Union Pacific Corporation (UNP) Q3 2013 Earnings Report, Transcript and Summary

John J. Koraleski - Chief Executive Officer, President, Director, Chief Executive Officer of Union Pacific Railroad Company and President of Union Pacific Railroad Company Eric L. Butler - Executive Vice President of Marketing and Sales for Railroad Lance M. Fritz - Executive Vice President of Operations - Union Pacific Railroad Company Robert M. Knight - Chief Financial Officer and Executive Vice President of Finance

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Allison M. Landry - Crédit Suisse AG, Research Division Scott H. Group - Wolfe Research, LLC Ken Hoexter - BofA Merrill Lynch, Research Division Justin B. Yagerman - Deutsche Bank AG, Research Division Christian Wetherbee - Citigroup Inc, Research Division Brandon R. Oglenski - Barclays Capital, Research Division William J. Greene - Morgan Stanley, Research Division Walter Spracklin - RBC Capital Markets, LLC, Research Division David Vernon - Sanford C. Bernstein & Co., LLC., Research Division Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division Justin Long - Stephens Inc., Research Division Cherilyn Radbourne - TD Securities Equity Research Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division Jason H. Seidl - Cowen and Company, LLC, Research Division Keith Schoonmaker - Morningstar Inc., Research Division Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated Donald Broughton - Avondale Partners, LLC, Research Division

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're 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 continued 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. So with that, let's get started this morning. I'll turn it over to Eric.

Thanks, Jack, and 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 3 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 6 business groups. Ag Products revenue declined 2% with third quarter volume down 4% and a 2% improvement in average revenue per car. Grain carloadings continued to reflect the impact of last year's drought with third quarter volume down 9%. Domestic feed grain shipments declined as tight U.S. 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 the higher U.S. prices. Partially offsetting these declines was an increase in weak Gulf exports, primarily destined to Brazil. Grain products volume was up 3%, driven by an 11% increase in ethanol shipments as the discounts to gasoline led refineries to replenish low ethanol inventories. Declines in import beer and barley led to a 4% decrease in food and refrigerated volume. Automotive volume grew 8%, which, combined with the 9% improvement in average revenue per car, produced a 17% increase in revenue. Growth rates in auto production and sales remained 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 vehicles shipments grew 5%, and sales continued to grow with seasonally adjusted annual sales rate reaching $15.7 million in the third quarter, the highest quarterly level in 5 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 carloadings 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 in 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 a steep decline early in the fourth quarter as volumes were impacted by nearly 3 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 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%. Nonmetallic minerals volume was up 21% as continued growth in shale-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 mine production issues that limited shipments last year. Growth in housing and home improvements continued to increase the demand for lumber, with shipments up 6%. Although the housing market continue 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 to extending the 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 transloading 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'd like to give a brief update on our Crude-by-Rail business, which accounts for about 40% of our shale-related volume and about 2% of our overall volume. As we said, we've 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 continued to be a premier rail destination. Additional opportunities have come from other areas, such as West Texas and Oklahoma, and these volumes, in particular, has 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 netbacks. 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 impacted by increased pipeline capacity. We've also seen a small 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 unique 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'll 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 the 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 shale-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 our broad portfolio of business. Assuming the economy does not slow down, we're well on track to deliver profitable revenue growth again this year. With that, I'll turn it over to Lance.

Thank you, Eric, and 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 or closing high-risk crossings and reinforcing public awareness. We achieved year-over-year improvement in 5 of the last 6 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 affected 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've 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 & 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 on 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 an 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've 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've 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'll 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 onetime 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 onetime $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 2 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 that 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 9 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 remained 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've 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 the flat volumes in the third quarter, it's unlikely that our full year volumes will be positive even with our modest growth assumptions in the fourth quarter. However, we will 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's 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 you that we retained and renewed roughly 50% of next year's $100 million legacy business. The lost legacy business, which is currently not moving at re-investable 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'll 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 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-lift cost escalator. At the end of the day, our fundamental strategy and focus 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'll 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'll turn it back to Jack.

Okay. Thanks, Rob. Well, 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. And 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 re-investable 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 line for questions.

