Greetings and welcome to the Union Pacific Third Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow today’s formal presentation. [Operator Instructions] As a reminder, this conference is being recorded and the slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Lance Fritz, Chairman, President, and CEO for Union Pacific. Thank you, Mr. Fritz. You may begin.

Good morning, everybody, and welcome to Union Pacific's third quarter earnings conference call. With me here today in Omaha are Eric Butler, Chief Marketing Officer; Cameron Scott, Chief Operating Officer; and Rob Knight, Chief Financial Officer. This morning Union Pacific is reporting net income of $1.1 billion for the third quarter of 2016. This equates to $1.36 per share, which compares to $1.50 in the third quarter of 2015. Total volume decreased 6% in the quarter compared to 2015. Carload volume declined in five of our six commodity groups, with coal and industrial products both down double-digits. Agricultural product volumes were up a robust 11% this quarter versus 2015 as grain shipments finally started to show some strength. The quarterly operating ratio came in at 62.1%, which was up 1.8 percentage points from the record third quarter last year, but improved 3.1 percentage points from the second quarter of this year. Continued momentum from our productivity initiatives, as well as positive core pricing helped partially offset the decline in total carload volumes. While many of the same volume challenges have continued throughout the year, we are keeping a laser focus on our six value tracks. This strategy ensures we provide our customers with an excellent value proposition and service experience, while efficiently and safely managing our resources. Our team will give you more of the details, starting with Eric.

Thanks, Lance, and good morning. In the third quarter, our volume was down 6% with near record agricultural product shipments more than offset by declines in each of the business groups. We generated core pricing gains of 1.5% in the quarter, reflecting the impacts of competitive markets and a weak economic environment, particularly in our energy related and international intermodal businesses. Despite these challenges, we continue to achieve solid re-investable returns even in these difficult markets and we remain committed to achieving positive core pricing gains that reflect our value proposition over the long term. The decline in volume in the 2% lower average revenue per car drove a 7% reduction in freight revenue. Let's take a closer look at the performance for each of our six business groups. Ag products revenue gained 6% on an 11% volume increase and a 4% decrease in average revenue per car. A robust U.S. grain supply and lower commodity prices generated export strength and let the grain volumes 27% in the quarter. Wheat exports rebounded in the second half of the quarter as adverse weather in South America caused significant loses elevating demand for the higher protein U.S. wheat. Grained products carload advanced 5% in the quarter, primarily due to increased ethanol exports and biodiesel shipments. Food in refrigerated carloads were flat in the quarter as strong demand for import beer offset softness in refrigerated food shipments and import sugar. Automotive revenue was down 8% in the quarter driven by 2% decrease in volume and a 6% reduction in average revenue per car. Finished vehicle's shipments decreased 7% by sales and production levels of passenger vehicles impacting key Union Pacific served plants and contract changes we referenced last quarter that will continue to impact that volume through the first part of 2017. In…

Thanks Eric and good morning. Starting with our safety performance, our year-to-date reportable personal injury rate improved 16% versus 2015 to a record low of 0.77. Included in this was a record low number of severe injuries, which have the greatest human and financial impact. Although we continue to make significant improvement, we won't be satisfied until we reach our goal of zero incidents getting every one of our employees home safely at the end of each day. With respect to rail equipment incidents or derailments, our year-to-date reportable rate of 3.13 improved 4% versus last year. While we made only a slight improvement on the reportable rate, enhanced TE&Y training and continued infrastructure investment helped significantly reduce the absolute number of incidents, including those who did not meet the reportable threshold to a new record low. In public safety, our grade crossing incident rate increased 13% to 2.55. We continue to focus on driving improvement by reinforcing public awareness through various channels, including public safety campaigns and community partnerships. Moving to network performance. While the California wildfires and flooding along various parts of our network created some challenges during the quarter, our network proved resilient as we continue to achieve solid operating performance. Effective use of our surge locomotive fleet and TE&Y workforce were critical to minimize the impact of these network challenges. As reported to the AAR, velocity improved 2% when compared to the third quarter of 2015. Terminal dwell also improved 2%, but the benefits of a food network were somewhat offset by productivity gains such as longer train lengths and other network management initiatives. Moving on to resources, as part of our ongoing business planning process, we continue to adjust resource levels to account for volume changes and productivity gains. As a result, our total TE&Y…

Thanks, good morning. Let's start with a recap of our third quarter results. Operating revenue was about $5.2 billion in the quarter, down 7% versus last year. Lower volumes and lower fuel surcharges more than offset positive core pricing achieved in the quarter. Operating expenses totaled just over $3.2 billion. Lower fuel costs, volume-related reductions, and strong productivity improvements drove the 4% improvement compared to last year. Operating income totaled almost $2 billion and a 11% decrease from last year. Below the line, other income totaled $29 million, roughly flat versus 2015. Interest expense of $184 million was up 17%, compared to the previous year. The increase was driven by additional debt issuance over the last 12 months, as well as about $8 million for the fees associated with our recent debt exchange transaction. This increase was partially offset by a lower effective interest rate. Income tax expense decreased about 14% to $674 million, driven primarily by lower pretax earnings. Net income totaled just over $1.1 billion, down 13% versus 2015; while the outstanding share balance declined 4% as a result of our continued share repurchase activity. These results combine to produce quarterly earnings of $1.36 per share. Turning now to our topline, fright revenue of $4.8 billion was down 7% versus last year, primarily driven by a 6% decline in volumes. Fuel surcharge revenue totaled $173 million, down $141 million when compared to 2015, but $86 million from the second quarter of this year. All in, we estimate a net impact of lower fuel prices was a $0.05 headwind to earnings in the third quarter versus last year. The business mix impact on freight revenue in the third quarter was about flat, similar to what we experienced in the second quarter. Year-over-year growth in agricultural product shipments and declines…

