Norfolk Southern Corporation (NSC) Q4 2010 Earnings Report, Transcript and Summary

Greetings, and welcome to the Norfolk Southern Corporation Fourth Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Leanne Marilley, Norfolk Southern Director of Investor Relations. Thank you. You may begin.

Thank you, and good afternoon. Before we begin today's call, it is come to our attention that portions of our earnings results were inadvertently accessed. And we are in the process of looking into the matter and taking corrective steps. I would like to mention a few other items. First, we remind our listeners and Internet participants that the slides of the presenters are available for your convenience on our website at nscorp.com in the Investors section. Additionally, mp3 downloads of today's call will be available on our website for your convenience. As usual, transcripts of the call also will be posted on our website. At the end of the prepared portion of today's call, we will conduct a question-and-answer session. At that time, if you choose to ask a question, an operator will instruct you how to do so from your telephone keypad. 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. Additionally, keep in mind that all references to reported results excluding certain adjustments such as non-GAAP numbers have been reconciled on our website at nscorp.com in the Investors section. Now it is my pleasure to introduce Norfolk Southern Chairman, President and CEO, Wick Moorman.

Thank you, Leanne, and good afternoon. It's my pleasure to welcome all of you to our fourth quarter 2010 earnings conference call. Today, we will provide a comprehensive overview of the quarter and review with you the current business environment as well as our capital plan. I'm joined today by several members of our senior management team including Don Seale, our Chief Marketing Officer; Mark Manion, our Chief Operating Officer; Jim Squires, our Chief Financial Officer and Deb Butler, our Chief Information Officer, all of whom you will hear from this afternoon. Since we have an additional presentation this quarter, I'll keep my remarks brief to allow time for your questions. While Norfolk Southern's fourth quarter results were not quite as strong as we might have anticipated driven by factors that we'll discuss on the call, they nonetheless were very strong on a year-over-year basis and capped a very strong year for our company. In fact, 2010 was our second best year ever for earnings and post Conrail operating ratio. And it also marked our highest ever free cash flow. Even more importantly, the trends that we saw in the quarter in terms of service delivery other than in the early winter storms we experienced, along with the trends in terms of demand, give us cause to be optimistic about our prospects for 2011. Looking at the numbers, bottom line net income of $402 million or $1.09 per share was up 31% compared with last year. Income from Railway operations of $642 million was up 17%, driven by a 14% increase in revenues and a 12% increase in expenses. Income taxes included a $34 million favorable adjustment, which Jim will describe. For the full year, net income and earnings per share both increased 45%, and our operating ratio improved 350 basis points to 71.9%. 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 and confident in further improvement. Our top line exhibited strong growth with fourth quarter revenues up 14% and full-year revenues up 19%. Don will talk more about our traffic in a moment and provide you with insights as to what we anticipate will be a solid 2011. Before leaving the numbers, I do want to say a word about safety, our most important metric. Mark and his team redoubled their efforts even in the face of weather challenges and delivered the best employee safety ratio in the company's history. This achievement is a testament to our people who continue to make the extra efforts to improve safety even as we handled increased volumes and tackled some severe operating conditions. Those severe operating conditions also had some impact during the quarter in terms of both revenue and expenses. And as I said earlier, our overall metrics particularly as they relate to some of our bulk business were not at the levels where we or our customers expect them to be. Since then, our service levels have improved, and we're continuing our targeted hiring and bringing on new locomotives in anticipation of future growth. Mark will provide you with a report on the service front. Looking ahead to 2011, we expect to handle increased business, and we plan to deploy over $2 billion into capital improvements in order to invest in the franchise, to build for growth and to improve operating service and efficiency. Deb will review with you the details of our capital plans. In recognition of the 2010 results and their confidence in the strategic direction of our company, the board this morning increased our quarterly dividend by $0.04 per share or 11%. We are also continuing this share repurchase program into 2011, as Jim will outline for you, another indication of our strong commitment to return value to our owners. As you will see from the presentations during 2010, we profitably grow the business, invested in the franchise, generated significant levels of cash and produced attractive returns for our shareholders. We have every reason to believe that 2011 will be an even stronger year for us fueled by growth across our network. With that, I'll turn it over to Don for a discussion of our revenues.

