聯合太平洋集團 (UNP) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Union Pacific fourth-quarter 2014 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.

Thank you, Rob, and good morning, everybody.

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

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

This morning, we're pleased to report that Union Pacific achieved fourth-quarter earnings of $1.61 per share, an increase of 27% compared to the fourth-quarter 2013, and another quarterly record.

Total volumes were up 6%, with increases in all six of our business groups.

Industrial products and coal showed particular strength, up 10% and 9% respectively.

These strong volumes, along with solid core pricing and productivity, help drive 3.6 points of improvement in our operating ratio to a record 61.4% for the fourth-quarter.

These strong fourth-quarter results rounded out a full-year 2014, which was very successful on many fronts.

We posted record financial results in revenue, operating income, earnings-per-share, and operating ratios.

The strong demand we experienced back in the first quarter was sustained throughout 2014, driving total volume growth of 7% for the year.

Robust volumes challenged our network for much of the year, and we remained focused on adding the necessary resources to safely improve service and we're encouraged with the progress that we're making.

We remain fully committed to deliver safe, efficient, value-added service for our customers.

So with that, I'm going to turn it over to Eric.

Thanks, Jack, and good morning.

In the fourth quarter, volume was up 6%, as solid demand across our franchise led to volume gains in all of our business groups.

Strength in industrial products and coal led our volume gain for the quarter, and intermodal and chemicals volumes were strong as well.

Growth moderated in ag products during the quarter, as we are now comparing to the strong grain harvest in 2013.

Core price increased 3%, which drove average revenue per car up by 3% in the quarter.

Our volume growth and improved average revenue per car combined to drive freight revenue up 9%, which set a fourth-quarter record of $5.8 billion.

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

Ag products revenue was up 9% in the fourth-quarter and a 4% increase in volume and 5% improvement in average revenue per car.

Grain car loadings were up 3% in the fourth-quarter, reflecting another record crop yield quarter for both corn and soybeans.

US corn production was up more than 3%, and soybean production was a up 18% over the 2013 crop.

We saw strong overseas export feed grain shipments this quarter, partially offset by lower exports to Mexico, as receivers switched to local supply.

Domestic feed grain shipments also contributed to our growth, as lower corn prices drove demand.

Wheat can car loadings continued to be a headwind, as lower wheat prices drove down export shipments.

Grain products volume grew by 4%, as strong gasoline demand and favorable export conditions drove another strong quarter of ethanol shipments.

Food and refrigerated shipments were up 4% for the quarter.

There was a strong domestic sugar beet crop, which combined with continued import beer growth to more than offset softer fresh and frozen food shipments.

Automotive revenue was flat in the fourth quarter, on a 2% increase in volume.

Average revenue per car was down 2%, driven by the previously reported change in the way we handled per diem shipments and also by mix.

As a reminder, we lapped the per diem change at the end of 2014, so we will not have this impact going forward.

Finished vehicle shipments were up 2% this quarter, driven by continued strength in consumer demand.

The seasonally adjusted annual rate for North American automotive sales was 16.7 million vehicles for the fourth quarter, up more than 1 million units from the same quarter in 2013.

Partially offsetting our volume gain was production variability at some key plants.

On the parts side, increased production and a continued focus on over-the-road conversions drove a 2% volume increase.

In chemicals, our revenue was up 8% for the quarter on a 5% volume increase and a 3% improvement in average revenue per car.

Fertilizer shipments were up 17% in the fourth quarter, driven primarily by strong international demand for potash and shipments of phos rock.

Crude oil volume was up 7% this quarter.

We saw gains in shipments from the Niobrara and Uintah basins, which more than offset continued weakness in Bakken shipments caused by unfavorable price mix.

Finally, liquid petroleum gas storage shipments, along with fuel additive and lube oil demand, drove our petroleum and LPG shipments up 5% for the quarter.

Coal revenue increased 9% on a 9% increase in volume and a 1% increase in average revenue per car.

Southern Powder River Basin tonnage was up 17% for the quarter.

You will recall that we had an easy comp, due to a snowstorm that impacted shipments out of the Southern Powder River Basin in October 2013.

In addition, strong demand from lower inventories and stockpile replenishment ahead of winter contributed to our growth and offset volume headwinds from our previously reported legacy contract loss.

Colorado Utah tonnage was down 11% for the quarter, driven primarily by continued soft demand for export coal.

Industrial products revenue increased 15% on a 10% increase in volume and a 5% improvement in average revenue per car.

Nonmetallic minerals was up 28% for the quarter, again, primarily driven by a 35% increase in frac sand shipments.

We continue to see to see demand for construction product shipments where volume was up 17% based on demand for aggregates and cement.

Lumber shipments were up 10% in the quarter, driven by housing and nonresidential construction demand as well as growth through over-the-road truck to rail conversions.

Finally, in intermodal, revenue was up 11%, driven by 6% increase in volume and a 5% improvement in average revenue per unit.

We had another strong quarter in the domestic intermodal, with volume up 10%.

New premium services and highway conversions continued to drive and lead to our best-ever fourth quarter in domestic intermodal.

Our international intermodal volume was up 2%, as new business volume and continued economic strength in the US offset headwinds created by reduced west coast port productivity.

Let's take a look at look at how we see our business shaping up for 2015.

In ag products, the strong corn and soybean crop and competitive corn prices should sustain domestic demand.

So worldwide grain inventories are relatively high, creating a potential headwind for exports.

Ethanol margins are tightening, which can lead to a reduction in ethanol production in the near term.

Longer-term, increased gasoline consumption and export opportunities should create strength in the ethanol market, and demand for DDG should strengthen as China reenters the market.

We also anticipate another strong year of import beer growth.

In automotive, finished vehicles and auto parts shipments will continue to benefit from strength and production in sales, driven by an improving US economy, replacement demand, and lower gasoline prices.

Low inventory levels should continue to drive replenishment demand for coal into 2015.

We are watching natural gas prices closely, but at this point, we have not seen lower prices impact demand for coal.

We expect most of our chemicals markets to remain solid in 2015, but we think crude oil would be a headwind throughout the year.

We will keep a close eye on oil prices as the year progresses, as the recent drop has led producers to reevaluate their plans for 2015.

Ultimately, if oil prices remain at current levels, it will impact our crude oil shipments.

We also expect energy markets to be a factor in our frac sand volumes and industrial products.

The decline in oil prices has impacted rig counts, so it is unlikely that we will see the robust levels of growth that we saw in 2014.

However, our franchise is well-positioned to participate in ongoing fracking operations.

We'll have to see how the energy markets play out to see what the ultimate impact will be on our sand volumes.

Also in industrial products, we expect the market in construction products to continue, particularly in the southern part of our franchise.

We also anticipate year-over-year improvement in housing and other construction markets to drive demand for lumber.

In intermodal, consumer demand and highway conversions will drive growth in domestic intermodal in 2015.

In international intermodal, we would expect increased imports to drive growth this year.

However, the deterioration of productivity at west coast ports is having an impact on our volume early in the first quarter.

At this point, while we are hopeful that the parties will come to a resolution soon, international intermodal will be a headwind until the labor dispute is resolved.

To wrap up, there are a number of uncertainties on the horizon.

We are keeping a close eye on the impact of crude oil prices, softening global economies, and the west coast labor dispute.

Overall, we expect the US economy to continue to strengthen this year and drive growth in many of our business groups.

With our diverse franchise, strong value proposition, and continued focus on business development, we expect to deliver another year of positive volume and profitable revenue growth.

