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Kansas City Southern (NYSE:KSU)

JPMorgan Aviation, Transportation and Defense Conference

March 06, 2013 2:55 pm ET

Executives

Michael W. Upchurch - Chief Financial Officer and Executive Vice President

Unknown Analyst

Joining us from KSU this afternoon, we have Executive Vice President and Chief Financial Officer Mike Upchurch, and in the audience, we have Director of Investor Relations, Ashley Thorne. So take it away, Mike.

Michael W. Upchurch

Thanks, appreciate it. Welcome, everyone. It's always nice to know you're the last speaker of the day, and the only thing standing in between everyone in this room and cocktails. So we will see what we can do to get through this material fairly quickly, and leave some time for questions.

I have to go through this slide real quickly just to caution that we will make some forward-looking statements today. Those may or may not materialize, and I'd direct you to our website where you can see all of our GAAP reconciliations.

I see some familiar faces in the room but there may be some of you that don't know a lot about Kansas City Southern. So I have one just very high level background slide. We've been in business for a long time. We celebrated our 125th year anniversary a year ago. Our senior management team is extremely experienced. Our Executive Chairman and CEO both have 40-plus years in this business. So we do think we have a lot of great experience running roughly 6,300 miles that is largely in the U.S. and Mexico. Actually, I was listening to the speaker before us a bit, and they talked a little bit about the Panama Canal. We have a very small 47-mile railroad in Panama. It may be the smallest railroad around, but it's probably one of the most profitable railroads of all.

Our 2012 revenues were $2.2 billion. I'll give you a little bit more insight into our financials for the full year. But we believe we're the best positioned growth story in the rail industry, and we'll go through a few of those factors. I'll probably have 10, 15 slides to talk through some of the higher growth areas that we have to offer in the rail space.

Our results. I won't spend a lot of time on this. They're a bit dated at this stage. We released our earnings in mid-to-late January. Volume growth was 5%, revenue growth was 7%. We had a record year from an operating ratio perspective. You can see our adjusted operating ratio was 69.9, which was the best operating ratio we've ever had in our company. You'll see reported was actually a bit lower, it was a one-time credit that we recorded back earlier in 2012. And then when you look at our reported our adjusted EPS, certainly nice growth, bottom line growth on a year-over-year basis.

Drilling into some of our segments, this chart here illustrates in red the revenue growth for each of the segments, in black, the revenue per unit growth and then in yellow, our carload volumes, the percent growth or decline on a year-over-year basis. And maybe starting with the 2 really high-growth areas, Intermodal and Automotive. You can see Automotive grew 25%, Intermodal 22%. And I'll spend a fair bit of time talking about our opportunities and why our growth is generally higher than anybody else in the industry for these 2 segments.

On the far left, Industrial and Consumer and Chemical & Petroleum, it had pretty solid years for us. Those aren't necessarily high-growth in our business. And then you'll see on the downside, in the middle, we had a decline in revenue of 4% in the Ag & Minerals space, and 1% in Energy. Let me cover each one of those separately.

We had a major drought in the Midwest, particularly hard hit were areas like Iowa and Nebraska, where there was a lot of corn production. And that happens to be the key commodity that we carry. Obviously, with the drought, there was less corn to move and it was not a very good year for us. We often refer to it as a outdoor business in many regards and including the commodities that we carry that are subjected to weather. So hopefully, we'll see a little bit better year this year. I think the first 6 months are still going to be challenging for us just because the next harvest season won't be upon us for a number of months here.

And then from an energy perspective, you'll see energy down 1% year-over-year. Energy in our business includes coal, crude oil and frac sand. And it really was 2 different stories. Our Coal revenues were impacted pretty severely, particularly in the first half of the year, where we had unseasonably warm winter back in late 2011, early 2012. So coal volumes were pretty depressed. Obviously, natural gas prices also impacted a lot of the utilities that we serve just because it's a more efficient commodity to provide electricity. But on the flip side, all the declines we saw in Coal, and we had about a $35 million year-over-year decline in the Coal business, were offset by increases in the crude business and frac sand business. So we'll spend a little bit of time on each one of those to give you an idea of why we're seeing that growth. But that certainly helps mitigate some of the declines that we saw.