Thank you, Wick, and good afternoon, everyone. In my comments today, I'll recap our fourth quarter and year end 2010 revenues, revenue per unit and volumes along with the key drivers of these results; I'll then conclude my remarks with our outlook for 2011. Starting with our fourth quarter revenue, 9% higher volumes and a 4% increase in revenue per unit combined to generate revenues of $2.4 billion, up $286 million or 14% over the fourth quarter of 2009. Approximately 65% or $190 million of our revenue gain in the quarter was driven by increased volume while continued growth in revenue per unit contributed $96 million. During the quarter, harsh winter weather, as mentioned by Wick, in the month of December in particular, reduced revenue by an estimated $14 million, mostly in our coal and merchandise traffic. Turning to Slide 3, you will see the summary of our full year's revenue, which was our second-highest year ever, with total revenue of $9.5 billion, up $1.5 billion or 19% over last year. Agriculture and chemicals traffic both achieved record revenue for the year. Looking at the components of our revenue growth, volume up 14% for the year accounted for 70% of the improvement, contributing $1.1 billion while increased revenue per unit up 5% added $468 million. With respect to yield, as shown on Slide 4, revenue per unit reached $1,400 for the quarter and $1,407 for the year, increases of 4% and 5%, respectively. All business groups achieved year-over-year RPU gains for the quarter and with the exception of forest products, all business groups produced positive comparisons for the year. Market-based pricing improvement and increased fuel revenue drove the gains last for both the quarter and the year. As seen in the third quarter, negative mix moderated revenue per unit gains in our Agriculture, Chemicals, Intermodal, and Coal business segments. In this regard, Agricultural's revenue per unit was impacted by increased shipments of shorter whole grain and phosphate rock. Chemical revenue per unit growth was moderated by higher volumes of industrial intermediates and a shorter haul petroleum-related traffic. Intermodal's RPU growth continued to be impacted by increased empty revenue movements, which were up 36% in the fourth quarter, accounting for 14% of total intermodal volume. And coal RPU was moderated by three primary factors: First, we handled higher volumes of shorter haul utility coal to our northern utilities in the face of heavier demand. Second, domestic met coal shipments to the river increased substantially as steel producers ramped up demand for coking coal. And finally, we handled lower volumes of longer haul, higher RPU export coal to Lambert's Point during the quarter, which was down by 28% while shorter haul exports over Baltimore increased by 10%. Despite all of these moving parts of revenue per unit for the quarter, I will point out that we continue to be very pleased with core pricing gains that clearly exceeded the cost of rail inflation both for the quarter and for the year. Now transitioning to volume on Slide 5. Total shipments were up 9% for the fourth quarter and 14% for the year. Agriculture related flows produced record volume for both the quarter and the year. In addition to Agriculture, Coal and Intermodal also achieved 52-week high loadings during the period. Project growth, conversions from the highway, and economic recovery were all the primary drivers of this performance. Now drilling down in more detail for our major business segments. Coal revenue of $685 million was up $105 million or 18%. Volume of 395,000 units was up 12% due to the rising demand for domestic and global steel, and restocking at power plants across our network. As depicted on the next slide, domestic metallurgical coal volume, lead coal comparisons, up 36%, which was triple the estimated 11% increase in domestic steel production as high-quality met coal on our system gained share in the market place. New business and stock pile rebuilding also added to this growth. For the full year, this was one of leading growth markets with volume up 69% over last year. But even with this strong growth, our domestic met coal customers tell us that stockpiles and coking ovens remained at only 30% to 35% of targeted levels, which bodes well for 2011 volumes ahead. As shown over the next slide, our utility volume ramped up during the second half of 2010 as we had expected. Fourth quarter carloads increased 16% driven by inventory rebuilding after stockpile levels fell in the third quarter due to strong summer demand and increased economic activity. Additionally, colder winter temperatures during the quarter and in particular the month of December drove increased residential power demand higher as heating degree days increased by 16% over December 2009 and some 19% above the norm. Currently, stockpiles for many NSC power plants including some for larger base load units are significantly below the eastern average level, and are reporting an average of 16 days of earned in inventory, two weeks into the New Year. Now concluding my discussion of coal volume on Slide 9, you will see export shipments declined 18% in the quarter in the face of 10-year high comps from the fourth quarter of 2009. Weaker volume was also driven by lower demand from China in the quarter and a 5% increase in global steel demand compared to an 18% increase one year ago. Now with respect to ongoing flooding in Australian coal mines and related infrastructure, it's been reported that the affected mines produce 80% of Australian met coal exports and some 27% of thermal exports. Metallurgical coal buyers are now seeking alternative supplies, which will most likely result in increased flows over our Pier 6 terminal at the Port of Norfolk. In this regard, we handled 15.6 million tons of this high-capacity peer in 2010, but we estimate that we can season and we doubled that volume assuming the proper convergence of coal availability and demand in the marketplace. Now transitioning to Intermodal on Slide 10, Intermodal revenue of $471 million was up $64 million or 16% over fourth quarter 2009, mainly from increased volume and higher fuel revenue. Our midyear general rate increase and customer-specific price increases taken during the third quarter also supplemented the overall gain. Volume of 755,000 units grew 13%, led by a 22% gain in domestic volume. Conversions from the highway an economic recovery drove the improvement in this segment. Of our total domestic increase for the quarter, we estimate that 44% came from local business, east of the Mississippi, which was up 23% with the remaining 56% from traditional interline business such as the Transcon market, which increased by 20%. Our international volume was up 4% as import and export volumes continued to improve as manufacturers work to replenish inventories. And premium volume fell to 14% as tighter truckload capacity presented highway conversion opportunities, and finally Triple Crown volume was up 4% based on increased Consumer Products business. I'll wrap up Intermodal with a brief recap of our results and ongoing activity with our core strategy. As summarized in the box on Slide 11, we experienced robust growth along each major corridor for both the quarter and the year and we expect to realize increased flows in these lanes along with the Heartland and MidAmerica Corridors this year or 2011. In short, with new terminals and further speed and capacity enhancements, we planned along this extensive network; we see very solid opportunities ahead as truckload capacity continues to tighten. I'll conclude our business group review with our merchandise sector as depicted on Slide 12. Total merchandise revenue of $1.2 billion was up $117 million or 10% over fourth quarter last year. Volume for the quarter was 559,000 carloads, up 3%. Metals and construction volumes up 16%, led merchandise growth in the quarter. Increased shipments of miscellaneous construction materials, aggregates, steel products and scrap metal opportunities accounted for 92% of this overall gain. New business opportunities were significant drivers of growth in this group for both the quarter in the year. As shown on Slide 13, construction material gains were driven by growth in shipments for a natural gas drilling in the Marcellus Shale region of Pennsylvania and New York. Total shipments in the fourth quarter associated with natural gas production in this region reached 6,700 carloads, up 160% over 2009. We continue to work closely with customers and short line partners to move products in this region ranging from sand, wastewater and pipe, to heavy-duty drilling rigs and drilling fluids. With respect to further opportunities to expand our industry leading position in transporting steel products, our forest first carloads from [indiscernible] new facility at Calvert, Alabama, north of Mobile were shipped on October 18. When fully operational, this facility, which is our largest industrial development project ever will produce 4.3 million metric tons of carbon steel annually. We expect to see significant volumes of new business from this mega-facility as it ramps up production. And further construction is also planned at this site, where the second 72 inches coal rolling mill scheduled to come of stream later this year presenting further opportunities for business growth. Turning to agriculture on Slide 15, record volumes revenue were driven by fertilizer and corn shipments. Fertilizer volumes were up 42% resulting from increased phosphate traffic. And corn volumes grew 14% driven by movements to processing facilities and ethanol production sites. Concluding with our remaining merchandise market segment on Slide 16, our chemicals volume increased by 9% in the quarter driven by higher shipments of petroleum, industrial intermediates and plastics. Basic chemical production continues to rise with the improving economy. Paper and forest products growth was driven by increased shipments on pulp board, newsprint, lumber and clay. These gains were slightly offset by a 25% decline in wood chip carloads due to year-over-year weather-related factors. Last of all, Automotive's 20% volume decline was the result of the vehicle network modification that we implemented last January that impacted volume by nearly 19,000 carloads in the fourth quarter. With the close of 2010, we've now cleared this negative year-over-year of your comparison, which will make for straight forward year-over-year comps in 2011 going forward. Now looking prospectively, we see new business initiatives, economic recovery, and network improvements across our system all converging to drive added growth opportunities for 2011. In chemicals, we expect to experience solid growth as the economy recovers as basic chemical production continues to ramp up. This growth however will be somewhat tempered by difficult comps in the upcoming quarters due to the completion of the Tennessee Valley Authority fly ash project on December 1, 2010, which generated 7,000 carloads per quarter in 2010. In agriculture, following a record performance last year, we expect further growth across our network. Higher shipments will be driven by continued buildout of our ethanol network, increased fertilizer shipments, and robust grain movements. In Intermodal, domestic intermodal volume growth continues to be led by the ramp up of our core order initiatives as I mentioned earlier, along with highway conversions and new services. With respect to new services, we are pleased to announce this afternoon that we've been selected as the primary eastern rail carrier for FedEx as it launches its new intermodal service. FedEx will systematically use rail intermodal service for the first time in its nearly 40-year history when it rolls out its revamped less than truckload operation next Monday. We are very excited about this developing opportunity and look forward to a long and successful partnership with FedEx. And looking ahead at the broader truckload market, some industry forecasters estimate truckload capacity will shrink by 10% in 2011, and truckload pricing will increase by as much as 9%. This obviously bodes well for conversion and yield on improvement opportunities for both intermodal and carload services across our network. In our remaining markets, international intermodal and export coal will benefit from growth in international trade. As I mentioned earlier, coal in particular will most likely get a boost from Australian flood-related demand for U.S. coals over the next six months of the year if not beyond. Now I will point out that we already had a robust outlook for export coal in 2011 before this flooding occurred. Domestic metallurgical coal will benefit from the forecasted 7% increase in domestic steel production and further inventory restocking that I mentioned earlier. Utility coal volume growth will also be driven by new mines coming off-line, lower utility stockpiles that will require increased replenishment rates and the ramp up of the Tennessee Valley Authority, Kingston Tennessee plant, which was down most of 2010. In Automotive, automotive volume growth will be given by the forecasted 14% gain in light vehicle production which will return automotive production to approximately 14 million vehicles for the year. And finally, paper and forest product volume will continue to be negatively impacted by uncertainty in the housing sector over the year. To summarize, we see a very solid set of opportunities ahead. We're well positioned to capitalize on market growth across our network, and we look forward to working closely with all of our customers to fully realize that potential as the progresses. Thank you for your attention and Mark will now provide an overview on our operations.

Okay, thank you, Don, and good afternoon. We ended 2010 with the best safety ratio NS has ever had. That ratio is estimated to be 0.89, Norfolk Southern safety results during 2010 showed continuous improvement quarter to quarter as our employees work together to prevent injuries. Our fourth quarter ratio of 0.68 ended the year in a strong way and is a great testament to the focus of our people and the safety process, particularly considering the unusual adverse weather conditions we experienced in December. Much work is underway to support continuous improvement in our safety process. Turning to our operating performance, we ended the fourth quarter with a composite service performance of 76.4% versus 78.8% for the same period last year, a 2.4 point reduction. For the full year, the composite performance was 76.7% versus 81%, a 4.3 point reduction. Our volumes outpaced our crew base during much of 2010, which impacted performance. We began getting trained conductors in the fourth quarter and this is having an increasingly positive effect. Since the mid point of the fourth quarter. These additional conductors have been placed at key locations, which is paving the way for sustained improvement even in the face of significantly increasing volumes. And while severe weather in December dampened the statistics we've seen the improved operations in the network through the quarter and into 2011. Turning the page to train and engine employees, our train and engine service employees increased 6% in the fourth quarter from 10,582 to 11,212, as we saw the first of the newly hired conductors get promoted out of training. The next slide indicates our actual T&E employment count by month from the beginning of 2010 through the end of the year, and then projected through the first six months of 2011. This is a count of productive T&E employees, net trainees and taking into account projected attrition in the out months. During 2010, we authorized hiring 1,929 conductors. During the fourth quarter, we put 248 of those people trained and on the ground working. Keep in mind that these people were hired for locations in the most need and even small numbers made a significant difference to the operation. The training pipeline is full, and we have reached the point in 2011 where we are substantially exceeding attrition at an accelerating rate. Turning to our productivity scorecard. In the fourth quarter, carload volumes were up 9% while crew starts were up a corresponding 5%. Total railroad employment was up 5%. Our efficiency metrics of gross ton miles per employee and gross ton miles per train hour were up 4% and 1%, respectively. Gross ton miles per gallon of diesel fuel were down 4% driven by a decline in system average train speed at December that was substantially colder than last year and the addition of less fuel efficient leased locomotives. As you may recall, we added 42 new AC locomotives in the fourth quarter, and with the additional 50 locomotives that we are now receiving we will have brought 92 new fuel efficient locomotives to the fleet by the end of April. We've been aggressive in our hiring through 2010 getting our T&E workforce correctly sized for the volumes we are forecasting in the coming year. We have the pump primed and the conductor ranks will be growing at a rate that's going to handle our volume increases even with the ever present attrition. Our locomotive fleet is correctly sized for the business at hand as well. Consequently, we are looking forward to a strong performance in 2011. I thank you, and now I'll turn it over to Jim.