With that, I'll turn it over to Lance.

Thank you, Eric, and good morning.

I'll start with safety, where our full-year results included a record low reportable personal injury rate of 0.98, an 11% improvement versus 2013.

I'm very proud of the team, as we made a nice step forward on our commitment that every employee returns home safely after each shift.

In rail equipment incidents or derailments, our reportable rate improved 7% to 3.00, falling just short of an all-time record.

Enhanced TE&Y training and continued infrastructure investment helped reduce the absolute number of incidents, including those that do not meet the regulatory reportable threshold, to a record low.

In public safety, our grade crossing incident rate increased 5% versus 2013.

Driver behavior continues to be a critical factor in crossing incidents.

We continued to reinforce public awareness through community partnerships and public safety campaigns and focused our countermeasures on high risk crossings.

In summary, the team has made terrific progress on our goal of achieving annual safety records on the way to an incident-free environment.

In regards to network performance, we worked hard in 2014 to match network resources with the robust volume growth we enjoyed.

During the latter part of the fourth quarter, our available resources were largely aligned with demand.

That, combined with a successful Thanksgiving holiday operation and better winter action plans, contributed to substantial service improvement in December.

The net result was sequential velocity improvement in each region of our network, all while handling strong volumes.

And while our velocity in December was more than a mile an hour faster than November and the best since January, our service performance still fell short during the fourth quarter.

As reported to the AAR, fourth-quarter velocity was down 8% and freight car dwell up 11% when compared to 2013.

Our performance in December was a step in the right direction, but we are still not we need to be.

The team continues its relentless push to handle our customers' growing volumes while improving service.

Moving to productivity, volume trends for the first nine months of 2014 largely continued in the fourth quarter, including relatively balanced growth in each region.

We continue to leverage volume by increasing train lengths.

During the fourth quarter, we set best-ever records in nearly all major categories.

The exception was in intermodal, where new service offerings created a headwind.

Even so, we still generated a year-over-year increase, in part reflecting our success in growing volumes within these lanes.

And our fuel conservation initiatives generated positive results in 2014, including a 2% improvement in the fourth quarter.

We found new opportunities to reduce waste and continued to deploy advanced technologies that assist the engineer in saving fuel and that optimize train leads.

With the workforce and locomotives resourced to match demand, we are positioned to generate both productivity gains and improved network validity.

Last year, our total TE&Y workforce increased by more than 1,700 employees, and our active locomotive fleet increased by around 800 units.

Surge resources activated during the year accounted for some of the TE&Y and most of the locomotive growth.

In addition to recalls, we hired around 3,600 TE&Y employees in 2014.

Approximately 1,000 of these new hires moved from training to active status during the last three months of the year.

For 2015, we plan to hire 2,800 TE&Y employees to cover growth and attrition and to generate incremental service improvement.

We also plan to acquire 218 locomotives on top of the 261 units we purchased in 2014.

As 2015 unfolds, we will adjust resources based on demand and network performance.

Rebuilding our surge resources is an important part of our operating strategy.

Capital investment in our track infrastructure has also helped us handle volume growth while maintaining a safe and resilient network.

In total, we invested just under $4.1 billion in our 2014 capital program.

This includes $2.3 billion in replacement capital to harden our infrastructure and to improve the safety and resiliency of the network.

At the end of the year, roughly 99% of our track miles were free of slow orders.

Spending for service growth and productivity totaled $1.4 billion, driven by investments in capacity, commercial facilities, and equipment.

Major growth investments included the completion of our Santa Teresa, New Mexico, facility as well as the Tower 55 project in Fort Worth, Texas.

Both alleviated key bottlenecks.

We also invested $385 million in positive train control during 2014, bringing our cumulative PTC investment to $1.6 billion of the roughly $2 billion projected spend.

Assuming moderate economic growth, our overall 2015 capital plan will likely be higher than last year's spending.

New capacity investments will continue in the eastern third of our network, and we will advance quarter strategies and reduce bottlenecks across the system.

Our core investment thesis will not waiver, which is to maintain a safe, strong, and reliable network and to invest in service growth and productivity projects that meet our aggressive return thresholds.

To wrap up, as we start 2015, our operating is to continue to move our service volume frontier up and to the right.

As a result, we expect to generate record safety results on our way to an incident-free environment.

We expect to create opportunities through improved network performance and to continue working with connecting railroads on key gateway interchange performance.

And we'll invest in the resources and network capacity needed to overcome congestion and to handle increased demand, leveraging volume growth and productivity gains to drive incremental operating ratio improvement.

And we will remain agile, adapting and adjusting resources according to network performance and demand.

In fact, we've already started to rebuild our surge plate, moving around 100 older, less-efficient locomotives into storage and 400 or so employees into furlough or alternative work status.

Ultimately, running a safe, reliable, and efficient railroad creates value for our customers and increased returns for our shareholders.

With that, I'll turn it over to Rob.

Thanks, and good morning.

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

Operating revenue grew 9% to nearly $6.2 billion, driven by strong volume growth and solid core pricing.

Operating expenses totaled just under $3.8 billion, increasing 3% over last year.

The net result was operating income growing 20% to about $2.4 billion.

Below the line, other income totaled $71 million, up from $37 million in 2013.

Included in the $71 million was approximately $0.02 per share of one-time items, including real estate gains.

Interest expense of $146 million was up 15% compared to previous year, primarily driven by increased debt issuance during the year.

Income tax expense increased to $867 million, driven primarily by higher pretax earnings.

Net income grew 22% versus 2013, while the outstanding share balance declined 3% as a result of our continued share repurchase activity.

These results combined to produce best-ever quarterly earnings of $1.61 per share, up 27% versus last year.

Turning to our top-line, freight revenue grew 9% to nearly $5.8 billion.

This was driven primarily by volume growth of 6% and [fourth] core pricing gains of 3%.

Fuel surcharge revenue was about flat for the fourth quarter, as the decline in fuel price was offset by the lag in fuel surcharge program and higher volumes.

All-in, we estimate the net impact of the reduced fuel prices added $0.05 per share in the fourth quarter versus last year.

This includes both the surcharge lag and lower diesel costs.

Business mix was also about flat for the quarter, as the positive mix impact from frac sand volume was offset by the increase in lower average revenue per unit intermodal shipments during the quarter.

Other revenue increased 8% in the quarter.

Primary drivers included revenue associated with the per diem on auto parts containers as well as subsidiary-related volume growth.

Recall that last January, we began reporting per diem revenue on auto parts containers in other revenue as a result of the change in how we are compensated for this service.

And as Eric just mentioned, we've now lapped that change on a year-over-year basis, so we won't see a variance from the per diem change, going forward.

Slide 22 provides more detail on our core pricing trends in 2014.

Fourth-quarter core pricing came in at 3%, reflecting steady improvement throughout the year and a more favorable pricing environment.

For the full year, core pricing was around 2.5%, demonstrating our commitment to market pricing at reinvestable levels above inflation.

While 2014 was a legacy light year, we do expect to see some benefit in 2015 for legacy renewals.

And I'm pleased to announce that we have successfully retained 100% of the legacy business that was up for renewal, beginning in 2015.

In addition, we have also successfully renegotiated a year early the legacy business that was due to expire in 2016.

So with the exception of only a few small contracts in the out years, we have now successfully addressed all of our remaining legacy contracts.

Moving on to the expense side, slide 23 provides a summary of our compensation and benefits expense, which increased 7% versus 2013.

