David Baggs – Investor Relations Michael J. Ward – Chairman, President and Chief Executive Officer Clarence W. Gooden – Executive Vice President of Sales and Marketing and Chief Commercial Officer Oscar Munoz – Executive Vice President and Chief Operating Officer Fredrik Eliasson – Executive Vice President and Chief Financial Officer

Allison Landry – Credit Suisse Robert Salmon – Deutsche Bank Thomas Kim – Goldman Sachs William J. Greene – Morgan Stanley Ken Hoexter – Bank Of America Merrill Lynch Chris Wetherbee – Citi Investment Research Thomas Wadewitz – UBS Investment Research Cherilyn Radbourne – TD Securities. David S. Vernon – Sanford C. Bernstein & Co., LLC John G. Larkin – Stifel, Nicolaus & Co., Inc Jeffrey Kauffman – Buckingham Research Scott Group – Wolfe Research Matt Elkott – Cowen and Company Benjamin Hartford – Robert W. Baird & CO. Keith Schoonmaker – Morningstar Inc. Walter Spracklin – RBC Capital Markets Justin Long – Stephens, Inc. Cleo Zagrean – Macquarie Capital

Good morning, ladies and gentlemen and welcome to the CSX Corporation Third Quarter 2014 Earnings Call. As a reminder, today’s call is being recorded. During this call, all participants will be in a listen-only mode (Operator Instructions). For opening remarks and introduction I would like to turn the call over to Mr. David Baggs, Vice President of Capital Markets and Investor Relations for CSX Corporation.

Thank you, Wendy and good morning everyone. And again welcome to CSX Corporation’s third quarter 2014 earnings presentation. The presentation material that we will review this morning, along with our quarterly financial report and our safety and service measurements are available on our website at csx.com under the Investor section. In addition, following the presentation, a webcast and podcast replay will be available on the same website. Here representing CSX this morning are Michael Ward, the Company’s Chairman, President, and Chief Executive Officer; Clarence Gooden, Chief Sales and Marketing Officer; Oscar Munoz, Chief Operating Officer; and Fredrik Eliasson, Chief Financial Officer. Let me remind everyone that the presentation and other statements made by the Company contain forward-looking statements. You are encouraged to review the Company’s disclosure in the accompanying presentation on Slide 2. This disclosure identifies forward-looking statements as well as the uncertainties and risks that could cause actual performance to differ materially from the results anticipated by these statements. In addition, at the end of the presentation, we will conduct a question-and-answer session with the research analysts. With nearly 30 analysts covering CSX, I would ask, as a courtesy for everyone, to please limit your inquiries to one primary and one follow-up question. Now, before I turn the call over to Michael, I would like to remind all of you that today’s call will be focused on the discussion of the Company’s strong third quarter results. As a longstanding policy here at CSX we do not comment on rumors or market speculation, and we will not address questions that do not pertain to our quarterly results. We appreciate your cooperation. And with that, let me turn the presentation over to CSX Corporation’s Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Well, thank you, David, and good morning everyone. Last evening, CSX reported record third quarter earnings per share of $0.51, up 13% increase from the $0.45 in the same period last year. CSX also generated record third quarter revenue of $3.2 billion, up 8% on a 7% volume increase. These results demonstrate CSX’s ability to capitalize on the continued economic momentum that is driving broad-based growth across nearly all markets, coupled with the secular growth trends in intermodal and the gas and oil markets. Even with the high level of demand CSX’s operations have remained stable. We are continuing to work with our customers to meet their current and future needs, by adding crews, investing in locomotives and infrastructure to increase capacity. Thanks for those efforts, the company increased operating income by 16% to $976 million this quarter and improved its operating ratio by 240 basis points to 69.7%. CSX continues to see growth potential across the markets. We are confident in our ability to continue to generate substantial value for our shareholders. Now, I’ll turn the presentation over to Clarence, who will take us through the top line results in more detail, Clarence?

Thank you, Michael, and good morning. The underlying macro-economy remains strong and the data and our experience suggest a positive outlook for growth. The Purchasing Managers Index came in at 57 in September; a reading above 50 indicates that the manufacturing economy is expanding. This is the 16th consecutive month the PMI index has signaled expansion. At the same time, the Customer Inventories Index declined to 45; a reading below 50 indicates customer’s inventories are low and suggests continued strength in the demand for manufacturing output. As a result, many of the customers we serve grew at a robust pace and most of the key indicators we track point to continued expansion. Now let’s look at the results on the next slide. Starting at the left side of the chart, total volume grew 7% to more than 1.75 million loads in the quarter with strong growth in merchandise, intermodal and coal. Moving to the right, total revenue increased $236 million to over $3.2 billion in the quarter, reflecting overall volume growth and increased pricing across most markets. Merchandise and intermodal account for over three quarters of CSX’s overall revenue. Total revenue includes $17 million of liquidated damages related to contract shortfalls in coal shipments which compares to $51 million in the third quarter of last year. Next, the average revenue per unit was up slightly. Here core pricing gains and our merchandised and intermodal markets offset the impact of mix and lower coal revenue per unit. Finally, let’s move to core pricing. Recall the same-store sales are defined as shipments with the same customer, commodity, and car type, and the same origin and destination. These shipments represented about 75% of CSX’s traffic base for the quarter. On this basis, all-in pricing was a positive 0.2% in the quarter, reflecting continued…