Thank you, Mark. I will now review our financial results for the fourth quarter and bottom line results for the full year. I'll close with some observations about the year ahead. Let's start with our operating results. As Don described, railway operating revenues for the quarter were $2.4 billion, up $286 million or 14% compared to the fourth quarter of last year. The next slide displays our total operating expenses which increased by $193 million or 12% for the quarter. Income generated from railway operations was $642 million, up 17% reflecting the sizable increase in revenues partially offset by increased operating expenses. The resulting operating ratio was 73.2%, a 1% improvement compared to 73.9% in the fourth quarter of 2009. Turning to our expenses, the next slide shows the major components of the $193 million net increase. Similar to third quarter results, fuel and compensation benefits expenses accounted for almost 70% of variance. The next slide reflects that 2/3 of the fuel increase was due to higher prices with the balance due to consumption. As shown on the next slide, our average diesel fuel price per gallon, the last two years, has generally trended upwards. The $2.46 price per gallon in the fourth quarter of 2010 was 24% higher than the $1.98 price per gallon in the fourth quarter of 2009. Next, compensation and benefits increased $546 million or 8%. Looking at the major components of increase on the following slide. First, higher employee activity level due to increased volumes added $28 million including about half for train and engine employees. Second, medical benefits increased $19 million largely related to higher agreement employee health and welfare premiums coupled with increased retiree medical cost. With respect to agreement employees' health and welfare premium rates, we anticipate about $30 million of additional expense in 2011. Pension expenses and payroll taxes each increased by $8 million and agreement wage rates were up $7 million partly offsetting these increases, stock-based and incentive compensation decreased a total of $30 million, which largely reflects stronger performance metrics and improvements during the fourth quarter of 2009. As highlighted next, materials and other expenses were up $37 million or 25%. The increase reflects volume related maintenance increases as well as less favorable personal injury reserve development in the fourth quarter of 2010 compared to 2009. In 2011, we expect an annual increase of approximately $55 million for locomotive and freight car materials. Purchase services and rents increased $29 million or 8% reflecting primarily volume related operating activities and equipment. As illustrated in the comparison on the next slide, income before income taxes increased $95 million or 20% due to higher operating income. Changes in non-operating items were inconsequential. Income taxes displayed next remain flat year-over-year totaling $160 million with an effective tax rate of 28.5% in the fourth quarter of 2010 compared to 34.3% in the fourth quarter 2009. The favorable comparison is due to a change in estimate for deferred tax assets and liabilities resulting in a nonrecurring income tax expense reduction of $34 million. For 2011, we expect substantial cash benefits related to 100% bonus depreciation. Net income and EPS comparisons are displayed on the next slide. Fourth quarter net income was $402 million, an increase of $95 million or 31% compared to last year. Diluted earnings per share were $1.09, which was $0.27 per share or 33% higher than last year. Turning our focus for the full year, net income reached $1.5 billion compared to $1 billion in 2009, and diluted earnings per share increased from $2.76 to $4 per share. Both results reflect 45% year-over-year increases and are second only to our record 2008 results. As shown on Slide 15, strong 2010 net income growth of 46% increase in cash from operations, which easily covered $1.5 billion in capital spending and produced a record $1.2 billion in free cash flow. Out of free cash flow, we distributed over $0.5 billion in dividends with the remainder sufficient to fund the majority of share repurchases totaling $863 million. We expect 2011 cash from operations to cover $2.2 billion in capital spending, about which Deb Butler will say more in a minute, dividends at the higher rate declared by our board this morning and significant share repurchases. We have cash on hand to fund additional shareholder distributions as well, and ready access to the debt market for refinancing of maturing debt and incremental borrowing. Debt repayments in 2011 are $458 million and based on our current maturity schedule will decline from there over the next few years. Thank you for your attention I will now turn the program over to Deb.

Thank you, Jim. As Wick mentioned, we are planning for a significant capital program in 2011. Slide 2 depicts our baseline 2011 capital program, which is budgeted to be $1.7 billion. This is 19% more than the total for 2010, and as Jim noted, includes investments both to maintain the safety and quality of our existing franchise and to support business growth in 2011 and beyond. Also included in this year's capital spending is $334 million to purchase freight cars that have historically been leased as well as $146 million for positive train control. Including updates to systems and track structure, that will be accelerated to support PTC implementation. I'll talk more about each of these later, but their inclusion will raise total planned 2011 capital expenditures to $2.2 billion. As in prior in years, the bulk of our baseline spending is targeted towards strengthening the franchise. At 83%, replacement and core spending as a percent of the total is slightly higher than in prior years, which is largely due to the resumption of our coal car replacement program. The growth portion of the budget, shown in red and totaling just under $300 million is for track and terminal expansions and for projects to improve asset utilization, workforce productivity and fuel efficiency. As might be expected, the largest percentage of our baseline spending is allocated to keeping our right of way in the condition needed to move our business safely and efficiently. Roadway spending in 2011 is budgeted to be $763 million or 44% of the baseline budget. Our roadway budget funds the replacement of rail ties and [indiscernible], as well as the improvement or replacements of bridges and covers. On Slide 7, investments and facilities and terminals throughout our network will total $244 million or 14% of our planned baseline capital expenditures. About half of the spending in this category is associated with investments in intermodal facilities including three new crescent car terminals in Tennessee, Alabama and Pennsylvania. Each of which also has a public funding component. In the industrial products area, we are building bulk terminals to support new business opportunities. And finally, we're continuing our ongoing programs to update our locomotive facilities. As shown on Slide 9, locomotive spending will total $212 million or 12% of the baseline budget. This includes the planned acquisition of 50 new locomotives as well as continued investment in alternative power programs. The category also includes funds to rebuild existing locomotives and for the installation of emission kits in order to meet government requirements. Baseline freight car acquisitions and improvements, it will total $155 million or 9% of our capital expenditures this year, most of which is due to the planned purchase of 1,500 coal cars. Our current expectation is that we will continue the coal car replacement program at this level or higher over the next several years. Slide 12 shows the baseline investment in computers and technology are budgeted to be $96 million or 6% of the capital budget. Our 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. These projects include the continued implementation of LEADER, a locomotive optimization system that improves fuel efficiency and unified train control system, which automates dispatching and through its rail edge component increases network velocity. Also included in this category is funding to complete the implementation of SAP in our financial, human resources, and material management systems. Investments in infrastructure are budgeted to be $79 million or 5% of baseline capital expenditures. In addition to ongoing network improvement projects, as Don already mentioned, we'll continue to invest in our mid-America corridor initiative with Canadian National. The infrastructure category also includes investments in public-private partnerships such as the Chicago CREATE project and Crescent corridor initiative. Before I turn to the two non-baseline capital investments, let me wrap up the baseline budget. With the addition of $194 million in other capital expense, our baseline capital budget totals $1.74 billion, a 19% increase over our 2010 budget. This is consistent with the level of capital spending Norfolk Southern has historically maintained and aligned to our previously announced plans to replace the bulk of our coal car fleet over the next several years. Starting with Slide 16, I'd like to turn to an item that represents a bit of a shift from how we finance freight cars in the past. We plan to spend $334 million to replace leased equipment with owned equipment reflected here in red. These investments will serve our long-term base load grain and intermodal businesses. In other words, this is equipment that supports our core business and that we expect to keep it service under any conceivable future business models. The decision to replace leased equipment produces a positive net present value, reflecting both the economic advantage of purchasing over release and the 2011 bonus tax depreciation. Because we currently lease this equipment, this portion of the capital plan is, at its core, a financing decision. The cost of this equipment has been reflected in equipment rent expense in previous years. Although there will be some offset in depreciation expense going forward, the net will be modestly accretive to earnings. I noted before that we will spend $146 million on the federally mandated although unfunded cost of train control project. During 2011, we will install on board network devices on locomotives, invest in technology and upgrade communications and signals. We expect the total cost of this initiative will exceed $1 billion before it's finally implemented at the end of 2015. To conclude, Norfolk Southern's 2011 capital program is focused on maintaining our core franchise, which includes improving our right of way, complying with safety and governmental requirements and replacing equipment for our baseload business. We are also committed to the growth and productivity of our franchise and to maximizing shareholder value by optimizing capital efficiency. Thank you and I'll now turn the program back over to Wick.

