聯合太平洋集團 (UNP) 2012 Q4 法說會逐字稿

Greetings and welcome to the Union Pacific fourth-quarter 2012 conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded and the slides for today's presentation are available on Union Pacific's website.

It is now my pleasure to introduce your host, Mr. Rob Knight, CFO for Union Pacific.

Thank you, Mr. Knight.

You may now begin.

Good morning, everybody.

This is Rob Knight, and welcome to the Union Pacific fourth-quarter earnings conference call.

Unfortunately, Jack Koraleski is ill with the flu today and will not be joining us.

But here with me in Omaha are Eric Butler, Executive Vice President of Marketing & Sales, and Lance Fritz, Executive Vice President of Operations.

This morning, we are pleased to announce that Union Pacific set a new fourth-quarter earnings record of $2.19 per share, an increase of 10% compared to 2011.

This record also tied our best-ever earnings performance, set in the third quarter of 2012.

Our diverse portfolio of business, solid core pricing gains and efficient network operations drove these results despite significantly weaker coal and grain markets.

Although it was a challenging year on many fronts, 2012 was Union Pacific's most profitable year in our 150-year history.

It is a testament to the strength and diversity of our franchise, the dedication and commitment of our employees and our unrelenting focus on creating value for our customers.

The results are reflected in record achievements that we've made this quarter in both employee safety and customer satisfaction.

Putting it all together, it translates into increased financial returns for our shareholders.

With that, I will turn it over to Eric Butler.

Thanks, Rob, and good morning.

Let's start with a look at customer satisfaction, which came in at 93 for the quarter, a one-point improvement over last year.

That continued the strong performance we saw throughout 2012, with customers' evaluation of our value proposition up one point from 2011 to 93 for the full year, setting a new best-ever mark.

We appreciate this recognition from customers and remain focused on driving further improvement in our value offering going forward.

As expected, some of our key markets were challenged in the fourth quarter, and as a result, overall volume was down 2.5%.

While Chemicals, Automotive and Intermodal and grew and Industrial Products was flat, it wasn't enough to offset the tough market conditions that drove deep declines in Coal and Ag products.

The softening of coal demand continued to significantly impact growth.

Setting the 17% decline in coal-loading aside, the other five groups grew 2% despite the shortfall in Ag.

Core price improved 4%, which combined with increased fuel surcharge revenue, produced nearly a 5% improvement in average revenue per car.

With price-driven average revenue per car gains outpacing the volume declines, freight revenue grew 2% to $4.9 billion.

Let's take a closer look at each of the six groups, starting with the two that saw declines.

Coal was down 17% as high coal stockpiles created by a sluggish economy and low natural gas prices continued to dampen demand.

A 12% improvement in average revenue per car held the revenue decline to 7%.

With the weakened demand, Southern Powder River Basin tonnage declined 19%.

Also contributing to the decline was the continued impact of contract losses, which more than offset business wins.

Strong global demand for high BTU coal drove a 6% increase in Colorado/Utah tonnage despite a softer domestic market due to low natural gas prices.

New business also provided a boost.

Late in the quarter, much-publicized low water levels on the Mississippi curtailed some shipments from both of these origins, but with relatively small impact on the overall volume shortfall.

Before we move on to Ag, note that this slide clearly shows the challenging comp we have in coal volumes year-over-year in the first quarter.

Ag products' volume was down 9%, mix-driven average revenue per car was flat and revenue declined 8%.

The 22% decline in car loadings was driven by last summer's drought, which unfortunately had its greatest impact in UP-served territories.

The resulting tight supply of corn has reduced the livestock counts and lowered domestic feed grain shipments, with increased reliance on local crops in East Texas and Arkansas also impacting our volumes.

Feed grain and wheat exports also declined with improved world supply and higher US prices.

Grain product shipments declined 6%, with reduced demand for gasoline and high corn prices curtailing ethanol production, driving a 17% decline in ethanol shipments.

Food and refrigerated shipments offered some good news, growing 8%.

The 78% increase in sugar shipments driven by a spot opportunity was a big contributor, while malt and barley carloads increased over 40%.

Our automotive volume grew 9%, which, combined with the 5% increase in average revenue per car, produced a 14% increase in revenue.

Pent-up demand and improved credit availability again drove sales in the fourth quarter, with year-end incentives also providing a boost as the auto industry's growth rate continued to outpace the overall economy.

With consumer confidence reaching a 54-month high in November and new vehicles offering more features and improved fuel efficiency, many continued to find it a compelling time to buy.

For the quarter, UP finished vehicle shipments grew 7%, with parts volume up 13%.

Chemicals' volume increased 14%, mix-impacted average revenue per car was flat and revenue grew 15%, leading the way again with petroleum products, where a 69% increase in volume was driven by over 160% growth in crude oil.

As has been the case all year, while crude oil is seeing substantial growth, other Chemicals segments continued to put up solid if more modest numbers.

Industrial chems grew 8%, plastics boosted by new business and solid export demand was up 7%, and soda ash grew 4%, with growth in the export market.

Dampening the good news was an 8% decline in fertilizer, primarily driven by soft international demand for potash.

Industrial Products' revenue increased 3%, even as volume remained flat, driven by a 3% improvement in average revenue per car.

Rock shipments grew 14% with increased construction activity, mostly in the Houston area, which also contributed to a 16% growth in cement volumes.

Lumber shipments were up 17% as housing starts showed solid year-over-year improvement.

Nonmetallic minerals saw modest growth, up 2%, but a number of other industrial markets faced some challenges in the quarter.

Hazardous-waste volumes fell 48% as the ramp-down of government funding again impacted our uranium tailing shipments.

Excluding this decline, our Industrial Products volume would have been up 2%.

A drop in gas-related drilling activity, lower steel mill utilization and softer demand for export scrap was reflected in a 9% decline in steel and scrap.

Continued mine production issues hampered export iron ore shipments, leading to a 28% drop in metallic minerals.

Intermodal revenue grew 6% as a 5% improvement in average revenue per unit combined with a 2% increase in volumes.

International Intermodal was flat, with a relatively weak peak season.

The November strike at the Los Angeles and Long Beach ports had minimal impact.

Domestic Intermodal shipments grew 4%, with continued success in converting highway freight to rail in both containers and trailers.

I will close with a look at how we see our business shaping up in 2013.

Even with an uncertain economic outlook, our diverse franchise still provides opportunities to grow.

As in the fourth quarter, the biggest challenges are expected to be tough market conditions in Coal and Ag products.

High coal stockpiles are expected to hamper recovery, and coal demand and the loss of one legacy contract beginning this year will also have an impact.

That combination would likely drive a slight decline in Coal volume for the year, despite expected continued growth in export volumes as global demand remains strong.

We expect the first quarter to see a steeper decline, likely in the midteens, driven by the high stockpiles, with some additional impact from continued low river levels.

Diminished 2012 grain crops should impact Ag Products throughout the first half, with first-quarter volume expected to be down in the high-single-digit range.

Hopefully, we will see a return to trendline yields when the crops come in later in the year, which should offer some opportunities.