Thank you, sir. Good morning everyone. Let me start with a review of our safety as it is our first and foremost priority. In the third quarter, the personal injury and train accident rates both increased versus last year’s near record lows. While we’re disappointed that the metrics have ticked up slightly this quarter, we remain focused on continuous improvement in safety. We remain a leader in the nation’s safest industry and we’re committed to both community and employee safety. Let’s turn over to the service performance on the next slide. As you can see on the left, third quarter on-time originations and arrivals, along with velocity and dwell, were all stable sequentially. While CSX’s overall service performance is still below the level of our customers and we have come to expect demand on our network has remained strong. As you can see on the chart on the right, service levels have remained steady since the end of the first quarter and have continued to support volume growth. And as importantly, our cost of service is improving. We are working with our customers to meet their rapidly increased demand levels, but as you know, resources in the rail industry take time to be put in place. In that regard, let me discuss the framework on the next page which we’ve been sharing with our customer to keep them updated on our service recovery efforts. Now, while elementary, the chart on Page 15 conveys the four primary service components, all of which are highly interrelated. We tell our customers there’s a need to ensure not only that we have the right level of train crews but the necessary infrastructure and appropriate number of locomotives with a process that anticipates and reacts to changing business conditions. Let me briefly touch on each…

Well, thank you, Oscar, and good morning everyone. Let me begin by providing a summary of our third quarter results. As Clarence mentioned, revenue increased 8% versus the prior year on 7% higher volume, driven by broad-based strength across our merchandise, intermodal and coal markets. Expenses increased 5% versus last year, driven primarily by higher volume, which I will discuss in more detail in the coming slides. Operating income was $976 million, up 16% or $136 million versus the prior year. Looking below the line, interest expense was relatively flat to the prior year, at $137 million. In addition, other income declined $31 million versus the prior year on two unique items. First, following our recent $1 billion debt offering we used some of the proceeds for early retirement of existing debt for which we incurred an additional expense. Redeeming the debt early, generated a positive value of holding the proceeds in cash. Second, we also incurred some environmental cleanup costs, during the third quarter related to a non-operating site. Income taxes were $304 million in the quarter for an effective tax rate of 37.4%. Overall, net earnings were $509 million and EPS was $0.51 per share, up 12% and 13% respectively versus the prior year period. With that, let’s turn to the next slide and briefly discuss how fuel lag impacted the quarter. On a year-over-year basis, the effect of the lag in our fuel surcharge program was favorable by $14 million. This reflects $8 million of positive in-quarter lag during the third quarter of 2014 versus $6 million of negative in-quarter lag for the same period in the prior year. Based on the current forward curve, we expect the year-over-year fuel lag impact to be slightly favorable in the fourth quarter. Turning to the next slide, let’s review…

Well, thank you, Fredrik. Over the past few years, CSX has overcome the challenge of an energy transition in America, absorbing a loss of nearly $1 billion in coal revenue and leveraging new opportunities to sustain earnings growth. CSX has emerged from this transition as stronger company. That strength was evident again this morning as CSX delivered record third quarter earnings for its shareholders and stable service for its customers, while reaffirming the company’s bright future. That future is built on the continued execution of CSX’s core strategy. That means enhancing our ability to grow faster than the economy, price above inflation, make strategic investments and produce ever more efficient operations to continue delivering superior shareholder value. That is what you saw drive our performance in the most recent quarter and we expect that strategy to drive our growth going forward. In short, we remain confidence CSX will continue to deliver compelling customer value, which directly translates into superior value for you, our shareholders. Now, we’ll be glad to take your questions.

Thank you. We’ll now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Allison Landry with Credit Suisse.

Good morning, Allison. Allison Landry – Credit Suisse: Good morning. Thanks for taking my question. I was wondering if you could talk about crude prices spiraling downward. And maybe how worried are you about this given that a lot of your recent growth has hinged on energy markets. So I was just wondering if you could maybe help us frame the risk here.

Allison, this is Clarence Gooden. Obviously, we have our eye on it with the crude prices this morning approaching $80 on West Texas’ Intermediate. But in the near-term we don’t see any impact on our crude business at this point in time. We’ll watch those prices as they test the ceilings of what the Bakken crude is, but we don’t see any near-term impact on that at this time. We think it’s sustainable. Allison Landry – Credit Suisse: Okay. And is that view sort of similar for frac and NGLs that you are moving?

Yes we see the same for that, yes. Allison Landry – Credit Suisse: Okay. Okay, thank you.

Thank you. The next question is from Rob Salmon with Deutsche Bank.

Good morning, Rob. Robert Salmon – Deutsche Bank: Hey, good morning guys. Clarence, as a follow-up to Allison’s question, you’ve done a really good job of kind of framing the export coal outlook predicated upon how the prices move. Are there certain price thresholds that we should be thinking about for the crude by rail where it comes more challenging based off of kind of what you see? And I realize there is more moving parts given there is net backs involved. But I would be curious to get your thoughts around that as well as any early comments you might have about the export coal outlook for 2015.

Well, let me take your second question first. It’s really too soon for us to give you any commentary on the export coal for 2015, but we’ll certainly do that on our fourth quarter call. On your first question, I’m certainly not an expert on crude spreads here. I did see a discussion this morning, however, by the former President and CEO of Shell Oil, in which he said he thought it was very interesting that the OPEC countries may in fact be – one of the reasons they’re bringing down the price of oil is to test to see where American fracking companies would in fact start to shut down wells. Since nobody knew what that number was, it was a closely guarded secret. So your guess is as good as mine when those would start coming in, but there’d obviously be some number, but it’s, to my knowledge we’re nowhere near close to what that number is. Robert Salmon – Deutsche Bank: Fair enough. Appreciate the color.

