聯合太平洋集團 (UNP) 2013 Q3 法說會逐字稿

Greetings.

Welcome to the Union Pacific third-quarter 2013 conference call.

(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. Jack Koraleski, CEO for Union Pacific.

Thank you, Mr. Koraleski, you may now begin.

Thanks, Rob, and good morning, everybody.

Welcome to Union Pacific's third-quarter earnings conference call.

With me today here in Omaha are Rob Knight, our Chief Financial Officer; Eric Butler, our Executive Vice President of Marketing and Sales; and Lance Fritz, our Executive Vice President of Operations.

This morning we are pleased to announce that Union Pacific achieved an all-time record financial results this quarter.

We generated best ever quarterly earnings of $2.48 per share, an increase of 13% compared to the third quarter of 2012.

The quarter was not without its challenges, including headwinds in coal and grain volumes and severe flooding in Colorado that caused network disruptions and shipment delays.

But at the end of the day that's all part of running a railroad.

We managed our network efficiently, overcoming these challenges, and continue to benefit from the strength of our diverse franchise.

When combined with real core pricing and productivity gains, we more than offset the flat volumes to generate a new best ever quarterly operating ratio of 64.8%.

We feel very good about our accomplishments this quarter.

We're leveraging our capital investments to strengthen the UP franchise and further enhance our value proposition in the marketplace.

We remain focused on delivering safe, efficient, high-quality service that generates value for our customers and increased financial returns for our shareholders.

With that, let's get started this morning.

I will turn it over to Eric.

Thanks, Jack.

Good morning.

In the third quarter the value and diversity of our franchise allowed volume to finish flat compared to last year, despite volume declines in three of the business groups.

Industrial products, automotive, and chemicals led the way with growth.

Offsetting that good news were declines in intermodal, ag, and coal.

Core pricing gains of 3.5%, which combined with a modest benefit from positive mix produced a 5% improvement in average revenue per car.

The combination of flat volume and improved average revenue per car pushed freight revenue to a record $5.2 billion.

Let's take a closer look at each of the six business groups.

Ag products revenue declined 2% with third quarter volume down 4% and a 2% improvement in average revenue per car.

Grain car loadings continue to reflect the impact of last year's drought with third-quarter volume down 9%.

Domestic feed grain shipments declined as tight US corn supply led to reductions in livestock feeding and increased reliance on local feed crops.

Export feed grains also declined with improved world supply and a higher US prices.

Partially offsetting these declines was an increase in wheat gulf exports primarily destined to Brazil.

Grain products volume was up 3% driven by an 11% increase in ethanol shipments as the discounts in gasoline led refineries to replenish low ethanol inventories.

Declines in import beer and barley led to 4% decrease in food and refrigerated volume.

Automotive volume grew 8%, which combined with a 9% improvement in average revenue per car, produced a 17% increase in revenue.

Growth rates in auto production and sales remain strong in the third quarter driven by pent up demand to replace aging vehicles.

Even so the average age of vehicles on the road continued to increase, reaching 11.4 years, with customers replacing them with new models offering improved technology and fuel efficiency.

UP finished vehicle shipments grew 5% as sales continue to grow with seasonally adjusted annual sales rate reaching $15.7 million in the third quarter, the highest quarterly level in five years.

Parts volume increased 12%, while pricing gains in the previously announced Pacer network logistics management arrangement increased average revenue per car.

Turning now to coal, you can see from the chart of weekly car loadings that volumes picked up from the second quarter as expected but tracked 7% below last year.

Core pricing gains and favorable mix led to a 10% improvement in average revenue per car and produced a 2% increase in revenue.

Tonnage from the Southern Powder River Basin decreased 8% as mild summer weather led to a 3% reduction in year-over-year electricity generation and UP-served territories.

Also contributing to the decline was the continued impact of a contract loss from the beginning of the year.

Colorado-Utah tonnage declined 17% as soft domestic demand and mine production issues offset growth in West Coast exports.

Also hampering loadings in the third quarter was the September Colorado floods.

Providing some good news, tonnage from other coal-producing regions increased 19% from a relatively small base, driven by gains from Southern Wyoming and Illinois loadings.

Before we move on, note this slide shows the steep decline early in the fourth quarter as volumes were impacted by nearly three feet of unseasonably early snow in the Powder River Basin during the first week in October.

This has impacted volumes through the first half of the month, but we expect the majority of shipments to be made up throughout the remainder of the fourth quarter.

In industrial products, a 9% increase in volume and 2% improvement in average revenue per car, despite unfavorable mix, produced revenue growth of 11%.

Non-metallic minerals volume was up 21% as continued growth in share-related drilling increased frac sand shipments by 27%.

Our construction-related volumes grew 11%, driven by an 11% improvement in rock shipments with increased construction activity, mostly in the Texas and California markets which also contributed to 12% growth in cement volume.

Metals volume was up 8%, as pipeline projects picked up following a slow start to the year.

We also saw an increase in export iron ore shipments with the resolution of volume production issues that limited shipments last year.

Growth in housing and home improvements continue to increase the demand for lumber with shipments up 6%.

Although the housing market continued to strengthen, lumber's growth eased early in the third quarter, as falling lumber prices and excess inventory slowed lumber shipments.

Offsetting some of the strength in other industrial products market was a 4% decline in government and waste volume.

As in previous quarters, reduced government funding limited military shipments.

And delays extending federal production tax credit led to a decline in win moves.

Intermodal revenue was flat, as a 2% increase in average revenue per unit offset a 1% decline in volume.

With the economic recovery continuing its slow pace, retailers proceeded cautiously in the third quarter.

Our international intermodal volumes declined 5% due to market share shifts within the ocean carrier industry and increased port trends loading activity.

Continued success converting highway business to rail drove 4% growth in domestic intermodal.

Chemicals revenue grew 5%, reflecting a 3% increase in volume and a 2% increase in average revenue per car.

Industrial chemicals volume was up 9%, driven by strength in end user markets such as housing and automotive.

Increased demand in new business led to a 10% increase in petroleum products volume.

Dampening the good news was a 5% decline in crude oil volume compared to the third quarter of last year, although crude oil shipments to St.

James, Louisiana continued to grow compared to 2012.

Before we move on to our outlook for the fourth quarter, I would like to give a brief update on our crude by rail business, which accounts for about 40% of our share-related volume and about 2% of our overall volume.

As we said, we have been expecting our 2013 crude oil volumes to increase at a moderate pace year-over-year, though not with the dramatic ramp-up seen in the year before, particularly given the lack of significant destination capacity expansion this year.

As you can see in the blue portion of the bar chart, so far this year we've seen the benefit of very steady demand into St.