Food and refrigerated is expected to see slow growth.

Automotive volumes should keep pace with the auto industry's expected growth.

Crude oil is expected to continue as one of our strongest growth markets, but the pace will ease against 2012's larger base.

Most other chemicals market should remain solid and we are expecting fertilizer to start growing again.

An improved housing market should boost lumber shipments and growth in construction is expected to support increases in rock, metals and other related markets, with metals also benefiting from the projected growth in the auto industry.

Anticipated shale growth will also give our metals and minerals a boost.

On the downside, we expect the falloff in wind business, reduced military shipments and a diminished federal funding should again impact hazardous waste.

Highway conversion should continue to drive domestic Intermodal.

International Intermodal may be challenged in the first half by the economy, but a stronger economy and improved housing market are expected to produce opportunities in the second half of 2013.

Our strong value proposition will again support business development efforts across all six groups, with highway conversion opportunities playing a role in both our Carload and Intermodal businesses.

Across the groups, we will continue to develop opportunities in Mexico, where our unparalleled ability to link their stronger economic growth and US origins and destinations is the strength of our franchise.

I mentioned the 2013 legacy contract loss, but we successfully retained and repriced 80% of the $350 million we competed for, providing a solid foundation for our 2013 price plan.

As a result, while we are cautious, we expect a slight volume increase to combine with price gains to drive profitable revenue growth.

With that, I will turn it over to Lance.

Thank you, Eric and good morning.

So let's start the operating update with safety.

We achieved another all-time record-low reportable personal-injury rate in 2012, which was 12% better than 2011 and our fifth consecutive year of improvement.

Training, process improvements, capital investments and total safety culture combined to further reduce our environmental and behavioral risk.

We've also reduced the severity of injuries to a record low this year.

Moving to rail equipment incidents, or derailments, our full-year reportable rates improved 2% compared with 2011.

Yard and industry track derailments, a major focus of the operating team, improved year-over-year.

Track-caused derailments declined considerably, reflecting the investments we've made in maintaining our infrastructure.

In public safety, the grade crossing incident rate increased 13% in 2012.

As I've mentioned before, the combination of increased rail traffic in the South, which has a higher grade crossing density than our overall network, and growth in highway traffic, which is driven by increased economic activity in parts of our network, has increased our grade crossing incident exposure.

On the positive side, we've made progress identifying and isolating high-risk locations and improving or removing crossings of concern.

We are starting to see a turning point, and although we still have a significant amount of work to do, I think we are moving in the right direction.

Our safety strategy helps keep our networks strong and resilient, and as a result, we are operating an efficient and fluid network, which is reflected in the 4% improvement in velocity compared to 2011.

In fact, we came very close to matching our fourth-quarter record set in 2009 despite running 9% higher volumes.

This year, we've clearly demonstrated agility and resiliency in managing through the shifts in mix, including growth in manifest and premium volumes in the South and lower coal shipments in the North.

Our improved network performance has been driven by a combination of process efficiency gains and capacity and expansion objects.

The process improvements reflect our execution of lean manufacturing principles, which we call the UP Way, which engages our entire labor force in the design and implementation of standard work.

Our service scorecard illustrates UP's customer value proposition.

The local operating teams continue to provide great service, as reflected by industry spot and pull, which set a best-ever fourth-quarter record of 95%.

The fourth-quarter Service Delivery Index, which is a measure of how well we are meeting overall customer commitments, also improved from 2011.

The Service Delivery Index is leveraged by the fact that we periodically improve service commitments to our customers.

In other words, the 89 in 2012 is measured against a more difficult standard than the 89 in 2008, reflecting our commitment to constantly improve the service product for our customers.

Moving on to network productivity, fourth-quarter slow-order miles improved to an all-time record low, down 31% from last year.

Our network is in excellent shape, reflecting the investment of replacement capital that has hardened our infrastructure and reduced service failures.

As we exited 2012, over 99% of our railroad was free of slow orders.

Moving to the upper right, car utilization improved 5% year-over-year, reflecting the improvement in network velocity and fluidity, and just shy of our all-time quarterly record set in 2009.

In the lower left, Intermodal train length grew to a fourth-quarter record of 174 boxes per train, improving 2% compared to 2011.

Manifest train length is also holding strong, given that much of the manifest growth occurred in the South, which is the most constrained area of our network.

We've used the UP Way to reduce variability in our operations, while increasing the role every employee plays on their work teams.

Employee engagement is critical to our operating strategy and has had a significant impact.

Our employees are utilizing their expertise to standardize their work and to remove variability.

To expand a bit more on growth in the South, fourth-quarter volumes in the South were up 3% versus 2011 and up 5% for the full year.

Traffic in the South has returned to pre-recession levels.

We've met the challenge with agility, repositioning horsepower and manpower to adapt to shifting demand.

We have adjusted car routings to leverage available terminal capacity and modified train starts to maintain fluid operations and to increase local service frequency.

While the UP team is successfully managing the carload surge in the South, we have growth capacity in other parts of the system, with about 800 employees furloughed and around 1000 locomotives in storage.

In addition, the capital investments we continue to make in the South are generating an excellent return and are having a positive impact.

They support our diverse book of business, including increased shale-related volumes, Gulf Coast chemical traffic and growing Mexico and Intermodal business.

Moving on to this year's capital plan, for 2013, we are planning to invest around $3.6 billion, which is down slightly from the $3.7 billion mark that we spent in 2012.

Our spending for 2012 was slightly higher than our $3.6 billion projections, as we took advantage of mild weather conditions during the fourth quarter to further advance some projects.

More than half of our planned 2013 capital investment is replacement spending, while approximately $1 billion will be invested in service, growth and productivity projects.

Capacity, commercial facilities and equipment are the primary drivers.

Major projects include work on the Santa Teresa, New Mexico facility, which should be completed by early 2014, and continuation of various projects in the South to support our diverse and growing book of business in that region.

We are buying 100 new road locomotives under our long-term purchase commitment, which is part of our Tier 4 strategy.

We also plan to acquire around 900 freight cars to serve as replacement for older assets and to meet expected business growth.

In addition, we are increasing our positive train control spend this year to approximately $450 million.

Through 2012, we've invested nearly $750 million of our estimated $2 billion projected spend.

Although it is unlikely the industry will meet the 2015 deadline, we are making a good-faith effort to do so and working closely with regulators as we implement the new technology.

In summary, we feel very good about our overall performance in 2012 and the improvements we've made in light of the dynamic market and geographical shifts.

Our network is strong, fluid and resilient.

We are going to carry that momentum forward and continue to focus on those critical areas that will drive further improvements, achieving record safety results driven by the commitment to value safety above all, driving year-over-year service and productivity improvements by engaging all of our employees through the UP Way and providing customers with a value proposition that supports growth with high levels of service.

We will take advantage of growth where it shows up, but effectively manage the network and resources if it doesn't.

And we remain well-positioned to handle dynamic shifts in volume while generating continued productivity gains and great returns on our invested capital going forward.

With that, I will turn it back over to Rob.