Higher volumes, inflation, and increased training expense were the primary drivers of the increase, along with some increased costs associated with running a less-than-optimal network.

Looking at our total workforce levels, our employee count was up 4.5% when compared to 2013.

At this point in time, we plan to hire around 5,700 employees in 2015 to cover attrition of just under 4,000 as well as for volume growth and capital programs.

And as Lance just discussed, the bulk of this hiring will come in our TE&Y ranks.

Labor inflation for 2015 is expected to come in between 4% and 5% for the full year.

This is driven primarily by agreement wage inflation.

Turning to the next slide, fuel expense totaled $813 million, down 10% when compared to 2013.

A 7% increase in gross ton miles was more than offset by a lot lower diesel fuel prices in the quarter.

Compared to the fourth quarter of last year, our fuel consumption rate improved 2%, while our average fuel price declined 14% to $2.66 per gallon.

Moving on to our other expense categories, purchased services and materials expense increased 14% to $665 million, due to volume-related contract and subsidiary expenses, higher locomotive and freight car material costs, and crew transportation and lodging expenses.

Depreciation expense was $489 million, up 7% compared to 2013, and in-line with our 7% to 8% full-year guidance.

In 2015, depreciation expense is expected to increase between 4% to 6% for the for the full year.

Slide 26 summarizes the remaining two expense categories.

Equipment and other rents expense totaled $296 million, which is 5% favorable when compared to 2013.

The favorability was primarily attributable to lower lease costs, as a result of exercising purchase options on some of our leased equipment.

Other expenses came in at $228 million, up $40 million versus last year.

Higher state and local taxes, personal injury expense, and damaged freight and equipment costs contributed to the year-over-year increase.

Other expenses finished the year up 9%, within the range of our full-year guidance of 5% to 10%.

For 2015, we expect the other expense line to, again, increase between 5% and 10% on a full-year basis, excluding any unusual items.

Turning to our operating ratio performance, we achieved a quarterly operating ratio of 61.4%, improving 3.6 points when compared to 2013.

The net impact of lower fuel prices contributed about 1.5 points of the improvement.

I am also pleased to report a full-year operating ratio of 63.5%, which is 2.6 points improvement from 2013.

As you will recall from our investor day event this past November, we have issued new operating ratio guidance of a 60% operating ratio, plus or minus, on a full-year basis by 2019.

Slide 28 provides a full summary of our 2014 earnings and a full-year income statement.

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

Operating revenue grew more than $2 billion to $24 billion.

Operating income totaled almost $8.8 billion, topping 2013 by 18%.

And net income was just under $5.2 billion, while earnings grew 22% to $5.75 per share.

Turning now to our cash flow.

In 2014, cash from operations increased to almost $7.4 billion, up 8% compared to 2013.

After dividends, our free cash flow totaled $1.5 billion for the year.

This is down $581 million from 2013, reflecting, primarily, higher cash capital and dividend payments along with the headwind of bonus depreciation.

Taking a closer look at 2015, we will see the benefit of 2014 bonus depreciation, which was passed just before year-end.

This benefit will nearly offset the cash tax payments associated with prior-year programs.

As a result, the net impact of bonus depreciation on this year's cash flow will be close to neutral.

Slide 30 shows our 2014 capital program of just under $4.1 billion.

In 2015, we expect to increase our capital plan somewhat from 2014's levels to approximately $4.3 billion, pending final approval from our Board of Directors in February.

The chart on the right shows our improvement in generating returns on these investments over the last several years.

Return on invested capital was 16.2% in 2014, up 1.5 points from 2013.

Of course, as we've said many times, if you calculate it on a replacement basis, our returns would be significantly lower.

In addition to funding our capital program, our record profitability and strong cash generation enabled us to also significantly grow shareholder returns.

We increased our quarterly declared dividend per share twice in 2014 to $0.50 per share by the fourth quarter, up 27% from the fourth quarter of 2013.

For 2014, we achieved a declared payout ratio of just above 33%, up from 31.5% in 2013 and consistent with our new guidance of growing dividend payout target to 35%.

We also continue to be opportunistic in our share repurchases.

In the fourth quarter, we bought back more than 7.7 million shares, totaling $880 million.

For the full year, purchases exceeded 32 million shares and totaled about $3.2 billion, up 45% from 2013.

Our current repurchase authorization of up to 120 million shares over a four-year time period went into effect January 1 of 2014.

About 88 million shares remain on that authorization as of year-end 2014.

When you combine dividend payments and share repurchases, we returned almost $4.9 billion to our shareholders in 2014.

These combined payments represented a 37% increase over 2013, continuing our strong commitment to increasing shareholder value.

Taking a look at the balance sheet, we increased our adjusted debt by approximately $2.1 billion in 2014, bringing our adjusted debt balance to $14.9 billion at year-end.

This increases our adjusted debt-to-cap ratio to 41.3%, up from 37.6% at year-end 2013.

This puts us in-line with our guidance of an adjusted debt-to-cap ratio in the low- to mid-40% range.

We also finished the year with an adjusted debt-to-EBITDA ratio of 1.4 and remain committed to our longer-term guidance of an adjusted debt-to-EBITDA ratio of 1.5 plus.

So that's a recap of the fourth quarter and full-year results.

As we look ahead to 2015, we are well-positioned to achieve yet another record year in many of our key financial measures.

Solid core pricing, ongoing productivity initiatives, and volume leverage opportunities -- assuming the economy cooperates -- should help drive continued margin improvement.

And as Eric highlighted earlier, we have growth opportunities across a variety of market sectors that should drive modest volume growth for the first quarter and the full year.

And we'll continue to focus on improving returns and generating strong cash flow, which will support our ongoing capital investments as well as our commitment to increasing returns to our shareholders.

So with that, I'll turn it back to Jack.

Okay.

Thanks, Rob.

As you'd expect with 2014 behind us, we're intently focused on the year ahead.

Here's what it's looking like.

Overall, the US economy continues to move forward at a moderate pace.

But of course, there's always some uncertainty out there.

Clearly, one of the biggest uncertainties is the outlook for energy markets, which will bring both challenges and opportunities as we move ahead.

Lower energy prices could slow the recent shale-related rustic energy boom, depending on how low the prices get and how long they stay there.

On the other hand, lower gasoline prices could spur continued auto sales and help strengthen the consumer economy, which would create opportunities in our other market segments.

So on balance, with all the pluses and minuses taken together, we expect to see positive volume growth for the 2015 year.

We'll watch closely and stay agile so that we can meet our customers' needs across our diverse franchise.

We'll also continue to build on the progress we've made in improving our network capability so that we can provide the safe, reliable service our customers expect and deserve.

We're entering the year well-resourced, and we're looking forward to safely providing efficient, value-added service for our customers and increasing returns for our shareholders in 2015.

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

Thank you.

(Operator Instructions)

Allison Landry, Credit Suisse.

Thinking about frac sand in 2015 and the number of wells drilled is expected to be down somewhere in the 25% range, and sort of offsetting that would be the better capitalized E&P companies high-grading and improving productivity per well.

So if you balance these factors, do you think you can still grow frac sand carloads year-over-year?

And in what scenario do think that volumes would outright contract?

Okay.

Eric?

Yes.

Allison, I think you have it exactly right, where there are ins and outs, in terms of there have already been reported -- probably about 20% rig reduction.

But the well-capitalized companies are focused on continuing to drill where they could make their profits.

And there's a wide range of economics in all of the shale.

So thinking of all of those factors, right?