Thank you, Rob. As the team has articulated here this morning we continue to experience a difficult, but improving market environment in the third quarter. While we were pleased to see improving volumes in some of our business lines such as grain and coal, many of our markets still remained at volume levels below a year ago. The macroeconomic environment still has its challenges and unstable global economy, the relatively strong U.S. dollar and continued soft demand for consumer goods. However, certain segments of the economy are showing signs of life. A recent rally in energy prices has crude oil over $50 a barrel and natural gas over $3 per million btu, which are both encouraging for our coal and shale-related businesses. We are also pleased to see strength in the overall grain market. With the record harvest currently underway we are well-positioned with our network and resources to serve an increase in demand from our Ag customers. Closing out 2016 and heading into next year, we’re optimistic about the opportunities that lie ahead. In the coming months, we will continue to do what Union Pacific does best, operate a safe, efficient, and productive network while providing an excellent customer experience and delivering solid shareholder returns. With that, let’s open up the line for your questions.

Thank you. [Operator Instructions] Our first question is coming from the line of Ken Hoexter with Merrill Lynch. Please proceed with your question.

Great, good morning. Just can you, Rob talk a little bit about the projects you are writing-off, I just want to understand what kind of cost we have going forward and it looks like as the business comes back, you're starting to ramp up your locomotives and employees, but you notice that there are fewer people in the training pipeline, should we see some start-up costs as you start to bring people back in? Thanks.

Yeah, Ken what I commented in the quarter was around 17 million of projects that were started that we have chosen to not pursue and so we’re taking adjustments there. So, I think if you look longer term that’s a number that is not going to repeat, I mean we occasionally will have situations like that, but I think it’s safe to assume that that’s a number similar to the Hanjin receivable write-off that I mentioned that are not going to repeat in that line item. In terms of the cost, we are confident that we are well situated both on locomotives and employees to leverage the volume that we hope does materialize. So we've got fewer people in training line because we've got so many people if you will in furlough status at this point. So, we feel very good about our ability to and we'd love nothing more than to see volume pickup and be able to put resources back to work.

Great thanks.

Our next question comes from the line of Cherilyn Radbourne with TD Securities. Please proceed with your questions.

Thanks very much and good morning. With the international shipping lines under continues financial pressures you noted and the prospect of a record grain crop match back is something that I’ve been hearing more about, just curious is that something that you’re facilitating and potentially see as a means to increase market share in intermodal grain or both?

Eric?

As you mentioned Cherilyn there is a significant volatility going on in the international container ship business. There have been three major mergers, one bankruptcy, there are a number of other entities that are in dire or questionable financial shape. One of the things that all of the container ship companies are looking at doing is finding ways to have match backs or exports from the U.S. to Asia. One of the large historical exports has been grain and in particular the DDGs to China. We are continuing to that look at that as an opportunity to grow our business in terms of the westbound business to Asia. We’re also really excited longer term or mid-term in terms of the opportunity to ship plastics to Asia from the expanding franchise we have in the Gulf and we think that that’s going to be an excellent opportunity for match backs also. So, we think both of those things are great opportunities. Of course, China occasionally as they have right now have tariffs or other governmental policy things that hinder imports like DDGs, but we think long-term that should be opportunity for us.

Cherilyn this is Lance. What Eric just outlined is indicative of the franchise strength that the Union Pacific brings to the industry. We've got breadth and coverage in a number of markets that allow us visibility into potential match backs.

Great and just by ways of very quick follow-up, when you say medium-to-long term on the plastics match backs is that sort of 2018 and beyond?

Yes, I mean as we've been saying for the last several quarters, we think most of the growth will happen in 2018 and beyond. There might be a tale of a small ramp-up towards the end of 2017, but basically 2018 and beyond.

Thank you. That's all from me.

Our next question is from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Hi, thanks good morning everyone. A couple of questions on pricing, you've committed to a positive core pricing, can you also commit to pricing over inflation? And second, can you just help us understand what the driver of the pricing, I would say the deterioration in the gains have been, is it mostly into real competition, is it truck competition, or is it you guys kind of just supporting some of your customers who may be going through a hard time and hoping to get it back little later on?

Eric?

Hi Ravi. So, one of the things that we're real excited about is the great franchise we have and we have a very diverse franchise. And some components of our franchise obviously as we mentioned, the energy related and the International related are facing both economic weakness conditions and also some competitive conditions. So, we've been talking about the challenges in coal, coal as you know has been greatly challenged not only a demand because of weather and other usage demands, but natural gas has been a great strong competitor to coal. The below $2 natural gas prices has created a headwind for coal in the past. We’re excited or we think that with natural gas being above $3 now and even some of the futures market showing it in the mid-3s that that certainly will improve the competitive condition for coal, but that has clearly had an impact likewise. The three mergers, the one large bankruptcy in the international intermodal, the volatility that we talked about in previous earnings releases has created economic conditions and competitive conditions in international intermodal. Even despite those challenges in those markets, we still have been able to put our market price at re-investable returns and we think that looking at the broadness of our portfolio we are pretty positive in the future about our ability to price for the excellent value we provide and we're going to price above re-investable returns and we have a broad portfolio of opportunities to drive that message.