James, Louisiana which continues to be a premier rail destination.

Additional opportunities have come from other areas such as west Texas and Oklahoma, and these volumes in particular have been somewhat more volatile as the domestic crude oil market continues to evolve and reflect the dynamics inherent in the commodity marketplace.

As you know pricing spreads are one of the influences on traffic flows as producers look to maximize the net-backs.

With the narrowing of the WTI discount to Brent, we've seen a resulting volume decrease into areas with readily available pipeline access, primarily Texas and Oklahoma, which also have been impact by increased pipeline capacity.

We have also seen a smaller decline in shipments from the Bakken to Texas as tighter spreads have made it more attractive to ship Bakken crude oil to the east, where new facilities have increased crude by rail capacity.

Going forward, we expect the economics of crude oil spreads to continue to be a driver of traffic flows particularly in areas such as Texas.

Other markets such as Canadian crude should provide new opportunities as crude by rail continues to evolve.

Meanwhile, our franchise strength in the south will continue to provide a solid foundation to our business, giving customers attractive access to important gulf destinations.

While crude oil volumes will always be subject to the ups and downs of market spreads, we believe the long-term fundamentals of crude by rail remain attractive.

Increasing crude production, limited pipeline infrastructure and the flexibility rail provides will enable us to leverage our value proposition and develop new opportunities ahead.

Let me close with what we see for the fourth quarter.

Our current outlook is for the economy to continue its slow improvement, although there is uncertainty in the marketplace.

No matter what the economy does we will continue to focus on strengthening our value proposition, attracting new customers and supporting our existing customers as they work to grow their business.

Given that, here's what we see across our business for the next few months, both the challenges and the opportunities.

With the effects of last year's drought behind us, an improved fall harvest is expected to provide opportunity for ag growth.

Global Insight raised their full-year light vehicle sales estimate to 15.5 million vehicles, which is good news for our automotive business.

Crude oil spreads will continue to impact our crude by rail volumes, but strength in other chemicals markets is expected to drive solid performance we've seen throughout the year.

With the challenges previously mentioned in our coal business, we now expect full-year volumes to be down in the high single-digit range, which includes the lost contract of about 5% of our coal volumes.

Industrial products should continue to benefit from share-related growth with increased drilling activity that supports frac sand and pipeline projects.

An improving housing market is expected to drive demand for lumber shipments and growth in construction is expected to support increases in rock, metals, and other related markets.

International intermodal volume is expected to be down slightly compared to last year, while highway conversions will continue to drive domestic intermodal growth.

For the full year, our strong value proposition and diverse franchise will again support business development opportunities across the broad portfolio of business.

Assuming the economy does not slow down, we are well on track to deliver profitable revenue growth again this year.

With that, I will turn it over to Lance.

Thank you, Eric.

Good morning.

Starting with safety, year-to-date results nearly matched our 2012 record results on the strength of a record low third-quarter reportable personal injury rate.

I expect our total safety culture, risk identification and mitigation process, and robust training programs to drive continued improvement as we go forward.

Our ultimate focus is making sure every one of our 50,000 employees returns home safely at the end of each day.

Rail equipment incidents or derailments improved 3% year to date versus 2012.

This is a direct reflection of the investments we've made to harden our infrastructure and to leverage advanced defect detection technology, which combined have reduced track and equipment-induced derailments.

We are also making progress on human factor incidents through enhanced skills training and root cause resolutions.

Moving to public safety, our year-to-date grade crossing incident rate improved 7% versus 2012, reflecting our continued focus on improving our closing high-risk crossings and reinforcing public awareness.

We achieved year-over-year improvement in five of the last six months, including a record third-quarter rate.

Our focus on grade crossing risk in the south has generated an 18% year-to-date improvement in that region.

Our safety strategy helps keep our network strong and resilient, and as a result our network remains fluid and is operating at very efficient levels.

Velocity in the third quarter improved 1% compared to 2012 and improved 2% sequentially from the second quarter, despite flooding that severed numerous corridors in Colorado.

We rerouted traffic and developed contingency plans during the event to support our effected customers, and rapidly restored service on the lines that were washed out.

Our agility in the face of these outages prevented any year-over-year deterioration in our service delivery index.

The measure which gauges how well we are meeting overall customer commitments improved sequentially from the second quarter and would have improved year-over-year if not for tighter service commitments to our customers.

We continued to provide outstanding local service to our customers with a best ever 96% industry spot in pull, which measures the delivery or pulling of a car to or from a customer.

Infrastructure investments and process efficiencies have improved our ability to recover after incidents, reducing their impact on the network.

We continue to invest in capacity across our network, most notably in the south where volumes are growing across our diverse portfolio.

Overall, our network remains well positioned to handle volume growth.

Moving on to network productivity, slow order miles declined 38% to a best ever third-quarter level.

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

We continue to identify and realize efficiencies that contributed to our record 64.8% operating ratio this quarter.

Locomotive productivity as defined by gross ton miles per horsepower day improved 1%.

Network planning and improved locomotive reliability drove this improvement in spite of a 2.5 to 3 percentage point headwind associated with the mix shift from lower coal shipments and higher manifest shipments.

During the quarter we continued to reposition resources to align with the traffic mix trend of growing southern region and manifest volumes, which require additional manpower versus the average of the network.

The chart in the lower right demonstrates our ability to leverage growing manifest volumes through UP's extensive terminal infrastructure.

We switched 1.5% more cars while keeping yard and local employee days flat.

This resulted in an all-time quarterly record in terminal productivity.

The improvement was particularly evident in our southern region where car switch per employee day was up 3%.

These results reflect employee engagement which is important part of our operating strategy.

Our employees are bringing their expertise to bear on improving safety, service and efficiency by standardizing work and reducing variability.

To recap, our operating performance in the third quarter was solid, improving nicely from second quarter levels.

We remain vigilant in our commitment to operate a safer and more efficient railroad for the benefit of our employees, customers, the public, and shareholders.

We have demonstrated the ability to successfully flex network resources in response to dynamic market shifts and unexpected events, including weather.

As I touched on last quarter, we have successfully completed a number of significant capital track programs, both on the replacement and capacity side.

Overall, these projects were completed with minimal network disruptions and resulted in measurable enhancements to our franchise.

We will continue to make smart capital investments that generate attractive returns and that keep the network fluid and safe.

With strong network fundamentals, we are well positioned for future growth while enhancing UP's value proposition.

With that, I will turn it over to Rob.

Thanks, Lance, and good morning.

Let's start with a recap of our third-quarter results.

Operating revenue grew 4% to an all-time quarterly record of nearly $5.6 billion, driven mainly by solid core pricing gains.