Having said that, I think it really is too early to tell how all of that's going to play out.

We certainly don't know if oil prices will remain this low.

If oil prices increase, certainly, that's going to be a lift for us.

So there are a lot of ins and outs.

We feel really good that we have the premier franchise, in terms of frac sand coverage.

We have the best franchise for most of the major shales, particularly the shales that will arguably still be profitable -- Eagleford, Permian, you can see growth in the Niobrara.

There's even rumblings about the Haynesville coming back.

So we feel really good about our franchise and our position.

And at this point, we -- like everybody else -- is keeping a close eye on it.

Okay.

That makes sense.

And just as a follow-up question, Jack, some of your comments at the end, I think, in terms of thinking about the broader economic benefit of lower oil prices against the backdrop of weakness in shale-related activity.

How do we think about this, in terms of overall volume growth?

Obviously, there's a lot of puts and takes, but are you thinking about it as a net-net neutral on a relative basis with benefits, maybe, in autos, consumer products, et cetera?

And then that being offset from crude by rail, frac?

Could you help us think about that?

Yes.

Allison, I think your head's in the right place on that.

I think, when you look at it, assume popular people -- popular opinion says consumers drive two-thirds of the economy.

If consumers are having discretionary spending and they're going to buy automobiles, they're going to build houses, they're going to buy new furniture -- consumer goods, those kind of things -- those kind of all hit right within the sweet spot of our franchise.

And we've seen that in the fourth quarter.

The construction products up 17%.

Lumber, up 10%.

Automobile business -- the (inaudible) at 16.7%.

So it's not unreasonable to think that knocking on the door of $17 million for 2015.

So again, when we add it all up -- pluses and minuses -- we think, at the end of the year, barring anything that is unusual that we haven't seen at this point in time, we're going to still end up with positive volume by the time we get to the end of the year.

Okay.

Excellent.

Thank you so much for the time.

Ken Hoexter, Bank of America.

Rob, when you set the operating ratio, target fuel was much higher.

And you noted a 1.5 benefit.

Are there any other offsets that don't get you to move up that timeframe?

I guess, if you think about the 1.5 benefit from the 63.5 along with the repricing that's already locked in, what can happen, in terms of -- is there a chance you hit that target in 2015?

Or is there something there that can offset that?

Yes, Ken.

Clearly this unprecedented fall-off in fuel helped us.

But -- and clearly, if it stayed at this level or dropped even further, that would be a contributor towards hitting -- achieving our targeted 60 plus or minus operating ratio target.

But we'll see how fuel plays out.

I'm not willing to bet that, over the long haul, fuel will stay where it is.

And there's really no other -- the rest of the story, if you will, in terms of us running a safe, efficient railroad, getting core pricing, squeezing out productivity.

So I think the what the drivers we're really going to get back to are core fundamentals in the business that will enable us to get to that sub 60 as soon as we possibly can.

Ken said that 1.5 points came from fuel.

I don't think that's quite right, is it?

Well, yes.

Just to clarify that, Ken, because I'm not sure -- I did count exactly how you asked it.

But just to clarify the impact of fuel, the benefit of the falling fuel price in the fourth quarter was about 1.5 points of benefit in the fourth quarter.

For the full year, the benefit of the fuel was more like 0.7 of a helper on our operating ratio.

Yes.

I was extrapolating that fourth-quarter benefit through the year, if we stay at these lower prices.

If I could get the follow-up, Eric.

Maybe on the -- you mentioned low nat gas prices can impact.

There's a lag before it impacts coal flows.

Can you delve into that a little bit -- talk about the outlook for coal?

Do we see one more quarter of replenishing stockpiles, and then, starting the second quarter, we see a fall-off with these prices?

Or is it still in that flux point, even at these levels, in terms of PRB switching.

It seems like it's already impacted the Colorado Utah side.

Maybe you can delve into that a little bit.

Yes, Ken.

So we've historically said, and I think the market convention was -- the switch-over point was the low- to mid-twos for natural gas pricing.

The Colorado Utah impact was really in export coal -- world coal price impact.

It's not a domestic US natural gas impact.

As we look forward, we're really not really seeing that a lot of switch-over impact for us now.

We are still seeing replenishment, as you suggested.

The inventory numbers for December should come out, here, in the next couple of days.

We still expect that inventories are going to be low when they come out, here, in the next couple of days.

But the other -- we've said forever, the real driver is weather and the economy.

And so that will be the ultimate driver for our coal volumes.

We do feel really good about where we stand from a position.

One of the strategic factors that I think may have changed from the past is that if you go a year ago, and what happened with natural gas prices, there was a lot of volatility.

And I think there's been rethinking on many of the utilities to really rethink coal as a baseline fuel as a risk hedge against the natural gas volatility.

So for that reason, I feel pretty good about our coal outlook.

Great insight.

Appreciate the time.

Thank you, guys.

Justin Long, Stephens.

I wanted to ask a question about intermodal.

I know this varies by lane, but when you look at the price differential between intermodal and truck in your network today, what's the typical spread?

And how is that spread changed, if at all, over the course of the last couple of quarters, as we've seen fuel prices come down?

Eric, that sounds like for you.

Justin, I think we've said, historically, that the spread can be pretty wide -- as much as 25%, 30% in some lanes.

And it could be narrow -- as low as 10%.

I think the factors that we've been talking about are still [there], even growing.

The factors being driver shortages.

I think that is still a factor that is going to drive conversions.

If you look at the experience that we've had, we've had another year of record domestic intermodal volumes.

You can look at our fourth-quarter volumes, and we've had new products and services.

Last year, we talked about the new services that we put in place.

We opened Santa Teresa, so we're entering new markets.

We still have driver shortages.

Growth in domestic intermodal is still a sweet spot.

There still is a gap there, but as we are selling our value, our goal is to grow volume and close that gap.

Okay.

That's great.

And maybe as just a follow-up to that, do you think that 2015 is a year where intermodal pricing mirrors contractual rate increases in truckload?

I'm just curious if this would be the best proxy -- truckload rate increases -- or if there's a reason you think intermodal pricing should be any different than truckload this year?

We still think we have strong opportunity to grow price in our intermodal book of business.

If you look at what happened in 2014, as the truckers -- as demand increased on trucks, driver shortage et cetera, they -- some truck loads, some truck entities had shorter-term prices.

So they probably were able to respond quicker than entities that have longer-term, contractual arrangements.

But we feel really good about our opportunity to price, going forward.

Okay.

Thanks, Eric, and congrats on the quarter.

Thank you.

Tom Wadewitz, UBS.

Congratulations on the strong results.

Thanks, Tom.

Yes.

Wanted to ask a bit about legacy contract repricing.

I think you highlighted that you were successful in retaining all of what was coming due in 2015, so that's good news, but also pulled forward what was in 2016.

So I think, in the past, you've talked about -- maybe it was the 2013 impact where you got like a 1.5 boost to pricing to core price from legacy.

Given the success on legacy in 2015, should we think of that as higher than the 1.5 impact to core price?

Is it's more like 2 points or above that?

Or how can you frame that legacy impact to core pricing in 2015?

Okay.

Rob, why don't you take that?

Yes.

Tom, what I'll tell you is, it's a positive.

But we're not going to give the specific numbers on that, as we never have, in terms of our guidance.

We're pleased with the business.

We're pleased that we were able to compete and retain those contracts that we talked about for 2015 and 2016.

And it would certainly be a positive contributor to our core pricing in 2015.