Thanks, Lance.

Let's start by summarizing our fourth-quarter results.

Operating revenue grew 3% to a fourth-quarter record of more than $5.2 billion, driven by core pricing gains and increased fuel surcharge recovery.

Operating expense totaled $3.5 billion, increasing 1%.

Operating income grew 7% to $1.7 billion, also setting a best-ever fourth-quarter record.

Below the line, other income totaled $43 million, down $11 million compared to 2011.

Interest expense of $128 million was down 9%, driven by lower average interest rates and some capitalized interest.

Income tax expense increased to $604 million, mostly driven by higher pretax earnings.

Net income grew 7% versus 2011, while the outstanding share balance declined 3% as a result of our share repurchase activities.

These results combined to produce a fourth-quarter earnings record of $2.19 per share, up 10% versus 2011.

Turning now to our top line, freight revenue grew 2% to $4.9 billion.

Volume was down about 2.5 points.

Revenue mix was also unfavorable, driven by lower grain shipments and growth in shorter length-of-haul stone moves.

Higher fuel prices and a positive lag impact on recovery drove higher fuel surcharges, adding roughly one point in freight revenue growth.

In addition, we saw the benefit from legacy contracts renegotiated in late 2011 and early 2012 that expanded our fuel surcharge coverage.

This generated an additional half point of revenue growth.

The impact in the fourth quarter was less than the full point of revenue growth that we saw earlier in the year, as we lapped some of those legacy renewals during the fourth quarter.

We also achieved solid core pricing gains of 4%, which was a key contributor to our fourth-quarter financial performance.

Lower coal volumes again hindered further pricing gains.

Moving to the expensive side, slide 23 provides a summary of our compensation and benefits expense, which decreased 2% from 2011.

Lower volume costs and solid operations more than offset higher training costs and modest inflationary pressures.

In addition, we received an IRS refund of around $20 million in payroll taxes, which also drove costs lower in the fourth quarter.

Workforce levels increased 2.5% in the quarter, mostly driven by more employees in the training pipeline and increased capital and positive train control activities.

As you recall, we tempered hiring a bit in the fourth quarter of 2011 based on expected volume levels and mix shift.

In 2012, labor inflation came in around 2.5%.

For 2013, we expect it to be a bigger hurdle, around 3%.

Also, our workforce levels, excluding capital, should grow in 2013 if volumes increase, but not at a one-for-one rate.

Turning to the next slide, fuel expense totaled $920 million, decreasing $15 million versus 2011.

Cost reductions driven by a 5% decline in gross ton miles more than offset the impact of a 3% increase in our average diesel fuel price versus 2011.

In addition, our consumption rate increased 1%, driven by lower coal volumes.

Purchased services and material expense increased 5% to $533 million due to higher contract expenses incurred by our logistics subsidiaries.

The revenue generated from these expenses is reflected in our Other revenue line.

Joint facility maintenance expense and locomotive repair expense also increased this quarter.

Depreciation expense increased 10% to $453 million, mainly driven by increased capital spending programs.

In 2013, depreciation expense will continue to increase, but not at the 9% rate that we saw for the full year 2012.

The combination of a favorable rate study and lower gross ton miles will result in an increase of around 3% to 4% versus 2012.

Slide 26 summarizes the remaining two expense categories.

Equipment and other rent expense totaled $302 million, up 4% from 2011.

Growth in automotive volumes drove higher freight car rental expense, which was partially offset by lower locomotive lease expense.

Other expenses came in at $182 million, down $9 million compared to 2011.

It was a little bit better than what we had projected in October, in part due to lower-than-expected volumes.

Lower equipment, property and freight damage expense, as well as other cost control measures, also contributed to this decrease.

Conversely, personal injury and property tax expense increased compared to 2011.

For the full year 2013, we expect the Other expense line to be more in the neighborhood of $225 million a quarter, barring any unusual items.

Higher property taxes and challenging year-over-year comps in personal-injury expense will add upward pressure in addition to any volume related expenses.

Now let's turn to our operating ratio performance.

We achieved a record fourth-quarter operating ratio of 67.1%, improving over a point compared to last year.

On a full-year basis, we generated a best-ever 67.8% operating ratio, the first sub-70% performance in our history.

Our performance highlights the positive impact of solid core pricing gains, growth in attractive new businesses and continued focus on productivity initiatives.

And this improvement was accomplished without the benefit of any volume growth.

Looking ahead, we remain committed to achieving our sub-65% operating ratio target by 2017.

Slide 28 provides a summary of our 2012 earnings with a full-year income statement.

I'll walk through a few of the highlights from our record-setting year.

Operating revenue achieved an all-time record of $20.9 billion.

Operating income also set a new best-ever mark of $6.7 billion, topping 2011's record by over $1 billion, dollars or 18%.

And net income of $3.9 billion and earnings per share of $8.27 also set new historic annual records.

Union Pacific's record full-year earnings generated strong free cash flow, up $1.4 billion, which reflects over $560 million more in capital spending and a 37% increase in cash dividend payments versus 2011.

In addition, cash from operations of nearly $6.2 billion includes more than $900 million in higher cash tax payments.

Over half of that was driven by the catch-up of prior years' bonus depreciation programs and a lower bonus depreciation rate in 2012 versus 2011.

On a positive note, we'll see the benefits from a new bonus depreciation program in 2013, which will drive an added boost to free cash flow of around $400 million this year from what we previously discussed with you in October.

The net benefit, which includes the impact from prior years' programs, will be roughly the same in 2013 as it was in 2012.

Our balance sheet remains strong, supporting our investment-grade credit rating.

At December 31, 2012, our adjusted debt to cap ratio was 39.1%, lower than this year's trend due to the pull-ahead of $450 million in debt maturities from the first quarter of 2013 to the fourth quarter of 2012.

Slide 30 shows our full-year 2012 capital investments of $3.7 billion.

Our preliminary capital plan for 2013 is around $3.6 billion, down slightly from the 2012 levels.

While spending on positive train control is growing, we'll be spending less on locomotive acquisitions this year.

The chart on the right reflects our achievements in generating returns on these investments.

Return on invested capital was a record 14% in 2012, up over a point and a half from 2011.

Returns must continue to improve to support the significantly higher asset replacement costs and investments required to achieve our safety, service and growth initiatives.

Beyond funding our capital programs, our record profitability and strong cash generation have enabled us to grow shareholder returns.

After increasing our dividend per share 58% in 2011, we raised it an additional 15% last year.

For 2012, our declared dividends totaled $2.49 per share, achieving our target payout ratio of 30%.

In addition, we continued to make opportunistic share repurchases, which play an important role in our balanced approach to cash allocations.

In the fourth quarter, we bought back over 2 million shares at an average purchase price of around $122 per share.

Full-year purchases totaled 12.8 million shares, averaging $115 per share.

Combining dividend payments and share repurchases, we returned over $2.6 billion to our shareholders in 2012, up 16% compared to 2011.

Looking ahead, we have about 15 million shares remaining under our current authorization, which expires March 31, 2014.

So that is a wrapup of 2012.