Thank you. The next question is from Thomas Kim with Goldman Sachs.

Good morning, Thomas. Thomas Kim – Goldman Sachs: Good morning. Thanks very much for taking the time here. I just wanted to ask on the intermodal side. First off, can you give us a little bit of color in terms of where your domestic intermodal rates are versus TL presently?

They’re running in general on the contractual side about 10% to 15% below where the truck load rates are. The spot market, however, is much closer to what the truckload rates are. We’ve been able to close that spot market in the – due to the tightening up of the truckload demand. So we’re probably within 5% of those. Thomas Kim – Goldman Sachs: Okay, great. And then just with regard to the comment on the mix shift, can you help us understand what exactly it is? Because when we look at the mix between domestic and international, they are actually – the shift has been only about 1 point year-on-year. So I am wondering if there is more in mix and commodity or is there a mix between increase in long-term customer versus spot. Just if you could maybe give us a little bit more color with regard to that. And then just I guess also related, is there any reason why the domestic intermodal hasn’t – the share hasn’t grown more significantly just given that there has been more growth that we would have thought over the last year with regards to domestic over international?

Well in our door-to-door service product, which has traditionally carried a higher RPU was roughly flat this quarter. And in addition, we saw pretty strong growth in what we’re traditionally backhaul lane markets and that has had a negative impact. For example, our UMAX product, which moves from the East to points beyond Chicago, which are traditionally back haul flows, has had a healthy volume growth even though it has had an RPU growth of around 3.5% that volume has still had a negative impact on the mix. And the rest of the intermodal businesses as you know is managed on long-term contracts, it has and has price escalators built in. So it is difficult for us to in the short term to get some of those rates up. Thomas Kim – Goldman Sachs: All right, thanks a lot.

Thank you. The next question is from Bill Greene with Morgan Stanley.

Hi, Bill. William J. Greene – Morgan Stanley: Hi, good morning. Fredrik, I wanted to ask you for a little bit more color on the 2015 commentary. I think we’ve all been surprised at the volume growth so far in 2014. And so can you talk a little bit about the confidence on that double-digit growth rate? Does it suggest that the pricing outlook is superior and therefore incrementals should look better? Is that kind of the key to getting to double digit? Because I would assume volume growth would slow just given the comps. But maybe you can offer some views there.

Well I mean as I think we said in our prepared remarks, in the fourth quarter we already expect volumes to come down slightly from what we seen here over the last few quarters, but we still expect a pretty robust macro environment next year and that coupled with some of these more secular things that we’re seeing in the energy environment and our intermodal trends continue to point towards a pretty healthy volume environment for 2015 as well. Clearly, as Clarence has mentioned a little early right now to talk about what export coal is going to do, but that is the wild card. We’ve said that repeatedly and there is probably more downside than upside. But we continue to produce pretty good results, we continue to bring a fair amount to the bottom line even though we’re not operating as efficiently as we can. So the fact that we are going to cycle some pretty significant headwinds we had here this year in the first quarter and even in the second quarter coupled with a good, healthy top line environment gives us the confidence that we should be able to produce double-digit earnings growth next year.

And Bill, this is Oscar. The cost structure part, that is mine, we got that one. That’s going to be a key focus for us next year, and I think that will be a contributor factor. William J. Greene – Morgan Stanley: Yeah, that makes sense. Oscar, in the third quarter – I think in the first half we talked about a little over $120 million of weather and inefficiencies due to the network challenges. Was there an impact that you can give us for the third quarter how much that might have cost?

Sure. So you’re right. It was about $32 million in the second quarter we estimated about $16 million here in the third quarter, the difference was predominantly that we had less reliance on foreign horsepower here in the third quarter than we had in the second quarter as we’ve been able to ramp up additional leases and other repairs that we’ve been doing on our equipment. Over time it’s still running relatively high. But the big delta between the second and third quarter was just that, it was the locomotive costs. William J. Greene – Morgan Stanley: And you said, one, six.

16, yes. William J. Greene – Morgan Stanley: Yeah. Okay. Thank you for the time.

Thank you. The next question is from Ken Hoexter with Merrill Lynch.

Good morning Ken. Ken Hoexter – Bank Of America Merrill Lynch: Good morning. Great bottom-line performance, great to see. Can you maybe, Oscar, address – the on-time origination and arrivals continue to remain so low and we can see the velocity improving. But why are those measures and metrics stuck at kind of really reduced levels compared to the 85%, 90% we’ve seen in the past. And what needs to turn? Is that just the employees and locos coming online or what else needs to happen to get the actual rails running on time?

Yeah, Ken, great question. Yeah, I think the public measures have always been and will continue to be sort of trailing indicators. I think getting back up to the pre-service recovery levels is going to take locomotives primarily. I think we’ve got a lot of the crews, but we need 100 or 200 more locomotives here over the next few months that would take us back to those 85%, 90% level, that’s the biggest factor. That’s why on that service framework again – it takes all of those things being interrelated, but for us the red icon is power at this time. Ken Hoexter – Bank Of America Merrill Lynch: And then we can presume there is no issues with one manufacturer making them or with the new Tier 4 or anything else in terms of getting those locos?