Operating expense totaled $3.6 billion, increasing 1.5%.

Operating income grew 10% to $1.96 billion, also hitting a best-ever quarterly mark.

Below the line, other income totaled $28 million, basically flat with 2012.

For the full year we would expect other income to be in the $110 million to $120 million range, barring any unusual adjustments.

Interest expense of $138 million was up 1% from last year.

However, it includes about $7 million of net one-time costs associated with our recent debt exchange.

Income tax expense increased to $701 million driven by higher pretax earnings.

Net income grew 10% versus 2012 while the outstanding share balance declined 2% as a result of our continued share repurchase activity.

These results combined to produce a best-ever quarterly earnings of $2.48 per share, up 13% versus 2012.

Turning to our top line, freight revenue grew 4.6% to more than $5.2 billion, driven by solid core pricing gains of 3.5% and favorable mix of a little more than a point.

A decline in lower average revenue per car intermodal shipments, combined with freight revenue impact from the Pacer arrangement, drove the positive mix.

But these items were partially offset by double-digit growth in rock shipments which typically move less than 200 miles, and a decline in longer haul grain moves.

Moving on to the expense side, slide 21 provides a summary of our compensation and benefits expense which was up 1% compared to 2012.

Inflationary pressures and higher training costs drove the increase largely offset by productivity gains.

Workforce levels increased 1% in the quarter.

About half of the increase was driven by more individuals in the training pipeline and the other half was due to capital projects, including positive train control activity.

When you think ahead to the fourth quarter, remember that we saw the benefit of a one-time $20 million payroll tax refund that is reflected in last year's fourth quarter comp and benefits expense.

Turning to the next slide, fuel expense totaled $866 million, decreasing 2% versus 2012, primarily driven by lower average diesel fuel price.

In addition, gross ton miles declined 2% due to lower coal and grain shipments.

This mix impact also contributed to the 1% increase in our fuel consumption rate compared to 2012.

Moving on to our other expense categories, purchased services and materials expense increased 8% to $588 million due to higher locomotive and freight car contract repair expenses and joint facility maintenance expense.

And we're incurring logistics management fees associated with the 2012 Pacer agreement, which are recouped in our automotive freight revenue line.

Depreciation expense was $447 million, basically flat compared to last year.

The impact of increased capital spending in recent years was offset by a new equipment rate study that went into effect at the beginning of this year.

Looking at the full year, we expect depreciation to be up about 1% versus 2012, slightly lower than our previous projections.

However, for 2014, full-year depreciation expense should increase at a more normalized rate, more likely in the 5% to 7% range.

Slide 24 summarizes the remaining two expense categories.

Equipment and other rents expense totaled $309 million, up 3% compared to 2012.

Increased container expenses associated with the Pacer contract and growth in automotive shipments drove higher freight car rental expense.

Other expenses came in at $205 million, up $5 million versus last year.

Higher property taxes and freight damage costs drove expenses up compared to 2012.

A moderate reduction in personal injury expense and effective cost control measures partially offset these increases.

For the fourth quarter we would expect the other expense line to be more in the neighborhood of $215 million, excluding any unusual items.

Turning to our operating ratio performance, we achieved an all-time best operating ratio of 64.8% this quarter, improving 1.8 points compared to last year.

Our performance highlights the positive impact of solid core pricing gains and network efficiencies, despite flat volumes.

Through the first nine months of this year we generated an operating ratio of 66.5%, improving 1.5 points from 2012, clearly illustrating the strength and value proposition of the Union Pacific franchise.

Union Pacific's record year to date earnings drove strong cash from operations of nearly $4.9 billion, up 12% compared to 2012.

Free cash flow of $1.3 billion reflects the growing profitability of the franchise and includes a 13% increase in cash dividend payments versus 2012.

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

At quarter end our adjusted debt-to-cap ratio was roughly 39%, which includes the impact of adding over $450 million to our balance sheet debt since year-end 2012.

Opportunistic share repurchases continue to play an important role in our balanced approach to cash allocation.

In the third quarter we bought back nearly 3.7 million shares totaling $575 million.

Year to date we have purchased more than 9.6 million shares totaling over $1.4 billion, already matching our full-year spend from last year.

Looking ahead, we have around 5.4 million shares remaining under our current authorization program which expires March 31, 2014.

So that's a recap of our third-quarter results.

As we move through the rest of the year, we're mindful of the economic uncertainty in the marketplace.

For the fourth quarter, we expect to see modest volume growth, mainly driven by improved grain shipments.

Assuming the economy doesn't slow down for the rest of the year, we would also expect to see continued growth in other market sectors.

Given flat volumes in the third quarter, it is unlikely that our full-year volumes will be positive, even with our modest growth assumptions in the fourth quarter.

However, we have to see how the rest of the year plays out.

In addition, we should see solid core pricing gains roughly similar to the third-quarter results.

All in, the fourth quarter should round out another record financial year for Union Pacific.

Now let's take a preliminary look at next year, realizing that it is still very early.

From where we sit today, we're expecting modest volume growth if the economy continues along a slow growth trajectory.

We think there will be some markets that will be stronger than others.

We should see strength in grain shipments, and if the economy holds, there should be positive growth in other business sectors.

Mexico-related traffic should also generate volume gains for us next year.

Our coal business is a little more difficult to predict, but we can tell that you we retained and renewed roughly 50% of next year's $100 million legacy business.

The lost legacy business, which is currently not moving at reinvestable levels, will create about a 2% headwind on our coal volumes in 2014.

But as always, weather and the economy will be the driving factors for our coal business next year.

Although 2014 is a legacy light year, we will continue to generate real core pricing gains.

However, we don't expect to match 2013's levels, which as you know, include about 1.5 points of legacy repricing that won't repeat next year.

In addition, inflation related escalators are expected to be lower next year, including those used to calculate the A-list cost escalator.

At the end of the day, our fundamental strategy is focused on pricing for returns has not changed.

While we won't see a legacy benefit next year and inflation escalators are expected to be modestly lower, pricing on the rest of our business in 2014 remains strong.

When you add it all up we expect to achieve core pricing above inflation next year.

Overall, we're forecasting another record financial year in 2014 if the economy cooperates.

In addition to our pricing initiatives, ongoing productivity gains and volume leverage opportunities should help drive continued margin improvement.

We feel very good about our outlook going forward.

The fundamentals are strong, supported by a diverse franchise that allows us to pursue new, attractive market opportunities.

We will continue to move the ball forward, focusing on improved returns to support capital investments that will strengthen and enhance our network, create value for our customers and drive increased returns for our shareholders.