Thanks so much for that color. Can you also, do you have the confidence that you can stay above inflation in pricing?

Ravi this is Rob, let me answer that. I mean clearly long-term that is still our goal. The one thing with these challenges and opportunities that Eric just outlined, you know one things that we haven't finalized yet, but as we look into 2017, at this stage it looks like global insights inflationary numbers are like 2.5% and our number may well be above that from an inflationary standpoint, largely driven by the health and welfare costs on our labor lines. So, still some work to play out there, but longer term absolutely we are as committed as ever to driving that price.

Great, thank you.

Our next question is from the line of Tom Wadewitz with UBS. Please proceed with your questions.

Yeah, good morning. I wanted to ask a little bit more on the pricing side, you commented how the higher natural gas price is helpful for coal, so that’s obviously a constructive thing, but I'm wondering if you are optimistic if that will - that should help the cold tonnage and obviously if you have a normal winter and so forth, but what about the pricing in coal, if we stay at this gas price will go a little higher, do you think that the, you know you will be able to go transition to better competitive environment where you could raise price for coal transport or is that something that some of that pricing pressure would likely present?

Yeah, so Tom you are asking a couple of different things here, as you know there are always a variety of market conditions that impact price transportation capacity availability and availability on transportation networks for other commodities, as you know competition, weather there are a lot of things, natural gas prices that will effect coal. We are positive that the use of coal should be increasing in the mid-term, if you just look at, again the competition against natural gas, if you look at the economic pick up and the use of energy we are confident that the use of coal should be picking up in the near mid-term and we saw that in the second to third quarter in terms of the sequential use of coal. We will continue to price for re-investible returns based on the value of service that we provide and we are confident in that strategy, we are confident in the value that we are providing and we are going forward.

Hi Tom, this is Lance. Clearly an environment where natural gas price is increasing, put it north of $3.50 or so and where weather is favorable and where the stock piles have been worked down that is a better pricing and competitive environment that not. So it helps.

Okay I appreciate that and for the follow-up, I don't know if this is kind of Rob or Cameron, but you’ve shown nice improvement in the train length good momentum there, so that’s very favorable, I’m wondering if you look at 2017 and if you do see a volume growth, is there a couple of things play out, let's say you see a couple of points in volume growth, how does that translate to incremental margins? Could you see something that well above the normal 50% incremental margin we’re talking about, could you see something 60% 70% as you expand train length more and see some of the benefit of the cost take-out and so forth, is that a reasonable equation or would you be more cautious about the incremental in 2017 if the volumes come back? Thank you.

Rob, why don’t you take that.

Yes Tom. This won't surprise you, but we won't give guidance on the actual incremental margins, but everything you said are certainly opportunities. I mean as you know our G55 and Zero initiatives which are some 15 different areas and our view is we’re looking at every single cost bucket in the entire company and attacking it aggressively with an eye on safety and efficiency and customer values. So, I would just answer that question by saying the scenario you outlined where there is positive volume and a reasonably positive economic environment would give us an outstanding opportunity to continue to drive productivity and staying away from an actual incremental margin calculation we would expect it to be a positive contributor. And by the way for us to go from where we are today to our 60 plus or minus by 2019 and with an eye on getting to 55 or so we're going to have a very healthy incremental margins from here to there. So we're going to certain certainly go after it.

Tom as we've opened up the door now to the productivity in your question, I just want to give recognition to the entire UP team who have done a tremendous job in a reduced volume environment of finding ways to grow, for instance manifest train size 5% year-over-year that’s a phenomenal effort, and that’s just one of many in terms of finding productivity on the network. I think the team has done a tremendous job in creating productivity in a pretty difficult environment.

Yes, clearly you guys are doing a great job in that area. That's an impressive performance. Thank you for the time.

Thank you.

Our next question is from the line of Jason Seidl with Cowen & Company. Please proceed with your questions.

Thank you operator. Good morning, gentlemen. I’m going to stick on the price force here for now. As we look at that 1.5% you mentioned, tough volume environment, competitive environment, is this something that you would expect UNP to hover around for a while or what could break it out of that 1.5%? I’m trying to figure out, is this near term are we going to see that throughout 2017 unless things recover from here?

You know Jason we don't give any guidance on price. Clearly, as we've outlined a little bit here this morning, there are certain markers that make the competitive environment better for pricing. Any time, for instance capacity and alternative modes tightens up that's good. Demand for the core underlying commodities as it increases that’s good. So you just got to keep your eye on what's happening with for instance natural gas prices and stockpiles and weather in the cold world. What's happening on import demand and the financial help of our international intermodal ocean carriers that helps? What happens for industrial production in the United States that helps? What's happening to truck capacity, alternative modes that helps? So all of those are helpful environment for our pricing.

I appreciate that. I mean I just, even checking my records, I can't remember the last time you guys were below we would call your real cost inflation. Looking at 2017, how does - and I know you guys don't provide guidance specifically, but are you pretty confident that you are going to be able to grow your volumes and 2017 forget what percentage, but just grow the volumes?

Eric do you want to handle that?