Is it reasonable to think it's maybe a bigger impact than 2013?

I'm not going to answer that.

And the caution that you've heard me say many times is, I wouldn't straight-line past performance and overlay that on top of these contracts.

When we report our pricing in the first quarter and beyond, you'll see that embedded in the pricing numbers that we report.

But I'm not going to give any more details on it.

Okay.

All right.

Well on the follow-up question, the industry had capacity challenges in 2014.

Your western competitor, perhaps, had greater challenges than others.

And I think it's fair to say, you probably gained some volume as a result of that.

How would you think about the impact of that to 2015 volumes?

Their velocity seems to be improving -- I think you said you believe that you're adequately resourced.

So is there some volume that goes back to them, potentially?

Should we assume your volume growth slows down because you don't gain share like you did?

Or how would we frame that potential impact, from change in capacity and service performance of your competitor?

I think overall think overall, Tom, when you look at the business that we were able to move in 2014, the table is set for us to prove the value proposition of Union Pacific versus our competition.

And our competitor has always been right there, chomping at the bit.

So it's always a head-to-head competition in any one of those opportunities.

And our challenge and our ability to convince those customers that the Union Pacific value proposition is what fits in their business model more effectively is really what we're all about, here.

So yes, we may lose some of that business.

We may gain some additional business.

We'll just have to have to see how the competitive world plays itself out in 2015.

Okay.

Great.

Thanks for the time.

Tom Kim, Goldman Sachs.

I wanted to follow on Tom's earlier question on the legacy re-price.

First off, can you quantify the amount of -- that was up for renewal for 2016, as you highlighted what was for 2015 previously?

Sure.

Rob?

Yes.

Tom, I would just call your attention to the last pie chart we showed at the investor day.

The revenue that we reflected there, which is based on historical, by the way -- it's not a projection of what those contracts are going to drive, going forward -- but we said there was about $300 million of revenue in the legacy bucket for 2015 and about $140 million in that bucket for 2016.

So those are the buckets that we're talking about here.

Okay.

That's really helpful.

And just -- so our [understanding, with regard to the] timing -- is this -- should we factor this in staggered over the course of the year?

Or is this a Jan 1 effect?

If you could give us a little bit of sense, in terms of how to be thinking about how that flows through, it would be helpful.

Thank you.

Yes.

The bulk of that $300 million for this year was front-end loaded.

So we should start getting it relatively early on that piece, this year.

Great.

Thanks very much.

Scott Group, Wolfe Research.

I actually had one more follow-up on the legacy stuff.

So, Rob, is there any way to put some color on historically, how much of the benefit of a legacy deal was in the base rate?

And how much was just getting a fuel surcharge for the first time?

And just note that to that -- could that suggest that maybe the legacy benefit isn't as good as, maybe, as it would have been, now that oil's much lower?

That's one question on fuel.

Yes.

Fuel -- not only in legacy contracts, but in all of our contracts -- will, obviously, play a role in how much -- what will be reported in average revenue per car per unit.

But in terms of your question of, can I give you some historical or shed some light on that, the answer to that is, no.

It was a combination of walking up the pricing on our historical legacy renewals and, as you know, rolling up or improving -- it wasn't always a case [in point] from zero to adequate.

In some cases, there were fuel surcharge mechanisms in place in some of those older contracts.

We just were able to look at them and make sure they were adequate.

And I would say the same thing applies in this go round.

But trying to quantify or give you a percentage split -- I can't give you that.

Okay.

That makes sense.

And then, can you guys give an update on what you're seeing at the west coast ports, what contingency plans you have in place in case there's a lockout or strike, and how you're thinking about what the impact there could be?

Sure.

We've been staying very close to the situation and working with our customers.

Eric, why don't you talk about some of the things that we're doing and thinking about?

Yes.

I think you probably know that both sides did ask for federal mediation.

So that mediator was appointed, I think, last week or so.

And they're going through the process.

I don't think we have any unique knowledge of how that process is going.

We're hopeful that the issue does get resolved.

We have put a contingency plan in place, in the event of a work stoppage.

And we've communicated those to our customers, in terms of the things that we will do to manage our network and do the best job we can of managing customer needs and expectations through a work stoppage.

So, as Jack said, we are staying close to it.

I'm not sure we have any specific knowledge beyond the parties in the federal mediation that's going on.

Do you think just the uncertainty is going to have an impact on your volume or your ability to get price?

Yes.

The uncertainty has nothing to do with price.

The price is driven by the market opportunities and the value of our product.

And that still remains.

Certainly, in the short term, [BCOs] are doing what they need to do to protect their supply chains.

And as expected, that's what has occurred at times in the past when similar labor issues have gone on in any port.

We think, going forward, that once the issues are resolved and they're behind, the whole supply chain effectiveness of the rail transportation network -- our rail transportation network -- with the ports of Long Beach, LA, still is the premier way of getting products into this country.

The southern California, west coast destination market is still a huge market.

So we are very comfortable, going forward, with the value of our franchise and our proposition once this labor issue is resolved.

Great.

Thank you, guys.

Rob Salman, Deutsche Bank.

As a follow-up to Allison's earlier question regarding the frac sand franchise, could you give us a sense how the split of that business is broken down by contracts versus tariff pricing?

And any sort of overall exposure that you guys have to the different shales?

Yes.

So we don't talk about the structure of our pricing by business.

We don't do that.

What I would say -- and if you refer back to some of the materials at the investor day -- we did share that the majority of our franchise is destined in Eagleford and Permian shale plays.

I think we said about 60% of that.

But we do have a great, broad franchise in all the shale plays, whether you want to look at Niobrara, Uintah, if you want to look at Marcellus, Haynesville, et cetera.

We have a great franchise.

And so we think that does provide us a natural hedge for whatever the changes that the market -- these low oil prices may bring.

And then, Rob, switching directions over to the core pricing side of the equation.

With that roughly $140 million for 2016, will be experiencing a step-up in 2015, regarding that pricing?

Or are you just saying that we've already locked in the pricing, which will commence in 2016?

I'm not going to get into the details of that particular renewal.

So we're confident with the business that we renewed.

We like the pricing, we like the margins on it, but in terms of the timing, I'm not going to get into that.

Okay.

Thanks for the time.

Brandon Oglenski, Barclays.

Congrats on the quarter.

Thanks.

Eric, in the past, you guys have quantified your exposure to the frac sand, the crude oil, and the pipe.

Is there any way that you can update investors, right now, your aggregate volume exposure to those three segments?

Yes.

I think, in the past -- and I'm checking the number -- but I think, in the past, we probably said about 5% of our volume is related to that.

But I think that's about the number.

Okay.

And for my follow-up, (multiple speakers) Jack talked about construction.

Hey, Brandon, hold on a minute.

Let's do some clarifying here.

Yes.

Just to be clear, you were asking in total what's our oil, frac sand market share or percent of our volumes.

We've said 4.5% all in, 2.5% from the sand, the rest -- like 1.5% from oil.

And then the remainder is some of the related materials, pipe, et cetera.

Just to size our total.

Okay.

Well, that's helpful because, obviously, folks have a pretty negative outlook on where that could go if oil stays at $50.

But I think Jack hit on it earlier, that you're seeing quite a bit of improvement in your construction markets.

So can you talk about -- and I know this might be more difficult to quantify -- but what's your exposure to non-res construction or even housing starts?

And how do you weigh that versus where you think construction projects were going into the energy markets?

And does that become a net benefit for you, going forward?

Yes.