With that, I will turn it back to Jack.

Okay, thanks, Rob.

As Eric mentioned, we've had a bit of a tough start here to the fourth quarter with the early blizzard slowing coal volumes out of the Powder River Basin.

But the good news is there's still a lot of quarter ahead of us.

As we did in the third quarter, we'll manage through the obstacles to ensure our customer commitments are met and our network is protected.

More broadly, we continue to monitor the economic landscape and the ongoing saga in Washington.

But supported by our diverse franchise, we remain agile and well-positioned for economic recovery.

The 50,000 men and women of Union Pacific stand ready to leverage the opportunities while navigating through the challenges.

We'll continue focusing on reinvestable pricing, attracting new profitable growth opportunities and running a safe, efficient and reliable network that generates greater value for both our customers and shareholders going forward.

So with that let's, open up the lines for questions.

Thank you.

We will now be conducting a question-and-answer session.

(Operator Instructions)

Due to the number of analysts joining us on the call today, we'll be limiting everyone to one primary question and one follow-up question to accommodate as many participants as possible.

Thank you.

Our first question is from Tom Wadewitz, JPMorgan.

Good morning.

Good morning, Tom.

Hi, Jack.

So I wanted to, I guess a broad framework that seems to be shaping up for 2014 is that there are pretty good reasons to think that your volume growth may be bit stronger.

Obviously grain, maybe coal is less of a headwind.

Hopefully the economy.

But you are going to get slower pace of pricing gains, less legacy contracts.

So how would you frame the results of that in terms of margin improvement?

Do you end up with a similar framework for margin expansion opportunity?

Is it more challenging if it is more volume and less price?

How do you think about margin opportunity in 2014?

You know, Tom, I think overall we're in a good position.

We have not varied at all from our guidance that says we are going to get to an operating ratio of sub 65%.

So it will be a little more difficult.

I will let Rob give you some technicolor here.

Yes, Tom, I would just add to Jack's point.

It's moving the ball forward.

As you know, volume is always our friend because we're able to leverage that from a productivity standpoint.

But you are right, without the benefit of the legacy repricing, we expect to continue to move the ball forward.

And that's going to be continued focused on providing good service, leveraging volume where we can to squeeze out additional productivity initiatives and continue to fairly price the business.

You add all that up, we expect to continue to make progress on our overall margins.

Okay.

Great.

And then a follow-up on coal.

I know it's probably really challenging to have much visibility on coal, but are there any parameters that we should consider, that you would consider?

Stockpile levels, any activity you are seeing in the east, plant shutdowns?

How would you put things together in terms of, is it more likely your coal tonnage is up in 2014?

Or is it more realistic to expect it down?

Just a little more detail on framing coal, if you can.

Sure.

I think overall, Tom, if you look at energy and the coal business, the two biggest factors are always going to be energy consumption.

How much electricity is generated and what the weather is going to be like.

We've seen the stockpile levels on a national basis come down a bit.

But you always have to be careful because even within that mix of business you have some that are a little higher, some that are a little lower.

Eric, you want to put some technicolor around that?

I think that's exactly right.

Stockpiles have come down.

They're about 20 days below where they were last year.

Actually a couple days below what would be considered historical norms.

What Jack said is exactly correct.

Factors are what's the electrical consumption generation, what's weather.

Those are always going to be key factors.

Okay.

Thanks for the time.

Our next question is from the line of Allison Landry of Credit Suisse.

Good morning.

Just wanted to follow up on Tom's question a little bit, but more with regards to rail inflation in 2014.

So if we're assuming this year inflation was around 2.5% to 3%, is it fair to think about next year being closer to 2% to 2.5%?

Rob?

Yes, Allison, at this point in time, and of course things can change, we would expect that inflation looks like it is going to be all-in 2%-ish.

2%-ish.

Okay, great.

And then, as a follow-up question on the crude by rail and looking towards next year.

Without getting too granular, I was wondering if you could comment on some volume growth that you see that is less spread-dependent?

And also within the context of new origination terminals that you have coming on-line in the Nyobrara.

And some new destination terminals in Louisiana and Texas that are UP-served.

Sure.

Eric, do you want to do the rundown on what we're looking at for 2014?

Yes, we still believe we will see moderate growth in 2014.

As we indicated in our comments, it is dependent upon a lot of market dynamics including the spreads, the timing of additional capacity, production levels, overall demand.

We're still very optimistic as we look at destination opportunities in California.

Those destinations are still coming on-line.

Some of them have long lead times just getting through the normal construction process that you typically go through in that region of the country.

But again, kind of the normal vagaries of market dynamics will drive what happens next year.

Okay.

Thank you very much.

Thank you.

Our next question is from the line of Scott Group, Wolfe research.

Thanks.

Good morning, guys.

Good morning, Scott.

Good morning.

I want to just follow up on the, Rob, your comment around pricing for next year, and understanding legacy light.

But when we think about 3.5% pricing that you got in third quarter, how much legacy do you think in third quarter you actually got?

Because I'm guessing with coal that was down, you didn't get a full 1.5 points from that.

I just want to get what the base is tracking right now, ex legacy.

Then maybe if you can give any color on how you think mix could help or hurt next year with grain coming back, and maybe some of the other moving parts when we see that overall utilization next year.

Yes, Scott.

In the third quarter our reported 3.5% price included, call it roughly 1.5 points of legacy.

But, to your point, the 3.5% did not include probably less than 0.5 points of coal reprice business because the coal didn't move.

So kind of do the math on that.

As you look forward in 2014, yes, it's a legacy light year, and yes, mix will play a part.

If the volume of business that we've repriced, whether it be in coal or grain, if it happens to move before we have lapped the renewal of a contract, then we should see the benefit of the price on our price calculation.

But as I always point out, if the business moves after we have lapped the repricing, while it may not show up in our core pricing number that we report, it will show up in our margin.

So it is a net benefit to us, clearly.

So I guess I would just summarize by saying that we head into 2014 as optimistic as ever on our ability to price.

But we just won't that have benefit of that, call it 1.5% legacy charge.

Okay.

That's helpful.

And then this other question for you, Rob, on the balance sheet.

You mentioned that we are going to need to reauthorize share repurchase next year.

As I look, you guys are at about a full turn less of leverage than most of the other rails, and your returns are better than average, for sure.

Do you think that there's an opportunity, now that we're through legacy and we need some other parts to the story, is there an opportunity to more aggressively take on some leverage and more aggressively buy back stock?

Scott, as you know, we always take a balanced approach.

And as I have said many times, we're comfortable in the range we are right now in our net debt-to-cap ratio.

It's not how we manage the business, but that's kind of a guiding light.