As you say we don't give volume guidance, but if you look at the markets that we have out there and you look at the pickup and different markets that we have. We feel pretty positive that as the economy continues to grow and is slowly strengthening. In many of our markets we feel very positive about the run rate opportunity. The one cautionary area that we have talked about before is in automotive sales, we continue to think those are cautionary, but if you look at even our Mexico franchise we had great growth in our Mexico franchise in the quarter. We still think that there are good opportunities to grow volume.

If I could just add to Eric's comments Jason, just kind of remind you and everyone else, you know our thesis from this point over the longer period is a positive volume environment and you look out the - as Eric just pointed out, you look at the unique diverse opportunities of our franchise while we are giving precise volume guidance for next year, but we do feel there is great opportunity for us to continue to leverage and over the longer period of time for us to have volume on the positive side of the ledger certainly.

Well, let me ask you quickly in another way, so if you saw negative volume next year that would mean that something would have to decelerate from here with the trends, is that an accurate statement?

Yes that's an accurate statement. Generally speaking, we got to be playing in multiple markets, but that’s a fairly accurate statement.

Okay. Gentlemen I appreciate the time as always.

Thank you.

Our next question comes from the line of Brandon Oglenski with Barclays. Please proceed with your questions.

Hi, good morning everyone and thanks for getting me on the call here. A couple, I think a few months into this year we have been talking about OR improvement even when volumes are down pretty significantly in the first quarter, and I know you guys backed off a bit in 2Q, but I guess as I listen to the call here, it sounds like pricing might be in-line with cost inflation maybe even a little bit below next year and let’s say volumes don't come back tremendously, what can you guys do on the operating ratio that maybe we could instill some confidence again that you guys would break into [indiscernible] territory?

Let me start Brandon, this is Lance and I’ll remind you that we have confidence, extreme confidence in our ability to continually find opportunities to be more efficient, reduce waste, and increase the value that we are adding. I’ll ask Cameron just to give us a handful of examples of things we're working on when we are going into next year, but our bucket is full of opportunity to be better.

On train size, the only commodity group that is truly optimized or nearly optimized is coal. Every single commodity that we have out there from manifest to automotive to intermodal to grain or rock all has tremendous opportunities for us to continue with the results that you have seen, so we feel confident that that is going to happen in 2017. The record all-time re-crew rate from a process perspective we feel like we have well in hand and we should continue to see that into 2017 and 2018. And we work on other initiatives like rationalizing our little horsepower for you. We've done a great job of moving to single unit local operations versus two units. There’s a number of initiatives that we have. We’re truly, we're just getting started in framing up the opportunity and getting ready to realize it as we step into the New Year.

Exactly. And even little things like see [ph] rates that improved 2% year-over-year here, there is plenty of opportunities we look forward to become world-class if you will and in consumption rate for diesel, so there is just a host of issues there Brandon that we can continue to work on.

No, and I appreciate all that you guys probably have gone on that we can see from here, but I guess in retrospect Lance was it just that volume got a lot worse than we thought in the second quarter or was it competitive factors, was it market pricing, what was it that led to the lack of ability to drive OR improvement this year.

Let me let Rob handle.

Yes Brandon. I mean your comment is right that we have always said and we do believe that we can make improvements in the operating ratio in spite of the lack of volume growth. And in fact if you look at over the last decade, you know we have taken almost 25 points of our operating ratio without the benefit of positive volume over that time frame. I would say that you are exactly right though, here in the short term this year I would say that the major driver of not likely improving the operating ratio this year is the pace of which we've been chasing volume down. I mean it’s, we never have perfect visibility as to where that volume is going to trough and that makes it difficult so we are always kind of chasing if you will and I think that’s really the answer to what you've seen this year. So as we look forward I think it’s still a fair assumption and it is certainly our drive that we expect to make improvements in our operating ratio in spite of what the economy deals us in terms of what happens with volume now. Having said that as we look out over the next several years we do have volume in our thesis on the positive side of the ledger, but we’re going to not use that as an excuse not to make continued productivity improvements.

Okay, thank you.

Our next question is from the line of Scott Group with Wolfe Research. Please proceed with your questions.

Hi guys good morning. So, wanted to follow up on pricing, Rob your point about inflation picking up to 2.5% next year is that to caution us that pricing could be below inflation or is that you telling us that we have line of sight to inflation getting higher, so we have line of sight to our pricing accelerating to next year, I’m not sure what you are trying to tell us.

Yes Scott, my point on the inflationary comment is, we do expect inflation to go back up if you will to more normal levels versus the below inflation, below normal levels that we enjoyed this year and again 2.5 global insight are numbers because of health and welfare costs might be higher than that, so my point on that is simply to say not unusual against historical numbers, but we do expect inflationary pressures to be back to sort of normal conditions if you will.

But because you have line of sight to inflation picking up do you have line of sight to your pricing re-accelerating too?

I would say no. I mean it’s not mechanical as you know the way we price and we play in so many different markets that they are not - it's not a cookie-cutter, it is not a one size fits all, and as Eric outlined. There are opportunities for us to achieve stronger prize than other areas in the short-term, but we will continue to drive service, drive value and price at minimum of re-investable levels as Eric outlined in spite of what that inflationary number turns out to be. So, I would say they are disconnected if you will in terms of the day-to-day pricing initiatives that we take.

So maybe just bigger picture, it feels like for the long term you guys have said hey, we're going to get pricing no matter what if you get volume okay, if we don't get volume we don't care and truthfully you haven't had much volume, but you’ve gotten great pricing, is the philosophy changing where you care more about volume now as part of G55 and so there is, it’s less clear you necessarily always get the pricing?

