Union Pacific Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Union Pacific (UNP)

Union Pacific (NYSE:UNP)

Q4 2012 Earnings Call

January 24, 2013 8:45 am ET

Executives

Robert M. Knight - Chief Financial Officer and Executive Vice President of Finance

Eric L. Butler - Executive Vice President of Marketing and Sales

Lance M. Fritz - Head of Operations, Executive Vice President of Operations and Executive Vice President of Operations - Union Pacific Railroad Company

Analysts

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

William J. Greene - Morgan Stanley, Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

Ken Hoexter - BofA Merrill Lynch, Research Division

Brandon R. Oglenski - Barclays Capital, Research Division

Scott H. Group - Wolfe Trahan & Co.

Cherilyn Radbourne - TD Securities Equity Research

Christian Wetherbee - Citigroup Inc, Research Division

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Keith Schoonmaker - Morningstar Inc., Research Division

Donald Broughton - Avondale Partners, LLC, Research Division

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Thomas Kim - Goldman Sachs Group Inc., Research Division

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

David Vernon - Sanford C. Bernstein & Co., LLC., Research Division

Operator

Greetings, and welcome to the Union Pacific Fourth Quarter 2012 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. Rob Knight, CFO for Union Pacific. Thank you, Mr. Knight, you may now begin.

Robert M. Knight

Good morning, everybody. This is Rob Knight, and welcome to the Union Pacific Fourth Quarter Earnings Conference Call. Unfortunately, Jack Koraleski is ill with the flu today and will not be joining us. But here with me in Omaha are Eric Butler, Executive Vice President of Marketing and Sales; and Lance Fritz, Executive Vice President of Operations.

This morning, we're pleased to announce that Union Pacific set a new fourth quarter earnings record of $2.19 per share, an increase of 10% compared to 2011. This record also tied our best-ever earnings performance set in the third quarter of 2012. Our diverse portfolio of business, solid core pricing gains and efficient network operations drove these results despite significantly weaker coal and grain markets. Although it was a challenging year on many fronts, 2012 was Union Pacific's most profitable year in our 150-year history. It's a testament to the strength and diversity of our franchise, with the dedication and commitment of our employees and our unrelenting focus on creating value for our customers. The results are reflected in record achievements that we've made this quarter in both employee safety and customer satisfaction. Putting it all together, it translates into an increased financial returns for our shareholders.

So with that, I'll turn it over to Eric Butler.

Eric L. Butler

Thanks, Rob, and good morning. Let's start with a look at customer satisfaction, which came in at 93 for the quarter, a 1-point improvement over last year. That continued the strong performance we saw throughout 2012, with customers' evaluation of our value proposition up 1 point from 2011 to 93 for the full year, setting a new best-ever mark. We appreciate this recognition from customers and remain focused on driving further improvement in our value offering going forward.

As expected, some of our key markets were challenged in the fourth quarter. And as a result, overall volume was down 2.5%. While Chemicals, Automotive and Intermodal group and Industrial Products was flat, it wasn't enough to offset the tough market conditions that drove deep declines in Coal and Ag products. The softening of coal demand continued to significantly impact growth, cutting into [ph] the 17% decline in Coal loadings aside, the other 5 groups grew 2% despite the shortfall in Ag. Coal price improved 4%, which combined with increased fuel surcharge revenue produced nearly a 5% improvement in average revenue per car. With price-driven average revenue per car gains outpacing the volume declines, freight revenue grew 2% to $4.9 billion.

Let's take a closer look at each of the 6 groups, starting with the 2 that saw declines. Coal was down 17%, as high coal stockpiles created by a sluggish economy and low natural gas prices continues to dampen the demand. A 12% improvement in average revenue per car held the revenue decline to 7%. With the weakened demand, Southern Powder River Basin tonnage declined 19%. Also contributing to the decline was a continued impact of contract losses, which more than offset business wins. Strong global demand for high BTU coal drove a 6% increase in Colorado/Utah tonnage despite a softer domestic market due to natural -- due to low natural gas prices. New business also provided a boost. Late in the quarter, much publicized low water levels on the Mississippi curtailed some shipments from both of these origins, but with relatively small impact on the overall volume shortfall.

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

Ag Products volume was down 9%, mix-driven average revenue per car was flat, and revenue declined 8%. A 22% decline in carloadings was driven by last summer's drought, which unfortunately had its greatest impact in UP-served territories. The resulting tight supply of corn has reduced livestock count and lowered the domestic feed grain shipments, with increased reliance on local crops in East Texas and Arkansas also impacting our volume. Feed grain and wheat exports also declined with improved world supply and higher U.S. prices. Grain product shipments declined 6%, with reduced demand for gasoline and high corn prices curtailing ethanol production, driving a 17% decline in ethanol shipments. Food and refrigerated shipments offered some good news, growing 8%. The 78% increase in sugar shipments, driven by spot opportunity, was a big contributor, while malt and barley carloads increased over 40%.

Our Automotive volume grew 9%, which combined with a 5% increase in average revenue per car produced a 14% increase in revenues. Pent-up demand and improved credit availability again drove sales in the fourth quarter, with year-end incentives also providing a boost as the auto industry's growth rate continued to outpace the overall economy. With consumer confidence reaching a 54-month high in November and new vehicles offering more features and improved fuel efficiencies, many continue to find in a compelling time to buy. For the quarter, UP finished vehicle shipments grew 7%, with parts volume up 13%.

Chemicals volume increased 14%. Mix-impacted average revenue per car was flat, and revenue grew 15%, leading the way again with petroleum products, where a 69% increase in volume was driven by over 160% growth in crude oil. As has been the case all year, while crude oil has seen substantial growth, other chemical segments continued to put up solid if more modest numbers. Industrial chems grew 8%. Plastics, boosted by new business and solid export demand, was up 7%. And soda ash grew 4%, with growth in the export market. Dampening the good news was an 8% decline in fertilizer, primarily driven by soft international demand for potash.

Industrial Products revenue grew -- increased 3% even as volume remained flat, driven by a 3% improvement in average revenue per car. Rock shipments grew 14% with increased construction activity mostly in the Houston area, which also contributed to a 16% growth in cement volumes. Lumber shipments were up 17%, as housing starts showed solid year-over-year improvement. Nonmetallic minerals saw modest growth, up 2%. But a number of other investor markets faced some challenges in the quarter. Hazardous waste volume fell 48% as the ramp-down of government funding again impacted our uranium tailing shipments. Excluding this decline, our Industrial Products volume would have been up 2%. A drop in gas-related drilling activity, lower steel mill utilization and softer demand for export scrap was reflected in a 9% decline in steel and scrap. Continued mine production issues hampered export iron ore shipments, leading to a 28% drop in metallic minerals.

Intermodal revenue grew 6%, as a 5% improvement in average revenue per unit combined with a 2% increase in volumes. International Intermodal was flat, with a relatively weak peak season. A November strike at the Los Angeles and Long Beach ports had minimal impact. Domestic Intermodal shipments grew 4%, with continued success in converting highway freight to rail in both containers and trailers.

A closer look at how we see our business shaping up in 2013. Even with an uncertain economic outlook, our diverse franchise still provides opportunities to grow. As in the fourth quarter, the biggest challenges are expected to be tough market conditions in Coal and Ag Products. High coal stockpiles are expected to hamper recovery in coal demand. And a loss of one legacy contract beginning this year will also have an impact. That combination will likely drive a slight decline in coal volume for the year despite expected continued growth in export volumes as global demand remain strong. We expect the first quarter to see a steeper decline likely in the mid-teens, driven by the high stockpiles, with some additional impact from continued low river levels.