Our guidance that we announced at the end of January was a really high single-digit revenue growth for the year. I think given some of the challenges that may still be present around the Coal business and certainly, grain for the first half year, we believe that to be pretty solid revenue growth. Continuation of improved operating ratio, we haven't set a specific target but we're quite confident to continue to improve the bottom line. And then we did guide to 21% of revenue as our CapEx spend for the year. And that is certainly 2, 3 points higher than what the industry typically spends but given our growth profile and specifically, investing in new equipment to carry some of the Automotive traffic that I'll talk about, there are a lot of new plants being built in Mexico, we want to make sure that we're very well-equipped to be able to carry that incremental traffic. So we are making some new investments on the equipment side.

Let me cover with you real briefly what we've seen in the first couple of months of the year. And these 2 charts on the left-hand side are average daily carloads for our entire business. And just to set this up, in yellow, our 2011 average daily carloads, in black is 2012, and then in red is what we've seen so far in 2013. And for the entire business, our volumes are up about 3.5%.

If you exclude grain, which we communicated would have some challenges during the first half of the year, we're up about 5.5%. Those are the series of bars on the right-hand side of the page. So our guidance was for mid-single-digit volume growth for the full-year. Certainly, if you isolate the grain issue that we have, which we think will be much, much better in the back half of the year, we're essentially there. Maybe a little bit soft the first couple of months coming out, but we certainly saw a little bit of a pickup here in the month of February.

Capital structure and credit update. Anybody that's followed us for a long time knows that we've made a lot of improvement here over the last few years going back to the 2009 time frame. And I just wanted to share with you a few of the improvements that we've made in our balance sheet and our credit metrics and talk about where we're at from a ratings perspective, and then on the next slide, give you a sense of some refinancing opportunities that we think may be ahead of us in the near term. But whether you look at total debt reductions of $400 million or reducing interest expense by $75 million, lowering our leverage ratio, increasing our average maturity and coupon rates, we've done a pretty good job on the balance sheet. And the agencies have recognized that by moving our credit rating back in 2009, which was at a B level to BB+ and in some cases, BBB-. So we're kind of a split credit right now. We need one more agency to upgrade us to investment grade and then we would be able to go and refinance some of the debt that we have on our balance sheet and continue to make improvements that you see on this chart.

Specifically, we've provided a maturity schedule here and I thought this might just be useful to describe what the opportunities are that we do have. And you'll see a $98 million note due in 2016. We actually called that last Friday. That 12.5% note was issued back in '09 during the credit crisis and certainly represents our highest cost debt today. Our plan is to use available cash at the end of March. It's call date is April 1. We use available cash to retire part of that and in all likelihood draw down on our revolver, and that's at less than 2% today. So it will be a nice improvement in reducing our interest expense.

And then upon attainment of another investment-grade rating, and we're hopeful that, that's just around the corner, S&P puts us on an annual cycle. The last upgrade we received from them was March of 2012. So we are in March now and very hopeful that they will take us through another review and hopefully, provide us that upgrade. But if they do, this $300 million note here is at 80%. In today's market, we could, as an investment-grade company, probably be around 4. The JPMorgan guys walking in right now might be able to do better than that for us, but Jim's laughing.

We also have 2 notes out here that have 6 handles on them. They're trading at a pretty high premium right now. So they may not be quite as economical for us to go in but we could certainly -- they're not callable but we could certainly perhaps tender for those.

And then finally, just to make a comment around the term loans, these are at the U.S. subsidiary level. This is obviously, very cost-efficient debt because we fixed a fair bit of this with some swaps and the effective rate's less than 2% on this debt. So anything we were to do there would probably take our interest expense up a little bit but in return, be able to push those maturities out 10 years or even 30 years as we access the investment grade space.

So let's spend some time on where the key growth areas are in our business and I think this chart is particularly useful to take a look at. What we were trying to illustrate here are the 5 highest growth components in our business. So in blue, that blue bubble at the top is crude oil. And I know you wanted me to talk a little bit about crude, and I will do that. Cross-border intermodal is in yellow, our frac sand business in black, Lázaro Cárdenas in red, and on the far right is the Automotive business. And the size of the bubble is, in essence, how big of a component of our overall revenue stream that is. And I think the key point to make here is these 5 segments represent about 20% of our total business and they're growing at 39% in the fourth quarter, so pretty strong results. And we'll talk through each one of these segments in a little bit more detail to give you some sense of what we think the growth prospects are going forward.