Scott our philosophy is not changing and as a matter of fact, our top line this quarter reflects that it’s not changing. We are pursuing business in the marketplace that we can price for the value that we represent and that’s re-investable. And if we can't find that we walk away from it. So nothing has changed about that philosophy.

Okay and if I can just ask one more just on grain pricing specifically, so as the grain volumes are finally picking up are there opportunities to start raising grain tariff, I was little surprised by the sequential drop in ag revenue per car this quarter, I don't know if that’s mix or lack of pricing there, does anything specifically on grain pricing?

Yes Scott, I think if you sum up pricing as you know is in public tariff, which is publicly available and I think you would see some of that sequential increase in pricing in the public available tariffs that mirror kind of the demand that’s picking up in grain. I think you will also see in some of the secondary markets huge increases in kind of the value in the secondary markets for equipment for grain, so some of that is yet public visibility too and I think if you look at those public things you would see pricing going with the demand increases.

Okay, thank you guys.

Our next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your questions.

Hi good morning this Danny Schuster on for Allison. Thanks for taking my question here. So just coming back to pricing a little bit, I think investors are looking at the downward trend and wondering whether we could eventually see flat pricing at some point, and I think after today we are a little bit potentially closer to that so what can you tell investors to alleviate the concern that flat pricing is not a possibility?

Just exactly what we’ve said this morning, which is our pricing philosophy is that we’re looking for markets and opportunities where we can price for the value that we represent and if we can't find that and have it re-investable we’ll keep searching. As markets improve, as the competitive environment improves that should translate into an environment where we have more opportunities than not, but our philosophy, our way of conducting business is not going to change.

Okay great thank you. And just switching gears on the field side, the discount to spot diesel prices seems to have climbed a little bit this quarter back up to around 66%, another 300 basis points up, so should we expect this trend to continue upwards or in other words expect the discount that you received to spot diesel to diminish as field prices go up? Thank you.

Rob?

Yes, I guess I would answer that by saying it’s hard to say, I mean I can't give guidance as to what that gap may be, but certainly the way I look at is overall as diesel fuel prices increase we will work hard and have good mechanisms in place to continue to - there may be a timing difference, but our surcharge is in place. So from a net impact we work hard to minimize that, but I can't predict exactly what the delta to the spot will be.

Okay great, thank you for taking my questions.

Our next question is from the line of Justin Long with Stephens. Please go ahead with your questions.

Thanks and good morning. I wanted to ask about the OR, I know you said you are not expecting improvement this year, but do you think we will see year-over-year improvement in the OR in the fourth quarter given what you are expecting for volumes?

Rob, do you want to …?

Yes, Justin you know as you probably are on top of your - comps get a little bit easier if you will in the fourth quarter number one and number two we can continue to drive the productivity initiatives that we've been successful with this year and volumes get easier and if volumes stay kind of flattish as I outlined in my comments, say even flattish with where they are now, we would see the fourth quarter gap over previous year narrowing. So, having said all that, again without giving specific precise guidance on the OR for the quarter we certainly have an opportunity to do that.

Okay, that's really helpful and I don't want to beat the dead horse on core price, but we did see the moderation there and it sounded like in your prepared comments you said it was mainly due to energy and international intermodal, I was wondering if there was any way to frame up how much of a headwind you saw from those two areas of the business like maybe to say that was all 50 basis points of the sequential deceleration that we saw or something like that?

Justin this is Rob, we don't break it out that way, but I would just tell you, I mean again as you've heard me say many times, we don't have just a simple cookie-cutter one price fits all, so all of our markets that we enjoy and again we have more markets because of the diversity of our franchise then many, it gives us opportunities and it’s - the pricing opportunities for us are very diverse, but having said that we don't break out the way you are asking it.

Okay fair enough. I’ll leave it at that. I appreciate the time.

Thank you, Justin.

Our next question is from the line of Chris Wetherbee with Citigroup. Please proceed with your questions.

Thanks, good morning. I do just need to come back to price and I apologies I know it’s been sort of - talked about this morning, but just one thought on renewals, you guys report core pricing be little bit different than some of your peers and I guess I just wanted to get a rough sense of the relationship between inflation and the renewal dynamic and I know it’s not mechanical Rob and you kind of highlighted that, but just generally speaking, higher inflationary environment would you expect that renewals would accelerate as well and how much may be of a lag do you think that there is, I guess I'm just trying to get a rough sense. Regardless of the magnitude, just sort of directionally, I’m guessing they work together, just want to get some color on that would be great?

Yes Chris, I mean just a couple of comments I would make. Number one as I think you and others know we have about 25% of our business if you will that is affected by a list. So over a longer period of time that mechanism sort of may be lumpy from quarter-to-quarter, but over a longer period of time it tends to reflect what’s happening with rail inflation number one, but I guess I would more broadly say and remind folks the way we calculate price and as you all have heard me say for many years, I’m very proud of the fact that we are very conservative in terms of how we calculate price, it is not a same store sales kind of number, it is a mathematical calculation of how many dollars we yielded in that particular quarter from our pricing actions and the denominator is our an entire book of business. So, it includes contracts that perhaps we didn’t touch certainly in the quarter for pricing. So, having said that there tends to be a little bit of a lead lag if you will in terms of the yield dollars that come from our pricing actions, but again our focus is unchanged from what it’s been at this point in time, you’ve got a couple of markets out there that are particularly challenging, but our commitment to driving value, driving quality service and driving positive price and positive volumes - positive margins has not changed.