So we'd always take a look at it, but that has served us well to be in that range.

In terms of will we look at more or less, we are going to be, hope to be optimistic in terms of our share repurchase.

We did this year, as you know, buy at a higher rate of share buyback this year than we did last year, so we have been ramping that up.

And I think that speaks to our thought process.

All right.

Thanks, guys.

Our next question is from the line of Ken Hoexter, Bank of America Merrill Lynch.

Great.

Good morning.

If I can hit Eric up a bit on intermodal.

Looking at domestic, is this the run rate here, the low single-digits on the domestic side on the highway adoptions?

And then internationally you noted some losses.

When do you grandfather that?

And should we see growth going forward in the fourth quarter into next year?

When do you start looking at the environment on the international side as well?

Let me start with the international.

The international, what I mentioned was some market share shifts amongst the steamship carriers.

And so, as you know, there's excess steamship capacity and there's natural shifts that are going on amongst them.

As the bid seasons happen every year, those shifts will happen in the steamship arena outside of the rail arena.

In terms of the domestic intermodal side, the 4% we're proud of, but we think there's upside.

We think there's still a large over-the-road truck market out there for us to convert.

We think we have the right products, we have the right strategies, we're investing in our franchise.

We have talked publicly about our new facility outside of El Paso, Texas that will be coming on line next year.

We think that will help us penetrate significantly, the Maquiladora market there around El Paso, and also allow us to put some new products and services in place.

So we are excited about the upside for continued domestic over-the-road conversions.

Great.

If I could get a follow-up with Rob on the productivity side.

As you look toward a little bit less coming from yields and more of that improvement coming from productivity, do you still see accelerating opportunities to continue to gain on the productivity side?

How do you look at that opportunity?

Yes, Ken, we never run out of opportunities to squeeze out productivity.

Lance and his team are continually looking at the mix shifts that take place in the business.

We challenge ourselves, and you've heard me say this many times, to offset 100% of inflation with productivity.

If we offset half of inflation with productivity, we're doing pretty well.

Our track record has spoken very strongly, I think, in doing so, even without the benefit of volume.

So if we get positive volumes that certainly will help.

We'll continue to look for every opportunity we can.

Appreciate the time.

Our next question comes from the line of Justin Yagerman with Deutsche Bank.

Good morning.

Wanted to get a sense as we enter into this post-legacy era for you guys, how your average book is structured right now with your customers.

And what the pace of contract renewal is going to look like on a go-forward basis and how we should expect that that gets attacked.

As I look out over the next five years, what piece of your overall book do you think comes up?

And what's the average tenor of the contracts that you have been re-signing?

Eric?

Justin, I'm not sure quite what you are asking.

We've talked historically in the past that at any one given time about 70% of our contracts or our prices are locked in for the next year.

As we go into the future there's a natural evolution of pace of things that come up, as you go through different markets.

We are, as Rob said and I think as Jack said, we're continuing to be excited about the value of our franchise and the value proposition that we sell, and the ability to get price as we go forward.

Eric, I think what he is talking about is, and Justin, chime in here, buddy, about 40%, typically 40% to 45% of our business is tied up in multi-year contracts that in that our current world 3 to 5 years is probably the time frame of those.

About a third of the business, or 30% is tied up in one year, like letter quotes and deals.

And then the other 30% is roughly tariff that we have 20 days notice in terms of changing price.

At any one point in time we have our business constantly being evaluated, and looking for market opportunities where we can take advantage of price increases.

That was exactly what I was looking to get at, so thanks for the clarification, Jack.

As I think about the guidance here looking out to 2017, I was just, Rob, wanting to get an idea.

Obviously volume has been more challenged in the near term because of coal.

But as I look out to 2015 and beyond, there are some expected positives on the chem side of your business, specifically on petrochem, I would think.

I wanted to get a sense as you guys think about mix within that long-term guidance, what type of volume CAGR you think you need to have, cognizant of what we just talked about in terms of the pace of pricing going forward.

And that being more of an inflation plus, as opposed having to that bump from the 1.5 points of legacy that we're seeing right now.

Yes, Justin, this is Rob.

The guidance, just as we said, the guidance on the operating ratio is by full-year 2017, to achieve a sub full-year 65% operating ratio.

Volume is our friend.

When we give that sort of guidance, we are assuming that the economy will cooperate and that volumes will be on the positive side of the ledger, if you will.

But we know that we can't predict precisely exactly what the mix is going to look like.

So we are going to have to deal with the hand that the economy plays us between now and then.

And we're confident that if the economy cooperates, that the mix will enable us to achieve that target.

But as I have said all along, each measure, each metric we have given, as we've been working down from the mid-80%s operating ratio years ago, we are going to get there as soon as we can, as efficiently as we can.

We are not going to stop.

So the sub-65% is not an end game, it's just the next rung on the ladder, if you will.

And we will get there as efficiently leveraging volume if we can, leveraging productivity and leveraging strong price.

Okay, so you're seeing volume growth that's sub-GDP right now across your franchise, and still being able to leverage that into margin improvement, which is something you guys have been able to do, you think you can do even as we start to see more legacy wear off.

Yes.

Thanks, guys.

Appreciate the time.

Our next question is from the line of Chris Wetherbee, Citigroup.

Thank you.

Good morning.

Following up on the longer-term OR guidance, as you think out, I think you have a few years now left to hit a target which is a few hundred or a couple hundred basis points away from the run rate that you are at right now.

When you think about the setup, is there anything that we should be thinking about, absent mix, that would be preventing the continued progress that you've been making steadily over the last couple of years?

Obviously legacy comes into all of that.

I want to make sure from an operational perspective, are there any other challenges we may need to think about?

It strikes me as being a bit on the conservative side, which is good, but I want to get a sense if there's something I'm missing in there on that guidance.

I think overall, Chris, when you look at it, we look at it from the perspective that we are going to achieve those goals.

We are going to achieve them despite whatever hand we are dealt in terms of the economic activity.

That's the commitment we are making.

But you can never say never in terms of what happens if you have another 2008.

What happens if the Washington situation melts down and consumer confidence wanes and we do a double dip here.

We're not looking forward to that.

I think the thing that you can feel good about is if you go back and you look at our results, and you look at our track record when those things happen, we marshal very effectively.

We deal with it and we move on.

So I don't know -- Rob, do you have any other big one-time things?

We've got productivity gains that we are absolutely focused on, Lance and his team.

Rob always uses the term squeeze.

I actually think of it more positively than just a squeeze.

We have a lot of people working hard to do things better to drive bottom line results, and you see that reflected in our 64.8% operating ratio.