Thank you, Deb. Well, as you can see, we continue to make significant core investments in our company commensurate to our belief in Norfolk Southern's prospects for 2011 and beyond. As you also heard, we are always alert to opportunities to look at changes in our current practices such as buying versus leasing equipment when such a change can produce good returns for the long-term. Deb also talked about our PTC commitment for 2011, which leaves me again to reiterate that this is a project, which will require enormous capital expenditures on the part of the entire industry for a project, which will produce marginal benefits at best. Our hope is that we will continue to do what we are doing in 2011, that is make the necessary PTC expenditures without sacrificing other investments. But, that hope is clearly predicated upon our being allowed to earn adequate return to do so. While the possibility of adverse legislative changes in this new Congress seem to have diminished, we do remain concerned about the regulatory front, and we, with the rest of the industry will be forcefully arguing that any changes which diminish the possibility of us continuing to earn an adequate return will have a very negative impact, not only on our company and industry but upon jobs and the economy. Let me close with the message I started with. As we look at 2011, we see the prospect for strong business growth in almost every segment of our business and particularly in coal and intermodal. As you've heard from Mark, we're now through the long ramp up period of hiring and training and are quickly adding crew capacity on most constrained areas, along with new locomotives. The result is both ongoing service improvement and additional capacity, and we feel very confident that we can handle the increased business, which is coming our way. It's also important for me to point out that when I talk about service improvement it's relative to an already very good service performance that we have continued to provide for many of our customers as evidenced by the FedEx business that Don discussed. Don and his team remain focused on generating that business, and generating that business at prices which will reflect the full value of our services and will drive continued margin improvement. The bottom line is that we expect a good 2011 and we will remain focused as we always have on continuing to drive improved performance and superior shareholder returns. Thanks and I'll now turn the program back over to the operator to take your questions.

[Operator Instructions] Our first question is from Chris Wetherbee with Citigroup.

If I can start on the cost side of the equation that you guys highlighted nicely the potential for growth particularly in the T&E headcount side. I want to get a sense of what you think maybe your full year type of growth run rate might be there and then also alternately on the cost per employee, how we can think about that line item as we go forward?

I think we tried to highlight areas of spending including maintenance and health and welfare benefit premiums where we expect to see something greater than an inflationary run rate for the cost. Beyond that, and a few other pockets we're looking at sort of steady inflation type increases across our cost structure. And that will add up to something somewhat greater than the overall inflation rate in the cost generally with the couple of super inflationary insignificant items. But overall, we think most cost buckets will be roughly inflation type growth.

As far as the when you think about kind of headcount on a total basis, thinking about enterprise-wide, just give us a sense of what we can expect kind of net-net of full year of 2011?

This is Wick. I think you'll see headcount rise in particular in T&E as Mark mentioned, we'll see a little bit more in I think our mechanical areas . There are large pieces of the railroad where headcount will just remain flat. T&E will rise to some extent commensurate with volumes. But I would caution you there again as we've talked about many times before that our increase in T&E headcount will have two components, one is trainees. And that's a lot of the increase you have seen already as we ramped up our training programs. And the other is active people on the ground, and of course, they're compensated on a trip rate. So, the growth in expenditures is not necessarily right in line with the numbers you see. It will be based on the productivity that we get out of those folks.

How should I think about attrition, I think you guys have highlighted something in the mid single digits type of run rate, I just want to make sure I understand what attrition should look like, at least, in 2011.

I think we've been saying 5%, 6% in that range. I think we still anticipate the numbers. Mark, is that a good number?

That won't be different going forward.

Final one for Don, if I could, on the core price side, I just want to try to understand where that came out. I apologize if I missed it, if you got a little bit more specific on that. But just want to kind of break out or understand that component relative to fuel and mix. I guess there's a couple of negative mix aspects in the quarter as well.

Yes, we had negative mix, I did not break out the price per se, but in terms of our core price realized, the performance metric that we're tracking is looking at the rate of rail inflation and exceeding that rate and I stated in the remarks, Chris, that we're confident that we cleared that hurdle for the quarter and the year.

And that's the forward run rate going forward you expect that to be able to clear that hurdle.

Yes.

The next question is from Gary Chase with Barclays Capital.

Don, wondered if you I could bring you back to some of the commentary you made surrounding export coal? You said you thought you could double the shipments off of New Port, subject to coal availability and then there was another factor. I'm Just wondering if you could sort of speak to how we should think about the likelihood of you being able to ramp that additional 15 million tons.

Yes, Gary, as I pointed out we handled 15.6 million tons this past year. We are confident that Pier 6 has the capacity to essentially double that volume should coal supply and coal demand in the marketplace converge where that type of tonnage is available to move. So Pier 6 without a lot of ramp up of manpower or resources, we are confident we can do that. We can take it from 15.6 million up to 30 million.

And do you have any sense on of what the production on the supply side of that might look like? Do you think it's feasible to get that much incremental tonnage?

That's a great question. And I think that as world metallurgical coal prices continue to reflect the disruption in Australia, a wonderful thing tends to happen when coal prices are high and more coal seems to be available. I don't know if it would 30 million tons, up from 15 million but we feel that there will be more coal available if pricing is right.

Jim, can I just ask you, is there going to be a material amount, you referenced cash credits from bonus depreciation? Because I thought I heard you say that cash from ops was going to cover the $2.2 billion in CapEx dividends and some potential share repurchases? Could you just elaborate a little bit on what those tax credits are?

Yes, that is what I said. The full year 100% bonus depreciation should yield very substantial deferred taxes for the year and a correspondingly large boost in operating cash flow.

And you think the cash from ops is going to cover all of those items, the CapEx dividends and some potential additional distribution.

Yes, that is our expectation.

The next question is from Matt Troy from Susquehanna International Group.

I'm just looking at you comparatively to some of your peers which have reported. It looks like your incremental margins came in, in the low 30% range, pretty close to corporate average versus some of your peers, closer to 50%. I know you mentioned the weather, but if you look at some of the headcount, you guys have brought on, it looks like you're making a larger investment earlier, I was wondering if you can just help me understand the thought process. Are we think about it right that you're ramping up your headcount and resources ahead of a volume pickup expectation and what your hurdle rates are and why it makes sense to do that now?

I think you have identified something we're thinking a lot about. We do anticipate as Don has said that we're going to have some very strong markets this year. As Don also said, we were probably a little bit behind the curve on headcount with the volume growth that we saw in 2009. So it's a combination of kind of catching up a little bit to that volume which we feel we're pretty close to and then getting ready for some more volume that we think is coming our way. In terms of the kind of the margin impact on this, we very clearly, as we have said expect to continue to improve our margins, but I think to realize the maximum potential of our franchise, we'd rather be a little early occasionally, in making sure that we have enough resources given what we've seen in the past year than be a little late. So, that's the way we're looking at the world.