Okay that's helpful, I appreciate that. And then maybe switching gears want to follow-up on the coal side, Eric you had mentioned I think 27 days - inventory is your 27 days above average I believe is what you highlighted there, what you think the right number is in terms of sort of the go forward period, what are the natural gas curve is sort of weather has been over the factor over the summer, we don't know what it'll be like over the winter, but what do you think that right number is, how close are you guys to kind of getting towards normalized inventories do you think?

If you think about Powder River Basin inventories, the five-year average as I said was the low 60, 63, 65, and right now we are still at 90. So that’s how you get to the 27 days. I do think that 60-ish number is probably right. If we have normal weather patterns and normal cold winter, if you look at the natural gas futures curve, I think right now it’s like projecting 340 in the early part of next year. That will drive the inventories down. That will drive usage of coal, coal market share in the quarter was 32%, compared to like 28% I think in the second quarter, so coal market share is grown I think, it will be in the good - placed a good position, you will see coal volumes grow, you will see the opportunity for coal pricing to grow you will see inventories go down and I think we will be in a better place.

One thing to note, you can get to that days inventory reduction adjustment a number of ways. If you think about what's happening in the coal world in a different perspective, on a stock level of qualitative million tons of SPRB coal we are about 3 million tons higher year-over-year and that represents as Eric says about 25 days of burn. So, it really doesn't take much in both how much you have in stock and how much you’re burning to affect that day’s ratio. You can get there in a number of ways.

That's really helpful and real quick, can you say what the coal outlook was for volume within the low-single digit decline in the fourth quarter?

We didn't Chris, but it’s in the, call it in the low teens, it’s probably a reasonable assumption, down low teens.

Okay great. Thanks for the time, I appreciate it.

Our next question is from the line of Brian Ossenbeck with JPMorgan. Please proceed with your questions.

Hi, good morning. Thanks for getting me on the call here. Lance just wanted to get your views on regulatory backdrop, obviously there’s been a lot of things coming over the is STB and their review of the standalone cost that’s an external consultant come out recently, we’ve got some news as the GAO about ECP bricks [ph], but just looking into next year it seems like it will still be fairly busy on the dock, I just wanted to get your thoughts on, if there will be any potential impact changes in regulations in 2017 that you would be particularly focused on?

Brian thanks for that question. We are focused on the activity at the STB. That’s largely driven by the reauthorization from Congress about a year ago in that reauthorization Congress has essentially encouraged the STB to work through their doc if they had a backlog of a fair number of action items. Our concern is that that’s interpreted as a desire to regulate the industry further. We don't believe that is the desire of Congress, we think Congress' desire was to have the S&P work through the workload. So we've got our eyeballs and are working on different activities, things like the reciprocal switching roles or the reduction of exemptions of different commodity groups. We are touching all the right points and making sure our perspective is known and incorporated into the thought process. There is a lot of moving parts there, so it’s taking a fair amount of work on my part on our legal team and our Washington team. I would say our largest concern would be the overwriting overall impact of each individual regulation. If the STB takes those in isolation, we could end up in an impact that is unintended and unconsidered and so we’re also working hard to make sure that the STB takes into account the full perspective of everything they are working and the knock-on impacts of each as a group. Does that make sense?

Yes it does. And helpful I think you feel the activity you think potentially activist, but it just seemed like a dock that just needed to move forward a bit. Just one real quick question for Eric on the Hanjin impact, you had mentioned the $13 million write-off, I was just curious if there is any operational issues you have been seeing as there's containers come on onshore and people don't necessarily want to move them, anything from the chassis shortage that we have been hearing a little bit about, if that's a concern, clearly it’s a lot of other puts and takes in the international intermodal side right now? Thank you.

Yes Brian, so you knew specific I think has weathered a lot of what I call the operational fallout from the Hanjin bankruptcy fairly well. At a high level on the day they went bankrupt there roughly had about 100 ships on the inflows around the world, 40 owned, about 60 leased and they had lots of issues in terms of what to do with all of the end traffic flows, it was roughly $14 billion worth of goods and in traffic flows lots of issues about what to do with that. We had a fairly nominal number of boxes in route on our railroad and we've been able to process all of those through - we probably have a couple of dozen left to process through from roughly probably a little over thousand on a day of bankruptcy. So, we navigated that fairly well, there are issues out there in navigating the rest of that and it is an issue for the industry and supply chain in terms of what to do with those boxes both loaded and empty in boxes on chassis what to do with those and that’s something that the industry is going to be struggling with to resolve, but for the Union Pacific side we’ve navigated that fairly well.

Okay, thanks for the detail Eric.

Our next question comes from the line of John Larkin with Stifel. Please go ahead with your questions.

Yes thank you very much for taking my question gentlemen. I had a question on coal, Q2 you have said a couple of times that the stockpiles are still well above kind of targeted levels yet sequentially there was a huge step up in coal volume too in theory replenish stockpiles rundown during the harder than normal summer, was that very specific to a few different utilities or what really drove that? It seems a little contradictory to make that comment that coal would be up sequentially even though stockpiles are still on average way above normal?

Eric can you handle that?

