at what point do you start to invest, the issue with a lot of our projects, particularly the project that Deb has outlined in terms of infrastructure, is a fairly long lead time project, longer lead-time than they used to be because as you might imagine, not just in the rail industry, the issues in timing around, particularly the acquisition of property and the permitting to do construction, just seems to take longer and longer every year. And with our commitment to investing for the volume growth that we know is coming, we have to kind of step out and make those investments we think quite often a year or two in advance just to the be to the point where we can go out and do the construction. But this is… as you say, it's a little choppy on the volume side, but it… we look through this and we’re going to do as we've always done, Scott. You know how we look at the world. We're going to try and do this in a ratable way and be ready so that when the volume comes we'll be able to handle it profitably. Having said that, we look at it very closely this year. One piece I should point out two of our capital program, which both Deb and Steve touched on, but it's something that's there that we've told you about before and that is… and it's just something that's out there that we have to contend within the next six years to eight years, and that is that we have to buy a lot of coal cars. Our coal car fleet is ageing rapidly and reaching the end of its… really its second life because most of the fleet was rebodied about 20 years ago as I am sure you all know. These cars start to deteriorate after some period of time because of the corrosive effects of coal. Now, the good news is with the new cars that we're buying, we're using different steels. That won’t be a factor in the future, and we also are adding capacity. So these are much more productive cars. But one of the drivers of our capital for the next few years is just going to be the fact that we've to step out and buy coal cars. And that's a fair sized component of this year's budget, 1300 cars this year.

And then the other question, and maybe this is for Don, is obviously imports and exports are shifting and there is obviously currency impact. Can you give us some sense of how much of your total business is actually affected by trade, either imports or exports, I know that maybe positive? And then give us some sense of how you're participating in the uptick in exports because obviously a lot discussion about imports falling off is well known. How and in what areas are you participating in exports and how that’s changing could be helpful.

Scott, one of the immediate impacts with the weaker dollar and the increased exports and somewhat softer imports and also the port shifts that we talked about earlier, is that we're seeing a lot less empty repositioning of containers transcontinentally back to the Pacific Coast ports. That is something that has changed rather dramatically, and those empties now are being loaded somewhat back to the East Coast ports for export product, but also the empties that are being taken back to the port are being repositioned back to the East Coast as opposed to the West Coast. Now, with respect to the second part of your question, in terms of the flavor of what types of products, our machinery market is up significantly. I mentioned in the automotive market that General Motors was one of the increases this quarter along with the new domestics. The GM increase was not domestic, it was export related. So if every... it's a range of products running from machinery, automotive products, agricultural products, I mentioned our grain business, our corn business, our domestic and export corn, which as we've told you in the past the grain… the export grain market has not been a market that we've played in on a strategic basis because we like the domestic market, it's more predictable, it is more ratable with southeastern feed mills that we've located. But the export grain market is so prevailing today that we are participating in it and we're doing quite well, and that business continues to grow. So grain, machinery, automotive, some chemical traffic, it's across the board.

Thank you.

Couple more over here and then we'll do a couple on the phone, if we can. There and then here.

Hi, Sami Cohen [ph] with Lehman Brothers. Two quick questions, in the uptick in the equity income from Cornwell you mentioned a tax audit... or Jim did. How much of that $20 million increase was from the tax audit reversal, like if we just put a number on it?

Essentially, all of it and that reflects obviously our portion from our owner… our ownership--.

That's right. And then the second question is, in the third quarter you spent a lot of time talking about mix, but specifically length of haul issues. Was there an offsetting impact in this quarter or was mix just mix between commodity types when you mention the positive mix impact?

I think one of the things we saw, Don, was we saw in the third quarter… we saw in our coal business in particular where this mix effect hit us is we saw for various reasons a little fall-off in our long-haul traffic and at the same time we got a lot of short haul river coal traffic and that accelerated and has continued to stay at a high level, but we saw the… some of the long-haul traffic come back to us, so that you didn't see that mix effect quarter… this quarter in the same way that you did last quarter. And the other mix effect, Don, anything in particular is just kind of something here or something there. It is no one thing. And you are always… every quarter you’re just going to see little pieces throughout our business. It could be a little bit in intermodal, it could be in variant places. One more here.

Hi, Adam Longs [ph] from Morgan Stanley. Just a quick… couple of quick questions, primarily for Don. Given all the... I know the economic environment creates a lot of uncertainty, but given all the growth initiatives that are out there, do you have a sense for when total volume growth might return?