We are now focused on the opportunities and challenges of 2013.

As we discussed at our October Investor Day conference, we are cautious on the economic outlook for this year.

We are expecting many of the same challenges that we faced in 2012.

We will be working through these issues, including the dynamics of the domestic energy markets and the carryover impact of the drought.

We are also focused on Washington as they work through the various fiscal challenges.

We will be watching to see how it impacts what we currently see as a gradually improving economy.

But if industrial production grows at around 2%, as projected, we would expect the strength in other areas to offset the shortfall in coal, driving slightly positive volume growth for us this year.

That said, we successfully navigated through the complexities of 2012 and will continue to follow that same strategy in 2013.

We will remain agile and leverage the strengths of our diverse franchise.

As we look out over the year, we are expecting to see a stronger second half relative to 2012.

We are clearly going to have our challenges in the first quarter with very tough year-over-year comps in coal and grain volumes, as Eric described.

Despite the challenges on the volume side, we continue to target inflation plus pricing gains.

We should also realize the benefits from continued productivity and network efficiencies.

Assuming the economy takes a positive step forward and fuel prices are stable, we expect to achieve another record financial year, generating best-ever marks in operating ratio and earnings, which will drive increased shareholder returns.

So with that, let's open it up for your questions.

(Operator Instructions) Tom Wadewitz, JPMorgan.

Good morning.

I'm going to surprise you here with a question on coal, I guess.

Sure you get a lot on that.

But anyway, can you give us some thoughts around what might drive upside or downside to your view on coal volumes?

I think you're saying coal volumes are probably full-year down a little bit.

What would be the scenario, maybe a gas price level, natural gas price level, that would drive some upside?

And also, in terms of risk to the downside, how are you thinking about the impact of the Edison Mission bankruptcy and whether you're factoring in lower volumes there into your comments on coal?

As you say, there are a lot of uncertainty in terms of the coal outlook and environment.

Certainly on the downside, regulatory environmental changes in Washington could have continued negative impact on the coal business and the coal market share.

Certainly the natural gas, the price of natural gas, can also have impacts on the downside and the upside.

Right now, we are expecting natural gas prices to remain in the $3.50, $4.00 range for the year.

But you know, on the upside, as natural gas prices go up, that will drive more business to coal.

If you look at the coal market share, full-year market share for 2012, we're not expecting substantially higher coal market share vis-a-vis natural gas for 2013; maybe a point or two higher, but basically flat in terms of overall market share.

But there could be upside and downside to that.

In terms of the announced bankruptcies that are out here, we are working closely with our customers to work with them as they are working through those difficult times.

We also are doing what we need to do to ensure that we are protecting our corporate interests.

As we are going through the process, as you know the way the bankruptcies work, customers have the right to look at contracts, and we are working with them as they are going through that process and will continue to work with them.

If I can just add a couple of more points to Eric's comments on the drivers of coal.

Remember, we said in October at a conference that it was about a 10 million ton contract loss, so that is factored obviously into our 2013.

And the other variable I would remind everyone that could impact our coal volumes up or down is weather.

I mean, that is always the case.

The biggest driver is will we have a deep, cold winter season, and more importantly, how early and how long and how deep will the summer season be, and that can always influence our volumes.

Bill Greene, Morgan Stanley.

Thanks for taking the question.

I was curious -- what do we make about -- when you mention these contract losses, it seems like that happened last year with some of the legacy repricing, same thing this year.

Does that suggest that some of the competitors are being a bit more aggressive on price than you would expect?

How do we sort of take that?

If I can just make a comment and then I'll turn it over to Eric.

Bill, we are negotiating contracts every day of the week.

There is a lot of visibility given publicly to the legacy renewals, but I would just say that we compete vigorously every day of the week on -- whether it is a legacy contract or non-legacy.

So it doesn't strike us as unusual.

That's the business we are in.

There is constantly negotiations taking place and there are factors like price and service, et cetera, that go into those equations.

But Eric, do you want to elaborate?

Yes, I'll add to that, Bill.

Price negotiations, as Rob said, they are always difficult.

We always compete in the marketplace.

We expect to win some, we expect to lose some, but our strategy remains the same.

We are going to be reinvestable.

We have had that strategy for many years now, and we remain committed to that strategy and focused on it.

I mentioned that for 2012, we had about $350 million in legacy.

We retained about 80% of that, and we feel pretty good about that retention rate.

These return-on-capital metrics now up around 14%, CapEx coming down.

Is there sort of something to think about there, whereby as the returns have gotten better, you've slowed the growth in the CapEx?

I'm not sure sort of if that suggests kind of maybe limited opportunity to keep taking up price because of where the returns are getting from a regulatory standpoint.

Maybe, Rob, you can sort of comment on how to think about that.

Yes.

I wouldn't read too much into that connection in terms of the slightly reduction, the $3.6 billion planned spend this year versus 2012's $3.7 billion and the ROIC.

I would say that, as we've said all along -- and we've walked our talk here over the last several years -- is we have to improve our returns to justify those kinds of capital investments.

And that is the takeaway here and that is how we look at every capital investment.

In terms of there being a slight reduction from year to year in capital spending, that is really more timing issues.

We expect to spend more, as I mentioned and as Lance mentioned, on positive train control spending this year, but less on locomotives.

We will take 100 locomotives this year.

Last year, we took 200.

So those are all factors.

Replacement spending remains strong.

That hasn't changed.

That is the key investment that we spend every year.

And the other thing that we talked about the last couple years and it will continue into 2013, as we direct more capital spending in the southern part of our network, because of the growth prospects that we are seeing there and the return expectations.

So that would be my answer in terms of how we look at our capital spending, and I wouldn't read anything into the slight reduction this year.

Lance, do you want to --

I would just add, Bill, that we are not at a loss for excellent projects to invest in.

Justin Yagerman, Deutsche Bank.

On the contract, the legacy contract dealings this year, I wanted to dig in on -- maybe asking Bill's question a little bit differently.

Of the 20% that you did not retain, is that business that went to a competitor or is that business that is no longer existent and wasn't really up for renewal?

Justin, as I've said before, we compete against both our direct rail competitors.

We compete certainly against alternative sources of fuel.

The 20% that I'm referring to went to a competitor.

And as I said, we compete all the time.

We are comfortable with the 80% we retained, and our strategy is we want to move our business at reinvestable levels.

Okay, fair enough.

And a follow-up.

Curious -- you talked a little bit about the crude growth rate declining as we look out at 2013, albeit staying at a relatively high level.

How much of that is pipeline supplanting some of the movement of crude by rail along the Bakken South line?

And then also, if you could talk a bit about some of the opportunities that you see as we move through this year and maybe into next year, that would be helpful.

You gave some good guidance last year around what kind of shale-related carloads you expect this year.

Maybe an update on how you see that trending in 2013.

As we mentioned all throughout last year, our shale-related business grew tremendously.

I think we've mentioned publicly that (inaudible) percent last year.

Just because of the size of the base, we certainly are not going to see that same growth rate in 2013.

We are expecting to see good, solid growth.