[Operator Instructions] Our first question is from Tom Wadewitz of JPMorgan. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: So I wanted to kind of -- 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 a bit stronger, obviously, grain, maybe coal is less of a headwind, hopefully, the economy, but you're going to get the slower pace of pricing gains, less legacy contract. So how would you frame the results of that in terms of margin improvement? Do you end up with a kind of a similar framework for margin expansion opportunity? Is it more challenging if it's kind of more volume and less price? How do you think about margin opportunity in 2014?

Tom, I think overall, we're in a good position. We've not varied at all from our guidance that says we're going to get to an operating ratio of sub-65%. So it'll be a little more difficult. I'll let Rob give you some technicolor here.

Yes. Tom, I would just add to Jack's point, I mean, 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're right, without the benefit of the legacy repricing, we expect to continue to move the ball forward. And that's going to be continued focus 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 continue -- we expect to continue to make progress on our overall margins. Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division: Okay, great. And then a follow-up on Coal. I know it's probably really challenging to have much visibility in Coal. But are there any, I guess, parameters that we should consider that you would consider, stockpile levels? Any activity you're 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 2 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 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, and actually, a couple of days below what would be considered historical norms. So what Jack said is exactly correct. It -- factors are what's the electrical consumption, generation, what's weather. Those are always going to be the key factors.

Our next question is from the line of Allison Landry of Crédit Suisse. Allison M. Landry - Crédit Suisse AG, Research Division: I 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. We would -- at this point in time, and of course, things can change, we would expect that inflation looks like it's going to be more around, all-in, 2%-ish. Allison M. Landry - Crédit Suisse AG, Research Division: 2%-ish? Okay, great. And then just 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 maybe 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 online in the Niobrara and some new destination terminals in Louisiana and Texas that are UP-served.

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

Yes. So we still believe we'll see moderate growth in 2014. As we indicated in our comments, it's 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 online. Some of them had 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 kind of what happens next year.

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

I want to just follow up on, Rob, your comment around pricing for next year and understanding that it's legacy light. But when we think about 3.5% pricing that you got in third quarter, would -- 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 from that. I just want to get maybe kind of what the base is tracking right now, x legacy. And 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 think about overall yields 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 point of coal repriced 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. I mean, if the volume of business that we've repriced, whether it be in coal or grain, if it happens to move before we've 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've 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's a net benefit to us, clearly. So I guess I'll just summarize by saying that we head into 2014 as optimistic as ever on our ability to price, but we just won't have that 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. So you mentioned that you were going to need to reauthorize share repurchase next year. If I look, you guys are at about a full turn less of leverage than the other -- 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, that -- 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've said many times, we're comfortable in the range we are right now on our net debt-to-cap ratio. I mean, 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. And in terms of will we look at more or less, we're going to continue to be -- hope to be -- continue 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 sort of our thought process.

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

If I can hit, Eric, up, I guess, a bit on Intermodal. Looking at domestic, is this the kind of run rate here, the low single digits on the domestic side on the highway adoptions? And then internationally, you noted some losses. When do your grandfather that? And should we see growth going forward in the fourth quarter into next year? When do you start looking at kind of 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 that -- as you know, there's excess steamship capacity, and there's natural shifts that are going on amongst them. And 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've talked publicly about our new facility outside of El Paso, Texas, that will be coming online next year. We think that, 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. And if I could just get a follow-up, I guess, with Rob on the productivity side. And as you look toward maybe a little bit less coming from yields and maybe more of that from -- coming from productivity, do you still seeing accelerating opportunities to continue to gain on the productivity side? How do you look at that opportunity?

Yes. I mean, Ken, we never run out of opportunities to squeeze out productivity. And Lance and his team are continually looking at the mix shifts that take place in the business. And we challenge ourselves, and you've heard me say this many times, to offset 100% of inflation with productivity. If we get half, offset half of inflation with productivity, we're doing pretty well. And 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. So we'll continue to look for every opportunity we can.

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

Wanted to get a sense, I mean, as we enter into this kind of post-legacy year for you guys, how your average book is structured right now with your customers, and kind of 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. So as I look out over the next 5 years, what piece of your overall book do you think comes up and, what's the average tenure of the contracts that you've been re-signing?