Diminished 2012 grain crops should impact Ag Products throughout the first half, with first quarter volume expected to be down in the high single-digit range. Hopefully, we'll see a trend -- a return to trend line yields when the crops come in later in the year, which could offer some opportunity. Food & Refrigerated is expected to see slow growth.

Automotive volumes should keep pace with the auto industry's expected growth. Crude oil is expected to continue as one of our strongest growth markets, but the pace will ease against 2012's larger base.

Most other chemicals markets should remain solid, and we're expecting fertilizer to start growing again.

An improved housing market should boost lumber shipments, and growth in construction is expected to support increases in rock, metals and other related markets, with metals also benefiting from the projected growth in the auto industry. Anticipated shale growth will also give our metals and minerals a boost. On the downside, we expect the falloff in wind business, reduced military shipments, and the diminished federal funding should again impact hazardous waste.

Highway conversion should continue to drive Domestic Intermodal. International Intermodal may be challenged in the first half by the economy. But a stronger economy and improved housing market are expected to produce opportunities in the second half of 2013.

Our strong value proposition will again support business development efforts across all 6 groups, with highway conversion opportunities playing the role in both our carload and Intermodal businesses. Across the groups, we'll continue to develop opportunities in Mexico, where our unparalleled ability to link their stronger economic growth with U.S. origins and destinations is the strength of our franchise.

I mentioned the 2013 legacy contract loss, but we successfully retained and repriced 80% of the $350 million we competed for, providing a solid foundation for our 2013 price plan. As a result, while we're cautious, we expect a slight volume increase to combine with price gains to drive profitable revenue growth.

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

Lance M. Fritz

Thank you, Eric, and good morning. So let's start the operating update with safety. We achieved another all-time record low reportable personal injury rate in 2012. It was 12% better than 2011 and our fifth consecutive year of improvement. Training, process improvements, capital investments and total safety culture combined to further reduce our environmental and behavioral risks. We've also reduced the severity of injuries to a record low this year.

Moving to rail equipment incidents or derailments, our full year reportable rate improved 2% compared with 2011. Yard and industry track derailments, a major focus of the operating team, improved year-over-year. Track-caused derailments declined considerably, reflecting the investments we've made in maintaining our infrastructure.

In public safety, the grade-crossing incident rate increased 13% in 2012. As I've mentioned before, the combination of increased rail traffic in the south, which has a higher grade crossing density than our overall network, and growth in highway traffic, which is driven by increased economic activity in parts of our network, has increased our grade-crossing incident exposure. On the positive side, we've made progress identifying and isolating high-risk locations and improving or removing crossings of concern. We are starting to see a turning point. And although we still have a significant amount of work to do, I think we're moving in the right direction.

Our safety strategy helps keep our network strong and resilient. And as a result, we're operating an efficient and fluid network, which is reflected in the 4% improvement in velocity compared to 2011. In fact, we came very close to matching our fourth quarter record set in 2009 despite running 9% higher volumes. This year, we've clearly demonstrated agility and resiliency in managing through the shifts in mix, including growth in manifest and premium volumes in the South and lower coal shipments in the North. Our improved network performance has been driven by a combination of process efficiency gains and capacity and expansion projects. The process improvements reflect our execution of Lean manufacturing principles, which we call the UP Way, which engages our entire labor force in the design and implementation of standard work.

Our service scorecard illustrates UP's customer value proposition. The local operating teams continue to provide great service, as reflected by Industry Spot & Pull, which set a best-ever fourth quarter record of 95%. The fourth quarter Service Delivery Index, which is a measure of how well we are meeting overall customer commitments, also improved from 2011. The Service Delivery Index is leveraged by the fact that we periodically improve service commitments to our customers. In other words, the 89% in 2012 is measured against a more difficult standard than the 89% in 2008, reflecting our commitment to constantly improve the service product for our customers.

Moving on to network productivity, fourth quarter slow order miles improved to an all-time record low, down 31% from last year. Our network is in excellent shape, reflecting the investment in replacement capital that has hardened our infrastructure and reduced service failures. As we exited 2012, over 99% of our railroad was free of slow orders.

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

In the lower left, Intermodal train lengths grew to a fourth quarter record of 174 boxes per train, improving 2% compared to 2011. Manifest train length is also holding strong given that much of the manifest growth occurred in the South, which is the most constrained area of our network.

We've used the UP Way to reduce variability in our operations while increasing the role every employee plays on their work teams. Employee engagement is critical to our operating strategy and has had a significant impact. Our employees are utilizing their expertise to standardize their work and to remove variability. To expand a bit more on growth in the South, fourth quarter volumes in the South were up 3% versus 2011 and up 5% for the full year. Traffic in the South has returned to pre-recession levels. We've met the challenge with agility, repositioning horsepower and manpower to adapt to shifting demand. We have adjusted car routings to leverage available terminal capacity and modified train starts to maintain fluid operations and to increase local service frequency. While the UP team is successfully managing the carload surge in the South, we have growth capacity in other parts of the system, with about 800 employees per load and around 1,000 locomotives in storage. In addition, the capital investments we continue to make in the South are generating an excellent return and are having a positive impact. They support our diverse book of business, including increased shale-related volumes, Gulf Coast chemical traffic and growing Mexico and Intermodal business.

Moving on to this year's capital plan. For 2013, we're planning to invest around $3.6 billion, which is down slightly from the $3.7 billion mark that we spent in 2012. Our spending for 2012 was slightly higher than our $3.6 billion projection as we took advantage of mild weather conditions during the fourth quarter to further advance some projects. More than half of our planned 2013 capital investment is replacement spending, while approximately $1 billion will be invested in service growth and productivity projects. Capacity, commercial facilities and equipment are the primary drivers. Major projects include work on the Santa Teresa, New Mexico facility, which should be completed by early 2014, and continuation of various projects in the South to support our diverse and growing book of business in that region. We're buying 100 new road locomotives under our long-term purchase commitment, which is part of our Tier 4 strategy. We also plan to acquire around 900 freight cars to serve as replacement for older assets and to meet expected business growth. In addition, we're increasing our Positive Train Control spend this year to approximately $450 million. For 2012, we've invested nearly $750 million of our estimated $2 billion projected spend. Although it's unlikely the industry will meet the 2015 deadline, we're making a good-faith effort to do so and working closely with regulators as we implement the new technology.

In summary, we feel very good about our overall performance in 2012 and the improvements we've made in light of the dynamic market and geographical shifts. Our network is strong, fluid and resilient. I'm going to carry that momentum forward and continue to focus on those critical areas that will drive further improvement, achieving record safety results driven by the commitment to value safety above all, driving year-over-year service and productivity improvement by engaging all of our employees through the UP Way and providing customers with a value proposition that supports growth with high levels of service. We'll take advantage of growth where it shows up but effectively manage the network and resources if it doesn't. And we remain well positioned to handle dynamic shifts in volume while generating continued productivity gains and great returns on our invested capital going forward.