Eric and his team are very effectively deploying business development strategies and taking advantage of price opportunities in the markets where we have the opportunity to go above and beyond what would be considered inflationary.

And that's good for us.

So everybody is focused on that.

Rob?

You are exactly right.

Clearly going from a mid-80%s to a mid-60%s rate of improvement is one slope.

Going from where we are today to the sub-65%, the slope of the line is different.

But the tenets of how we get there are unchanged.

Sure, that makes sense.

It's helpful.

When you think about the capital spending side of it in context of that target and the slope of the line, as you say, over the course of the next couple of years, I think you updated us with guidance last year around this time for how we should be thinking about CapEx.

Anything you need to change as you think about that, as you are further into that?

Obviously PTC is still in the picture and probably will be for at least a few years to come, but curious your thoughts around that for 2014 and beyond.

We are watching our capital spending very closely.

We had reduced our 17% to 18% to 16% to 17%.

Clearly that implies we are going to see some volume growth.

If we don't see the volume growth, we'll be paring back capital.

We'll be making the right decisions from a return perspective as we see the needs across our network.

PTC is still in there.

At some point in time we may or may not change those numbers.

But at least right now we are comfortable with the 16% to 17% number we put out there last year.

Great.

Thanks very much, guys, I appreciate it.

Thank you.

Our next question is Brandon Oglenski with Barclays.

Good morning, everyone.

I wanted to come back to the pricing discussion.

In the past you guys have been pretty successful at getting rates up to reinvestable levels.

Is there any way to quantify for us today what percentage of the business, or in broad strokes, that remains at uninvestable rates that has a lot of pricing upside in the future?

Rob, why don't you take a shot at.

Brandon, I know what you are asking, and it is just not a number we provide.

Other than to say that we're confident across our entire book of business there are opportunities for us to price to market and make sure that we are at the reinvestable level.

So that's as detailed as we get on that.

Okay.

And a follow-up for Eric.

When we look at grain dynamics heading into 2014, what's the mix looking like right now from a domestic grain perspective or an export perspective, or even ethanol?

And how is that going to impact mix and revenue and volume for you going forward?

As you know, with the drought and high US corn prices, US grain on the world markets really took a hit.

Just because we were high-priced relative to what the other prices were in other growing markets around the world.

It looks as if, and as you know the USDA websites have been down for the last several weeks, but the last public report looks as if this will be a near record year for corn production.

And so I think that will make US exports, corn, on the bean side, and even wheat exports, more competitive on world markets.

I think you should see some growth in export opportunities, vis-a-vis this year as you go into next year.

All right, thank you.

Our next question is from the line of William Green, Morgan Stanley.

Rob and Jack, you have always described your longer term OR guidance as not really a target and an ending point, but things can go beyond that.

And I think something that we've all struggled with over the years is thinking about what structure of a network limits how good margins can get.

When you look at the Union Pacific network and you see what you have been able to achieve over the last five to seven years, which in margin terms are kind of breathtaking, is there anything about the network that makes you say, yes, it is going to be hard for us to ever achieve record profitability relative to our peers in the industry?

Is there anything about your network structure that limits how good you can be?

Man, I can't think of anything.

Rob, can you?

No, Bill, there's not like a mountain that's in our way that's not in other people's way.

We all have the same challenges.

It's a great theoretical question in terms of how low can you get.

And we get that question.

The sub-65% is pretty good performance.

We think we can go below that.

While at the same time, of course, that's just a measure we use as shorthand, if you will.

Because at the same time what we are very focused on, of course, is improving returns, improving income, driving larger cash, et cetera.

So at the end of the day that's what we're really focused on.

How low can the margins go?

We will see.

Yes, okay.

Eric, a follow-up for you on intermodal.

Do you feel like the new hours of service rules so far have had any impact on your growth rate there?

Or is this something that will take longer to show up?

Any impact right now has been negligible.

Certainly the truckers probably are seeing some impact on their expense lines.

But in terms of conversion rates to intermodal it's been negligible so far.

We do expect over the long term that it will drive more business to intermodal, to the rails.

And as I mentioned before, we still are pretty excited about the upside opportunity in terms of over-the-road conversions.

All right.

Thank you so much for the time.

Our next question comes from the line of Walter Spracklin of RBC Capital Markets.

Thanks very much.

Good morning everyone.

My question focus in on the weather impact that you had in Colorado and Denver and more of a theoretical one here.

When you see that kind of weather impact manifest itself, and it may be that we are going into a period where in the future where these happen more often.

My question is, do your clients, do your customers say -- okay this is weather, it's out of your control.

We won't let it damage too much our relationship.

Or are we seeing more and more customers saying, and it looks like you've been able to reroute quite well, do you see that as a competitive advantage versus other railroads that might or might not be able to reroute as well due to whatever network constraints they have?

In other words, do you view that, your rerouting capacity, as a competitive advantage?

And perhaps, Lance, you could answer that, maybe Eric, in your customer conversations, are they attaching more and more importance to that ability to reroute?

Walter, I will let Lance and Eric chime in here.

But let me just, from an overview perspective I think our team did a remarkable job of working with customers, rerouting trains, and ensuring that their freight moved to their marketplace as quickly and as efficiently as possible.

And doing it in a way that they knew we're working hard to keep them ahead of the trouble and out of harm's way.

And then to get the whole process back up and running again, get the railroad back up and running in a record amount of time.

I think customers appreciate that.

We spent a lot of time talking to them about our strategy, is basically to create value for them.

We consider that a strategic advantage of ours in terms of being able to demonstrate what does value mean.

And this was a great time to do that.

That's not to say we were perfect in all cases, but I think our customers are giving us high marks for that.

Lance or Eric, you want to chime in on that?

Yes, Jack.

We do talk about how our franchise is a wonderful thing, and it showed through in how we reacted to what happened in Denver.

We had alternative routes that we could use, and to Jack's point, support our customers while they were going through some of the same issues.

So I think that's a great manifestation of the franchise strength, basically.

Better than your competitor?

I won't speak to whether it's better than our competitor.

We focus on providing our customers outstanding service so they fall in love with Union Pacific and think of us first.

One of the things that Lance and Eric's team does that I love, and I think the customers do as well, is they do a postmortem on every one of these events.

And go back and say what did we learn from this?

What would we be prepared to do differently the next time the cards line up this way?

So that we always learn, we always -- the next time mother nature takes a swipe at us, we are better prepared and more experienced in terms of how to deal with it and minimize any disruptive situations for our customers.

That makes a lot of sense.

My follow-up question is on your crude by rail.

You mentioned St.

James seems to be he showing a little bit more resiliency.