I understand it's not a one quarter game. Second question would be, one, congrats on the FedEx win, coupled with J.B. Hunt; clearly some pretty bright folks are selecting you as an exclusive partner in the east. I was just wondering if you could maybe flesh out a little bit some of the details of that agreement, what lanes you might be serving or what kind of freight you'll be moving for them. I'm aware of their restructuring but maybe just some more details on how you won the contract, competitive bid process, and the nature of the business you'll be handling.

Yes. We handled -- along with others, handled test shipments in 2010 as FedEx started to actually put some freight out into the intermodal network to see performance. And as I mentioned, we were fortunate enough to be able to win that review. And the business that will start next Monday will be reflective of their restructuring of their LTL network. And we see that as a first step with them, and we see it as a great opportunity. With respect to lanes it'll be pretty much through our Southeastern and Northeastern network, with points like Harrisburg, Pennsylvania being very heavy.

Our next question is from Jon Langenfeld with Robert W. Baird. Jon Langenfeld - Robert W. Baird & Co. Incorporated: On the buy-lease side and that decision, how far does this carry forward? Is this something you see for the next several years? Or is it elevated this year simply because of the tax change? I know you had given us warning on this, but just kind of curious as you're thinking about it longer term.

Well, I think that this is clearly something that we looked at this year in terms of some of the lease renewals that were coming our way, some very significant lease renewals in our covered hopper fleet and also, some projected growth and replacement issues on the container side. We'll look at this every year. We'll be opportunistic if the opportunity arises. Certainly, this is not a continuing program in any sense at all, but any time that we see the stars align as we have this year, including the accelerated depreciation, we'll try to take advantage of those where we see returns, as we are with this, that are in excess of our cost to capital and accretion to our earnings. Jon Langenfeld - Robert W. Baird & Co. Incorporated: And then would you care to quantify it? I think you gave a revenue impact of the weather. Any idea on the cost side with weather and fuel also creeping up in the quarter?

We've worked through that. We don't really have a very clear picture. We just know that it had some impact on the quarter in terms of things like recrews, in terms of fuel consumption, both because our network velocity, as Mark said, slowed so much in December, and because unlike most winter weather we see, this weather, as you will all remember, really gripped our entire network and was far more disruptive in the southeast than we ordinarily see during the winter. Other things that are hard to quantify. We kept a lot more locomotives idling during the cold weather than we normally would at that time of year. So it's difficult for us to get our hands around all the numbers, but we know it had an impact.

Our next question is from Jason Seidl with Dahlman Rose. Jason Seidl - Dahlman Rose & Company, LLC: Just quick questions, one on Intermodal, one on some of your assets on the Pocahontas Land Corporation. On the intermodal side, you mentioned some of the repo cost. I'm assuming you were just repositioning some of the 53-foot intermodal containers into the more profitable lanes. And one, are you guys caught up in terms of the 53-foot container demand? Do you have enough going forward? And then two, on the intermodal side, I'm assuming the FedEx business is going to be all substitute line. How should we look at modeling that in terms of the yield and the impact that it's going to have on your arc in intermodal?

Jason, with respect to the empty revenue movements, those were empty container revenue movements that I spoke to in the quarter, which were up 36% or 14% of the total intermodal volume. That is a reflection of continued tight container demand when you see that level of repositioning for loads. With respect to container availability, I will tell you that it continues to be tight. We're expecting additional container deliveries from China in 2011 that were delayed in 2010 because of capacity constraints and other reasons. But we still see a tight domestic container... Jason Seidl - Dahlman Rose & Company, LLC: So, at least in the near term, we should still expect to continue sort of empty movements for your intermodal business until maybe midyear or so as you get some of those new containers on board?

For the next two quarters, I would say that's correct. Jason Seidl - Dahlman Rose & Company, LLC: And in terms of the new FedEx business, how that's going to affect your growth per carload?

Well, I can't speak to the yield aspect of it, Jason, other than saying that it's good business for us, and we're pleased to partner with FedEx to gain that. Jason Seidl - Dahlman Rose & Company, LLC: Well, how did this -- the average length of haul was already existing in the system? Is it a shorter length of haul. Is it a longer length of haul business? I would imagine it'd be shorter.

It should be average length of haul, because a lot of this business will be traversing lanes like Chicago, as I mentioned, the Harrisburg, lanes like that. So it will not be shorter haul in nature than the average. Jason Seidl - Dahlman Rose & Company, LLC: And just in respect to your Pocahontas Land Corporation, I know you spend too much time talking about it. But, I mean, you own a bunch of assets in the Coal side, especially on the Met Coal side. The met coal prices have been going up. Could you talk a little bit about what's owned in Pocahontas right now? And also, do you guys have any access to some of Marcellus Shale exposure in what Pocahontas owns?

I'll take the last part of that question, Jason, first. We are not positioned with Pocahontas Land to have a great involvement with Marcellus Shale. Our exposure there, as I spoke to in the call, is more on the transportation of frac sand and drilling equipment and waste water transportation. The components, we see that ramping up very rapidly, and we've got growth plans that are fairly substantial for 2011 and beyond in that regard. With respect to Pocahontas Land, we have over 800,000 acres of coal properties. We have most of those coal properties fully deployed, with leases to coal operators. And as indicate or indicated in the question, we do have a substantial inventory or book of high quality metallurgical coal in that property. But, we have leases in place with coal operators for most of that acreage. Jason Seidl - Dahlman Rose & Company, LLC: Now are those leases -- correct me if I'm wrong. Are they on a... based on the production, on a revenue split? You guys get a percentage of it, correct?

We derive a royalty, which does have a sensitivity to prices in the marketplace. Jason Seidl - Dahlman Rose & Company, LLC: So as met coal prices go up, we should see that below-the-line number move throughout the year to remain high.

That is a correct assumption.

The next question is from Scott Group with Wolfe Trahan.

Don, just wanted to follow up on one of the prior question on Export Coal, I think I heard you say that you think it could be tough for mine capacity or mine production to increase more than 15 million tons. Was that comment limited to the export opportunity? Or is that what you think NS Served mine production is kind of capped at this year?

Scott, what I was addressing there earlier was Pier 6, Lamberts Point in Norfolk, whether we could conceivably see demands and market and supply converge to take that from, say, 15.6 million tons that we handled in 2010 up to 30 million, which would be what we could see doing without a substantial investment in additional resources, like manpower, to take the Pier up to that level of tonnage. With respect to coal volumes, we don't really have a clear view at this point with respect to how much additional tonnage could be produced, but I'll go back to the comment that I made earlier. With metallurgical coal prices rising worldwide as a result of Australia's disruption, we think that more coal will be made available for the export market. And I think, also, we'll see more coal made available for the utility in domestic met markets as well as pricing firms.

So you don't see any mine production or mine capacity issues impacting your coal volumes this year?

Not at this point. I've mentioned that we have some new production coming online, and I'm talking about the Illinois Basin in that regard and some Central App production as well. And then of course, Northern App is very well positioned to continue to increase its share over Baltimore as well as some shipments possibly to the port of Norfolk as well.

And then just to follow up on the new FedEx business, Don, did you mention what the revenue number or the revenue amount you expect from that is? Can you give that, if possible? And then are you doing any test runs for FedEx on the ground or parcel side? And then last thing with the FedEx business, is this all local leased? Or who's the Western Rail partner if it's transcon?

Scott, with respect to the latter part of that question, I would defer to FedEx, obviously, to answer who their Western partner is. With respect to revenues and volumes, that is also part of our confidential agreement with FedEx, which we'll honor, obviously.

And then just one last quick one, if I can. This is for Wick. We have seen the first two rate cases before the STB against you guys in, I think, something like six or seven years, and one of them, to some extent, is based on the revenue adequacy. Just wondering what impact this is having on your pricing strategy going forward on the Coal side.

I would just say, obviously, we got a rate case. In one of those cases, as you know, there's been some additional litigation filed. I think we're better off right now just not discussing what's going on in terms of how that's being handled. So, I'll just pass on that question.

The next question is from Walter Spracklin with RBC Capital Markets.

Just curious, you did have a ramp in your capital expenditure program, obviously. And looking at sort of what's going on in Washington and some of the move away from kind of legislation over to regulation, is your capital spending plan reflecting a little bit more comfort on your side with regards to the regulatory environment? And can you comment a little bit about -- obviously, there's some hearings coming up. There's some movement toward fines as sort of a new way by the STB to rein in some of the things that they're focusing on. What's your overall view outside of just wanting less regulation -- what's your overall view on how that trend is going right now and how that relates to your CapEx program?