: Ken Hoexter – Bank Of America Merrill Lynch: All right. And just a follow-up on the peer pricing. Is there, Clarence, any thoughts on the decelerating peer pricing? Given demand is so strong why we continue to see the peer pricing metric fall. It’s half a point, but just why we see that downtick?

Ken, that was mainly in one of our market areas. I think you’re going to see very robust pricing going forward. We are concentrated and focused on our pricing. So in regards to the question that Bill Greene asked earlier, pricing, you’ll see going forward being very strong and very robust for us. Ken Hoexter – Bank Of America Merrill Lynch: All right, I appreciate the time. Thanks.

Thank you. The next question is from Chris Wetherbee with Citi.

Good morning, Chris. Chris Wetherbee – Citi Investment Research: Hey, good morning. Thanks. Maybe a question on the utility coal side; just curious sort of how that restocking is playing out. Just wanted to get a rough sense of sort of how your utilities that you serve are, in terms of historical inventories or inventories relative to historical levels. Are we getting closer? How much longer do you think this plays out?

The North, Chris, is almost at their target levels. In fact, you could say they’re at target levels. The South is still building and by the fourth quarter should be at target levels. Chris Wetherbee – Citi Investment Research: Okay. So it feels like there is about one more quarter or so to get prepped, and then we‘ll see what the winter brings us.

That’s right. Chris Wetherbee – Citi Investment Research: Okay. And then my second question, just a little bit of a bigger picture stepping back and thinking about the 65% OR target. As you stand with it now and the market as it stands today, could you give us some sense of sort of what you need to see happen to get toward that target, move towards that target? You made great strides on OR in the third quarter. Just want to get a rough sense of sort of how to think about sort of the puts and takes towards getting to that 65%, and maybe a little bit of color sort of when that could potentially happen.

Sure. So obviously this is – we’ve put together two quarters now in a row below 70%. And we have said we want to move to the 65% is kind of the target that we have out there. And clearly the foundation for that is service excellence. We need to restore service to the level that we expect from ourselves and the customers expect from us. And as we do that, we think three good things will happen and we’ve seen that in the past, which is that we continue to price above inflation, and we see that the market is tightening up and we see opportunities to accelerate our pricing. Two, we continue to see a robust economic environment and we see now the positives of the new energy environment that should allow us to grow faster than the economy as a whole. And then as we get our network velocity up to the level we expect, we should also see cost coming out of the system again. Between those three, which are really the levers we’ve been pulling for an extended period of time, we see the math is pretty compelling. It gets you there over time. But over the last two years, as you’ve seen, with $800 million from coal coming out in terms of our top line, we have stood still for a period of time, as we now transition out of that period. We feel the momentum is coming back again, as we feel pretty good about where we’re heading now. Chris Wetherbee – Citi Investment Research: So natural progression over the next couple years, I guess?

Yes. Chris Wetherbee – Citi Investment Research: Okay, thank you.

Thank you. The next question is from Tom Wadewitz with UBS.

Good morning, Tom. Thomas Wadewitz – UBS Investment Research: Hi, good morning. Wanted to ask Clarence a little bit about how much visibility you have to pricing at this point. I would think that with some of the multiyear contracts that would be expiring next year, you probably would have been in negotiations at this point. Maybe you have some of those deals signed already. So can you give us a flavor of what you are seeing for pricing for 2015, just in terms of either the multiyear contracts or other business? And perhaps also what – how much has already been repriced for 2015?

We are well along in our pricing for 2015. I would tell you that in excess of 50% of our contracts that we have to renew for 2015 have been repriced. It’s looking very good. That is why I made the statement earlier that prices were going up for 2015. I felt very positive about what 2015’s pricing is looking like, it will be much more robust than you’ve seen probably in the last three to four years for CSX. Thomas Wadewitz – UBS Investment Research: So when we think about that – what more robust means, does that mean a percentage point higher? Does that mean more than that? Could it be 2 or 3 percentage points higher than the pricing you have seen in the last couple years?

It means significantly improved. Thomas Wadewitz – UBS Investment Research: Okay.

Welcome back Tom. Thomas Wadewitz – UBS Investment Research: I don’t know if that counts as my second or not. I will try to – Oscar, do you have a quick thought on the timing of the locomotives coming up? You said 300 I think is for multiple years. You need 100 to 200 more, but when do you get 100 to 200 more? Is that first half next year or?

Yeah, thanks. So yes, the early part of next year, we’ll get 100 new. Thomas Wadewitz – UBS Investment Research: Okay.

And then, we are hoping for early delivery of a couple hundred of a – of the second hundred later in the year. But we also have our internal what we call heavy repair process that should deliver roughly between 100 and 150 over that same between now and the middle part of next year. So we’ve another outlet just other than the purchases. It is just timing. Thomas Wadewitz – UBS Investment Research: Okay. That’s great. I appreciate the time. Thank you.

Thank you. The next question is from Cherilyn Radbourne with TD Securities.

Good morning, Cherilyn. Cherilyn Radbourne – TD Securities. : Thanks very much. Good morning. My question relates to Chicago. It is my understanding the rails have agreed to a series of protocols that will be triggered automatically if certain thresholds are tripped this winter. And I was just wondering if you could give us a bit of color on how that will work and how you think it will improve the industry’s recoverability?