I think what you're asking is, geographically, where are our markets?

And so, as we've shared before, the fastest-growing states are in the Southwest and the West and then, the Southeast.

Certainly, when you think about the South, the Southwest, and the West, we have a great franchise exposure to those.

Certainly, some of the growth has come from the energy-related growth in Texas, particularly around the Houston market.

But we're seeing good growth in our construction projects and construction products and housing in non-Houston, non-Texas markets also.

Thank you.

Jason Seidl, Cowen and Company.

You mentioned that there's probably going to be a little shift change between international, domestic intermodal, particularly in 1Q, given what's going on in the ports.

Can you remind us the impact that's going to have on your intermodal yields?

Eric?

So we have not discussed what our yields are by our intermodal business.

We are seeing positive trends in yields across our book of business, whether it's domestic or international, because of our strong pricing.

And we expect that trend to continue.

I'll ask it a different way.

Is there any big difference between the length of hauls between domestic and international?

There's not a significant difference in the length of hauls between those two.

There's a minor difference because, again, our domestic business runs east-west from the west coast to the Midwest, Chicago and Midwest interchange.

And our international business runs over that same route.

The minor difference would be the mix of our business that runs north-south, which would have a shorter length of haul.

Okay.

And related, as a follow-up -- this might be a little bit more for Lance.

Obviously, the rail industry was challenged in 2014 operationally.

It impacted everybody's bottom line.

Can you talk about productivity gains, assuming everyone shows a little bit of improvement this year in 2014 -- if we can put a number on it?

Yes.

Without putting a number on it, I'll remind you that when we went, as we discussed going through 2014, we said we were getting significant productivity and probably a little bit aberrational in that we would have liked to have had more crews and locomotives to run the network.

As we move into 2015, we expect to continue to get productivity.

I would expect it maybe not to be quite as turbo-charged as it was in 2014 because we'll now be matched, in terms of resources, to demand.

But we will get productivity continuing in 2015.

And especially, as cycle times improves, we're able to pull locomotives out of -- put them back in storage -- pull them out of service.

Those kinds of things.

Those are the least productive units that we'll be storing.

Yes.

So there's just some natural productivity that occurs, as the velocity spools up.

And I think our latest numbers that we reported has a velocity of 25.3% and headed in the right direction.

So we feel good about that.

Okay.

Gentlemen, I appreciate the time, as always.

Chris Wetherbee, Citigroup.

Thinking about pricing for a second, if we put legacy aside and think about the underlying potential of the business into 2015, it would appear that we're getting -- there's a little bit of an inflection more positively throughout the year of 2014.

Just want to get a to get a rough sense of how you think about the outlook for everything ex-legacy, as we think about the next year, what you've had the opportunity to touch, and maybe what could be coming up?

Yes.

As we've said throughout 2014 and as we're saying today, we feel good about our market value and our opportunity for pricing.

And we have the strong value proposition.

The economy is strengthening, and we're excited about our ability to get price, going forward.

Yes.

And we -- Chris, this is Jack.

We don't really see anything that's changing our view on our pricing model, at this point in time.

Reinvestability has to be the threshold to get onto the Union Pacific franchise.

Price-to-market -- take advantage of opportunities across the franchises as we see them.

And we don't see anything that's happened here, recently, that would cause us to veer from that at all.

Certainly.

That makes sense.

And then, with a follow-up on the intermodal side, just thinking about the international intermodal side, with what's going on in the west coast ports and the prolonged period of negotiations there.

Do you get any sense that some of the disruptions that you're seeing may ultimately be permanent or semipermanent, as shippers look for all other alternatives?

We talked about this before, in the past.

And my guess is, most likely, business comes back, once we get resolution.

But I just want to get a rough sense, Eric, maybe how we should think it be thinking that.

Do you hear that at all?

Chris, I think you're exactly right.

Certainly, any shipper, in terms of while this uncertainty is here, they're trying to identify options to protect their supply chain.

And you see that, for example, right now, with growth into Oakland -- or shippers trying to get into Oakland, which is part of our franchise also.

Long-term, the Port of LA, Long Beach is in a sweet spot, in terms of the connectivity with the rail network, our network, our competitor network.

And long-term, the expectation is, once these things are behind, that will be the preferred option for shippers.

Okay.

That's helpful.

Thanks for the time, guys.

Appreciate it.

David Vernon, Bernstein Research.

A couple on trying to get some help on modeling forward RPUs.

As you think about the demand outlook -- I think we talked about -- in terms of crude oil and frac sand, should we also be expecting that, with any reduced demand for sand or oil transportation, there's also going to be an impact on the RPU?

Or is the pricing going to be pretty well divorced from the supply-demand economics in the underlying commodity?

Eric?

Yes.

As I said before, we still feel really good about our franchise and our strength and our value proposition.

And we still see upside opportunity to drive value and to drive price in that market.

But if the price of the frac sand goes down a lot, should we expect that the producer is going to eat that, or there's going to be a lot of pain shared between the producer and their transportation partner?

We have never, and we don't anticipate ever, tying our value of our transportation products to commodity price values.

Okay.

And then, maybe just as a quick follow-up.

As you think about the outlook as we talked about it, maybe a little be weaker, depending on what oil prices do -- maybe a little stronger on construction -- as you think about that mix impact, would you expect that the average RPU on the construction stuff that would be growing would be directionally better or worse than maybe some of the oil-related stuff that's going to be coming down?

I'm not looking for specifics.

I'm just trying to get a sense of, directionally, what impact that mix should be having on the result.

Yes.

I think, overall, when you look at it, it will depend on which market.

So if it's a manifest business, if it's the lumber business, and things like that tends to have a somewhat longer haul than some of our frac sand.

But there are so many moving parts to this, David, that it's pretty difficult for us to say what mix is going to come our way, as we look ahead to the year.

Can you give us any insight into that directional -- the average construction unit, versus the average crude and frac unit -- higher or lower?

Rob?

David, let me take a shot at your overall question here.

The answer is no, to your specific question.

Okay.

But you heard me say many times that we avoid giving any guidance on our average revenue per car.

And that's not a negative thing.

It's just -- I think what it says is, the strength of the UP franchise is so diverse that we play in multiple markets.

And just because one piece of business has a lower average revenue per unit, it's not a bad thing.

It might have a higher margin.

So that doesn't bother us, when we see an average revenue per unit go up or down, because it speaks to the diversity.

It speaks to the mix.

And in every case, we're focused on improving our margins.

The other thing is clearly going to impact revenue per unit, right now and potentially throughout the year, is going to be the impact of fuel.

So you're going to see, I think, some swings up or down.

But that in and of itself doesn't trouble us.

And we can't give guidance on that.

Yes.

Appreciate it.

Thanks, anyway.

Bill Greene, Morgan Stanley.

Rob, I wanted to ask a question on the cost side.

And that is, there is a sense that, given the number of locomotives and employees that we've added and embedded in the cost structure, if volumes disappoint us, perhaps in the second half of the year or whatnot for whatever reason, that you've embedded a kind of fixed nature into this cost structure.

Can you speak to the variability of the cost structure?

How much you could take out if you had to adjust because the markets turned against us in ways we don't expect?

Yes.

Bill, I would answer that by saying we're not projecting that.

As you know, our guidance is positive volume for the year with all the moving parts.

But to your point, I think we've proven over the years when there are times when the economy goes south on us, that we've taken the right steps.

And Lance highlighted some of them in his talk -- the furlough opportunities, the storage of the less efficient units.