Eric?

Justin, I'm not quite sure quite what you're asking. We've talked historically in the past that at any one given time, about 70% of our contracts or our prices are kind of 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. And we're, as Rob said and I think as Jack said, we continue 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 on...

But as we -- as Eric -- I think what he's kind of talking about is and, Justin, chime in here, buddy, about 40%, typically 40% to 45% of our business is tied up in multiyear contracts. But in our current world, 3 to 5 years is probably the timeframe of those. About 1/3 of the business or 30% is tied up in 1 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. So 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. And as I think about the guidance here looking out to 2017, I was just, Rob, wanting to get an idea. Obviously, volume's been more challenged in the near term because of coal. But as I look out to 2015 and beyond, there's some expected positives on the Chem side of your business, specifically on petrochem, I would think. So 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 kind of an inflation plus as opposed to having that bump from the 1.5 points of legacy that we're seeing right now?

Yes, Justin, this is Rob. The guidance, it's just a reset. The guidance on the operating ratio is to -- by full year 2017, to achieve a sub-full year 65% operating ratio. And volume is our friend. And when we give that sort of guidance, we're assuming that the economy will cooperate, 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're 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've said all along, each measure, each metric we've given, as we've been working down from the mid-80s operating ratio years ago, we're going to get there as soon as we can, as efficiently as we can. We're 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'll get there as efficiently, leveraging volume, if we can, leveraging productivity and leveraging strong price.

But -- 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, do you think you can do even as we start to see more legacy wear off?

Yes.

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

Just maybe 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 sort of the run rate that you're at right now. So when you think about the setup, is there anything that we should be thinking about, absent mix, that would be preventing kind of the continued progress that you've been making steadily over the last couple of years? Obviously, legacy comes into all of that. But I just 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 just kind of 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're going to achieve those goals, we're going to achieve them despite whatever hand we're dealt in terms of the economic activity. That's the commitment we're 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 kind of do a double-dip here. We're not looking forward to that. But 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 kind of like big onetime things or things -- I mean, 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's kind of focused on that. Rob?

Yes -- no, you're exactly right. Now clearly, going from a mid-80s to a mid-60s rate of improvement is one slope. Going from where we are today to sub-65%, the slope of the line is different, but the tenets of how we get there are unchanged.

Sure, sure. That makes sense. That's helpful. And then when you think about the capital spending side of it, in context of that target and sort of 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're further into that? Obviously, PTC is still in the picture and probably will be for at least a few years to come. But just kind of curious, your thoughts around that for '14 and beyond.

We're watching our capital spending very closely. Our -- we had reduced our 17% to 18% to 16% to 17%. Clearly, that implies we're 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're comfortable with the 16% to 17% kind of number we put out there last year.

Our next question is from the line of Brandon Oglenski with Barclays.

I wanted to come back to the pricing discussion. In the past, you guys have been pretty successful at getting rate up to re-investable levels. Is there any way to quantify for us today what percentage of the business, or in broad strokes, that remains at -- on investable rates that has a lot of pricing upside in the future?

Rob, why don't you take a shot at that?

Yes. Brandon, I know what you're asking and it's 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 re-investable level. So that's as detailed as we get on that.

Okay. And maybe 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's that going to impact mix and revenue and volume for you going forward?

So as you know, with the drought and high U.S. corn prices, U.S. grain on the world markets really took a hit, just because we're a high price relative to what the other prices were in other growing markets around the world. It looks as if -- and as you know, the USDA website has 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 U.S. 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-à-vis this year as you go into next year.

Our next question is from the line of William Greene with Morgan Stanley.

Rob and Jack, you've always sort of described your longer-term OR guidance as a -- as not really a target and an ending point but things can go beyond that. And I think something that we've all sort of struggled with over the years is thinking about kind of what structure of a network kind of limits how good margins can get. When you look at the Union Pacific network and you see what you've been able to achieve over the last 5 to 7 years, which, in margin terms, is kind of breathtaking, is there anything about the network that makes you say, yes, it's going to be hard for us to ever achieve sort of record profitability relative to our peers in the industry? Is there anything about your network, structurally, that limits how good you can be?