As I mentioned in my comments, the crude oil side of our business will be one of the strongest parts of our business, so we are still excited about that.

In terms of your pipeline comment, there is additional pipeline capacity coming on.

We did mention at our Dallas discussion when we were there that the number, the capacity of pipelines coming on, I think publicly are barely keeping up with the production increases.

So production increases are growing rapidly than even the pipeline capacity increases.

So we still see a place for rail, pipe or crude by rail in the market for the foreseeable future.

Ken Hoexter, Merrill Lynch.

Because it sounds like nobody has touched on coal yet, one more on coal for you.

But can we read into that lost contract that this was one of those that was won before the pricing paradigm kicked in?

Was this kind of naturally on somebody else's network that is shifting over, or is competition increasing on some of the baseload operation, given the lighter volumes?

I would just say -- and Eric can expand on this -- that we always have, we always will compete vigorously in our business.

Coal is no different, but coal clearly is an area where we do.

But Eric, do you want to comment any further?

Yes, the contract, Ken, that we are referring to was a legacy contract.

We've talked about our legacy contracts for many years.

It was one of our legacy contracts.

And, as we've been saying for years, our strategy has been to ensure that we price at market rates and that we attain reinvestable rates.

I understand it was legacy, but was it one that had been one during kind of the heated battles of before the legacy pricing contract kicked in, before 2003, 2004?

Was that a contract that had that been won maybe based on price, and therefore you viewed it as not a core part of your network?

Or was this just competed business?

Let me just say, I wouldn't get too hung up on the timing of when those discussions took place or when the decision was made.

And of course, we don't have visibility absolutely into when they made the ultimate decision.

We know when we were informed.

But I would also just say, the piece of business we are talking about -- in October, remember, we called it out; it was about 10 million tons of coal.

It fits nicely with our competitor, and that is all we will probably get into on that.

Brandon Oglenski, Barclays.

This question is, I think, for Jack.

But when we think about 2013, a slower economy, and maybe a little bit less year on year tailwind from those legacy renewals that you had early last year, how should we be thinking about the OR expansion?

You had a lot in 2012.

Is it going to be diminished from those levels of gains but still a pretty positive turn?

I'm sorry -- could you repeat your question?

I'm just asking, with a soft economy, less contribution from legacy renewals that you had last year, how should we be thinking about OR expansion in 2013?

Let me -- this is Rob.

Remember, we gave guidance of hitting a sub-65% operating ratio target by 2017.

We had previously given a 65% to 67% by 2015.

And if you keep backing it up, we had previously given a significantly low 70%s, and we previously gave a 75%.

But we've always said we are going to get there as efficiently, safely as we can.

We are not using that as a hard stop.

We are going to get there as early as we possibly can, assuming markets cooperate, but we are going to focus on safety, service, productivity.

And with that service comes our confidence that we are going to be able to get core real pricing gains.

You could define that as inflation plus.

Those are still the same principles that are driving us forward.

To your point, does the tail sort of get a little bit slower as you get into the 60%s, where we are today, as you head to that 65%?

Sure.

The slope of the line coming from 87% to 67% is a pretty dramatic slope.

Going from 67% to that sub-65% target is a little bit different slope.

But our focus and our commitment and our confidence of making progress hasn't changed at all.

So we're going to continue to drive the same principles that got us to where we are as we move forward.

How do we think then about core pricing gains this year?

You've been running in the 4%, 4.5% range.

And I understand that with coal coming off last year, obviously, you didn't get the full benefit in your calculation of those coal contracts that we were renegotiated.

But should we be assuming something similar to 4% throughout 2013?

We don't give specific guidance on the pricing numbers, other than to say it is going to be inflation plus or real pricing gains.

The other thing I would remind you is as we look backwards -- and we are not giving guidance going forward on this -- but as we look backwards, remember that we've obtained from legacy renewals 1.5 to 2 from legacy in our core pricing gains.

So depending on the timing and how much legacy you have in any particular period will influence certainly how much pricing you get.

But even ex-legacy -- and that could be lumpy from the time that contracts come up for renewal on the legacy front -- but non-legacy, we are confident that we will get that inflation plus overall pricing number, and that is the guidance we are giving as we look forward.

Scott Group, Wolfe Trahan.

Number one, on coal, when I look at the 13.5% decline in 2012, how much of that do you think is structural, of plants closing or losing business?

And then if at some point we get to gas prices back above $4 or $4.50, six months, a year or two years from now, whenever, how much of this 13% decline in coal do you think comes back?

We attempted to say -- back in Dallas, we attempted to separate the market drivers from the plant closures.

Today, there is surplus plant capacity versus the demand.

So plant closures aren't necessarily going to impact the volume of tons.

It is really the demand for electricity generated by coal.

So if you look at it on that metric, Coal historically has had about a 50% market share.

It was probably in the high 40%s 18 months ago.

For 2012, it is probably call it 37%, 39% market share, coal, electrical generation.

We think that's about where it is going to be at a $3.50, $4 natural gas price.

As natural gas prices go up, that percent market share will grow, and the potential for coal volumes will grow.

Additionally, if you look at the mix of where the coal is being produced, certainly Powder River Basin coal is a cheaper coal to produce than Central Appalachian coal.

So we think you will continue to see a migration of market share from Central Appalachian coal to Powder River Basin coal for the amount of coal that is moving.

So it sounds like you think that a lot of what you lost in 2012 you can make up at some point -- not in 2013, but at some point in the future, if gas prices get back to more normalized levels.

As we were saying, if gas prices stay $3.50, $4.00 or above, we think that the coal market share, and therefore our potential to participate in that coal market share vis-a-vis natural gas, will be positive going forward.

That, and weather and the economy, more electricity demand, all those are factors that would be positive for us.

Okay, thanks.

And then one on the Intermodal side.

So better domestic volume growth than we've seen in a little while, and then the yields growth slowed a little bit to what we've seen.

Wondering if there is any changes in the strategy when it comes to domestic Intermodal to focus a little bit more on growth and less on pricing, or am I not reading that right?

I don't think you are reading that right.

If you think about our domestic Intermodal strategy, our strategy has been consistent and firm and we are going forward with the same strategy in the future that we've had in the past.

Domestic Intermodal has huge opportunities in terms of conversion, over-the-road conversion.

And each year for the last three years, we've had successively high domestic Intermodal volumes driven by over-the-road conversion.

We still think that there is a large market out there.

We estimate there is probably $7 million to $10 million of over-the-road truckloads that can be penetrated by the Intermodal market.

So our strategy is to go after those over-the-road truck moves.

We are going to continue to go after that.

We are going to continue to do it as we are pricing to the market and ensuring we have stability in that business.

7 million to 10 million units.

Yes, 7 million to 10 million units.

Cherilyn Radbourne, TD Securities.

I wanted to ask a question first just about the growth that you've experienced in your southern region.

You have mentioned a number of times that volumes in that region are at pre-recession levels.

I just wondered if you could give us some context on where volumes are relative to prior peak levels in that region.

Our pre-recession levels were, relatively speaking, historic peaks.