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

Robert M. Knight

Thanks, Lance. Let's start by summarizing our fourth quarter results. Operating revenue grew 3% to a fourth quarter record of more than $5.2 billion, driven by core pricing gains and increased fuel surcharge recovery. Operating expense totaled $3.5 billion, increasing 1%. Operating income grew 7% to $1.7 billion, also setting a best-ever fourth quarter record. Below the line, other income totaled $43 million, down $11 million compared to 2011. Interest expense of $128 million was down 9%, driven by lower average interest rates and some capitalized interest. Income tax expense increased to $604 million, mostly driven by higher pretax earnings. Net income grew 7% versus 2011, while the outstanding share balance declined 3% as a result of our share repurchase activity. These results combined to produce a fourth quarter earnings record of $2.19 per share, up 10% versus 2011.

Turning now to our top line. Freight revenue grew 2% to $4.9 billion. Volume was down about 2.5 points. Revenue mix was also unfavorable, driven by lower grain shipments and growth in shorter length of haul stone move [ph]. Higher fuel prices and a positive lag impact on recovery drove higher fuel surcharges, adding roughly 1 point in freight revenue growth. In addition, we saw the benefit from legacy contracts renegotiated in late 2011 and early 2012 that expanded our fuel surcharge coverage. This generated an additional 0.5 point of revenue growth. The impact in the fourth quarter was less than 1 full point of revenue growth that we saw earlier in the year, as we lacked some of those legacy renewals during the fourth quarter. We also achieved solid core pricing gains of 4%, which was a key contributor to our fourth quarter financial performance. Lower coal volumes again hindered further pricing gains.

Moving to the expense side, Slide 23 provides a summary of our compensation and benefits expense, which decreased 2% from 2011. Lower volume costs and solid operations more than offset higher training costs and modest inflationary pressures. In addition, we received an IRS refund of around $20 million of payroll taxes, which also drove costs lower in the fourth quarter. Workforce levels increased 2.5% in the quarter, mostly driven by more employees in the training pipeline and increased capital and Positive Train Control activities. As you recall, we tempered hiring a bit in the fourth quarter of 2011 based on expected volume levels and mix shifts. In 2012, labor inflation came in around 2.5%. For 2013, we expect it to be a bigger hurdle, around 3%. Also, our workforce levels, excluding capital, should grow in 2013 if volumes increase but not at a 1-for-1 rate.

Turning to the next slide, fuel expense totaled $920 million, decreasing $15 million versus 2011. Cost reductions driven by a 5% decline in gross ton miles more than offset the impact of a 3% increase in our average diesel fuel price versus 2011. In addition, our consumption rates increased 1%, driven by lower coal volumes.

Purchased services and material expense increased 5% to $533 million due to higher contract expenses incurred by our logistics subsidiaries. The revenue generated from these expenses is reflected in our other revenue line. Joint facility maintenance expense and locomotive repair expense also increased this quarter. Depreciation expense increased 10% to $453 million, mainly driven by increased capital spending program. In 2013, depreciation expense will continue to increase but not at the 9% rate that we saw for the full year 2012. The combination of a favorable rate study and lower gross ton miles will result in an increase of around 3% to 4% versus 2012.

Slide 26 summarizes the remaining 2 expense categories. Equipment and other rents expense totaled $302 million, up 4% from 2011. Growth in Automotive volumes drove higher freight car rental expense, which was partially offset by lower locomotive lease expense. Other expenses came in at $182 million, down $9 million compared to 2011. It was a little bit better than what we have projected in October, in part due to lower-than-expected volumes. Lower equipment, property and freight damage expense, as well as other cost control measures, also contributed to this decrease. Conversely, personal injury and property tax expense increased compared to 2011. For the full year 2013, we expect the other expense line to be more in the neighborhood of $225 million a quarter, barring any unusual items. Higher property taxes and challenging year-over-year comps in personal injury expense will add upward pressure, in addition to any volume-related expenses.

Now let's turn to our operating ratio performance. We achieved a record fourth quarter operating ratio of 67.1%, improving over 1 point compared to last year. On a full year basis, we generated a best-ever 67.8% operating ratio, the first sub-70% performance in our history. Our performance highlights the positive impact of solid core pricing gains, growth in attractive new businesses and continued focus on productivity initiatives. And this improvement was accomplished without the benefit of any volume growth. Looking ahead, we remain committed to achieving our sub-65% operating ratio target by 2017.

Slide 28 provides a summary of our 2012 earnings with a full year income statement. I'll walk through a few of the highlights from our record-setting year. Operating revenue achieved an all-time record of $20.9 billion. Operating income also set a new best-ever mark of $6.7 billion, topping 2011's record by over $1 billion or 18%. And net income of $3.9 billion and earnings per share of $8.27 also set new historic annual records.

Union Pacific's record full year earnings generated strong free cash flow of $1.4 billion, which reflects over $560 million more in capital spending and a 37% increase in cash dividend payments versus 2011. In addition, cash from operations of nearly $6.2 billion includes more than $900 million in higher cash tax payment. Over half of that was driven by the catch-up of prior year's bonus depreciation programs and a lower bonus depreciation rate in 2012 versus 2011. On a positive note, we'll see the benefits from a new bonus depreciation program in 2013, which will drive an added boost to free cash flow of around $400 million this year from what we've previously discussed with you in October. The net benefit, which includes the impact of prior year's programs, will be roughly the same in 2013 as it was in 2012.

Our balance sheet remains strong, supporting our investment-grade credit rating. At December 31, 2012, our adjusted debt-to-cap ratio was 39.1%, lower than this year's trend due to the pull ahead of $450 million in debt maturities from the first quarter of 2013 to the fourth quarter of 2012.

Slide 30 shows our full year 2012 capital investment of $3.7 billion. Our preliminary capital plan for 2013 is around $3.6 billion, down slightly from the 2012 levels. While spending on Positive Train Control is growing, we'll be spending less on locomotive acquisitions this year. The chart on the right reflects our achievements in generating returns on these investments. Return on invested capital was a record 14% in 2012, up over 1.5 points from 2011. Returns must continue to improve to support the significantly higher asset replacement costs and investments required to achieve our safety, service and growth initiatives.

Beyond funding our capital programs, our record profitability and strong cash generation have enabled us to grow shareholder returns. After increasing our dividend per share 58% in 2011, we raised it an additional 15% last year. For 2012, our declared dividends totaled $2.49 per share, achieving our target payout ratio of 30%. In addition, we continue to make opportunistic share repurchases, which play an important role in our balanced approach to cash allocation. In the fourth quarter, we bought back over 2 million shares at an average purchase price of around $122 per share. Full year purchases totaled 12.8 million shares, averaging $115 per share. Combining dividend payments and share repurchases, we returned over $2.6 billion to our shareholders in 2012, up 16% compared to 2011. Looking ahead, we have about 15 million shares remaining under our current authorization, which expires March 31, 2014.