Man, I can't think of anything. Rob, can you?

Yes. No, Bill, I mean, there's no -- there's not like a mountain that's in our way that's not in other people's way. I mean, we all have the same challenges, and there's -- it's a great theoretical question in terms of how low can you get, and we get that question. I mean, a 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 end of the day, that's what we're really focused on. How low can the margins go? We'll 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 kind of something that'll take longer to show up?

Yes. 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.

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

My question, I guess, focus in on the weather impact that you had in Colorado and Denver and more kind of a theoretical one here. When you see that kind of weather impact manifest itself, and it may be that we're 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 can answer that. Maybe, Eric, in your customer conversations, are they attaching more and more importance to that ability to reroute?

Yes. Walter, I'll let Lance and Eric chime in here, but let me just kind of 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 spend a lot of time talking to them about our strategy is basically to create value for them. And 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. And that's not to say we were perfect in all cases, but I think our customers have given us high marks for that. Lance or Eric, you want to chime in on that?

Yes, Jack. So 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.

Do you think it's 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're 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, I guess, is on your Crude-by-Rail. You mentioned St. James seems to be showing a little bit more resiliency. Other areas seem to be more impacted by the differential. My question, I guess, is to what extent can your St. James destinations be insulated from that differential? And perhaps talk a little bit about the difference as to why that is and what level does it need your St. James and as they -- also be impacted by differentials.

Yes. So we talked in the past about the reason for St. James being such a premier rail destination, and it's really the connectivity, the pipeline connectivity, the connectivity to multiple refiners, the ability to do blending there. And so it has become, really, a premier destination for crude, light sweet crude, going to the Gulf. And we think that, 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've historically talked about with St. James makes it a premier destination, and we will see that resiliency remain for the future.

Our next question is from the line of David Vernon of Bernstein Research. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Eric, maybe you could -- if you could give us a little more color on the legacy retention issues. Are we done sort of settling up the legacy book for next year? Was the -- were the plants that did not get renewed, did they just shut down or was it a share loss? And whether this was PRB or Rocky Mountain coal?

Yes. So as you know, we don't really get into customer-specific negotiations or discussions other than what we 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 re-investable levels, so. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: Okay. But was some of the losses perhaps due to the plant just being shut down, or was it -- or if you don't want to comment, that's fine. I'm just trying to understand the -- 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's not any measurable mine shutdowns that are occurring in our service territories, at least not this year and not for the foreseeable future. David Vernon - Sanford C. Bernstein & Co., LLC., Research Division: All right, great. And maybe just as a quick follow-up, how do you feel about the viability of the Colorado and Rocky Mountain coals that were moving east relative to the Illinois Basin kind of going forward?

That's a good question. First, 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 of the utilities and 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, the export market opportunities for Colorado/Utah are probably larger than even the Illinois Basin export coal opportunities.

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

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. And that doesn't look like a trend that's about to reverse, so some color there, please.

Yes. 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 the IPI option, to move all the way inland. Our view of the world is we're 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. And then I'm hoping you can either confirm or deny the chatter we've heard from some of the IMCs that part of the issue with intermodal growth on your network is lack of access to equipment. And I think they were talking specifically about chassis. Can you put any detail behind that?

Wow. Eric?

Yes. I'm not -- I think it's just chatter. We do not have a lack of access issue on our network. I think it's just chatter.

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

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?

Yes. 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. And so with the opening of this new facility, we'll immediately be able to double our capacity, but we're not limited by that. We'll have the footprint to go beyond that as we have market opportunities.

Yes, Justin. The initial buildout should handle 250,000 lifts a year. And we have plenty of space available to go way beyond that, in addition to it being our new fueling facility.

Great, that's helpful. And second question, I was wondering how much visibility you have on the potential impact from the new automotive production that's coming online 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 could move on your network at this time?

So you're referring to kind of the large, announced facilities by Nissan and Volkswagen, those opening dates are beyond next year. We, along with the Mexican railroads, both the FXE and the KCS, we're working to develop service products and offerings so that we can get our fair share of participation in those. But those facility operation -- I mean, opening dates are beyond 2014.