That's a question we ask all the time.

That's a question that I feel like the weight of the world is on my shoulders. That's a great question, and with all the moving parts in the domestic economy, the international economy, in terms of when volume growth will resume, if you break it into a couple of components, the domestic trucking industry, when that industry tightens up inside the U.S. we'll see domestic intermodal certainly continue its growth pattern. On the international trade side I see that coming back. I don't think... we are in the middle of a transition of repositioning of vessels, repositioning to ports, but that growth will be there, import/export growth. The coal business with the Illinois Basin, PRB, Central App., Northern App., coal sourcing and import sourcing before the dollar got so weak. Coal demand and the alternatives for coal are the lack thereof. Coal volumes will continue to grow over time, and we may get to a point because of weather that stockpiles are high as they are today in the Southeast, but natural gas prices are at 8 bucks today and that will continue to drive demand for coal because I think it is the most of available, most economic fuel for utility… electrical utility generations. So volume growth will resume in that coal market over and above the export market that we have already talked about, which will continue to grow. The housing sector, your guess is as good as mine, in terms of when that's going to actually bottom out. We have seen starts down 25% last year, year before last, another 26% in '07. We've got ways I think to work through that. And as we've mentioned in earlier meetings, housing has a... it has a pervasive cover in the economy of what we transport and what's moved. So if you put all that together, we still feel that our '08 volumes will be better than our '07 volumes.

Up year-over-year?

Up year-over-year.

Okay. And then just one more quick follow-up. In terms of the 4% pricing you’re talking about next year, how much confidence or visibility do you have into that through things that are somewhat locked in, say, escalation contracts, contract renewals, things like that?

I can say we have very good confidence on that number. We know when contracts are going to be re-priced, which contracts are going to be re-priced. We know when we are going to re-price confidential quotes. So that numbers, excuse me, is an aggregate of the plan over the year. And as Wick indicated, that plan over the year doesn't call for it to be the same every quarter because the timing that… the termination or expiration dates of those instruments are not all timed in every quarter because they've been in place for years. And depending upon when they’re renegotiated, when they’re put in place, it varies the next expiration and renegotiation time. But we're very confident on the 4%.

And then, if we have time, just one last quick one, I know improving service and investing in service has been a hallmark of Norfolk Southern, particularly over the last couple of years it’s sort of been the mantra. Yes, the volume growth hasn’t been there and that's… a lot of that's due to the economy. Have you really seen the kind of returns you are expecting from investing and service, and has that shifted your approach to how you may invest going forward?

Let me answer that. We haven't seen anything. We look at the impact to the economy and obviously that's a significant driver. I think the world has changed some, but we're still very closely tied to the economy. But we don't see anything in terms of how we deal with our customers, what they tell us, and what we've been able to do in our renegotiations in the terms of both price and the volume that they have available. It tells us that investing in services doesn't… isn't a high return prospect. And I think it’s particularly important to kind of look at… I think the last four or five years are very instructive in terms of when the volume growth came on in '03 and '04 our network was able to handle it and we were able to deliver good customer service, and that's really what drove a lot of our volume growth. It’s people turned to us because they knew we had a high-value service product. And we're consistently told and we do a lot of market analysis that the better we make it the more prospects we have. As well as Steve said, the other great thing about improving service and running the railroad more and more like a Swiss watch is you take out assets. The more regularity you have, the more assets efficient you are and the more cost that come out. So from both standpoint, that's the direction we want to go. Let me see it… I know we have a few people on the telephone and we're running out of time here. But who's out there?

[Operator Instructions]. We have our first question coming from Edward Wolfe of Bear Stearns.

Hi, thanks everybody for reaching out to the phones this time. Thanks, Wick. A couple of things, you've talked a lot about contracts re-pricing and some of them in the fourth quarter. Don, if you said it I didn't hear it, you talked about the contracts being three to five years. What was the average amount of rate you're getting per year on those three to five-year international contracts? And then separately, could you talk about where there any other legacy contracts long-term? It looks like coal yields are up dramatically relative to last quarter as well. Where there some long-term coal contracts that came up in the fourth quarter?