Yeah, the stockpiles have come down, you know if you look at over the second to the third quarter the stockpiles have come down 13 days and it came down to cause the burn increase and so our volumes improved roughly 40% and the stockpiles came down because the burn increased even at a higher percent than that.

Okay. So it doesn't sound like the utilities are all that dedicated to driving those stockpiles down that aggressively if they are replenishing still fairly aggressively there in the third quarter, just one more question, the U.S. dollar has been sitting at elevated levels relative to foreign currencies now for a year or longer what’s your outlook on that for the rest of this year and throughout 2017 and the impact it might have on exports, which are so critical and sort of the bulk side of your business?

Yes John, this is Lance. You are right, the dollar has been strong. We don't make prediction about what the dollar is going to be going forward, but you got to believe all reasonable expectations are it’s going to remain strong. In order to change that you need real acceleration in the global market, which would enhance the strength of other currencies and there is just not a lot of catalyst that you see for that. To your point, a strong dollar does make exports difficult however. Even in today's world you see for instance grain exporting of Pacific North-west and the Gulf Coast and into Mexico despite a strong dollar, so market conditions can still prompt commodity movement in global trade. And the other thing to note is that the U.S. is unique in its ability for its manufacturing base to figure out how to be globally competitive over time. I think the shale energy revolution is indicative of that. Where a couple of years ago people would say $70 a barrel shale oil was competitive and in today's world they say no that’s maybe more like $50 a barrel. So, there’s a lot of moving parts there, clearly we would prefer an acceleration in the global economy which would prompt more global trade, which would mean more U.S. exports that all would be really helpful to us.

Got it. Thanks for the explanation.

Our next question comes from the line of David Vernon with Bernstein Research. Please proceed with your questions.

Hi good morning guys and thanks for taking the question. Rob I know you guys don't want to get too much into predicting price, but maybe could you let us or clarify for us kind of what percentage of the volume right now is under contract or would have a normal inflationary escalator versus those that are going to be subject to more of the competitor over market conditions that are out there?

Yes David, I mean we don't necessarily break it out exactly where you are asking other than I would just remind that overall about 25% of our book of business is touched by the a list index, but to your question of how much do we have sort of under contract or if you will kind of sized from a pricing standpoint, it’s a same answer I would have given you last quarter and that’s about 70%. I mean every day of every week we are negotiating and with the customers and negotiating our deals, so it’s not like it’s done each quarter on day one, so it’s an ongoing continuous process and roughly speaking any day of any week we have about 70% of the next 12 months business under contract or sized up.

And I guess as you think about kind of your outlooks in your sort of near term to 60 and then the longer term to G55+ does the recent trend in that same store sales price metric make you the CFO sort of rethink the timing of some of those targets or do you think that you see enough opportunity in the cost side here to keep the full momentum on the margin side?

Yes we haven't changed our guidance in terms of a 60 plus or minus by 2019 and then our eyeballs on getting to a 55 and I would just say, don't read that we are like changing longer-term view in terms of our commitment to pricing, we’re not. I mean we’ve got a little bit of the bump off the road because of some of the market conditions that Eric outlined, but as we look longer-term the levers that got us to where we are today that are going to take us to that next rung on the ladder of 60 then eventually 55 or certainly we hope positive volume, but are going to be solid value to our customers, solid core pricing at re-investable levels plus and solid productivity gains.

Alright, well I appreciate the color on that it's been a long call. Thanks for your time and we look forward to hearing more about those G55+ initiatives over the coming years.

Thanks David.

Our next question is from the line of Ben Hartford with Baird. Please go ahead with your questions.

Thanks. Rob quick question for you, you had provided the 15% revenue target that you had talked about in the past for next year, as it relates to Capex, can you envision as you march toward the 55% OR target longer term, can you envision the situation in which Capex does approach D&A on an absolute basis, is that realistic for a relevant period of time or a relevant time horizon?

Ben, probably not, I wouldn't use that as a marker again because of the timing and these are long live assets generally speaking, but to your broader point, I’m very proud of what the team has done to continue to make progress on tightening our capital discipline and I think it’s a significant step of getting to that 15%-ish range if you will from where we have historically been. I mean there’s a lot of great productivity and a lot of great work that goes into getting to that level. So, we will get to that rung next and then we’ll see where we are at that point.

Okay, that's helpful thanks.

Our next question if from the line of Walter Spracklin with RBC. Please proceed with your questions.

Thanks very much. Good morning everyone. So, just on the OR long term your targets as you mentioned, when we started the year we heard the entire, all the railroads each indicate that they would be able to reduce OR despite a challenging environment, you noted the same, most of done so and your OR unfortunately has not followed that trend and I am just looking on a relative basis, when you see the improvement across the group, is it - can you point to something that is specific to your company that be it a business mix, be it some structural challenges that lead you to have that challenge that the others did not and I frame it in a relative question, I know you don’t like looking at peers, but I know your investor do, so I want to be able to understand is there something company specific here or how do you I answer that question when I get that OR question?

Yeah Walter, this is Lance. So, again I won’t compare ourselves to our peers. We are a unique railroad. When we began the year, we were hopeful we were going to make OR improvement. The topline went away from us as Rob said a little more aggressively than we had anticipated. If you think about our ability to improve OR over the long run we are still confident that we can do it that’s shown in our - maintaining the guidance for a plus minus 60 in 2019. We did start the year with very low operating ratio, it’s still an attractive operating ratio, we’re not pleased that we didn't have the opportunity to improve it this year and again we are just laser focused on all the activity necessary to continue to improve our margins for our shareholders.