So the south right now is at historic peaks, and we are seeing a lot of that volume show up in carload traffic and terminals.

Is that a function of the growth of crude by rail primarily, or are you seeing a lot of the other traffic groups also back at prior peak levels?

It is part a function of crude by rail.

It is also part a function of Texas booming from the standpoint of oil production, the shale plays and all of the related activity with that.

It is also reflective of the auto strength to and from Mexico.

Okay, if I could sneak one last one in.

I was sort of intrigued by your comment that you expect a stronger international peak in 2013.

And I was just curious whether that is a general comment on the expectation of a stronger economy, or whether in fact you are becoming more optimistic that the housing upturn will translate into a ripple effect into things like furniture and that sort of thing.

I would say it's both.

We certainly -- there is a lot of economic uncertainty, and as Rob said and others have said, there is a lot of things that are happening in Washington that could take us in a lot of different directions.

But we certainly are hopeful that there will be a stronger economy in the second half of the year.

And of course, as housing strengthens, as the global impact projections are suggesting that it will continue to strengthen, the things that you build housing with, whether it is furniture and other internal items, will drive our Intermodal outlook for the second half of the year.

Chris Wetherbee, Citigroup.

Maybe just a question on the legacy coal volumes from 2012 that maybe didn't move.

When you look at a scenario of maybe $3.50 to $4.00 natural gas, is there an amount of that legacy business on the coal side that you would expect to move in 2013 that maybe you would see that coming through in either core pricing or I guess maybe incremental margins?

I just want to kind of think about that a little bit in this natural gas kind of environment.

Let me just make a comment, and then Eric may want to elaborate.

And I'll come at it from the pricing standpoint.

It is kind of a difficult question to answer from what is normal, but if you kind of rough the impact it had on pricing, as we increased the terms and conditions in pricing on some of those legacy contracts and did not then get all the full volume compared to what we might have in the past, that hurt us in our pricing calculation about a half point in the quarter.

So to your point, there is clearly a drag there.

I guess the mystery or the question then would be how much of that will come back.

And I think it depends upon all the other factors that Eric walked through.

Eric, you want to add anything?

I the only thing I would add to what Rob would say is as the coal business comes back for those repriced legacy contracts, we will not consider that price going forward.

But to your point, Chris, it will be in our margins going forward.

Okay.

When you think about maybe what the breakpoint on -- can you give us any help, I guess, on maybe what the breakpoint on natural gas is for a portion of that business?

Is it something in the neighborhood of $3.50, or maybe is it a little bit lower?

I guess I just want to kind of get some rough kind of guidelines maybe to use there.

You know, our best assessment is that the market currently is at $3.50, $4.00.

And as the price of natural gas goes higher, coal becomes much more competitive; as it goes lower than that, natural gas becomes much more competitive.

I would just add that we are in sort of in uncharted territory here, just as we were on the downside, that at what point exactly will utilities switch back at what gas price.

And one of the factors to consider is -- which we don't have visibility on -- is how long has the utility contracted for the gas.

That is a variable also that we will see how that plays out.

Jason Seidl, Dahlman Rose.

I hope Jack gets over the flu.

It's never any fun.

I'll bring up an old question, but ask it a different way.

Since I've covered you guys for an awful long time, I do remember when you battled with your western partner for a small percentage of market share.

It doesn't seem like this is the case.

It seemed like this is normal back-and-forth in terms of contracts that might move.

Am I right in my interpretation?

Jason, you're absolutely right.

One of the lessons learned that you know well and we've communicated and we are still driven by is we are not in this for market share.

And I think where we walked our talk as much as anything is we turned in these record financial results without the benefit of positive volume for the year.

If you go back to when we started this whole turnaround effort, if you will, and the returns and focused on the right fundamentals of the business, we were running higher levels of volume in the high 80%s operating ratio.

So we learned that lesson.

We understand it is not a market share gain.

We are certainly aware of what is happening in the market, but we are focused on competing, providing good service, pricing it right and generating returns.

My next question is going to actually look out a little bit further than I think some people have been focusing on.

As I look at your auto business, I look at a lot of the growth in the plants in Mexico.

Even if they don't happen to go on (inaudible) cash who does distribute them to other railroads, including yourself, talk a little bit about some of the new plants and lines and how might that impact UNP in 2014.

You are right, Jason.

There is an immense amount of auto construction new capacity coming on in Mexico.

The vast majority of that is coming on for export to the US, or actually export to Europe and Asia.

Some of the manufacturers are adding capacity in Mexico, interestingly enough, to export back to Europe and Asia.

But the large portion of that is going to be dedicated to North America, particularly the US.

We have the best franchise to and from Mexico.

We have the best auto franchise.

We have, as we've said publicly, about 75% market share in the autos market.

A large portion of our autos business is to and from Mexico.

We work with both the KCSM and the FXE equally.

So our perspective is no matter where the auto plants are located in Mexico, whether they are sole served by the KCS or the FXE or dual served by both of them, we want to work effectively with the partners and provide an effective service and take it to destinations in the US.

And we have the best franchise, and we are going to continue to build on that franchise.

Walter Spracklin, RBC.

I just wanted to focus a little bit.

I understand your core pricing is intact at that inflation plus.

But looking a little bit at the mix effect from some of the length-of-haul moves, I noted your coal volumes and ag volumes most -- hardest hit here this quarter.

But in one, the average revenue per car was up 12% in coal and flat in ag.

I was wondering if you might be able to, Eric, perhaps give us some color as to the difference in length of haul there and what implication that might have on mix effect going into 2013 on those two areas.

Our coal mix of length of haul really did not substantially change in 2012.

The ARC effect, as we've been talking about our focus on legacy pricing and repricing our legacy contracts, if you look at our Ag side, we did have a length of haul with the drought and the very small corn crops -- our length of haul in taking corn to destinations was significantly shortened.

Our California feeders used a lot of local feed, as opposed to long-haul corn, which is relatively high-priced.

So our length of haul was impacted in our Ag business significantly, primarily due to the corn drought factor.

Matt Troy, Susquehanna.

A longer-term question on coal.

If I think about some of the sourcing differentials between the Eastern franchises and the Western franchises, obviously PRB coal is in a advantageous position long-term; it's cleaner burning, it's more economical, it's more competitive with gas at a lower price.

So one at least academically would think it is more fungible and might backfill lost production at less environmentally viable Eastern mines.

But that is more of an academic observation.

I was just wondering if you could give a realistic assessment in terms of as we see sourcing shift over the next let's call it three, five, seven years, to what extent might you be a continued share gainer, and might that make your coal franchise grow more quickly than the market -- at whatever the market is going to be?

Matt, let me make a couple comments and then I'll turn it back over to Eric.

I think all the academic -- the positives that you repeated, we would agree with all those.

The other thing that you recall we give some guidance on in October was our export opportunity; albeit relatively small compared to the Eastern routes, but still a nice growth opportunity for us.

Eric, do you want to (multiple speakers)?

I would just add what Rob said and kind of repeat what we said before.