Yes, Cherilyn, this is Oscar. Yes, certainly there is a broader set of issues and a very complex environment, right, kind of a spider network, six Class I’s, heavy commuter and passenger rail on the plays, so those require a lot of coordination. What is called the CTCO, which is in essence the terminal operating team that is represented by most of the railroads, it has been a coordinating factor there and has done a pretty good job. Remember we forget that Chicago just got slammed with a huge amount of volume which has created a little bit attention. So knowing that, knowing that another winter is coming and that heavy volumes continue, we have been working across most of the industry to sort of get CTCO to act more like a single terminal. We’re going to 24/7 operations during the period. A lot more engagement between all levels and most of the railroads again and then importantly to your question, improve the informational planning tools because for a while there was kind of word of mouth. I called you and said I was in trouble and then you tried to fix it. Or you didn’t see that problem. And so rather than taking the human aspect of that, let’s put it in a system, put it in a scorecard, if you will, and then that will drive what we call an alert status that will increase the level of interaction and coordination. So it’s a combination of people, communicating more, using tools to get facts and data so that we are not guessing. And then really there is kind of a great level of trust, desire, and capability for everyone to work together there. So it is a broad, complex environment and we are focused on getting that done for the next few months. Cherilyn Radbourne – TD Securities. : That’s great and that’s all from me. Thank you.

Thank you. The next question is from David Vernon with Bernstein.

Good morning, David. David S. Vernon – Sanford C. Bernstein & Co., LLC: Good morning. Thanks for taking the question. So, Fredrik, as you think about the incremental margin performance going forward, what do you think is the right sort of range we should be looking at into 2015? It seems like the volume driven leverage is having a good effect, and if Clarence is right you’re going to get more pricing. Should we be actually expecting the incremental margin performance to step up next year?

We’ve said that in order to get to our mid-60s target, that we need to have incremental margins above 50% this quarter depending on how you look at it, somewhere between 50% to 60%. And I think that is a good place to be as. . As you think about 15% specifically, you’re right, we’re going to have I think an improved pricing environment, but you’re also going to have a period of time, where we are going to have to essentially over resource slightly in order to get the velocity of our network up and running. So there are some puts and takes there, but you clearly have to be in the 50% to 60% range long-term in order to get to the place where we need to get to. David S. Vernon – Sanford C. Bernstein & Co., LLC: And then maybe just as a follow-up, Michael, we are talking a lot about the tightness of the rail infrastructure. And I would love to get your perspective on an industry issue which would be not specific to any type of specific deal. But do you think that consolidation across the larger Class I’s could actually improve the capacity in the network in a way that would not be achievable without further consolidation, or do think that that it is less of a reality going forward?

I think what we see out there, David, is that all the railroads are increasing their capacity similar to what we are doing. And I think those will produce the capacity needed to move America’s freight. David S. Vernon – Sanford C. Bernstein & Co., LLC: So you don’t – we wouldn’t see an extra step up in efficiency through consolidation across some of the Class I’s?

You might actually see a step back. As you know, in the past mergers there have been severe service disruptions after one of those transactions. David S. Vernon – Sanford C. Bernstein & Co., LLC: Great. Thanks very much for the commentary.

Thank you. The next question is from the John Larkin with Stifel, Nicolaus. John G. Larkin – Stifel, Nicolaus & Co., Inc: Hi good morning gentlemen, thanks for taking my question.

Good morning John. John G. Larkin – Stifel, Nicolaus & Co., Inc: Just wanted to bore in a little bit more deeply on the $16 million that was the cited cost of the congestion in the third quarter for the Company, quite a bit down from where it was in the second quarter. But that strikes me as being a relatively low number given the extent and far-reaching nature of the congestion. So as you resource up by adding more people, add all these locomotives and so forth, presumably that’s going to cost more on the other hand than the cost of congestion is costing you presently. Is that going to provide a little bit of a margin headwind over the next say two to four quarters as you go forward?

I think you are pulling on one of the reasons why we are not putting that explicit number into our earnings report at this point because the calculation itself becomes more complicated as you start to ramp up additional hiring and so forth. But if you look at where were again in the third quarter while we’ve had some additional people in training the big driver really was the difference in terms of how we’ve sourced our locomotives for the quarter. And so it has come down because it is a lot cheaper to get our leases, the use leased locomotives versus the foreign horsepower. And as you think about the next couple of quarters, to your point, there will be incremental cost that will come in as we bring on additional locomotives, as we bring on additional maintenance for those and additional hiring that we are doing. So I think that’s a fair point.

But then again, all those resources, again remember, investment equals better service and service equals better volume and margins. And that is the reason why we do all this. And I think other than just bringing on equipment our process, we are spending a little bit better. Again, the indicators you see out there are trailing and you will be to see more of the financial, better financial impact here over the next couple of quarters. John G. Larkin – Stifel, Nicolaus & Co., Inc: Thank you for the answer. Just maybe as a follow-on. A while ago you shifted to the fixed and variable cost pricing approach for utility coal contracts, volume has spiked as utilities have scrambled to sort of replenish their inventories and stockpiles. Has the fixed and variable pricing model worked the way you thought it would? And was one of the reasons why you’re able to pick up a little competitive market share that you touched on just briefly during your formal comments?

John, this is Clarence. One, it has worked the way we expected it to work. And two, it is not the reason we made a competitive pick up. John G. Larkin – Stifel, Nicolaus & Co., Inc.: Okay. Thank you.

Thank you. The next question is from Jeff Kauffman with Buckingham Research.