So that's a wrap-up of 2012. We're now focused on the opportunities and challenges of 2013. As we discussed in our October Investor Day Conference, we're cautious on the economic outlook for this year. We're expecting many of the same challenges that we faced in 2012. We'll be working through these issues, including the dynamics of the domestic energy markets and the carryover impact of the drought. We're also focused on Washington as they work through the various fiscal challenges. We'll be watching to see how it impacts what we currently see as a gradually improving economy. But if industrial production grows at around 2% as projected, we would expect strength in other areas to offset the shortfall in coal, driving slightly positive volume growth for us this year. That said, we successfully navigated through the complexities of 2012, and we'll continue to follow that same strategy in 2013. We remain agile and leverage the strengths of our diverse franchise. As we look out over the year, we're expecting to see a stronger second half relative to 2012. We're clearly going to have our challenges in the first quarter with very tough year-over-year comps in coal and grain volumes, as Eric described. Despite the challenges on the volume side, we continue to target inflation plus pricing gains. We should also realize the benefits from continued productivity and network efficiencies. Assuming the economy takes a positive step forward and fuel prices are stable, we expect to achieve another record financial year, generating best-ever marks in operating ratio and earnings, which will drive increased shareholder returns.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Tom Wadewitz of JPMorgan.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

I'm going to surprise you here with a question on coal. I guess, I'm sure you'll get a lot on that, but anyways, can you give us some thoughts around what might drive upside or downside to your -- your view on coal volumes? I think you're saying coal volumes are probably full year down a little bit. What would be the scenario, maybe gas price level, natural gas price level that would drive some upside? And also in terms of risk to the downside, how are you thinking about the impact of the Edison Mission bankruptcy and whether you're factoring in lower volumes there into your comments on coal?

Eric L. Butler

Thanks, Tom. As you say, there are a lot of uncertainty in terms of the coal outlook and environment, certainly, on the downside, regulatory environmental changes in Washington that could have continued negative impact on the Coal business and the coal market share. Certainly, the natural gas, the price of natural gas can also have impacts on the downside and the upside. Right now, we're expecting natural gas prices to remain in the $3.54 range for the year and -- but on the upside, as natural gas price goes up, that will drive more business to coal. If you look at the coal market share, full year market share for 2012, we're not expecting substantially higher coal market share vis-à-vis natural gas for 2013, maybe 1 point or 2 higher but basically flat in terms of overall market share, but there would be upside and downside to that. In terms of the announced bankruptcies that are out there, we are working closely with our customers, we work with them as they're working through those difficult times. We also are doing what we need to do to ensure that we are protecting our corporate interest. As we're going through the process, as you know, the way the bankruptcies work, customers have the right to look at contracts. And we're working with them as they're going through that process, and we'll continue to work with them.

Robert M. Knight

Tom, if I could just add a couple of more points to Eric's comments on the drivers of coal. Remember, we said in October at our conference, there was about a 10 million-ton contract loss, so that's factored, obviously, into our 2013. And the other variable, I'd remind everyone, that can impact our coal volumes up or down is weather. That's always the case. The biggest driver is when we have a deep cold winter season and more importantly, how early, how long and how deep will the summer season be, and that can always influence our volumes.

Operator

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

William J. Greene - Morgan Stanley, Research Division

I was curious, what do we make about when you mentioned these contract losses, it seems like that happened last year with some of the legacy repricing, same thing this year. Does that suggest that some of the competitors are being a bit more aggressive on price than you'd expect? How do we sort of take that?

Robert M. Knight

If I can just make a comment and then I'll turn it over to Eric. I mean, Bill, that's -- we're negotiating contracts every day of the week. There's a lot of visibility given probably to the legacy renewals, but I would just say that we compete vigorously every day of the week on whether it's a legacy contract or non-legacy. So it doesn't strike us as unusual. That's the business we're in, that there's constantly negotiations taking place, and there are factors like price and service, et cetera, that go into those equations. But Eric, do you want to elaborate?

Eric L. Butler

Yes, I'll add to that, Bill. Price negotiations, as Rob said, I mean, they're always difficult. We always compete in the marketplace. We expect to win some, we expect to lose some, but our strategy remains the same. We're going to be reinvestable. We have had that strategy for many years now, and we remain dedicated to that strategy and focused on it. I mentioned that for 2012, we had about $350 million in legacy. We retained about 80% of that, and we feel pretty good about that retention rate.

William J. Greene - Morgan Stanley, Research Division

Is return on capital metrics now up around 14% CapEx coming down? Is there sort of something to think about there, where the returns have gotten better, you slowed the growth in the CapEx? I'm not sure sort of if that suggests kind of maybe limited opportunity to keep taking up price because the way the returns are getting from a regulatory standpoint, is there -- maybe, Rob, you can sort of comment on how to think about that.

Robert M. Knight

Yes, though I wouldn't read too much into that connection in terms of the slight lead reduction, the $3.6 billion planned spend this year versus 2012, $3.7 billion and the ROIC. I would say that, as we've said all along and we walked our talk here over the last several years, is we have to improve our returns to justify those kinds of capital investments, and that's the takeaway here, and that's how we look at every capital investment. In terms of there being a slight reduction from year-to-year in capital spend, that's really more timing issues. We expect to spend more, as I mentioned and as Lance mentioned, on Positive Train Control spending this year but less on locomotives. We'll take 100 locomotives this year. And last year, we did 200. So those are all factors. Replacement spending remains strong and hasn't changed. That's a key investment that we spend every year. And the other thing that we talked about last couple years and we'll continue into 2013, as we direct more capital spending in the southern part of our network because of the growth prospects that we are seeing there and the return expectations, so that would be my answer in terms of how we look at our capital spending. And I wouldn't read anything in the slight reduction this year. Lance, you want to add?

Lance M. Fritz

I'll just add, Bill, that we're not at a loss for excellent projects to invest in.

Operator

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

Justin B. Yagerman - Deutsche Bank AG, Research Division

I guess on the contract -- the legacy contract dealings this year, I wanted to -- maybe asking Bill's question a little bit differently. Of the 20% that you did not retain, is that business that went to a competitor or is that business that is no longer existent and it wasn't really up for renewal?

Robert M. Knight

Justin, as I said before, we compete against both our direct rail competitors. We compete certainly against alternative sources of fuel. The 20% that I'm referring to went to a competitor. And as I said, we are -- we compete [ph] all the time, we're comfortable with the 80% we retained. And our strategy is we want to move our business at reinvestable levels.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay, fair enough. And then a follow-up, I'm curious, you talked a little bit about the crude growth rate declining as we look out in 2013, albeit staying [ph] at a relatively high level. How much of that is pipeline supplanting some of the movement of crude-by-rail along the Bakken south line? And then also if you could talk a bit about some of the opportunities that you see as we move through this year or maybe into next year, that'd be helpful. You gave some good guidance last year around what kind of shale-related carloads you expect this year. Maybe an update on how you see that trending in 2013.

Robert M. Knight

Eric?

Eric L. Butler

Yes, our -- as we mentioned all throughout last year, our shale-related business grew tremendously. I think we've mentioned possibly about 80% [ph] last year. Just because of the size of the base, we certainly are not going to see that same growth rate in 2013. We are expecting to see solid growth. As I mentioned in my comments, the crude oil side of our business will be one of the strongest part of our business, so we're still excited about that. In terms of your pipeline comment, there are -- there is additional pipeline capacity coming on. We did mention at our Dallas discussion, when we were there, that the number, as the capacity of pipeline is coming on, I think probably are barely keeping up with the production increases. So production increases are growing rapidly, that even the pipeline capacity increases, so we still see a place for rail type or crude-by-rail in the market for the foreseeable future.

Operator

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

Ken Hoexter - BofA Merrill Lynch, Research Division

Just because it sounds like nobody's touched on coal yet, one more on coal for you. But on the -- can we read into that lost contract that this was one of those that was won before the pricing paradigm kicked in? Was this kind of naturally on somebody else's network that is shifting over, or is competition increasing on some of the baseload operation given the lighter volumes?