If you look at the coal overall market share, as natural gas prices stay in the range that they are in, the market share will probably remain high 30%s, perhaps low 40%s, vis-a-vis natural gas.

We do continue to see a shift from Central Appalachian coal, which probably need to be at $5.50 natural gas prices versus the Powder River Basin -- call it $5.00, $5.50 versus Powder River Basin Coal at $3.50, $4.00.

So we will -- do expect to see a natural shift in share from Central App to Western coal.

Chris Ceraso, Credit Suisse.

Just wanted to follow up on a comment earlier about your returns.

I'm just wondering what your view is.

Do you think that given that you are generating 14% returns on capital, do you see an increased risk that you will face more rate cases?

That is something that we will continue to communicate our message as broadly as we can in terms of we have to earn adequate returns, we have to grow our returns to be able to make the kinds of capital investments that we are making, and that we hope to make going forward, as long as the returns are there.

I think what it does introduce is more discussion on -- which I know you're well aware of, and others as well -- the whole replacement cost way of looking at your returns.

If you factor that in, rather than a 14%, our numbers look more like -- call it a 7%-ish.

So that is a message that we will continue to communicate and continue to work on.

But we have to earn adequate returns in order to make these kinds of capital investments.

Makes sense.

And than just a follow-up on the revenue per car in the Chemical division.

Can you just explain why that was flat in the light of such big growth in crude?

I would have thought that would have had a positive effect on your revenue per car.

So maybe explain where the offsets are, and if that is something that going forward you think the growth in crude will help improve revenue per car.

As you look at our Chemicals business overall and kind of look at it historically, our revenue per car in our Chemicals business has been some of the best overall of all of our businesses.

As we talked in previous earnings releases, our crude oil business, the majority, if not all of that, is interline business, and so it is moving from our interchanges with CTPartners and [B] in Santa Fe, where we interchange also some substantial business with them in terms of the crude oil market.

The crude oil business -- because our Chemicals business has such a good revenue per car, the crude oil business is not substantially different than what the remainder of our base chemicals business is.

So we don't necessarily see a big driver of that in the future.

I would just add to that, that arguably, the right way to look at the benefit that we are talking about and that we are in fact achieving here is not spelled out in the ARC analysis, but it is more in our returns.

I would say that the new business growth that we are seeing, while it is not changing significantly the Chemical line ARC, it is a very positive contributor to our overall margin expansion that we are experiencing.

John Larkin, Stifel Nicholas.

On the issue of train size, I know it is difficult with all the growth being focused on the southern part of the network to really get a lot of traction there.

But as you put more capital to work in the south, how do you think you're going to be able to leverage train size over the next, say, two to five years, as presumably traffic continues to build down in that part of the country?

Sure.

Across the system, you know we have opportunity on train size.

We continue to demonstrate that quarter to quarter and year over year.

When you look at the south, everywhere that we see significant volume growth and have seen significant volume growth, we've got capital being invested that helps us continue to grow size.

So if you look at the route between El Paso, Dallas, Shreveport, we call that the Texas Pacific route TP route, we've had substantial investment going there for siding extensions and new sidings; that helps us grow train size.

We're doing the same kind of investments on a north-south route that supports crude oil, as well as Ag to the Gulf, once that kicks back up, as well as the chemical industry franchise.

And then we've been making incremental investments around the state of Texas and points north that help us on our Intermodal and autos business to and from Mexico.

So virtually everything that is shipping to and from Texas has an opportunity for train size in the next handful of years.

Very good answer.

Thank you.

And then maybe a longer-term question on International Intermodal.

Haven't really talked too much about the new Panama Canal locks that are opening up, I think in early 2015.

Has your view changed at all in terms of how much, if any, of the transpacific traffic might shift to the all-water route to access some of the ports on the East Coast, that presumably by then will be able to handle the larger ships?

What might your response be?

Is there a way to preserve some of that traffic over the West Coast ports?

Thank you.

Our view hasn't changed from that from what we've said before.

Today, there is about 30% of the business that is all-water route to the Panama Canal, and the rough dividing line is roughly the Appalachians.

Things that go east of the Appalachians typically go all-water; west of the Appalachians, you typically can have a land bridge rail product.

Just kind of a rough rule of thumb.

We think that might change by a percent or two.

So you might go from 30% to 31%, 32%.

But as we've pointed out before, the Panama Canal also has to get a return for the significant amount of investment that they are making.

The other thing that we've pointed out publicly before is that if you look at the supertankers, the Panamax tankers, they really have a route to the East Coast now, particularly as production goes further and further into Southeast Asia.

And so to the extent the business that makes sense to go in those big tankers and go to the East Coast, they could do that now.

Not going through the Panama Canal, but going the opposite direction.

And so you do see some of those flows going on now, which is why we are not sure we're going to see much beyond a percent or two change as you go forward.

And the last point I would make is we still think that international trade and economic growth is going to grow the pie.

So we still see upside volume growth on the long-term as the pie grows.

Ben Hartford, Robert W. Baird.

Eric, I think this question is for you.

I am just wondering where you ended the E&P and UMAX fleet count at the end of the year and what net growth expectations are for 2013.

We don't typically give our explicit kind of container fleet count publicly.

We are excited about our MCP program, and we do have a large container ownership.

We, with our partners, have the strongest container ownership position in the industry, and so we think that is a competitive advantage for us long-term.

And the way we are using that with our MCP program, we think, is the right strategic direction.

We've been pleased with the success and we are going to build on that.

I guess directionally could you give us some sense whether you would expect total fleet count to grow in line, faster or slower than what domestic Intermodal growth would be in 2013?

That's a good question.

As you know, the last couple of years, the total industry fleet count grew significantly and substantially.

We added to our fleet.

IMC has added to their fleet.

And so there were large fleet additions over the last several years.

I do not expect to see significant, if any, fleet additions from an industry perspective this year.

Certainly, each company will make their own decision.

But I think as you look at it, the industry probably has enough capacity to absorb at least growth in the next year or two.

But we will see what happens from a competitive standpoint.

Keith Schoonmaker, MorningStar.

In the current trucking capacity and fuel price environment, can you comment on your ability to close some of the historical discount between Intermodal and trucking rates?

That's a good question.

If you look at -- trucking capacity is narrowing.

If you look at the driver shortages, they are increasing shortages.

There is some evidence that as the construction industry is coming back, it is more difficult for the trucking industry to get qualified drivers in midyear.

The new hours-of-service law will come in place, which will also be an impact on the available drivers.

So we think that the trends remain strong that Intermodal will increase its value proposition vis-a-vis over-the-road truck as you go throughout this year and future years.

And Eric, don't forget, our service product supports that as well.

It's an outstanding service product that is very competitive with truck right now.

Maybe just a follow-up for Eric.

Eric, considering shifts in manufacturing to North America from other historically lower cost regions, Union Pacific is perhaps uniquely positioned to capitalize on either location where products are made.

Are you sort of ambivalent as to whether products are made in Mexico versus Asia, or is there an advantage to Mexico and perhaps you can haul raw materials and finished goods as well?