Other areas seem to be more impacted by the differential.

My question is to what extent can your St.

James destinations be insulated from that differential?

And perhaps talk a little about the difference as to why that is and what level does it need your St.

James destination and also be impacted by differentials.

We talked in the past about the reason for St.

James being such a premier rail destination.

And it is really the connectivity, the pipeline connectivity, the connectivity to multiple refiners, the ability to do blending there.

So it has become really a premier destination for crude, light sweet crude going to the gulf, and we think that resiliency will remain.

As you know, the oil will move to where the market dictates based on spreads, but we think that the factors we have historically talked about with St.

James makes it a premier destination.

We'll see that resiliency remain for the future.

That's all my questions.

Thanks very much, guys.

Thank you.

Our next question is from the line of David Vernon of Bernstein Research.

Good morning.

Thanks for taking the question.

Eric, if you could give us a little more color on the legacy retention issues.

Are we done settling up the legacy book for next year?

Were the plants that did not get renewed, did they just get shut down?

Or was it a share loss?

And whether this was Pierre B or Rocky Mountain coal?

As you know we don't really get into customer-specific negotiations or discussions other than what we've said before.

We had about $100 million of legacy renewal.

We retained about half of those.

And the half we didn't retain was not at reinvestable levels.

Okay.

But were some of the losses perhaps due to the plant just being shut down?

Or was it --?

If you don't want to comment, that's fine.

I'm just trying to understand what was driving the loss.

Yes, our calculation of legacy does not include plants that are shut down.

There are lots of shutdowns going on in the east in terms of mine shutdowns.

But in terms of our serving territory, there is not any measurable mine shutdowns that are occurring in our serving territory.

At least not this year and not for the foreseeable future.

All right, great.

Maybe just as a quick follow-up, how do you feel about the viability of the Colorado and Rocky Mountain coals that we're moving east relative to the Illinois basin going forward?

That's good question.

Utilities that are looking to convert, they can decide to convert to Illinois basin or Colorado-Utah coal.

And there's a different sweet spot depending on the mechanical burn capability and the scrubber capability at the utilities.

They have an economic profile that may drive them one place or the other.

We intend to participate in both markets.

We have service products in both markets.

We still see Colorado-Utah coal having a strong place in the marketplace, particularly the export market.

And I think going forward their export market opportunities for Colorado-Utah are probably larger than even the Illinois basin export coal opportunities.

Great.

Appreciate the time.

Our next question is from the line of Anthony Gallo with Wells Fargo.

Thank you.

Good morning, all.

I thought I heard you mention that transloading was a bit of a headwind for intermodal.

I was hoping you could expand on why that is.

That doesn't look like a trend that's about to reverse.

So, some color there, please.

As you know, some of the BCOs are looking at landing product on the west coast and transloading it into a domestic intermodal container, as opposed to using the steamship container to move the product all the way inland.

That is a trend that appears to have ramped up in the last year or so and there are some benefits for some customers to do that.

There are some benefits for some customers to keep the steamship carrier, what we call IPI option to move all the way inland.

Our view of the world is that we are going to participate in both markets and we're going to provide effective products and services no matter how the shipper decides to ship the product.

Okay, great.

I'm hoping could you either confirm or deny the chatter we've heard from some of the IMCs that part of tissue with intermodal growth on your network is lack of access to equipment.

And I think they're talking specifically about chassis.

Can you put any detail behind that?

Thank you.

Wow.

Eric?

Yes, I think it's just chatter.

We do not have a lack of access issue on our network.

I think it's just chatter.

That's perfect.

Thank you.

Thank you.

Our next question is from the line of Justin Long of Stephens.

Thanks and good morning.

You touched briefly on the Santa Teresa intermodal facility earlier and it sounds like that's still on track to open early next year.

But could you provide any details on the capacity of that facility?

And how we should think about the potential ramp in volumes in 2014 and beyond that?

So our investment in that facility is going to do a couple of things for us.

One, as you know, the El Paso-Juarez area has huge Maquiladora opportunities.

I think there's something like 250 customers that have manufacturing facilities in that region.

And today a large portion of that is moving by truck over the road.

We are capacity constrained in our current El Paso intermodal facility to take advantage of that.

So with the opening of this new facility, we will immediately be able to double our capacity but we're not limited by that.

We will have the footprint to go beyond that as we have market opportunities.

Yes, Justin, the initial build-out should handle 250,000 lifts a year.

And we have plenty of space available to go way beyond that, in addition to it beg our new fueling facility.

Great.

That's helpful.

Second question, I was wondering how much visibility you have on the potential impact from the new automotive production that's coming on-line in Mexico the next couple of years.

Is that something that should be a meaningful tailwind as we head into next year?

Or is it still too hard to tell how much that volume can move on your network at this time?

So if you're referring to the large announced facilities by Nissan and Volkswagen, those opening dates are beyond next year.

We, along with the Mexican railroads, both the FXC and the KCS, we're working to develop service products and offerings so that we can get our fair share participation in those.

But those facility opening dates are beyond 2014.

If I could just add on that, Justin, because you have heard me say this many times.

No franchise matches the Union Pacific in and out of Mexico.

We're the only railroad that has the six border crossing points.

Today we enjoy an excess of, call it around 80% market share of all autos business in and out of Mexico.

While we haven't given a precise number of what the market share is going to look like after these plants go, we feel very good about the franchise we have north of the border.

And the fact that we are the only rail that crosses the six border points, that we will get our fair share of business that wants to move north and south.

Okay, great.

I appreciate the time this morning.

Our next question is from the line of Cherilyn Radbourne of TD Securities.

Please proceed with your question.

Thanks very much and good morning.

It's been a long call, so I will just ask one.

I was just struck by the massive decrease you've had over the last couple of years in slow order miles.

Just wondered if you could elaborate on what's driving that and where else that shows up in your operational metrics and in the cost structure.

Did Lance pay you to ask that question?

(laughter)

I love that question.

Go for it, buddy.

Cherilyn, It reflects our capital programs, which are pretty sophisticated in trying to figure out where to spend the money and what to spend it on.

So you see us investing $1.6 billion, $1.7 billion directly into track infrastructure renewal for about the last, call it 6 or 7 years.

And that slow order mile decrease is a direct reflection of that appropriate investment.

When you think about the impact it has, it has an impact on every aspect of customer service, because those slow order miles are throughout the network.

They basically have the network when they're present operating a level that's below design.

And any improvement we make in slow orders, generally speaking, has a direct and immediate impact on the reliability of our service and the absolute magnitude of the service we can provide.

Thank you.

That's it for me.

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

Eric, quick question on intermodal.