Robert M. Knight

Ken, I would just say, and Eric can expand on this, that we always have, we always will compete vigorously in our business. Coal's no different, but coal clearly is an area where we do. But Eric, want to comment on this?

Eric L. Butler

Yes, the contract, Ken, that we're referring to was a legacy contract. I mean, we've talked about our legacy contracts for many years. It was one of our legacy contracts. And as we've been saying for years, our strategy is to ensure that we price at market rates and that we attain reinvestable rates.

Ken Hoexter - BofA Merrill Lynch, Research Division

I understand it was legacy, but was it one that had been won during kind of the heated battles of before the legacy pricing contract kicked in, before like '03, '04? Was that a contract that had been won maybe based on price and therefore, you viewed it as not a core part of your network or was this just a competed [ph] business?

Robert M. Knight

Ken, let me just say I wouldn't get too hung up on the timing of when those discussions took place or when the decision was made. And of course, we don't have visibility absolutely to when they made the ultimate decision. We know when we were informed. But I would also just say the piece of business we're talking about in October and November we called it out, it was about 10 million tons of coal, it fits nicely with our competitor, and that's all we're probably getting into on that.

Operator

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

Brandon R. Oglenski - Barclays Capital, Research Division

This question is I think for Jack, but when we think about 2013, a slower economy, and maybe a little bit less year-on-year tailwind from those legacy renewals that you had early last year, how should we be thinking about the OR expansion? I mean, you had a lot in 2012. Is it going to be diminished from those levels of gains but still a pretty positive turn?

Robert M. Knight

I'm sorry, could you repeat your question?

Brandon R. Oglenski - Barclays Capital, Research Division

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

Robert M. Knight

Yes, let me -- this is Rob. Remember, we gave guidance of hitting a sub-65% operating ratio target by 2017. We've previously given a 65% to 67% by 2015. And if we can't keep backing it up, we had previously given a lower -- the low 70s, and we previously gave 75%. But we've always said, we're going to get there as efficiently, safely as we can. We're not using that as a hard stop. We're going to get there as early as we possibly can, assuming markets cooperate. But we're going to focus on safety, service, productivity, and with that service comes our confidence that we're going to be able to get core real pricing gains. We define that as inflation plus. Those are still the same principles that are driving us forward. To your point, does the tail sort of get a little slower as you get into the 60s, where we are today, as you head to that 65%? Sure. The slope of the line, coming from 87% to 67%, is a pretty dramatic slope. Going from 67% to that sub-65% target is a little bit different slope, but our focus and our commitment and our confidence of making progress hasn't changed at all. So we're going to continue to drive the same principles that got us to where we are as we move forward.

Brandon R. Oglenski - Barclays Capital, Research Division

Well, and how do we think about core pricing gains this year? You've been running in the 4%, 4.5% range. And I understand that with coal coming off last year, obviously, you didn't get the full benefit in your calculation of those coal contracts that were renegotiated. But should we be assuming something similar to 4% throughout '13?

Robert M. Knight

We don't give specific guidance on the pricing numbers other than to say that it's going to be inflation plus or real pricing gains. The other thing that I would remind you is as we look backwards, we're not giving guidance going forward on this. As we look backwards, remember that we've obtained from legacy renewals 1.5% to 2% from legacy in our core pricing gains. So depending on the timing and how much legacy you have in any particular period will influence certainly how much pricing you get. But even ex-legacy, that can be lumpy from the time that contracts come up for renewal in the legacy front. But non-legacy, we're confident that we'll get that inflation plus overall pricing number, and that's the guidance that we're giving as we look forward.

Operator

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

Scott H. Group - Wolfe Trahan & Co.

So another one on coal. When I look at the 13.5% decline in 2012, how much of that do you think is structural of plants closing or losing business? And then if at some point we get to gas prices back above $4 or $4.50, 6 months, 1 year, 2 years from now, whenever, how much of this 13% decline in coal do you think comes back?

Robert M. Knight

Eric?

Eric L. Butler

Yes, Scott, we attempted to say back in Dallas, we attempted to separate the market drivers from the plant closures. Today, there is surplus plant capacity versus the demand. So plant closures aren't necessarily going to impact the volume of tons. It's really the demand for electricity generated by coal. So if you look at it on that metric, coal historically has had about a 50% market share; was probably in the high 40s, 18 months ago; for 2012, it's probably call it 37%, 39% market share. Coal electrical generation, we think that's about where it's going to be at a $3.50, $4 natural gas price. As natural gas prices go up, that percent of market share will grow, and the potential for coal volumes will grow. Additionally, if you look at the mix of where the coal is being produced, certainly, Southern Powder River Basin coal is a cheaper coal to produce than Central Appalachian coal. So we think you will continue to see a migration of market share from Central Appalachian coal to Powder River Basin coal for the amount of coal that's moving.

Scott H. Group - Wolfe Trahan & Co.

So it sounds like you think that a lot of what you lost in '12, you can make up at some point, not in '13, but at some point in the future if gas prices get back to more normalized levels.

Eric L. Butler

As we were saying, if gas prices stay at $3.50, $4 or above, we think that the coal market share and therefore, our potential to participate in that coal market share vis-a-vis natural gas will be positive going forward.

Robert M. Knight

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

Scott H. Group - Wolfe Trahan & Co.

Okay. And then one on the Intermodal side, so better domestic volume growth than we've seen in a little while, and then the yields growth slowed a little bit to what we've seen. Wondering if there's any changes in the strategy when it comes to domestic Intermodal to focus a little bit more on growth and less on pricing, or am I not reading that right?

Eric L. Butler

Yes, I don't think you're reading it right. If you think about our domestic Intermodal strategy, our strategy has been consistent and firm, and we're going forward with the same strategy in the future that we've had in the past. Domestic Intermodal has huge opportunities in terms of conversion, over-the-road conversion, and each year for the last 3 years, we've had excessively high domestic Intermodal volumes driven by over-the-road conversions. We still think that there's a large market out there. We estimate there's probably $7 million to $10 million of over-the-road truckloads that can be penetrated by the Intermodal market. And so we --- our strategy is to go after those over-the-road truckloads. We're going to continue to go after that. We're going to continue to do it as pricing through the market and strong reinvestability in that business.

Robert M. Knight

7 million to 10 million units.

Eric L. Butler

Yes, 7 million to 10 million units, yes.

Operator

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

Cherilyn Radbourne - TD Securities Equity Research

I wanted to ask a question, first, just about the growth that you've experienced in your southern region. You've mentioned a number of times the volumes in that region are at pre-recession levels. I just wondered if you could give us some context on where volumes are relative to prior peak levels in that region.

Robert M. Knight

Lance?

Lance M. Fritz

Yes, sure. So our pre-recession levels were, relatively speaking, historic peaks. So the South right now is at historic peaks, and we're seeing a lot of that volume show up in carload traffic in terminals.

Cherilyn Radbourne - TD Securities Equity Research

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

Lance M. Fritz

It's part a function of crude-by-rail. It's also part a function of Texas booming from the standpoint of oil production, the shale plays and all of the related activity with that. It's also reflective of the auto strength to and from Mexico.