Or lower average rate per Intermodal car perhaps at a disadvantage to Asian import?

Maybe if you can just give some color on if you have a preference, given those two options.

That's a great question.

I'm not sure I would phrase it as a preference.

What I would say is that there is a very strong trend with Mexico having a very quality, effective, low-cost workforce, and not having the supply-chain issues and potential other issues that you may see in some of the Asian countries.

You are seeing a trend of near-sourcing.

You also are seeing a trend of near-sourcing actually even from Europe due to low energy prices in the US driven by the shale plays.

So I think over the next several years, you're going to see -- and we are actually starting to see it now in terms of inquiries from companies for rail sidings, so to speak.

So the actual opportunity is still several years in the future.

But we are seeing a growing trend of near-sourcing to North America, both in Mexico and in the US, that we think will be upside for the rail industry.

I would just add that because of the strength of our network, we are in a position to leverage both opportunities because of our strength at both the ports, and our unique strength in and out of Mexico, being the only railroad that services rail border crossing points.

And the other thing is as you have this manufacturing opportunities come, they typically bring good jobs, which helps unemployment, which again helps as a driver for the economy, which helps our transportation outlook.

Don Broughton, Avondale Partners.

Looking at -- this kind of goes to a 100,000-foot kind of a question here.

I'm looking at all of your operating metrics, and they just -- every one of them continues to get better and better and better.

Obviously, you've more than adequately invested in the infrastructure.

So when I look at capital investment and I look at your outlook for 2013, and you're saying you need the economy to participate, that makes sense.

To what level is there flexibility?

I understand PTC; that's going to be what it is, the unfunded mandate.

And you've got infrastructure replacement budgeted at 1.675.

How much of the other is flexible in your mind if you didn't get the economy you're looking for and could be trained towards other items, such as share repurchase?

Let me just make a couple comments, and then I'll turn it to Lance to elaborate.

First of all, remember that every capital dollar we spend, we are very focused on it being return-based.

So we go through a calculation based on what we think the projection of the economy is going to be and volumes and service, safety and returns from that business.

And that is not going to change.

So if there was ever a point where we didn't feel confident in making those investments, rest assured we would back off making those capital investments.

The other point -- and I know you know this -- is that in our capital spend, about $2 billion each year is for replacement.

So to your point, above and beyond that, we've got other spending decisions.

Lance, do you want to (multiple speakers)?

You got that just right, Rob.

And like in every year, we know going into the year what our on-ramps and off-ramps are, depending on what the economy does.

So as we stand right now, we've got a good, robust plan that will be able to match capital spend with what is happening in the economy and what our needs are looking like.

So it is fair to say that your CapEx outlook is much more dynamic than most people assume it to be or understand it to be.

Is that a fair statement?

I think that is a pretty fair statement absent what Rob reminded you of, and that is over half is keep the store open capital spending.

And of course, we have positive train control in our current numbers, and we have that still in front of us.

But Lance is right.

We will -- the rest is flexible, if you will, and it is based on returns.

Jeff Kauffman, Sterne, Agee.

Congratulations.

It has been a long call.

Most of my questions have been answered.

Just a quick one here.

When coal does normalize -- and I am referring to the question you had about what could come back once coal does normalize -- when we add that in with the new crude carriage, the frac sand, the piping that is going up, do you think the net effect of this, if I look at it on a total energy universe basis, will be a long-term positive growth?

Or will the crude be able to offset the structural coal losses?

So when you talk about coal, again, I don't think we are projecting -- I don't think the market is projecting that coal is going to return to the levels that it used to be at.

I think what we are saying is that given a natural gas range, again, $3.50 to $4.00, coal will probably stay in that, round number, 40% share in the market.

So I'm not sure we are projecting that to be significantly changed, returned back to historical levels, unless you have an assumption about natural gas prices being significantly higher.

To add to that, to your point, the shale opportunities and all the related moves, we are very optimistic.

And our network is extremely well-positioned to continue to serve those growing markets.

So when you add it all up, the energy story for us we think is a very positive story.

Okay, thank you very much.

Thomas Kim, Goldman Sachs.

With regard to labor costs, I was just taking a look at the annualized average rate for the fourth quarter, which was down about 4% year on year.

And then compared to the full 2012, it was it down about 3%.

And I'm just wondering as we look forward, is the fourth quarter a good guide for the average rates for 2013?

Thank you.

No, it's not.

I would expect that that's going to increase.

Remember, the tax refund I mentioned in my comments certainly was a factor in that.

There was also a greater percentage, if you will, of growth in our capital spending programs as it relates to labor.

So I would expect that as we move into the first quarter, it would be more normalized, if you will, at a -- call it 3% range.

So just to follow up on that, would the 2012, with that incremental increase that you mentioned, then -- so if we just make minor adjustments around that, would the 2012 annualized number then be sort of the figure we should be looking at, basically 102,000 roughly, give or take?

With sort of a 3% growth assumption in there, that is probably not unreasonable for inflation.

Anthony Gallo, Wells Fargo.

Congratulations as well.

If you pull together all of your unconventional energy business, what is roughly the mix right now between the inbound, the frac sand, the pipe, et cetera, versus the outbound crude takeaway?

And what does that mix look like 2013, 2014?

How might that change?

Thank you.

I'm not sure we have that split.

I just want to make sure the question you are asking.

You're asking how much of our business is inbound versus outbound, recognizing it is in different regions and different origins and destinations?

Yes.

Okay.

So our frac sand and pipe business predominately is going from Minnesota/Wisconsin down to South Texas and West Texas; so it is going inbound that way.

Our crude business is coming from the Bakken, going to the South.

It is probably a 55/45, 60/40 kind of a split.

Okay.

And does that change materially as you get into 2013, 2014?

My guess is that the takeaway grows more quickly, but I'm just (multiple speakers) --

The crude opportunity, as I said in our earlier comments, is one of our strongest growth opportunities.

That will grow faster than the inbound opportunity in 2013.

Ladies and gentlemen, we've reached the end of our question-and-answer session.

We have time for one final question.

The question is from the line of David Vernon, Bernstein Research.

Two quick follow-ups, just to clarify on guidance.

You said there's a potential for slight positive volume growth overall.

If you could just kind of clarify that a little bit.

And then specifically with Ag, kind of what you are expecting for the full year, kind of first-half, back-half, that would be great.

Thanks.

Yes, just to remind everyone what we said on the volume guidance is we said assuming the economy cooperates -- and let's define that as an industrial production number of around 2% -- we would expect, when you add it all up, that our overall volumes in the face of slight decline in coal, is what we called out also, we expect volumes to be on the positive side of the ledger, overcoming, if you will, that slight falloff in Coal.

Ag, we said we've got challenges in the first half of the year.

We expect that things will hopefully improve in the back half of the year, but we didn't give any further clarity beyond that.

I would now like to turn the floor back over to Mr. Rob Knight for closing comments.

Great.

Again, we are very proud of what we've accomplished here and look forward to continuing to meet the challenges in 2013.

Thanks for joining us on the call, and we look forward to speaking with you again in April.

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