Well, let me say this. If you look at our CapEx program for 2010, we spent fairly close to $1.5 billion. If you look at our core program this year, its $1.7 billion, and you can really kind of look at two or three things. Obviously, some inflationary pressure in some of the materials that we buy. Clearly, last year, we didn't buy coal cars. That's a core part of our business. We have been buying coal cars in prior years. So I think you can look at the $1.7 billion and equate it to the $1.5 billion fairly easily. And then the other items, we've mentioned PTC and these equipment purchases drive the number higher. I would say that our capital expenditure program for the past three or four years has been driven by our consistent belief that at the end of the day, there will not be actions which seriously or really damage in any way our ability to earn an adequate return. There's certainly a lot of attention, as you say, being focused on the regulatory side, on the STB. There's some hearings scheduled. As I've said in my remarks, we and the rest of the industry and a lot of friends of the industry will go in and very vigorously defend the fact that we have reached the point where if we are allowed to earn what I would call adequate, although certainly, in no way excessive returns, it's clear that the industry is determined to keep investing, keep growing capacity and move forward. And I think we have a great case to make. I think we'll make it successfully, and we're going to continue to invest in the property and with that belief. I will say the minute we think that there is really going to be any significant impact on our ability to earn an adequate return; we will go back and revisit our capital philosophy almost at once.

Second question here just for Mark. Just so I understand, you said there was a catch-up -- is that how I understand your employee hire program, a catch-up in the fourth quarter based on the ramp in 2010, and any incremental hiring will be in conjunction with the added growth that we're going to see if we do see it in 2011. Do I have that right there?

Well, of course, we began the hiring process way back in the beginning of 2010, but we've got a comprehensive training program. So it took a while for these people to get marked up and out there and on the job, and we started to see the beginning of that in the fourth quarter. And that is coming along nicely, and that'll continue on through the balance of this year. And the rate at which those people are coming out available in the workforce is commensurate with the volumes we've got coming online, and of course, we've got attrition that takes place on a monthly basis. So we're pretty well caught up with that -- we've caught up with that attrition, where we've gained ground on it. And so we've got a nice run rate going forward as far as being able to handle the business going forward.

I'm just trying to get a sense of the -- when these people come on, is there going to be flex in the system in 2011 for added growth? Or are these just coming on in 2011 just to sort of keep up with the current trends that you've got? It sounds like you're matching it to have a little bit of a flex.

No. There's absolutely flex. And they're coming on at an even flow, and they will be throughout the year.

The next question is from Bill Greene with Morgan Stanley.

There's a lot of puts and takes here in the near term, but it sounds like the on balance, the outlooks for coal's pretty positive. But how do you think about investing and preparing for some of the longer-term regulatory hurdles on the horizon, such as with utility coal? Some of the EPA regulations going into effect say like in the middle of this decade, how do you prep for that? How do you think about getting ready for that kind of environment and what it could mean for your volumes?

Bill, that is a great question. And I will tell you that I think we all have, obviously, a very strong belief based just purely on the facts that there's going to be a lot of coal burned to generate electricity for well into the future. I will say that we do have some advantage in our capital program if we should see something that, quite frankly, we don't now anticipate, in terms of a change in demand, particularly the demand that drops. We happen to be in the middle of a multi-year process to renew our coal fleet. And so from a capital standpoint, we can moderate that capital, moderate the size of the fleet and accommodate any changes that we see based on regulatory action. But, I'll go back to reiterate what Don has said many times in the past, we think we have a great coal franchise. We've got great ability to source coal from all of the major coal fields in this country, and we're very optimistic about Coal for the future at Norfolk Southern.

And then you've made, obviously, a significant investment in the intermodal strategy, and you've had some wind to your near term. I realize you don't give specifics on pricing per se in, say, a segment like intermodal, but we look at that RPU and I realize some mix effect is in there. But how do you ensure, given all the capacity you're adding, you're getting a decent pricing level with that capacity given the investment that's gone in there? It's a pretty competitive market, nonetheless. It just seems tough to think that the pricing can be sufficiently high there. How do you make sure that works?

Well, Bill, we're tracking that very closely. And in the fourth quarter, our revenue per unit, even with that 36% spike in the empty revenue moves, increased by 3%. And we took a third quarter general rate increase in that sector, and as I mentioned, we see truckload capacity continuing to tighten. And if the forecasters are right, for 2011, we'd see, I say, 2011 and the hours of service and the restrictions being placed on truck drivers and fuel expense being higher, we think that there could definitely be a further contraction in capacity, maybe as high as 10%. And if that 9% increase in truckload pricing is correct, and we think it might be for 2011 that gives us additional leverage in terms of continuing to improve the yield of that business as we build more volume, which in turn generates a lower unit-per-unit cost in the network. So we get leverage on the cost going down and also leverage on yield going up.

Your next question is from Scott Flower with Macquarie Securities.

I know that we've talked a lot about Export Coal, but I wanted to get some clarity or some color from Don. Are you expecting, obviously, price rising can obviously incent the mines. But with some of the regulatory action in Appalachia, are you expecting more that maybe there's going to be more thermal crossover coal or that you actually will get a supply response from the met side? I'm just trying to get a sense of is it more that you're thinking you'll pick up more thermal here as opposed to that much more met on the export markets.

Scott, the answer to that is both. And to your question on crossover, there's no doubt about that coals that are being marketed today is met coals. If you go back 15 years ago, might have been just thermal coal, and now they're competitive in met coal markets. So we are seeing some of that take place. But when you look at the balanced sourcing equation that we have across our network with our Northern App position, our Central App position as well as Illinois Basin, I think that we see an opportunity for increased metallurgical coal to move to the domestic met market as well as export. We were 27% for export for the year, and we had a 60-plus percent increase in domestic met coal. Plus, we had a 16% increase in utility coal in the fourth quarter as the demand picked up. So that in itself tells us that we've got Coal that could move to all three segments.

And then just maybe a couple for Jim. You talked about casualty in the reserve development. Am I to take from that perhaps, we're sort of running at sort of a run rate that makes sense unless there are significant improvements on some of the safety ratios?

Well, it's difficult to say a significant component of this being actuarial, with adjustments quarter-by-quarter. But we did have favorability in the PI reserve adjustment in the fourth quarter of 2010 to the tune of $5 million, and that was significantly below the fourth quarter of 2009's $29 million. So, it was an overall $16 million negative swing in the PI reserve adjustments. And we've seen a declining rate of favorability in PI reserve adjustments this year, but it's difficult to know. There may be a little bit more room to run on that, but we're not expecting adjustments in the magnitude that we have seen.

And then this is just sort of maybe administrative. What was the amount of fuel surcharge revenue in the fourth quarter?

It was $187 million, and there was also a $29 million negative lag effect in the quarter.

And then one last one on the op side. I just wanted to get an update on how we are in the rollout of RailEdge and LEADER and how many divisions we're across and how that's progressing in terms of results versus what you initially may have thought from the implementation.

It's coming along well, and we anticipate we're going to add several more divisions this year to the rollout that's already out there. By the end of the year, we will have - we're forecast to have seven or eight divisions that will be online with that, and it's looked favorable so far. We're pleased with what we see. We're estimating that we're getting somewhere in the neighborhood of a two- to four-mile-an-hour increase with that, perhaps as much as a 10% to 20% improvement in velocity. And it's still early on. It's still early on, but the employees that are working with this, our dispatching forces are working well with it, and they're encouraged by it. So stay tuned, and we'll let you know how it progresses.

Scott, its Jim. Let me jump back in for a minute here. I misspoke a minute ago. The PI reserve adjustment in 4Q '09 was $21 million not $29 million. And the 4Q '10 reserve adjustment was $5 million.

The next question is from Chris Ceraso with Credit Suisse. Christopher Ceraso - Crédit Suisse AG: First, as it relates to the headcount and hiring ahead of demand, is there some level of volume that you feel that you gave up in 2010; because you didn't have enough conductors or you didn't have enough rolling stock?