If you had to go deeper, you've got opportunities to consolidate the terminal operations, et cetera.

So without putting a number on it, I would tell you that's something that we take pride in, in terms of being agile and being able to react to market conditions.

So, as Lance pointed out in his comments, we feel like we're fully resourced, right now, with people and locomotives.

We played catch-up, if you will, through the back half of 2014.

And we're confident that there's still opportunities to grow our business.

And we've got attrition on the labor front still in front of us.

So we're confident we'll make the right steps, should what you're outlining play out.

Okay.

Fair enough.

And then, Jack, I wanted to ask you more on the legislative front.

We've seen that Senator Thune is, potentially, going to put forward the bill that he's talked about in the past.

I don't know how much of the bill you've seen, but maybe you can speak a little bit to, is this the sort of thing that you can work with them on?

Is there something here that we could get out of this, or is it all bad news, and we'd rather keep the status quo as we have?

Can you speak to any of that?

You know, Bill, I think we have -- Senator Thune has kind of opened the door to comments and to working with the industry and asking us what we think about the provisions of the bill and things like that.

We've been able to provide some input.

As always, we try to be a positive force -- or a positive voice -- at the table and look at both the good opportunities as well as the challenges that each piece of legislation presents.

And I have no concerns that we won't be able to do that again.

Okay.

I think we'll have an opportunity, here, to help shape that piece of legislation and work to mitigate any of the negative consequences and, hopefully, even add some positives for us.

That's great.

All right.

Thank you for the time.

Matt Troy, Nomura.

The service issues that plagued the industry through much of 2014 -- each carrier to varying degrees -- operations seemed to have stabilized.

If you talk to a lot of the IMCs out there, mid- to early-fourth quarter was some improvement.

Just wondering -- the next two months are critical from a from a weather perspective.

What specific steps are you taking?

You talked about the loco ads and the crew additions and headcount additions, but what do you see as the critical focal points of your service remediation improvement plans -- let's call it -- in the first three to four months of the year, as we look at a winter that so far has been benign?

Sure.

Lance?

Sure.

So, Matt, one thing we've done is learn from last years' experience during very difficult weather environments.

And we beefed up our winter action plans.

That includes, at any sign of inclement weather, 24 by 7 command centers locally that can make the right adjustments and calls on the ground.

We've taken advantage of this benign weather and done some engineering work on our track that is positioning us better for the spring thaw.

So I'm very pleased with that.

And we've also been working with our interchange partners at critical gateways like Chicago to put in early warning systems that are more robust and have more robust action plans around them.

And they've actually kicked in at different points during this winter -- during bitter cold periods -- and proven themselves to be very effective.

So I'm really pleased with how we're navigating this winter, notwithstanding that it, in certain parts of our territory, has been a more benign winter than last.

Sure.

Thank you for that.

And I guess, second question -- or follow-up question -- would be just to clarify on the surcharge.

There seems to be varying opinions out there, in terms of the potential benefit of lower fuel costs, if they were to remain down where they are currently.

If oil stays in this mid-$40 range, is it fair to think about -- you had mentioned, I think, something about the tune of $0.05 of benefit from lower fuel costs in 4Q.

If I just look at the slope and the two-month lag, it would imply something similar, maybe $0.01 or $0.02 higher.

Is that a fair assumption with fuel where it is, and should we expect thereon, if fuel stays down here at the same level, that it becomes somewhat of a wash in second quarter and beyond?

Just trying to think about the benefit.

I know it's a long run net neutral, but just timing is obviously an issue here.

If you could help us there, that would be great.

Thanks.

Rob?

Yes, I mean, Matt, under your assumption, if fuel stayed in the neighborhood it is through the first quarter, I would expect that the first quarter looks similar to what we saw in the fourth-quarter.

So that's consistent with your thinking.

Beyond that, there is some 60 plus different surcharge mechanisms, and we're not guiding that fuel is going to stay flat forever.

But what we endeavor, of course, to keep the cost of the impact neutral.

So if it did just flatten out, that would be certainly our objective.

It doesn't usually play out that way, but I don't think you're thinking about it wrong.

Okay.

Thanks for the time, guys.

Jeff Kauffman, Buckingham Research Group.

Just to follow-up -- I think most of my questions have been answered at this point.

I think you mentioned a higher amount of labor cost per employee inflation in 2015.

Could we delve into a little bit more detail in that?

And in particular, I'm thinking more on the pension and benefit side.

Can you talk about any headwinds that you'll have in 2015 there?

Sure.

Rob, why don't you handle that?

Yes.

I said that the labor inflation line for 2015 was going to be in the more in the 4% to 5% range.

And really, the big driver of that is wage inflation.

There were a couple of kicks, if you will, at wage increases in the contracts that were negotiated several years ago.

And there's a kick up of -- call it -- half a point or so in that number of higher pension expense as well.

And those are the two main drivers.

Okay.

So mostly base wage?

Yes.

That's all I have, guys.

Congratulations.

Thank you.

Thank you.

Keith Schoonmaker, MorningStar.

With Santa Teresa open now, could you highlight two or three of the capital investments you expect to be most impactful over the next couple of years?

Yes.

Lance?

Sure.

So let's go around the railroad little bit -- start down in the southeastern part of our network.

We've been increasing our capital investment in Texas, Louisiana, up into Oklahoma and Kansas, both on our north-south routes and in the Texas area.

That will continue and pay very big dividends for a multitude of commodities that use those routes.

We have added about 40 miles of double track on the Sunset.

We're going to continue to add double track there.

We're at a point now where about 80% double tracked on that route, so that will be good.

We're adding some capacity in the PNW for our critical bulk and premium routes.

We're adding capacity in Chicago.

We have a public-private partnership project on our primary corridor in and out of Chicago, which is the Geneva Sub, to triple track a critical portion of that that's shared with a metro service.

And that will be very, very helpful.

And then, we've also announced a [Hearne] new network terminal in the middle of Texas.

And I think, at the investor day, we talked about a $600 million kind of number and a 2,500 daily car count kind of number.

And that will be very impactful, probably taking us the next two and half years or so to build.

Maybe a little more.

Thanks.

As a question on intermodal, looking at the AAR velocity data, it appears that you maintained intermodal velocity quite well, even when overall velocity slowed a bit.

I recognize that velocity is only one measure, so could you speak, perhaps, to your on-time performance within intermodal?

Is it where you want it, or, excluding new intermodal lane offerings, is this still an area in which you expect a little improvement?

We do expect improvement in intermodal.

If you look backwards, I would not be as charitable, in terms of our premium intermodal service in 2014, as you were.

Our expeditions were for better performance than that.

We were able to differentiate the service, compared to other services we provide.

A real positive note is that, in the peak season ending the year, we performed very well.

And as we're entering this year, that same level of performance has sustained.

There are opportunities on certain lanes in our premium domestic intermodal franchise.

But it is showing better service.

And I anticipate it will continue to show better service this year.

Thanks.

Ben Hartford, Robert W. Baird.

Back to the west coast issues -- putting aside some of the labor disputes at the moment, how much conversation have you had with some of the international intermodal shippers that are more reluctant today than they have been in the past to allow some of their containers to free float inland and more interested in doing [trans] loading activity to make sure that the containers get back to Asia?

Can you talk about any sort of conversations that you might be having that could affect international intermodal volumes in 2015?

And presumably, to the benefit of some [trans] loading and domestic intermodal activity?

Thanks.

Eric?