Cherilyn Radbourne - TD Securities Equity Research

Okay. If I could sneak one last one in, I was sort of intrigued by your comment that you expect a stronger international peak in 2013. And I was just curious whether that is a general comment on the expectation of a stronger economy or whether, in fact, you're becoming more optimistic that the housing upturn will translate into a ripple effect into things like furniture and that sort of thing.

Eric L. Butler

Yes, I would say it's both. We certainly -- there's a lot of economic uncertainty. And as Rob said and others have said, there's a lot of things that are happening in Washington that could take us in a lot of different directions. But we're certainly hopeful there will be a stronger economy in the second half of the year. And of course, as housing strengthens, as the global insight projections are suggesting that it will continue to strengthen, the things that you build housings with, so whether it's furniture and other internal items, will ride our Intermodal outlook for the second half of the year.

Operator

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

Christian Wetherbee - Citigroup Inc, Research Division

Maybe just a question on the legacy coal volumes from 2012 that maybe didn't move, when you look at the scenario, maybe $3.50 to $4 natural gas, is there amount of that legacy business on the coal side that you would expect to move in 2013 that maybe you would see that coming through in either core pricing or, I guess, maybe incremental margins? Just want to kind of think about that a little bit in this natural gas kind of environment.

Robert M. Knight

Let me just make a comment, and then Eric may want to elaborate, and I'll come at it from the pricing standpoint. It's kind of a difficult question to answer from what's normal, but you kind of roughed up the impact we had on pricing. As we increased the terms and conditions in pricing on some of those legacy contracts and did not then get all the full volume compared to what we might have in the past. That hurt us in our pricing calculation about 0.5 point in the quarter. So to your point, there's clearly a drag there. I guess, the mystery or the question then would be how much of that will come back, and I guess it's dependent upon all the other factors that Eric walked through. Eric, if you want to add?

Eric L. Butler

Yes, and the only thing I would add to what Rob would say is as the coal business comes back for that -- for those repriced legacy contracts, we will not consider that price going forward. But to your point, Chris, it will be in our margins going forward.

Christian Wetherbee - Citigroup Inc, Research Division

Okay. And when you think about maybe what the breakpoint on -- can you give us any help, I guess, on maybe what the breakpoint on natural gas is for a portion of that business? I mean, is this something in the neighborhood of $3.50 or maybe is it a little bit lower? I guess I just want to get some rough kind of guidelines maybe to use there.

Eric L. Butler

We -- our best assessment is the market kind of currently is at $3.50, $4. And as the price of natural gas goes higher, coal becomes much more competitive. As it goes lower than that, natural gas becomes much more competitive.

Robert M. Knight

Chris, I would just add that we're certainly in unchartered territory here just that we were on the downside, that at what point exactly will utilities switch back and what gas price, and one of the factors to consider, which we don't have visibility on, is how long has the utility contracted for the gas. That's a variable also that -- we'll see how that plays out.

Operator

Our next question is coming from the line of Jason Seidl of Dahlman Rose.

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

I'll bring up an old question but ask it in a different way since I've covered you guys for an awful long time. I do remember when you battled with your western partner for a small percentage of market share. It doesn't seem like this is the case, it seems like this is normal back and forth in terms of contracts that might move. Am I right in my interpretation?

Robert M. Knight

Jason, you're absolutely right. I mean, one of the lessons learned that you know well and we've communicated and we're still driven by is we're not in this for market share. And I think where we walked our talk, as much as anything, is we turned in this record financial results without the benefit of positive volume for the year. If you go back to when we started this whole turnaround effort, if you will, and the returns and focus on the right fundamentals of the business, we were running higher levels of volume in the high 80s operating ratio. So we learned that lesson, and we understand that it's not a market share game. We're certainly aware of what's happening in the market, but we're focused on competing, providing good service, pricing it right and generating returns.

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

Okay. My next question is going to actually look out a little bit further than actually being able to be focusing on, but as I look at your Auto business, I looked at a lot of growth in the plants in Mexico. Even if they don't happen to go on firm [ph] as much as they go [ph] on cashew, cashew [ph] does distribute them to other railroads, including yourself. Talk a little bit about some of the new plants online and how might that impact UNP in 2014?

Eric L. Butler

You're right, Jason, there's an immense amount of auto construction new capacity coming on in Mexico. Vast majority of that is coming on for export to the U.S. or actually export to Europe and Asia. And some of the manufacturers are adding capacity in Mexico and just not enough export back to Europe and Asia, but the large portion of that is going to be dedicated to North America, particularly the U.S. We have the best franchise crew from Mexico. We have the best autos franchise. We have, as we've said, publicly about 75% market share in the autos market. A large portion of our autos business is to and from Mexico. We work with both the KCSM and the FXE equally. And so our perspective is no matter where the auto plants are located in Mexico, whether they're still served by the KCS, served by the FXE or dual-served by both of them, we want to work effectively with the partners and provide an effective service and take it to destinations in the U.S. And we have the best franchise, and we're going to continue to build on that franchise.

Operator

Our next question is from the line of Walter Spracklin of RBC.

Walter Spracklin - RBC Capital Markets, LLC, Research Division

I just wanted to focus a little bit. I understand your core pricing's intact at that inflation plus. But looking a little bit at the mix effect from some of the length of haul moves, I noted your Coal volumes and Ag volumes most, are hardest hit here this quarter. But in one, the average revenue per car was up 12% in Coal and flat in Ag. I was wondering if you might be able to, Eric, perhaps give us some color as to the difference in length of haul there and what implication that might have on mix effect going into 2013 on those 2 -- those areas.

Robert M. Knight

Eric, you want to?

Eric L. Butler

Yes, our coal mix of length of haul really did not essentially change in 2012. The ARC affect, as we've been talking about, are focused on legacy pricing and repricing on legacy contracts. If you look at our Ag side, we did have a length of haul with the drought and the very small corn crops. Our length of haul in taking corn to destinations was significantly shortened. Our California feeders used a lot of local feed as opposed to long-haul corn, which is relatively high priced. So our length of haul was impacted and our Ag business significantly primarily due to the corn drought factor.

Operator

Our next question is from the line of Matt Troy of Susquehanna.

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

A longer-term question on coal. If I think about some of the sourcing differentials between the eastern franchises and the western franchises, obviously, PRB coal is in an advantageous position long term. It's cleaner burning, it's more economical, it's more competitive with gas at a lower price. So more than at least the academic, you would think it's more fungible or might back-fill lost production, that's environmentally viable, eastern mines, but that's more of an academic observation. I was just wondering if you could give a realistic assessment in terms of -- do we see sourcing shift over the next 3, 5, 7 years, to what extent might you be a continued share gainer and might that make your coal franchise grow more quickly than the market, whatever the market is going to be?

Robert M. Knight

Matt, let me make a couple of comments, and I'll turn it back over to Eric. I think all the academic -- the positives, as you repeated, we would agree with all those. The other thing that, if you recall, that we gave some guidance on October, was our export opportunity, albeit relatively small compared to the eastern routes but still a nice growth opportunity for us. Eric, if you want to...

Eric L. Butler

Yes, I would just add to what Rob said and kind of repeat what we've said before, if you look at the coal overall market share, natural gas prices being in the range that they're in, the market share will probably remain high 30s, perhaps low 40s, vis-à-vis natural gas. We do continue to see a shift from Central Appalachian coal, which probably needs to be at $5.50 natural gas prices versus the Powder River Basin coal -- sort of $5, $5.50 versus Powder River Basin coal at $3.50, $4. So we will, do expect to see a natural shift in the share from Central App to Western coal.