We haven't really tried to quantify it. I think it is probably safe to say that there was some demand out there that had in some markets, where if we had the ability to move it, we would have probably handled some more business. Christopher Ceraso - Crédit Suisse AG: But, you haven't tried to quantify that?

No. Christopher Ceraso - Crédit Suisse AG: And then the second question has to do with the average revenue per car, your revenue per unit, which if I back out, some assumed level for fuel looks like a pretty thin increase. And I'm wondering how much of an effect, I think what you had called project business, which is kind of a short-haul business that maybe had a low price. Is that diluting the overall price in your network? Or how much of a negative effect is that having on your pricing overall?

Well, Chris, in terms of the mix, we were up 4% in RPU for the quarter, 5% in RPU for the year. And as I mentioned, we had a lot of changes with respect to the length of haul across all of the businesses. Now, I'll give you a couple more examples of that is in the fourth quarter alone, we handled an increase of about 5,000 carloads of additional coke and iron ore traffic. It's good business, and it's very profitable business for us, but it has a much lower RPU than the average coal RPU. The same thing happens in our domestic intermodal market east of the Mississippi. In shorter-haul lanes, we're picking up business from truck. It's attractive business for us, but it is less RPU than the average RPU for intermodal overall. So, as you go down through the businesses and you can see that type of negative mix, that's impacting RPU. With respect to the price itself, we're measuring that outside of revenue per unit. We're measuring that internally with our own scorecard. And as I've mentioned, we are pleased with the core pricing gains for the fourth quarter and for the year. Christopher Ceraso - Crédit Suisse AG: Is some of this short-haul traffic expected to roll off? Or is this going to stay with you?

As we continue to look at the truck conversion opportunities in our Eastern market, we foresee additional opportunities out there, not only in the intermodal sector but also in our carload sector. We have one movement of phosphate rock, for example, that moves from the mine to the processing plant. That's a grand total of 17 miles in distance. We have a coal move at 16 miles round trip. That was up over 2,000 cars in the fourth quarter. Those were profitable moves. They just have a very pronounced impact on the average RPU. And we'll continue to see some of those opportunities and continue to secure those.

Our next question is from Ken Hoexter with Merrill Lynch.

If I could just follow up on that last question, just for a quick sec, on the coal moves, you mentioned that some of the stuff moving to the river accelerated in the quarter. Is there something that was driving that shift of business to shorten the hauls?

Ken that was the domestic metallurgical coal that I've mentioned. And a lot of that flows to the river, where it then moves to our Clairton, Pennsylvania coke oven or the ultimate destination on the river, where the coke ovens are operating. We're also blending coal at our Wheelersburg River Terminal, custom blends for our metallurgical coal customers. And that increased -- that business was up 36% in the fourth quarter. The driver of it is that while steel production was up 11% in the fourth quarter, our business grew by 36% in the face of continued stockpiles that are not at target at those coke ovens. And as I mentioned in the remarks, we're being told by our coke customers that their stockpiles are somewhere 30% to 35% of target levels. So there's a lot of headroom left in terms of added demand to ramp that up as 2011 progresses.

So we saw coal yields come down sequentially. Should we expect that to them continue into 2011?

We will see continued growth in our domestic Metallurgical Coal to the river and to those blending stations that involve the river. But I will tell you that we also will see increased activity in our utilities to the South. In the fourth quarter, for example, Ken, we had about a 5% increase in our Northern utility business, which is shorter haul and about a corresponding 5% decline in our -- this is for the year, not for the quarter -- 5% decline to the South. We expect that to diminish in 2011. We will see more long-haul coal to the South as well as to the North, but we'll see additional coal going to the export market, which carries a higher RPU. So, higher utility RPU to the South and higher export coal expected for the higher RPU.

And then you mentioned earlier that on the auto side, the volumes were down. You had that 19,000 network issue, and you said it was all kind of cleaned up. Yet, I noticed that the volumes are still down to start off this year. Is that kind of timing? Is it that weather related? Should we see the autos pick up? Because it looks like the production numbers out there are pretty sizable.

We've got a good increase in production scheduling at the plants that we serve. I will tell you that the first two weeks of January; we had a major General Motors plant, Roanoake, Indiana, down for retooling. That has now come back, and we'll see shipments ramp up there. We've also seen some holds on products by a couple of our manufacturers releasing new product, holding it until they're ready to release it into the marketplace. So we've got some pent-up demand that will help us recover from the first two weeks of January.

On the employee side, Wick, in deciding to go ahead and start hiring and making that longer-term decision, is there a trade off here of trying to get higher, I guess, revenue based on keeping the network tight versus scaling the network a little bit ahead of time here? How do you balance those two goals?

Well, we're always trying to avoid being too early adding resources. But with the belief, and we have seen this before, that we're better off from a revenue and profitability standpoint of being a touch early than a touch late. So, as Mark mentioned, it's taken us a while to get our training pipeline full. We're comfortable with that. It seems that it's coming online. A lot of these folks are going to come online really much as demand continues to increase. So, we think our timing is actually going to end up being pretty good on that. It's something we watch very closely and something, obviously, that we can modulate in the hiring process if we need to. But, you'll recall -- I guess, all of you will recall that we, along with all of the rail carriers, facing the kind of attrition that we do for four or five years in a row, hired and trained significant numbers of T&E people. And as we see volumes continue to rebound, we're going to be back in that business. We have to do that in order to keep up with attrition as well as handle new business.

Your next question is from Tom Wadewitz with JPMorgan. Thomas Wadewitz - JP Morgan Chase & Co: You've been asked a bunch about Export Coal, but I don't recall you commenting really on your view on what pricing might look like as of April 1. Don, can you give -- do think it's realistic to think that you can get another $5 a ton or something of that magnitude given your pretty constructive comments on the tightening export coal market?

Tom, I can't comment on what we think we might get in April 1. We're looking at that and assessing it as we always do, and we'll be working very closely with our customers, both receivers and shippers of metallurgical coal as well as any thermal coal opportunities in the export market. And we will be taking appropriate action that reflects the market. Thomas Wadewitz - JP Morgan Chase & Co: I mean, without being specific on whether its $5 or $10 or $2, whatever it is, is it reasonable to think that that price is going to go up materially?

Tom, I can't really address that at this point, but we certainly are studying that intensively, I will tell you that. Thomas Wadewitz - JP Morgan Chase & Co: The results in fourth quarter came in, where it's, frankly, a bit disappointing in terms of incremental margin or however you want to look at it versus what I had in the model and I think consensus and so forth. Some of that could be weather impact, some of that it fuel and so forth. And I'm trying to get a sense of what you think may have been kind of temporal impacts that you would quickly recover from if you looked at 2011 or where our expectation is just a little bit too aggressive and maybe if you frame that in terms of incremental margin or pace of OR improvement or whatever. I'm just trying to, again, figure out what's kind of temporary and some temporary headwinds and what's really recalibrating the run rate in terms of margin.

Tom, it's a good question, obviously, something we have talked a lot about. As we look at the fourth quarter and as I mentioned, I think, in the beginning of my remarks, our results for the fourth quarter were not really what we might have anticipated either. It is somewhat hard, I will tell you, to quantify everything that happened to us, but I will just leave it at this. We had a December, in particular, that fell short of where we thought it would be. That was coupled with some weather events that we know impacted a lot of folks, but just seemed to really have a significant impact on our network in terms of our ability to deliver coal to utilities and to Lambert's Point and some, as we talked about earlier, some significant impacts on the expense side. A lot of it in fuel, with the networks slowing. Some amount of it in labor, in terms of recrews, in terms of a lot of overtime to deal with a lot of locomotive problems that resulted from the wintery weather. And I will tell you, I think that what we have tried to tell you is that we are -- another issue, I guess, too, which you may have picked up in your modeling, I don't know, is we had a fairly significant $29-or-so million lag on the fuel surcharge. But I will tell you that we think barring whatever Mother Nature does to us, and we clearly saw another big storm move to the Southeast the first week of January, we feel good about where our network is. We feel good about our ability to meet what we think is a substantial amount of demand out there. And we're confident, as we've all told you, that this is going to be a good year for us. So as I say, it's a fourth quarter where we, quite frankly, internally, didn't see what we thought we would see. We saw a lot of network issues, which I think are temporary. Thomas Wadewitz - JP Morgan Chase & Co: Do you think the network has bounced back at this point? Or did the early January storm kind, is that still kind of holding you back from running the network a bit better?