Well, Ed, first of all, thank you for the comment about opening up the phone lines, but although we've broken with tradition to do that we are not going to break with tradition in terms of not really talking about price increases that are built into contract... any specific group of contracts. In terms of the coal, for the fourth quarter I don't think that we... I think we had a couple of renewals, but I think what you saw there really again is the mitigation… more than anything was the mitigation of that mix effect that just seemed to really be specific to the third quarter. The other thing too that we didn't mention is that a lot of our coal contracts have an RCAFU inflator in it or adjustment in it and so you start to see the impacts of fuel flow through that as well. And really, the impacts in the third quarter year-over-year were down and the impact in the fourth quarter year-over-year is up, and so that is the other piece of it, I guess you are seeing.

Okay. Just directionally without getting into company specific, can you talk about are there contracts similar to fourth quarter coming up throughout the first, second, third, fourth quarter of '08?

Well, again, I think that… on any… in any given year, we feel that between contracts, private quotes, and public tariffs, there is about half of our book of business that is out there for some kind of re-pricing. And we don't see anything that makes us think that that number is different in 2008. It's just going to run about that number every year.

Okay. Can you talk a little bit about export coal and as a percentage of total coal right now what that looks like or what the rail cars this year with our versus what could be possible in '08?

Let me get Don to comment on that. Export coal, as you know, our franchise as compared to what it was ten years ago looks dramatically different in terms of the percentage of coal that goes export versus utility. Don, you want to comment a little more on that?

Yes. Ed, good morning. On the export, I will put it in terms of tons. The '07 tons for export was about 15.5 million tons total. That was over Baltimore as well as Lambert's Point, and that will be up significantly in 2008 based on our plan.

Could it be doubled? Is there that kind of capacity?

Yes, I am not comfortable going into the order of magnitude. I think if you look at the increases that we've seen in '07, certainly we feel that export coal, the utility steam coal that I mentioned earlier, as well as the metallurgical coal, and then if we see some of the mines come back that I mentioned like Canon, that will be another boost. And we have the capacity at Pier Six at Lambert's Point to go to 19 million tons. So we have the capacity to… without doing anything else, and we've got capacity to go above that just by tweaking it.

Is the 19 million before the two mines reopened or after assuming, they reopen?

No, the 19 million I'm talking about the capacity of the terminal at Norfolk, Ed.

Okay, that's helpful. In terms of mines reopening, what would that add would you think to volume? How do we think about that potential?

Well, Consol went down... Consol’s Buchanan mine went down in August of 2007 and that mine produces 5.2 million tons of coal per year. It’s low-vol… high quality low-vol metallurgical coal and it can go to the steam market at the proper price or it can go to the export market. So that certainly would be a boost to availability to what today on low-vol coal for export is a tight market… tight supply.

That makes sense. Jim, switching gears for a second, now that the syn fuel credits are gone, can you give some kind of guidance on other income excluding them? It’s just it’s been all over the ballpark, how do we think about that going forward?

Well, I think that's going to revert back to in more normalized pattern ex the syn fuel. The effective rate will gravitate upwards turning the taxes upwards to more like a statutory rate… type of rate.

So, the tax rate I know will be 37, 38, but how do I look at that other income number, is $75 million for you a good number or $100 million how do I think about that?

There is just a lot of components in that, Ed. You've got probably two dozen or so different moving parts inside other income. I mean the big ones are obviously the real estate related rentals, the real estate sales, the royalties, and whatnot, you will see a detail of the... of some of the larger components of that in our 2007 10-K. So take a look at that. I think that will give you a sense of what's a more normalized level for those types of other income, net items.

Okay. And then just quickly, can you give an update if there is some sense that there could be an Amtrak strike, and if there was a strike in Amtrak what impact that might have for normal?

Well, as you know, Amtrak and the labor unions that had gone through the PEB process have now signed an agreement, which I think calls for the back pay, which the PEB recommended, I think maybe paid over a couple of years. Clearly, it's got to go to Congress, but everything I read in the newspapers says that Congress is ready to act to give them the money. So I... knock on wood, I think the possibility of an Amtrak strike is pretty much gone.

Okay, thank you very much. I appreciate all the time.

Sure. Thanks, Ed.

Thank you. Our next question is coming from Jason Seidl of Credit Suisse.

Thanks again for taking the calls from the phone. A quick question, you mentioned you are expecting carloading growth to go up year-over-year. You did you say that the first couple of months are going to be very challenging. Should I anticipate that most of this is going to from sort of export coal growth coupled with mines coming back and the Maersk port, or do you anticipate any sort of economic recovery in the second half of the year with those comments?