Operator

Our next question is from the line of Chris Ceraso, Crédit Suisse.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

I just wanted to follow up on a comment earlier about your returns, and I'm just wondering what your view is. Do you think that given that you're generating 14% returns on capital, do you see an increased risk that you'll face more rate cases?

Robert M. Knight

Chris, that's something that we'll continue to communicate our message as broadly as we can in terms of -- we have to earn adequate returns. We have to grow our returns to be able to make the kinds of capital investments that we are making and that we hope to make going forward as long as the returns are there. I think what it does introduce is more discussion on, which I know you're well aware of and others as well, the whole replacement costs way of looking at your returns. I mean, if you factor that in rather than a 14%, hard numbers would look more like call it a 7-ish. So that's a message that we'll continue to communicate and continue to work on, but we have to earn adequate returns in order to make these kinds of capital investments.

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Makes sense. And then just a follow-up on the revenue per car in the Chemical division. Can you just explain why that was flat in the light of such big growth in crude? I would have thought that, that would have had a positive effect on your revenue per car. So maybe explain where the offsets are and if that's something that, going forward, you think the growth in crude will help improve revenue per car.

Robert M. Knight

Eric?

Eric L. Butler

If you look at our Chemicals business overall and kind of look at it historically, our revenue per car in our Chemicals business has been some of the best over all of our businesses. As we talked in previous earnings releases, our crude oil business, the majority, if not all of that, is underlying business [indiscernible] moving from our interchanges with our CP [ph] partners and BN Santa Fe, where we interchange also substantial business with them in terms of the crude oil market. If the crude oil business -- because our Chemicals business has such a good revenue per car, the crude oil business is not substantially different than what our -- the remainder of our base Chemicals business is. And so we don't necessarily see a big driver of that in the future.

Robert M. Knight

Chris, I would just add to that, that arguably, the right way to look at it, the benefit that we're talking about that we're in fact achieving here, is not spelled out in the ARC analysis but it's more in our returns. And I would say that the new business growth that we're seeing, while it's not changing significantly the chemical line arc, it is a very positive contributor to our overall margin expansion that we're experiencing.

Operator

Our next question is from the line of John Larkin of Stifel, Nicolaus.

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

On the issue of train size, I know it's difficult, with all the growth being focused on the southern part of the network, to really get a lot of traction there. But as you put more capital to work in the South, how do you think you're going to be able to leverage train size over the next, say, 2 to 5 years as presumably traffic continues to build down in that part of the country.

Robert M. Knight

Sure. Lance?

Lance M. Fritz

Yes, sure. So across the system, we have opportunity on train size. We continue to demonstrate that quarter-to-quarter and year-over-year. When you look at the South, everywhere that we see significant volume growth and have seen significant volume growth, we've got capital being invested that helps us continue to grow size. So if you look at the route between El Paso, Dallas, Shrieveport, we call that the Texas Pacific route, or TP route, we've had some substantial investment going there for siding extensions in new sidings. That helps us grow train size. We're doing the same kind of investments on the north/south route that supports crude oil, as well as Ag to the Gulf. Once that kicks back up, as well as the chemical industry franchise. And then we've been making incremental investments around the state of Texas end points north, that help us on our Intermodal and Autos business to and from Mexico. So virtually everything that's shipping to and from Texas has an opportunity for train size in the next [indiscernible].

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

Very good answer. And then maybe a longer-term question on International Intermodal. Haven't really talked too much about the new Panama Canal locks that are opening up, I think, in early 2015. Has your view changed at all in terms of how much, if any, of the transpacific traffic might shift to the all-water route to access some of the ports on the East Coast that presumably by then will be able to handle the larger ships, what might your response be? Is there a way to preserve some of that traffic over the West Coast ports?

Robert M. Knight

Eric?

Eric L. Butler

Yes, John, our view hasn't changed from what we've said before. Today, there's about 30% of the business that is all-water route to the Panama Canal. And the rough dividing line is roughly the Appalachians, to go east of the Appalachian, typically go all-water. West of the Appalachian, you [ph] can have a land bridge, a rail product. This is kind of the rough rule of thumb. We think that might change by 1% or 2%, so you might go from 30% to 31%, 32%. But as we've pointed out before, the Panama Canal also has to get a return for the significant amount of investments that they're making. The other thing that we pointed out publicly before is that if you look at the supertankers, the Panama tankers, they really have a route to the East Coast now, particularly as the production goes further and further into Southeast Asia. And so to the extent that the business that makes sense to go into those big tankers and go to the East Coast, they can do that now, not going through the Panama Canal but going the opposite direction. And we do see some of those flows going in now, which is why we're not sure we're going to see much beyond 1% or 2% change as you go forward. And last point I would make is we still think that international trade and economic growth is going to grow the pie. So we still see upside volume growth on the long term as the pie grows.

Operator

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

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Eric, I think this question is for you. I was wondering where you ended the EMP and UMAX fleet count at the end of the year, and what net growth expectation there are for 2013.

Eric L. Butler

Yes, we don't typically give our explicit kind of container fleet count publicly. We're excited about our MCP programs, and we do have a large container ownership. We, with our partners, have the strongest container ownership position in the industry, and so we think that that's a competitive advantage for us long term. And the way we're using that with our MCP program, we think, is the right strategic direction we've been, pleased with the success, and we're going to build on it.

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

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

Eric L. Butler

Yes, that's a good question. As you know, the last couple of years, the total industry fleet count grew significantly and substantially. We added to our fleet, IMCs added to their fleet, and so there were large fleet additions over the last several years. I do not expect to see significant, if any, fleet additions from an industry perspective. This year certainly, each company will make their own decision, but I think if you look at it, the industry probably has enough capacity to absorb at least growth in the next year or 2, but we'll see what happens from a capacity standpoint.

Operator

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

Keith Schoonmaker - Morningstar Inc., Research Division

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

Eric L. Butler

That's a good question. If you look at tracking capacity, it's narrowing. If you look at the driver shortages, they are increasing shortages. There's some evidence that as the construction industry is coming back, it's more difficult for the trucking industry to get qualified drivers. And mid-year, the new hours-of-service law will come in place, which will also be an impact on the available drivers. So we think that the trends remain strong, that Intermodal will increase its value proposition vis-à-vis over-the-road truck as we go throughout this year and future years.

Lance M. Fritz

And Eric, don't forget our service products' port side as well.

Eric L. Butler

Absolutely.

Lance M. Fritz

An outstanding service product. It's very competitive with truck right now.

Keith Schoonmaker - Morningstar Inc., Research Division

Maybe just a follow-up for Eric. Eric, considering shifts in manufacturing to North America from other historically lower-cost regions, Union Pacific is perhaps uniquely positioned to capitalize on either location where products are made. Are you sort of ambivalent as to whether products are made in Mexico versus Asia, or is there an advantage to Mexico and perhaps you can haul raw materials and finished goods as well, or lower average rate per Intermodal car perhaps a disadvantage to Asian imports? Maybe you could just give some color on if you have preference given those 2 options.