If I could just add on that, Justin, because you've 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 6 border-crossing points. And today, we enjoy in 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 the crosses those 6 border points, that we will get our fair share of business that wants to move north and south.

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

It's been a long call so I'll just ask one. I was just struck by the massive decrease you've had over the last couple of years in slow order miles. And just wondered if you could elaborate a little bit 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?

I love that question.

Yes. Go for it, buddy.

So, 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. And 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, and they basically have the network, when they're present, operating at 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.

Our next question is from the line of Ben Hartford of Robert W. Baird. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Eric, a quick question on Intermodal. Could you give us a sense of what you believe the discount to the product vis-à-vis a like-for-like truckload move would be today?

Yes. 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 equivalent over-the-road long-haul truck. But again, that's lane-dependent, lane-specific. Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division: Of course. And 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?

Yes. So a couple of factors. One, the question was asked before about the hours in 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 that there are places where we can narrow that gap and still convert. And 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, and so it's an ideal market sales opportunity for us to penetrate. So there's lots of upside opportunities, and we could get it. Even by narrowing the gap, we can still grow.

And we also have new service products that your team has been working on with Lance and his team in terms of providing great service, some new market destinations and some originations. And as the network continues to evolve and develop, that's an opportunity for us as well.

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

Two quick ones here. When I look at Coal out into 2014 and look at the arc or the yields, given that you've retained sort of 50% of that legacy business, how should we look at how that arc's going to move? I mean, were the 50% return retained, longer length of haul, about average?

Rob?

Just trying to get a sense of the number that we're going to see all else being equal.

For planning purposes, I'd look at it as an average, but we're not going to give detailed arc projections for Coal. And by the way, it will be dependent upon mix. I mean, in terms what -- 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. But all I'm saying is that the mix that you retained, that 50%, that wasn't, overall, vastly different from your normalized mix?

I'd call it in the normal range.

In the normal range. Okay, great. And just a quick follow-up question on Intermodal. I hear you guys on -- in terms of the hours of service and truckload rates eventually have to go up. But we've been waiting for that for a while and we haven't really seen much progress on that. Sort of how do you look at sort of gaining market share off the highway if we're still stuck in this sort of very muted truckload pricing environment?

Yes. So again, hours of service just went into effect on July 1. So that's why when I answered earlier about negligible impacts, 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 sell what -- what we've seen is large shippers really have a great understanding of the intermodal value proposition, and they're heavy users of the intermodal value proposition. There's some market segmentation opportunities for the other guys other than the Walmarts or 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.

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

I think a couple of us have hinted at the -- how conservative it seems, the sub-65% goal by 2017. And I mean no insult because you guys have identified conservative goals in the past and hit them again and again. But are there are 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, D.C., and the fact that it wasn't really a resolve, it was just moved ahead, is 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. I mean, you're right. And you're 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 that Jack points out, would be the fuel price. Just the math of the operating ratio performance is heavily -- can be heavily impacted by fuel. But beyond that, it's sort of 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 identify fuel price and consumer spending are a couple of principal ones and maybe legislation. But I noticed that you didn't mention sort of regulatory environment, is that less of a threat than might previously have been discussed?

Well, 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's going to curtail capital spending and investment. Nobody really wants to see that happening. And most people in Washington want to see more jobs and growth. So I never want to say we're not concerned about it, but we're working it as hard as we can to ensure that that's not a major issue for us.

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

I know it's been a long call, so I'll 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 depreciation 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. I mean, you're right. Bonus depreciation, we've had that benefit for several years now, and we don't anticipate that we'll see that benefit continuing to 2014. And as I've said, it's -- that impact in '14 is going to be in the several hundred million dollar range, but we don't think -- it's not going to impact our capital structure or our plans that we've outlined. But it's going to be kind of 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?

Yes. From a tax rate standpoint, I'd use around a 38%. On a book basis, yes.

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

Question, in your assumptions in longer term, and it's 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 then 2017, are you looking for international Intermodal volumes to be flattish, just diminished rates of growth, or actually go negative for you?

So we have talked publicly before, and we still think it holds that, today, about 1/3 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. At this time, I would like to turn the floor back over to Mr. Jack Koraleski for closing comments.

Well, 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.