Good morning, Jeff. Jeffrey Kauffman – Buckingham Research: Hey, good morning guys. Thanks for taking my question, and congratulations. Two questions, one financial and then one a follow-up to the system fluidity question. Fredrik, how have these changes in investments affected your capital budget thoughts for 2014 and 2015? And can you address the drag on operating cash flow from the reversal of bonus depreciation? How much is that weighing on operating cash flow and will that change as we get into 2015?

Sure. In terms of capital, I think we have a better idea in the fourth quarter, but clearly because of the locomotives we’re going to be purchasing next year. We’re probably looking at the higher end of the 16% to 17%, probably around 17% realistically. In terms of the cash flow, just ask me that question again? Jeffrey Kauffman – Buckingham Research: Well, a bonus depreciation reversed and that’s been a drag, I thought, of about $200 million to $300 million on operating cash flow. And I was just wondering if we’re going to start to mitigate that in the next year or two and what that drag is likely to be.

Sure. So next year I think will be the height of that drag. We’ve started seeing a little bit here in this year, but next year essentially our cash taxes will be almost at the statutory rate, so 36%, 37%. There won’t be many opportunities to defer taxes next year because of the fact that we’ve enjoyed that bonus depreciation for so many years. But as you move into 2016, you will start building up some of that depreciable base again. Now all of this assumes that bonus depreciation will not be extended, which there is still some talk about. But right now it looks like about $250 million or so, $250 million of impact on our cash flow year-over-year just from the fact that bonus depreciation is going away in 2015.

This is Michael. I’d just add. When I go to DC, I think the general sentiment is they probably will do the tax extenders before the end of the year. Jeffrey Kauffman – Buckingham Research: Okay. And then, Mike, a thought question. A lot of people that invest in the stock today weren’t around in the 1990s when we had the service issues and that led to the STB’s merger moratorium and then the new rules. I heard your answer to the earlier question that consolidation would probably muck up the system. But in terms of the concept of consolidation there was a reason the STB made it tougher. Do you think in this environment when service across the industry is struggling that the argument can be made that service would be better as a result of consolidation? Or that any large consolidation could even be likely in this environment?

Well, I think all this is very speculative, but as you know, the STB is very concerned about the service levels being produced by the industry with this surge of business. And it even asked for new reports on a weekly basis to monitor that. So I might speculate they would be very cautious about this because in the past they have created disruptions and the industry is already somewhat slowdown by this tremendous growth in the volumes. Jeffrey Kauffman – Buckingham Research: So you would argue that the regulators would be very skeptical in this environment anyway?

That would be my speculation, but you’d probably be better to ask them. Jeffrey Kauffman – Buckingham Research: :

Thank you. The next question is from Scott Group with Wolfe Research.

Good morning, Scott. Scott Group – Wolfe Research: Hey, good morning, guys. Fredrik, if we take out the liquidated damages this quarter and a year ago, you still saw a pretty big increase in other railway revenue. Can you give us some color on what that was and if that is sustainable or not, how we should model that going forward?

Yes. If you look at where we are on other revenue, I think there is couple other drivers if you look at a year-over-year clearly, we are seeing a little bit of higher incidental revenue predominantly in intermodal, because of the tight capacity environment that we find ourselves in we see some of the subsidiary railroads have done a little bit better, than they did a year-ago. And then last year was a little bit depressed because of some of the revenue adjustments that we had, so, that kind of explain it. So I would say that this quarter was a pretty good run rate. I think historically I have said $80 million to $90 million is probably a good place to be, we were slightly above that here this quarter. But somewhere around $80 million to $90 million is probably a good place to be in other revenue, excluding any liquidated damages. Scott Group – Wolfe Research: That is great. And then the guidance for next year, if I remember when you first laid it out for us there was this assumption that coal would stabilize. And now you don’t add that caveat as much about coal stabilizing. So do you think you need coal to be flat next year? Or is there enough going on in pricing and merchandise growth where you can still get to the double-digit earnings growth next year even if coal gets worse next year?

I think we’re trying to stay away from any specific market and try to predict what it will do, because as we try to do that in the past, we found ourselves that we usually are wrong, either good or bad for that matter. And so, we try to stay at a high level. As we look at next year, we still feel that double-digit is the right place to be. But clearly there are lots of pluses and minuses. We got the fact that the macro environment, as I said earlier, is positive. We’ve got a tightening capacity environment that should be helpful in the pricing side. But then you do have export coal and you do have the fact that we need to see the cost coming out of the system as short-term over resource but then see the cost coming out. And then the thing that you don’t know what is going to happen is obviously weather. We just don’t know the impact on weather both in terms of utility coal stockpiles and we don’t know whether in terms of the impact of our network performance. So take all that together and when we add that and we’ll look at it and we still say that double-digit is the right place to be. Scott Group – Wolfe Research: Okay. Thank you guys.

Thank you. The next question is from Jason Seidl with Cowen.

Good morning Jason. Matt Elkott – Cowen and Company: Good morning, this is actually Matt Elkott for Jason. Thank you for taking our question. I want to go back to the locomotive topic. My question is assuming current freight demand levels, when you guys start receiving the new locomotives is the focus going to be on moving more freight or is it moving similar freight levels more efficiently?