So any part of our growth story always starts with Mexico. It's certainly the differentiator that we have. I think it's a very strategic asset, given everything that's happening in Mexico today. And I wanted to share with you just a few facts why we think there's a real manufacturing renaissance taking place south of the border.

First of all, Mexico is the large -- or U.S. is the largest trade partner for Mexico, roughly 2/3 of what gets manufactured in Mexico does end up in the U.S. So certainly, the proximity there makes for a very good trade relationship between the 2 countries. GDP was almost double what it was in the U.S. in 2012 so our economy is growing at a much faster pace.

But as companies try to evaluate building new production capacity, we think there are 4 key reasons why they would tend to choose Mexico over any other location. First and foremost, wage rates between Mexico and China are now, for all intents and purposes, equivalent. So there's no longer a labor benefit by having something manufactured in China. And there are a lot of third-party data sources that you can verify that.

I think moving to the bottom one, you then compare Mexico versus China, transportation cost coming in to the U.S. are anywhere from 50% to 80% cheaper largely because of the distance. And then you have other factors such as managing your supply chain. It's 5 days, Monterrey to Chicago versus 25 to 30 coming from the Far East. Obviously, if you want to go down and visit your facilities in Mexico, it's easy enough to get on a company plane, fly down, be back for dinner. You can't do that in Asia. And we're not here to suggest that this is the end of manufacturing in China. But any kind of new production that's put in place, we think there is certainly a tendency to want to locate in Mexico, and I'll give you one good example coming up.

This shows trade growth, U.S.-Mexico trade growth in yellow bars. And you can see that we had a, certainly, a decline during the recession but a very steady increase over the last few years at record levels at this point. And then we also put U.S. production capacity, industrial production on this chart just to show you that there is a correlation there. And again, given that 2/3 of what gets produced in Mexico ends up in the U.S., they are certainly somewhat dependent on each other.

One fun fact about Mexico is they happen to be -- have the second-most free-trade agreements of any country in the world. And the only country that has more free trade agreements happens to be Israel, which obviously, for our business wouldn't be well-positioned. So Mexico, this is a huge benefit that we have. They are very trade-friendly. And you can see, whether it's shipping by rail directly into the U.S. or shipping to ports for export, we're pretty well-positioned. And I think their trade policies certainly, are very helpful to our business model.

Over the last decade-plus, we've seen about $300 billion invested in Mexico in a variety of different industries. Certainly, the Automotive industry, I think, is the one that most people are familiar with. That goes back 10 to 15 years ago when the U.S. auto manufacturers began to put facilities into Mexico really to take advantage of lower labor rates. And what you'll see on this chart are a whole host of other companies like Unilever, DuPont, Siemens, some the biggest names in the world that have opened up facilities in Mexico, and we've illustrated where some of those locations are. Those are plants that have been announced in the last 12 to 18 months. You'll see a lot of them are directly on our line and put us in a position, obviously, to participate in any kind of freight movement into the U.S.

Shifting to Automotive, what you'll see in this chart, we currently serve 9 plants in Mexico. So you'll see all the big U.S. auto manufacturers, Chrysler, Ford, GM. You'll also see Nissan and VW on this chart. And then there are an additional 4 that are under construction right now. So we're going from 9 to 13. Honda, Mazda, Nissan and Audi are under construction. The first facility that will be opened is Honda, which is expected before the end of 2013. And the others will be opened sometime in 2014. So we think there's a tremendous growth opportunity. In fact, there is another auto manufacturer we don't show here because they haven't really selected a site but BMW has also announced they want to build in Mexico. And then, there's a very notable Japanese auto manufacturer that's not on this list. We don't have any particular insight that they may end up building there but if you think about trying to compete against Honda, and Mazda, and Nissan and you're shipping from Japan and incurring those transportation costs versus coming out of Mexico, I would suggest that, at some point in time, they may need to take a look at Mexico as well. The other great thing about this for our business, this represents about 8% of our consolidated revenues. But given that Mexico now has become -- I believe, they're either fourth or maybe third in terms of auto production, there are a lot of Tier 2 and Tier 3 suppliers to the auto industry that are also beginning to locate in Mexico, whether it's steel manufacturers, plastics manufacturers or a variety of parts and components that go into autos, they are all beginning to look at Mexico because of the number of autos that are being produced.