Eric L. Butler

Yes, that's a great question. I'm not sure I would phrase it as a preference. What I would say is that there is a very strong trend with Mexico having a very quality-effective, low-cost workforce and not having the supply chain issues and potential other issues that you may see in some of the Asian countries. You are seeing the trends, and you're also seeing a trend of near-sourcing actually even from Europe due to lower energy prices in the U.S. driven by the shale plays. I think over the next several years, we're going to see -- and we're actually starting to see it now in terms of inquiries from companies for rail sidings, so to speak, so the actual opportunity is still several years in the future. But we're seeing a growing trend in near-sourcing to North America, both in Mexico and the U.S., that we think will be upside for the rail industry.

Robert M. Knight

I would just add that because of the strength of our network, we're in the position to leverage both opportunities because of our strength of both the ports and our unique strengths in and out of Mexico being the only railroad that serve [indiscernible] the border crossing point.

Eric L. Butler

And the other thing is that as we have these manufacturing opportunities come, they typically bring good jobs, which helps unemployment, which again helps -- as the driver for the economy, which helps our transportation outlook.

Operator

Our next question is from the line of Don Broughton of Avondale Partners.

Donald Broughton - Avondale Partners, LLC, Research Division

Looking at this kind of just to 100,000-foot kind of a question here, I'm looking at all of your operating metrics, and they just -- every one of them continues to get better and better and better. Obviously, you've more than adequately invested in the infrastructure. So when I look at capital investment and I look at your outlook for 2013, and you need the economy to participate, that makes sense, to what level is there flexibility? I understand PTC, that's going to be what it is on mandate. And you got infrastructure replacement budgeted at $1.675 billion. How much of the other is flexible in your mind if you didn't get the economy you're looking for and could be trained towards other items such as share repurchase?

Robert M. Knight

Don, let me say a couple comments, and I'll refer to Lance to elaborate. First of all, remember that every capital dollar we spend, we are very focused on hitting the return base. So we go through the calculations based on what we think the projection of the economy is going to be in volumes and service, safety and returns from that business. And that's not going to change. So if there was ever a point where we didn't feel confident in making those investments, rest assured, we would back off making those capital investments. To the point, I know you know this, that in our capital spend, about $2 billion each year is for replacements, so a few points above and beyond that, we've got other spending decisions. Lance, you want to elaborate?

Lance M. Fritz

Yes, you got that just right, Rob. And like in every year, Don, we know going into the year what our on-ramps and off-ramps are, depending on what the economy does. So as we stand right now, we've got a good, robust plan that will be able to match capital spend with what is happening in the economy or what our needs are.

Donald Broughton - Avondale Partners, LLC, Research Division

So it's fair to say that your CapEx outlook is much more dynamic than most people assume it to be or understand it to be. Is that a fair statement?

Lance M. Fritz

I think that's a pretty fair statement, absent the -- what Rob reminded you of, and that is over 1/2 is keep the store open in capital spending.

Robert M. Knight

And of course, we have Positive Train Control in our current numbers, and we have that still in front of us. But Lance is right, we will -- the rest is flexible, if you will, and that's based on returns.

Operator

Our next question is from the line of Jeff Kauffman with Sterne Agee.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

It's been a long call, most of my questions have been answered. Just a quick one here. When Coal does normalize -- I'm referring to the question you had about what could come back once Coal does normalize. When we add that in with the new crude carriage, the frac sand, the piping that's going up, do you think the net effect of this, if I look at it on a total energy universe basis, will be long-term positive growth, or will the crude be able to offset the structural coal losses?

Robert M. Knight

Eric?

Eric L. Butler

So when you talk about coal, again, I don't think we are projecting, I don't think the market is projecting, that coal is going to return to the levels that it needs to be at. I think what we're saying is that given a natural gas range, again, $3.50 to $4, coal will probably stay in that round number, 40% share in the market. So I'm not sure we are projecting that to be significantly [indiscernible] return back to its historical levels, unless we have an assumption about natural gas prices being significantly higher.

Robert M. Knight

And to add to that, to your point, the shale opportunities and all the related moves, we're very optimistic that our network is really well positioned to continue to serve those growing markets. So when you add it all up, I mean, the energy story for us, we think, is a very positive story.

Operator

Our next question is from the line of Thomas Kim with Goldman Sachs.

Thomas Kim - Goldman Sachs Group Inc., Research Division

With regard to labor costs, I was just taking a look at the annualized average rate for the fourth quarter, which was down about 4% year-on-year, and then compared to the full 2012, it's down about 3%. And I'm just wondering, as we look forward, is the fourth quarter a good guide for the average rate for 2013?

Robert M. Knight

No, it's not. I would expect that that's going to increase. Remember the tax refund I mentioned in my comments certainly was a factor in that. There was also a greater percentage, if you will, of growth in our capital spending program as it relates to labor. So I would expect that, as we move into the first quarter, to be more normalized, if you will, at a call it 3% range.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Okay. So just a follow-up on that, would the 2012 -- with that incremental increase that you mentioned did then -- if we just make minor adjustments around that, would the 2012 annualized number then be sort of this figure we should be looking at based on 100,000 or 200,000 [ph], roughly give or take.

Robert M. Knight

Yes, I mean, sort of a 3% growth assumption in there, that's probably not an unreasonable with inflation.

Operator

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

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

If you pull together all of your unconventional energy business, what's the -- roughly the mix right now between the inbound, frac sand, pipe, et cetera, versus the outbound take away? And what does that mix look like, 2013, 2014, how might that change?

Robert M. Knight

Eric, I'm not sure we have that.

Eric L. Butler

So I just want to make sure the question that you're asking. You're asking how much of our business is inbound versus outbound, recognizing it is in different regions and different origins and destinations?

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

Yes.

Eric L. Butler

So our frac sand and pipe business predominantly is going from kind of Minnesota, Wisconsin, down to South Texas and West Texas, so it's going inbound that way. And our crude oil business is coming from the Bakken going to the South. It's probably a 55-45, 60-40 kind of a split.

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

Okay. And does that change materially as you get into 2013, 2014? I guess, just the take away [indiscernible].

Eric L. Butler

Yes, the crude opportunity, as I said in our earlier comments, is one of our strongest growth opportunities. That will grow faster than the inbound opportunity in 2013.

Operator

Ladies and gentlemen, we've reached the end of our question-and-answer session. Time for 1 final question. That question is from the line of David Vernon with Bernstein Research.

David Vernon - Sanford C. Bernstein & Co., LLC., Research Division

Just 2 quick follow-ups just to clarify on guidance, you said your -- the potential for quite positive volume growth overall, if you could just kind of clarify that a little bit. And then specifically with Ag, kind of what you're expecting for the full year, kind of first half, back half, that would be great.

Robert M. Knight

Yes, just to remind everyone, what we said on the volume guidance is we said assuming the economy cooperates, and let's define that as an industrial production number of around 2%, we would expect when you add it all up that our overall volumes in the face of slight decline in coal, is what we call that also, we expect our volumes to be on the positive side of the ledger, overcoming, if you will, that slight falloff in Coal. Ag, we said we got challenges in the first half of the year. We expect that things will hopefully improve in the back half of the year, but we didn't give any further clarity beyond that.

Operator

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

Robert M. Knight

Okay, great. Again, we're very proud of what we've accomplished here and look forward to continuing to meet the challenges in 2013. And thanks for joining us on the call, and we look forward to speaking with you again in April.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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