In general there… as Don mentioned and with mines coming back and other growth in coal, it's project driven to some extent in some of our other markets like ethanol, like scrubber stone. It does have to do with the renewal of some of our international intermodal volumes as well, not just Maersk and not just Norfolk. So it's a lot of project driven growth and it comes on throughout the year, it's not really tied to any kind of economic forecast that has a much rosier second half of the year, for example. It's tied to the economic forecast that essentially say, this year with housing and everything it will continue to kind of look like… the economy will look like it has for a while, I think it is the best way to say it.

Okay, fair enough. And if I can go back to pricing for a moment, you'd mentioned that roughly half of your businesses comes up for re-pricing every year. Your rival CSX actually basically said they have almost about 70% of new business locked up in pricing for 2008. Could you give us a similar number without giving us the exact amount?

Pricing, no, I don't know that we can just because if for no other reason that… I think we all define the world in slightly different ways, and trying to understand exactly how someone else thinks it defines the world is difficult for us some time.

Okay.

Let me just dodge that one.

That's not a problem. And Jim, on the incentive compensation of $13 million in the quarter, was that just a quarterly number or was that a reversal for an accrual that you took part of?

That's an accrual that is updated continuously throughout the year, and reflects the expectation for the incentive compensation for that period. So we adjusted... you saw that sort of an adjustment throughout the year as we had raised the bar on our bonus and incentive compensation for 2007, and so you saw favor ability in that item in each quarter.

Okay. Fair enough. Thanks again for the time. I appreciate it.

Okay, Jason.

Thank you. Our next question is coming from David Feinberg of Goldman Sachs.

Hi, how are you. Hello?

Hello, we're here.

Okay, two quick questions. With regard to material and others, I've some comments here in my notes that there were some insurance reserve reversals. I wanted to conform if there were in the quarter, how big they were, and get a sense in terms of how often you review your insurance reserves and what your expectations are for where they might be headed in '08?

No, there were no such items included in materials and other this quarter for us.

How often do you review those reserves? Is it once a year, twice a year, once a quarter?

What do you mean specifically when you are referring to insurance reserves?

The reserves you are taking for your employee… for your safety insurance as well as--.

Causalities and other, right, quarterly, two times a year on the PI with a full-blown actuarial study and then the other two quarters an update, but it is adjusted quarterly.

Perfect, and just a housekeeping question on the changes you're making in terms of measuring train performance. You mentioned that going forward you are going to be looking at all scheduled trains. What I didn't have is what you were looking at previously?

Effectively, our merchandise and intermodal network--.

Thank you very much.

Okay, we're running little late. Let's try and get one, and if it's a quick one, two more.

Okay. Our next question is coming from John Larkin of Stifel Nicolaus. John Larkin- Stifel Nicolaus & Company: Good morning, gentlemen.

Good morning. John Larkin- Stifel Nicolaus & Company: Thanks for taking the extra call here. I didn't hear a lot of commentary on headcount from Steve, in particular a lot of talk about the volume decline and increased efficiency. Just wondering, how dramatic the headcount reduction was year-over-year and how you see that playing out going forward especially, if we were to get a volume increase? Would you have to dip into the folks around furlough or would you have to begin to train new employees at some point in the future.

Well, we have… the volume was down just slightly, and… if you look at… I mean our headcount… if you look at our headcount there are a couple of different things going on. One, as you know, we have hired and trained a lot of people on the T&E side and we are doing some… continuing to replace people on the engineering and mechanical sides. We have not furloughed anyone, and we are trying and I think we've looked at the cost side and it makes sense for us to kind of let attrition take our numbers down because we have as you know a workforce with a lot of people retiring in the next few months or a year even. So rather than furlough people who are typically your younger people, a lot of whom don't then come back when you call them back, and we look at the cost of what it takes to train… hire and train one conductor, we think right now it makes better economic sense to try to keep folks working and let the numbers go down. And we expect that on the T&E side, if volumes stay down we won't be hiring as much and those numbers will go down. The other thing that has driven our headcount a little bit in the past year or two is that we've done… on the management side we've got far bigger training programs. We are hiring people for our training… management training, first level supervisor training, and you've all heard me talk about demographics before. We are expecting a lot of turnover in our supervisory ranks in the next year or two, and we are getting ready for that. I always say that we’re like every other American company other than Google. We've got an aging workforce and we are getting ready for some fairly dramatic shifts in terms of the demographics of our workforce over the next few years. John Larkin- Stifel Nicolaus & Company: Thanks. That's very helpful.

One more, no? Okay, I think we are all done. Thank you very much. I know it's been a long meeting. Thanks for your questions. We look forward to talking to you again.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.