Yes and yes I think. It’s an interesting question, but, no, absolutely. I mean, I think there is – whatever pent-up demand in customers that we have some areas where we can easily use more power will generate more business. But also importantly, to sort of turbocharge our system to spin more rapidly. So it will be useful for both of those areas. Matt Elkott – Cowen and Company: Okay. And just a quick follow-up on the export coal topic, have you guys had to do more on the rate front in order to keep producers competitive with your fixed variable structure?

Matt, this is Clarence Gooden. First, we don’t have fixed variable rates in the export coal. But to answer your question I think you were driving at, we said earlier on last quarter’s call and to reiterate on this one, we are at the bottom on the export rates. So we’re doing nothing, we are as low as we can go everything from here forward is up. Matt Elkott – Cowen and Company: Okay, great. Thank you very much.

Thank you. The next question is from Ben Hartford with Robert W. Baird.

Good morning, Ben. Benjamin Hartford – Robert W. Baird & CO.: Good morning guys. I guess this is for Oscar. I just want to get a little bit more specific in terms of service expectations. You had talked about gradual improvement and I think Fredrik had talked about returning to service levels that you and your customers expect. I’m just wondering more quantitatively what does that mean. Do you think that – if we use the high watermark of train velocity for let’s say it was 2013, is it reasonable to expect that you can get back to those levels, the cycle, and we can define a cycle for as long as we need to? I mean, 2015, can train speed velocity get back to 2013 levels? Is that a realistic target? Do you think that – have you seen enough to think that surpassing those levels is unreasonable as well? I’m just trying to get a perspective on how quickly and how fully we should expect service to be restored.

I think to reiterate what was said before it is a gradual and not linear as we go into really the first half of 2015. I think after that fact I think – again, these things being trailing indicators, you’ll begin to see them markedly increase and, yes, to previous levels and not necessarily static of that. I think as we spend more – we had two record years before this particular issue. I think it’s easy to forget that. But I think once we get past this, really this power resource and again our volume sort of begins to stabilize as opposed to the surges that we’ve had. I think it’s important. I’ll tell you, the confidence that I have from seeing all this just in this quarter alone, July we had about 14% GTM growth and that’s a month where everyone takes off for vacation in our employee workforce in the union. And we struggled with that. I mean that was a power and crew issue. In our business the ability to recover is critical. And the fact that in this quarter you’re seeing the results that we have, given the fact that a good four to six weeks was really a struggle period, I think sort of gives me the confidence that our recoverability process is there. Even with limited resources. So as we get more I think we’ll improve again gradually, but not necessarily linear. Benjamin J. Hartford – Robert W. Baird & Co.: Okay. And then, I guess, just a follow-on on that point, in terms of the employee count, it did, growth on a year-over-year basis did accelerate modestly through the quarter. Is there an idea when that growth rate will peak and then begin to decelerate?

I think we expect by the end of this year to be up about 2% and I think you’ll see a slight increase in the first quarter as well. But it is nothing significant. The predominance of our hiring right now is in the T&E ranks and some on the support side and the mechanical side. But it is not a significant increase. Benjamin J. Hartford – Robert W. Baird & Co.: Okay, thank you.

Thank you. The next question is from Keith Schoonmaker with Morningstar.

Good morning. Keith Schoonmaker – Morningstar Inc.: Yes, kind of a question also related to crewing and labor. Longer-term question. What portion of TD labor works on hourly contracts now and do you see moving to hourly based compensation as beneficial for productivity and quality of life?

I don’t think in terms of our T&E folks we have any hourly workforce. I think that obviously that could be a benefit. The question is ultimately what you have to do in order to make that work economically with the unions as you do go through those negotiations. Keith Schoonmaker – Morningstar Inc.: Maybe, Fredrik, I could switch to a CapEx question in light of the locomotive orders in your remarks that around 17% will be invested next year in CapEx. There’s been a big slug of CapEx with PTC and maybe can you give us a quick update on where the spending is this year and next? And do you expect that CapEx would remain still in the 16% or 17% range even after PTC is fully invested at least for the heavy capital portion?

Yes. So, PTC is above our core capital guidance, so that’s 16% to 17% – around 17% next year excludes PTC. If you look at PTC in itself, we are spending about $300 million this year and by the end of this year we will spend about $1.2 billion. We’ve said that cost is approximately $1.7 billion in total at least. And we will probably spend somewhere in the neighborhood of the same amount we’re spending this year next year, and then it will start coming down after that. Keith Schoonmaker – Morningstar Inc.: Okay, great. Thank you.

Thank you. The next question is from Walter Spracklin with RBC.

Good morning, Walter. Walter Spracklin – RBC Capital Markets: Thanks very much. Good morning everyone. So two questions here, one for, I guess Clarence, one for Oscar. And, Clarence, just really a clarification on your fourth quarter outlook in particular for domestic coal and ag. Given the change in compares going into the fourth quarter 2013 they’re quite substantial. I mean you did 15.5 million tons in fourth quarter of 2013, but you are running at a 20 million run rate this year. To say that it’s favorable, I mean it would have to be up 25% to 30% to maintain the 20 million run rate. So are you indicating that we should look at some kind of seasonal drop in the fourth quarter, or do we run it at that kind of 20 million clips that you’ve been experiencing this year even though it means up 25%, 30% year over year?

You’re talking about coal? Walter Spracklin – RBC Capital Markets: Utility coal, domestic utility, yes.