As you mentioned, that has been a trend going on, probably, three or four years, where international shippers are seeing a value proposition of letting their ISO boxes or international boxes to just destine on the west coast, trans-load into a domestic box, and then go inland.

So that trend, we have been seeing for probably three or four years.

We think that is a trend that will probably continue, mainly because a lot of the BCOs, as part of their supply chain organizations, are using to trans-loading function as part of their distribution management strategy.

So it's less a transportation-driven issue, but it's part of their overall warehousing and distribution center management strategy.

So we think that that is a trend.

It will continue.

I don't think the west coast labor issues have any particular significant long-term change to that trend.

That has been going on for several years.

Okay.

So when we look at some of the expected weakness in international intermodal in 2015, we should ascribe it to the ongoing labor dispute and not an acceleration of that trends loading trend?

That would be the assessment right now.

Okay.

Thank you.

Cleo Zagrean, Macquarie.

My first question is related to the impact of the recent volatility in the energy markets on your investment and business development.

Please help us understand how you're thinking about it.

Are you looking at winners and losers from an environment of sustained low prices?

Are you expecting these to recover?

For example, is the Southern chemical franchise less of an urgency and consumer-related areas more in focus?

Please highlight a few areas that are gaining traction in business development for you this year.

Thank you.

I'm not quite sure exactly what the question is.

I would say we are continuing a focus on business development.

Energy, even with the recent volatility, still, I think, has some positive drivers for us in North America because we still have relatively low energy prices, and in fact, even lower energy prices than what we thought earlier.

That is going to be a positive driver for things like chemicals production in this country.

That's going to be a very positive driver, in terms of continuing the trend that we've seen for near sourcing.

We've talked in the past about the trends of manufacturing moving back to North America.

We think that's still, if anything, it's going to be even a more positive driver from some of the volatility.

So we still think that's positive.

Yes.

Cleo, I think one of the things that, as we look at this and as we talk to our customers, first of all, this is still a relatively early phenomenon, in terms of the dramatic reduction in oil prices that we've seen.

Nobody that I can find expects that this is going to be a long-term trend.

And certainly, know one, at this point in time, has made any decisions to alter long-term capital facility expansions or things like that.

I think it's just way too early to see if this is a sustainable trend in energy prices.

Thank you very much.

And my second question relates to operations -- productivity, specifically.

Can you share with us a few operating initiatives that your team is most excited about this year?

So that, apart from volume and price impact on operating ratio, we can get a sense of where you might gain the next important improvement in the OR?

Thanks so much.

Sure.

Lance?

Yes.

So, Cleo, one of the things that we talk about routinely, that continues to be an exciting opportunity for us, is the penetration of UP Way concepts.

That's our interpretation of lean manufacturing principles.

And Cameron and the operating team -- actually, the whole Corporation -- is doing a wonderful job of absorbing those principles, turning them into projects and action plans, and removing variability out of the network.

So I can see dozens of different projects at any given time that are going to be paying off, either from the productivity perspective, a safety improvement perspective, or a service improvement perspective.

That's the first thing I would highlight.

The second thing I'd highlight is, we've got a very robust menu of capital investment that is gaining significant traction as we enter this year.

And each one of those critical investments is going to make an improvement in safety and service and in productivity and unleash different bottlenecks around the network.

So I'm just really jazzed with what we've got facing us for the coming year.

Thank you very much.

John Engstrom, Stifel.

Looking at intermodal -- and I'm trying to tease out the story -- which is difference between competition with truck, versus having low diesel prices, versus a weak retail season, and things of that sort.

Also, with a soft year-over-year baseline, can you talk to me a bit about, given the sequential decline in carloads, how you think about what the primary drivers were behind that?

Thank you very much.

You're talking about intermodal sequential decline in carloads?

What are you looking at?

Yes.

I'm looking at the sequential between 3Q and 4Q.

Just given that the year-over-year comps are a little challenging, given the winter and December of last year.

I'm just trying to tease that story out.

Yes.

So again, the international side of our intermodal business had all of the west coast labor challenges through the fourth quarter, all of the uncertainty.

The domestic side of our intermodal business, with the new products and services and the over-the-road truck conversions and the whole story about truck availability and all of that -- we've had a record year on the domestic side of the intermodal business.

Okay.

(multiple speakers) And we think that trend is continuing.

Right.

Yes.

That's fantastic.

And so one follow-up question on capacity.

So we talked a bit about adding crews and locomotives, too, as a primary liver behind velocity.

I'm wondering if you can talk a bit about your CapEx investments in Fort Worth, Robertson County, opening up Santa Teresa, and if you also see that increased capacity as being another lever, which is sort of beneficial for you guys, moving forward, on velocity?

And if there's a bit of a trade-off, moving forward?

Sure.

Lance?

Yes, John.

So, absolutely, the investments that you outlined have helped us, in terms of velocity and service performance.

You take just a little snapshot, like Fort Worth and Tower 55.

We increased speed through that facility on both a north-south and an east-west route.

We increased capacity, adding the ability to run an incremental about 20 trains a day through the facility, and we reduced the complexity of the facility itself and simplified its signal systems, which is a safety enhancement.

One project that did all three, and we've been seeing the benefit of it.

And on that particular route, that impacts our manifest product to and from the shale play.

It impacts our premium intermodal product from the west coast to the southeast United States.

So, yes.

You outlined it just right.

Yes.

Fantastic.

Thank you very much for your time.

John Barnes, RBC.

Great quarter.

Just two quick ones.

Number one, on the west coast issue.

If, in the event that there is a more pronounced labor action -- as much as a shutdown, how much will that impact service levels immediately, in terms of just equipment imbalances?

And then, once normal operations resume, how long does it normally take you to recover from those imbalances and get the intermodal network -- the velocity there -- back up to normal levels?

You know, John, we have been monitoring this closely and already taking steps -- storing equipment and staging them in critical locations -- so that if the next move takes place of a total shutdown, we will embargo.

We will lockdown and not allow the congestion of the ports to impede on the velocity of the rest of our network.

We can't allow that to happen.

So we have plans in place to take those steps.

We've communicated with customers about our intent to do exactly that, in the event of a total shutdown.

And I feel pretty well about our ability to stage and think about this so that, if it does happen, we will have positioned ourselves for a quick return once service has been restored to the ports.

Anybody see that differently?

Lance, Eric, Rob?

[You good, there?] All right.

All right.

And secondly, the eastern rails have talked a little bit about that their coal franchise has become more surge dependent than base load dependent and, therefore, more dependent on heating days and cooling days.

Where do you believe your coal franchise stands in that paradigm?

Is it -- are you close to a point where it's more surge dependent, or is just the cost benefit still close enough that you're still seen as a vital piece of the base load in the western US?

Eric?

Coal remains a vital piece of the base load energy in the western US.

It is a critical part of utility and manufacturing fuel source.

You know, John, if you think about it, our coal business has always been very dependent on weather, whether you have cold or hot summers and those kinds of things.

So to that extent, there is some surge component.

But I think the interesting thing that Eric talked about in his remarks is a realization that a coal base kind of helps cushion against the volatility of natural gas.

And I think that realization, on the part of the utilities, is making it a little more stable than what most people would think.

Okay.

All right.

Again, thanks for your time.

I appreciate you taking my questions.

Thank you.

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

Well, great.

Thanks, Rob, and thanks, everybody, for joining us on the call today.

We'll look forward to speaking with you again in April.

This concludes today's teleconference.

You may disconnect your lines at this time, and we thank you for your participation.