Mark's going to tell you all about that.

No. Actually, if you go back to November, we started to get a nice bump in our velocity, and that's been mitigated somewhat by the December weather, but nevertheless, our operation is coming along nicely. And even with that Southeast storm that we took, we are completely recovered from that, and we are running what I would say is well considering winter weather. We always deal with winter. It comes every year. And we are running just as well as ever as far as that goes.

The next question is from Anthony Gallo with Wells Fargo.

What should we think of as the tax rate for 2011? And then my second question is on the FedEx business, is that 100% direct? Or will you use any intermediaries? And is that containers or trailers or both?

I'll take the tax rate question first. For 2011, we're assuming something along the lines of 35% effective rate, plus statutory rate, plus 3% for state taxes. So call it 38%, something in the high-30s probably is a reasonable estimate.

And with respect to the FedEx question, it's a direct relationship with FedEx. Norfolk Southern is a great believer in the idea of lowering corporate tax rates.

The next question is from Justin Yagerman with Deutsche Bank.

Why they ask, along the lines of some of the questions, combining coal and the weather explanations that you've given, will there be any catch-up in terms of the volumes in Q1 as we look at some of the coal volumes that maybe were missed because of weather in the back half of the fourth quarter?

I will not quantify, but the answer is yes. And we're seeing some of that activity at Lambert's Point currently.

So I guess to take that you're running above normal fourth quarter run rate in the beginning of this year Lambert's Point right now?

Yes.

And you think that that's volume that's catch-up for Q4?

It is volume that, basically, was brought over from December into January to meet the supply chain requirement.

How long do you think that'll last for?

We see -- as I mentioned, we see a fairly robust outlook for Export Coal for all of 2011, and that's Western Europe, Asia, South America, Brazil in particular. So, we have a good solid forecast for Export Coal in 2011, and we had that good solid forecast before Australia flooded.

You talked a lot about labor and attrition, but just kind of piggybacking on that, when you think about these raised levels of training that you're doing ahead of whether you expect to be volume growth this year, when do you start to anniversary that heightened level of employees in the pipeline? And then I guess the next piece of that is there a volume threshold that you think about this year -- I don't know how you want to put it, either GDP growth or just carload growth, where we would have to ramp up again in terms of the pipeline of employees that you have in order to feel like you've got a sufficient amount of labor to cover the growth in your network?

You're going to continue -- I think, in regard to your first question, we have a training pipeline, as I've mentioned before, that's full. We're going to -- based upon what we see right now in terms of attrition as well as some volume growth. Right now, our plan is to keep it full. We're estimating -- we hired, as I think Mark said, 1,900-some-odd conductor trainees in 2010. Right now, we're projecting about 1,500 trainee hires in 2011. I will say that, as Mark has said, part of this process of bringing folks on has really been a little catch up to handle the volumes that were out there in 2010 more expeditiously, more efficiently. We'll be at that level fairly soon, if we're not there already. And I think that's we're going to add some more employees, but we still got -- in terms of the capacity of our network, once we get our employee base up this year, we're going to have, I think, still a lot of incremental capacity without making substantial increases beyond this year. We'll be in a position where we can handle a significant amount more traffic. And we want to do that, because as I said earlier, when we look at T&E employment in particular, the most important thing to remember is that those folks are basically paid based upon the amount of work that they do. A higher headcount will pay some benefits for them, obviously. But with our higher headcount, what you'll see is what actually we saw a couple of years ago, which is we'll have a number of people out there, all of whom will start making a little less. So the impact on expenses is not proportional in terms of the T&E headcount we had. It'll be much more impacted by the amount of work they do.

Is the read through there though that train length growth is limited in the near term and that we're going to start to see train starts pick up materially on a relative basis to volumes?

No, not at all. We've still got -- we have plenty of capacity out there. And to the extent we're talking about the general Merchandise business, our average train length is such that we have got room to grow for the most part on existing trains. And to the extent that we get additional coal business, that tends to be unit train business. And that's great profitable business, and we're glad to accrue those up so...

Can you quantify percent growth that you think you have in the different of types of trains that you're earning?

Only to say that we are still nowhere near the 2006 levels that we have enjoyed in the past and we've got a lot of room to grow in order to reach those levels. So, there is a significant ways to go.

With the FedEx business, is there any CapEx associated with that? And I think Anthony had asked if it was containers or trailers, and I don't know if you guys gave any answer to that.

No. There is no direct CapEx. It's part of our quarter strategy and the investments that we're making, so it's leveraging those investments that are already in place to deliver service that supports the FedEx business. And with respect to the second question, it will be trailers, initially.

The next question is from Jeff Kauffman with Sterne Agee & Leach. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Jim or Deborah, once you make the conversion from lease to own, what changes -- let's say we go beyond '11 and look at 2012. How much would I expect to see equipment rents drop and depreciation increase as a result of the $340 million that you're spending?

I don't have the exact numbers, but as I noted earlier, we will see a reduction in the equipment rents offset by a small increase in depreciation expense. But as we noted earlier, it is accretive to earnings, so it does produce a positive net present value for us. Jeffrey Kauffman - Sterne Agee & Leach Inc.: All right. Depreciation's longer lived, so equipment runs for about $81 million. I'm just trying to get a sense for perspective. I mean, could this be a $20 million decline? Or are looking at...

No. It's smaller than that, because the $81 million in equipment rent includes the car hire portion as well as equipment lease expense. And the equipment lease expense is less than 1/3, I think, of the total equipment expense. Jeffrey Kauffman - Sterne Agee & Leach Inc.: And one quick one for Mark and Don, if I can. I mean, you've been very clear about the 36% increase in empty intermodals. One of the things I was surprised at is your gross ton miles per employee up just under 4%, RTMs per employee up 6 1/2%. How much of that is explained by the intermodal empties? Or was there something else going on? I mean, you mentioned a hiring, so I get that. I get the people coming online, but I'm trying to just get a sense for what else might be different in your quarter than other people and whether it's short term or just a structural issue.

I think, obviously, when you see the growth ton miles not grow in quite the same way as revenue miles, that's obviously some mix effect. As we talked about, we saw a lot more continued growth, fourth quarter in Intermodal where we did not see it in Coal, and I think that's the primary driver of that impact. That's a good question, because that disparity is a little wider than we usually see it. But I just think we had an unusual quarter in terms of the balance of those two businesses.

Our last question is from Keith Schoonmaker with Morningstar.

During the period, you moved about 9% greater volume using just 5% greater crew starts. And given train length and strength, I'd expect this gap must eventually close somewhat. Can you share some insight as to the timing of this sort of convergence?

I think as Mark said, you have to think about the crew starts in terms of the kind of business you're handling. In our Merchandise network, we have a lot of capacity left in terms of train length, and we feel there's substantial volume in the merchandise load that we can add without really much impact at all in terms of crew starts. On the flip side of that, when you look at Coal, that comes to us in bulk. It comes to us primarily in unit trains. And when we start to add volume in Coal, we tend to add crews commensurately, so it's hard to say. On the Merchandise side, I would tell you, I think we have a lot of room left on the Merchandise side in terms of train productivity and improved productivity.

You mentioned train length and of course, some longer length sort of haul railroads really have sort of the benefits of building a longer consist, particularly through relatively uninhabited terrain. But probably, how important is this to Norfolk Southern at this point? And what progress has been made?

Our average train length right now, I think -- I'm not looking at a figure. But I think we're in the neighborhood of 4,600 feet on the average for general merchandise trains. And so obviously, there is a lot the room to grow on the average. So we're looking forward to filling those out as the year goes on.

We have seen the average train length go up this year as we've seen business additions, and that's been a big driver in the productivity stats that we've shown you all year. But as Mark said, and I'll reiterate again, I think in terms of the Merchandise fleet, we look at train length all the time. It's one of the key metrics we design our operating plan around to make sure we're running adequate lengths of trains, and we're very focused on getting the average length of all of our trains up.

There are no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Well, thank you, everyone for your patience and for the excellent questions. And we look forward to speaking with you again at the end of the first quarter.

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