Oh, domestic utility coal. Walter Spracklin – RBC Capital Markets: I mean, you’re 15.5 million fourth quarter 2013, but 20 million last quarter. So, I mean, if we are favorable, yes, up year-over-year you’d have to be really up 25% to 30% to maintain 20 million tons. Just curious if that’s what you are guiding. Are you guiding kind of continued 20 million or are we looking at a rather substantial downtick given the seasonal nature of the fourth quarter if seasonal at all?

Well, I’m not looking at it on my sheet here in terms of tons. I was looking at it in terms of percentages, but I’m guiding you to strong, a very strong fourth quarter in coal on a year-over-year basis. Walter Spracklin – RBC Capital Markets: Right, okay.

Utility coal. Walter Spracklin – RBC Capital Markets: Utility coal, okay. And I guess the same question kind of is for ag, right, except the flipside, you had a very strong fourth quarter last year, 113,000 carloads. This year you’re – I mean this quarter you’re 98,000. So flat would mean a significant downturn in the ag. Just curious if you are guiding us here relative to third quarter or relative to last year’s fourth quarter?

Relative to the last year’s fourth quarter. Walter Spracklin – RBC Capital Markets: Okay, all right. Oscar, just a follow-up on the congestion side. You indicated that there are lots of opportunities that you have internally, all the railroads have internally to increasing capacity through your own strategies. At what point does that get exhausted? In other words, when you’ve exhausted a good degree of your own capacity expansion issues or initiatives, where does the next pinch point come up?

Michael, let me tackle that. I think what we find is we have a fair amount of ability to continue to expand, a fair amount of our network is single track. We can add a second track to that, in fact a long passing siding and making it double track. So we have the ability on our line of road to incrementally add capacity and we are in the areas that are growing. So I think the horizon with which railroads can continue to increase their capacity on their own, I think is fairly long-term. Walter Spracklin – RBC Capital Markets: Okay. So you are saying the next pinch point, several pinch points are all kind of inter – or intracompany, not necessarily between interchange points of Chicago or with your supply chain partners, anything like that?

Well as Oscar said earlier, Chicago is complex and it is always going to be complex and we’re working cooperatively to increase the throughput there. But I think your categorization and most of the needs to create capacity are internal to the existing individual railroads. Walter Spracklin – RBC Capital Markets: Okay. Thank you very much.

Thank you. The next question is from Justin Long with Stephens.

Good morning, Justin. Justin Long – Stephens, Inc.: Good morning. Thanks for taking my questions. First one I wanted to ask was on intermodal margins. You’ve talked over the last few quarters or so about how they’ve caught up to other commodity groups with the exception of coal and chemicals. But as you look out over the next several years and think about the opportunity to get price and also build density, do you think that intermodal margins can be significantly better than the non-coal, non-chemicals businesses?

Well. Certainly, intermodal margins are going up. They’re going up for a couple of reasons. The trains are getting longer. The double stack clearances are obviously helping getting more density on the trains. The efficiencies that we have in the newer and more modern terminals with the automation that made the margins better. And frankly the price increases that we are getting in the marketplace now both in our international business and in our domestic business has got a long way towards improving those margins. So I think you’ll see margin improvement in the intermodal marketplace as we move forward. Justin Long – Stephens, Inc.: Okay. And second question I wanted to ask – I know there is several intermodal terminal projects on the network you mentioned Montreal, the expansion at Northwest Ohio in the prepared comments. But is there any way you could quantify how much capacity the current intermodal terminal projects that are underway will add your network.

Well. I don’t have those numbers right in front of me, but we can make them available to you. Justin Long – Stephens, Inc.: Okay, great. I will just follow-up on that. I appreciate the time.

Okay.

Thank you. And our final question today is from Cleo Zagrean with Macquarie Capital.

Good morning, Cleo. Cleo Zagrean – Macquarie Capital: Thank you very much for taking my question. Good morning. My first question is about the outlook for rates on coal. You have already stated that you see the export rates only going up from here in terms of your stance. What do you – where do think we should see coal rates all add up to when we also consider the impact of fixed variable contracts on the domestic front and any mix issues?

Well, I think Clarence – this is Michael, I think Clarence actually said that the export rates will not go down anymore. I think they won’t go up unless we see a change in the world marketplace. So he was not saying they’re going to go up, he was saying they would not go down anymore. On the domestic side, Clarence, maybe you could address what you are seeing there.

On the fixed variable, obviously as the tonnage goes up on that part of the fixed variable, and about a third of our contracts are under fixed variable, the average RPU will go down as the volume goes up. If the volume stays flat next year then you will see the rates will stay the same. If the volume goes down then the RPU will go up next year.

But your base pricing is going up.

But the base pricing itself is going up. Cleo Zagrean – Macquarie Capital: Thank you. And my second question was with regards to EPS guidance. Prior to today, I think as of last quarter or even the most recent conference, you were saying that you expect to return to double-digit EPS growth beginning in 2015. And I would have taken that to mean that’s the beginning of a series of years. Now you are saying you expect double-digit growth in 2015. Should we take this to mean any kind of change in long-term guidance for EPS beyond 2015? And any other comment you would like to make for beyond 2015 I would greatly appreciate it. Thank you.

No, I think that overall our guidance has been 2015, I think we tried to stay away from longer-term guidance than that because of the fact that it’s hard to predict. But our overall arching goal is to getting our operating margins is down to the mid-60s and that’s the longer-term guidance that we have, but so there’s no change in guidance from that perspective. Cleo Zagrean – Macquarie Capital: Thank you very much.

Thank you. Thank you everyone. We’ll see you again next quarter.

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