Could you give us a sense of what you believe the discount to the product vis-a-vis a like-for-like truckload move would be today?

We've talked before that it's lane dependent, lane specific.

But a 15% number is probably a reasonable number, 15% to 20% in terms of the all-in cost of intermodal versus an equipment over-the-road long haul truck.

But, again, that's lane dependent, lane specific.

Of course.

When you talk about some of the optimism that comes from that network being able to even reaccelerate the 4% volume growth, is it under the context of being able to continue to narrow that gap as well and accelerate volume growth?

Or do you anticipate that differential to be constant and expect volume growth to potentially accelerate?

How should we think about that?

Couple of factors.

One, the question was asked before about the hours of service.

So that is going to continue to have a cost impact on truckers, so their prices are going to increase.

So we'll continue to grow our pricing even without narrowing the gap.

I do think there are places where we can narrow that gap and still convert.

Fundamentally we've done some work and analysis that basically says there's still a pretty large untapped market of people who just haven't tried intermodal and haven't used it.

So it's an ideal market sales opportunity for us to penetrate.

There's lots of upside opportunities and we could get it even by narrowing the gap.

We could still grow.

We also have new service production that your team has been work on with Lance and his team in terms of providing great service, some new market destinations and some originations.

As the network continues to evolve and develop, that's an opportunity for us as well.

That's helpful.

Thank you.

Our next question is from the line of Jason Seidl of Cowen and Company.

Good morning, guys.

Two quick ones here.

When I look at coal out into 2014 and look at the arc or the yield, given that you have retained 50% of that legacy business, how should we look at how that arc is going to move?

Was the 50% retained longer length of haul, about average?

Rob?

Just trying to get a sense of the number that we are going to see going forward.

For planning purposes, I'd look at it as an average.

We're not going to give detailed arc projections for coal.

By the way, it will be dependent upon mix.

We're confident in our ability to continue to price our overall book of business.

We won't, obviously, have the legacy tailwind that we called out.

But the arc will move based on the mix of the coal traffic that actually moves.

So I can't give you a projection on that.

Right.

All I'm saying is that the mix that you retain out of that 50%, that wasn't overall vastly different from your normalized mix.

I call it in the normal range.

In the normal range.

Okay, great.

Just a quick follow-up question on intermodal.

I hear you guys on in terms of the hours of service and truckload rates eventually to have go up, but we've been waiting for that for awhile and we haven't really seen much progress on that.

How do you look at gaining market share off the highway if we're still stuck in this very muted truckload pricing environment?

Again, hours of service just went into effect on July 1, so that's why when I asked earlier about negligible impact it really is just recent.

If you look at what we've said before, we are putting in place lots of products, new offerings.

There's an opportunity to -- what we've seen is large shippers really have a great understanding of the intermodal value proposition and their heavy uses of the intermodal value proposition.

There's some market segmentation opportunities for the other guys other than the Walmarts and Targets of the world.

And that's why I think we continue to be very optimistic about the ability to penetrate intermodal, get growth and get price.

Thanks for the time as always, guys.

I appreciate it.

Our next question is from the line of Keith Schoonmaker of Morningstar.

Thanks.

I think a couple of us have hinted at how conservative this seems, a sub 65% goal by 2017.

I mean no insult because you guys have identified conservative goals in the past and hit them again and again, but are there a couple of threats?

What would be the top couple of threats that could disrupt this progress?

I think when you just step back and look at it, certainly what we just went through in Washington DC, and the fact that it wasn't really resolved, it was just moved ahead.

It's still out there and it's very concerning for us, given that 70% of the economy is driven by consumer spending.

And so anything that would cause the housing market to go back down, for people to stop buying cars, those have all been big benefits to us in the recovery piece of that.

And that's a concern for us.

I don't know of any other, quite honestly.

Rob?

I would just add to that, you are right.

And you are also right that we're not going to stop at that and get there as efficiently as we can.

But the things that can impact you, clearly in addition to the economy, as Jack points out, would be the fuel price.

Just the math of the operating ratio performance can be heavily impact by fuel.

But beyond that it's business as usual, if you will, in terms of the tenets of what are going to get us from here to there.

So it sounds like you identified fuel price and consumer spending are a couple of principal ones, and maybe legislation.

But I notice that you didn't mention regulatory environment.

Is that less of a threat than might previously been discussed?

You never say never, because there are a number of pieces of legislation that we're watching, either legislation or from the Surface Transportation Board.

But we work very hard to make sure that we're telling our story clearly, that we're creating value for customers, that we're investing heavily in our network and infrastructure.

And anything that gets done on the regulatory front, we've been very clear that if it caps our ability to generate a return for our shareholders, it is going to curtail capital spending and investment.

Nobody really wants to see that happen.

Most people in Washington want to see more jobs and growth.

I never want to say we're not concerned about it, but we're working it as hard as we can to ensure that's not a major issue for us.

Thank you.

Our next question is from the line of Jeff Kauffman of Buckingham Research.

Thank you very much.

I know it has been a long call so I will be brief.

What should we be thinking about in terms of, I'm looking at cash flows here, tax rate?

And with the reversal of some of the bonus depreciating items over the last year, what should we be thinking about in terms of deferred taxes and depreciation on the cash flow side?

Rob?

Yes, Jeff, you are right, bonus depreciation, we've had that benefit for several years now.

We don't anticipate that we will see that benefit continue into 2014.

As I have said, that impact in 2014 is going to be in the several hundred million dollar range.

But it's not going to impact our capital structure or our plans that we have outlined.

But it is going to be in that neighborhood.

Okay.

So in terms of modeling free cash flow, how should I think about the difference between the income statement depreciation, cash flow depreciation, and what tax rate should I be thinking about?

From a tax rate standpoint, I would use around 38%.

All right.

Thank you very much.

Congratulations.

On a book basis.

Our final question this morning is from the line of Don Broughton of Avondale Partners.

Good morning, everyone.

Thank you for taking my call.

Question.

In your assumptions and longer term, still a ways away, what kind of assumptions have you made on international intermodal post the opening of the wider Panama canal?

So in the latter half of 2015 and 2016, and in 2017, are you looking for international intermodal volumes to be flattish, just diminished rates of growth, or actually go negative for you?

We have talked publicly before, and we still think it holds, that today about a third of the business, or about 30% of the business goes all water to the east coast, versus west coast destinations.

We think that that might grow by 1% or 2% to 31%, 32%, but it won't be beyond that.

Thank you very much.

Thank you.

At this time I would like to turn the floor back over to Mr. Jack Koraleski for closing comments.

Great.

Thanks for joining us on the call this morning.

We look forward to speaking with you again in January.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.