So coming back to your long-term then, I mean from where you sit today, I mean that’s a 900 basis point improvement, it’s a significant improvement many - several of your peers are there already and many investors are banking on you to achieve that, given the trends that we are exhibiting the reversals on those trends, I'm just trying to understand what confidence that we can be put in a reasonable timeframe, a long-term is a fairly vague definition, a reasonable time frame for evolution toward a 55 OR.

Rob why don't you take that?

Yes Walter, I guess I would remind you and everyone that we are confident in sticking with our 60 plus or minus target OR by full-year 2019 and as you have heard us talk with eyes on where do we go beyond that to the 55, so while we have put a date on the 55, but I would just say that getting to a 60 is a very enviable spot in my opinion, I mean we’ve made great progress on that. So, I would not read that this one year of perhaps not making OR improvement is a new trend or a new objective or new signal here, it’s not, I mean to get from where we are today to that 60 is going to take all the initiatives we just talked about and it is the same levers that got us 25 point improvement over the last decade. So, we're going to continue to make that progress and we haven't backed off our 60 OR guidance.

Okay, thank you very much.

Our next question is from the line of Brian Konigsberg with Vertical Research. Please proceed with your questions.

Yes, hi good morning, thanks for taking my question. A lot of ground has already been covered, maybe just on the bonus depreciation and moving some of the purchases on locomotives from 2016 to 2017, so should we just think of the those two are connected and the carry over into 2017 will show up?

I think I would stick with the guidance I gave on bonus depreciation impact this year of about $350 million. I don't think that’s not going to move much. We haven't finalized what the number is going to look like all in for 2017, but I think I would still just kind of use that assumption of 350-ish for this year.

But conceptually a lot of that bonus depreciation is associated with the purchases of locomotives and is that just the way to think about it generally?

Yes, I mean it certainly impacts that, but I would say it’s still in that 350 range for this year and again we’ll see, we’ll get some - got carryover benefit next year, but we of course have to start paying back previous year, so we haven't finalized we are giving guidance as to what the impact all in net will be next year, but you are right, I mean the locomotive moment will have some impact on what those numbers are?

Understood, thanks. And maybe just touch a little bit on balance sheet, so you are approaching the self imposed leverage limits you talked about, just thought process from here you look to maybe deliver or actively deliver or will you naturally do a three EBITDA growth, how do you see that playing out?

Yeah, I mean actually we've made great progress on that measure over the last several years and at this point in time the biggest opportunity we still have in front of us, which we are laser focused on is driving EBITDA, driving cash flow, and that will give us additional capacity and that’s how we are approaching it. So, we've either do have room as we grow our earnings and grow our cash flow.

I will leave it there, thank you.

Our next question is from the line of Scott Schneeberger with Oppenheimer. Please proceed with your questions.

Thanks very much. With regard, just focusing on the automotive sector, you mentioned the contract changes being a headwind in the 2017, could you just kind of compare and contrast what you think the impact will be as it looks like over the row conversions are good and then obviously there’s a lot of near shoring and lot of development in Mexico and with manufacturing so just if you could compare and contrast within that sector, how you think it, you enter next year, is it going to be a net up or down in that category thanks?

You know Scott, we love our autos franchise, we think we have the premier autos franchise. We think all of the trends in terms of Mexico production is positive for us. In terms of our franchise we think we are in a great spot for over the road auto parts conversions, we have great success this year and we think they will continue in the future. There will always be contract changes and it’s a competitive marketplace and we saw that’s a share and that’s something that will happen across time. The big driver as we’ve been saying my view on the automotive side is the cautionary impact in terms of sales. Sales have been at record or near record levels and there are some indicators out there that should give cautionary lights, it’s the amount of debt inherence in auto loans and leases. Actual sales incentives per car were at an all time record level in the quarter. The highest since 2008 was the previous record, so there is some cautionary signs out there, if auto sales stay strong we have a great franchise and we are in a great spot, I do think there are some cautionary signs out there?

Okay thanks, and just a quick follow on, on Panama Canal, any update there, what are you hearing from customers just [indiscernible]. Thanks so much guys.

No, I think the Panama Canal story is what we’ve been saying for the last several years and certainly I think the last couple of quarters we’ve been mentioning that the amount of traffics hitting the West Coast versus the East Coast did - there was traffic that moved to the East Coast because of the strike and BCO’s trying to diversify their risk and not be dependent upon the West Coast. We did see that phenomena. We have seen some of that business start to come back, but it hasn’t all come back from before the strike. That has probably been a larger factor than any Canal opening factor. The fact that the BCOs are diversifying their flows and a lot of ways just to not have that risk. Having said all of that we do believe, I do believe that the West Coast ports are the most economical, the best supply chain in terms of transit time to get goods from Asia to the interior of the country and even into the East Coast. And if you look at some of the technologies at some of the West Coast ports are employee to make themselves more efficient or timing this vehicles and things like that, I think West Coast ports are still going to be positioned to be the best supply chain factor going into the future though you will see people running to do risk mitigation strategies.

Thank you. I would now like to turn the floor back over to Mr. Lance Fritz for closing comments.

Thank you Rob, and thank you all for your questions and interest in Union Pacific. We’re looking forward to another conversation with you in January.