And specifically, you'll see -- and there are some varying estimates here, but roughly 2.6 million vehicles that were produced in Mexico in 2012 and there are a variety of different estimates out there, what growth we'll see in Mexico. But given that you have 4 new plants that are opening, a fifth one potentially with BMW, it's somewhere between 30% and 40% growth over the next 3, 4 years. So it's a pretty exciting part of our business.

Moving across border intermodal. This is a typical day as a truck driver at the border in Laredo, Texas. And I think a picture sometimes tells a thousand words, how's that saying goes, something to that effect, right. But you can obviously see a lot of congestion here. It could take a day, it could take a couple of days to get across the border. It is a cumbersome process via truck. And what we're trying to do, and we're still very early in the game here, is to work with a variety of trucking companies to convert intermodal containers over to our operation and move it via intermodal. And to give you a perspective, if you're moving by truck, there are a lot of delays and extra handling that takes place at the border that you don't incur with rail. So we actually go straight across the border, everything is precleared in our intermodal facilities because customs is located there. So there's no inspection, no customs process to go through. The only thing we have to do is run at a relatively low speed across the border, so that everything can be x-rayed with the gamma technology. And just to make sure that there isn't anything in our cars that shouldn't be coming into the country.

So these costs represent an incremental anywhere from $150 to $250 per container that you then avoid via rail. And you might ask the question, well, you have to get it on a train, you have to get it off a train, you're right, there are lift charges, but we build all of this into our line-haul rate and generally for a move that's 400 or 500 miles or longer, we're going to be a much more efficient play than any trucking company.

We have made a lot of investments in this business over the last 3 or 4 years. We didn't always have these intermodal facilities that we've pointed out here in these black arrows. So it did take a little bit of time for us to build this out. But we now think we have a great product offering that's very competitive with truck.

And just to show you the growth rates in 2012, volume growth of 88%, revenue growth of 83%. It's a little over 2% of our business at $43 million last year in revenue. But obviously, growing at very high rates. So we're pretty excited about the opportunity. What's really interesting is we size our target market at roughly 3 million trucks. This market is very bifurcated, lots and lots of trucking companies, nobody has a significant share here that you could go and try to convert quickly. So there's a lot of effort involved in this. But we're at close to 2% now in terms of market share and believe there's some great opportunities for us to grow that going forward.

The port at Lázaro Cárdenas is an exciting opportunity for us as well. This port has been around for a number of years, but really over the last 5 years has demonstrated very high growth. It's the fastest-growing port in North America. The current port operation includes not just a container port but there's an auto distribution facility there, a bulk handling facility that at some point may be able to export coal out of. PEMEX has a refinery operation there. There are a whole host of other operations besides just containers. But you'll see on the pictures, this is Hutchinson's current concession that they operate. And then we've got in the second picture, you can see it from a little further away in all this vacant land is another concession that a subsidiary of Maersk acquired about a year ago, and they've announced a $900 million investment they're going to make in this port. So today, there's roughly 1.3 million, 1.4 million TEUs that are available to go through this port. We think over maybe a 5-year period, that could be $4 million to $5 million given the growth that we've seen and the award of the second concession. And then you can see our 3-year growth rates at Lazaro, 28% from a volume perspective and 34% from a revenue perspective.

Energy. So you knew I'd get to crude oil at some point in time, right? Energy markets are very hot today. There's been a lot written, especially about our opportunities over the last week to 2 weeks. I know Tom's got some research out on crude oil markets. So it's a very important market to us. And so let me cover just the kind of North American map here and the Canadian oil, heavy oil, coming out of the sands, the Bakken region and then there are other basins here that don't produce quite what you will see in Canada or the Bakken. But what we try to illustrate here is while we don't serve directly Canada or the Bakken region, we can interchange with CP and BN in Kansas City and then with CN in Jackson, Mississippi, and we have the most direct route into Port Arthur, which is where some of the world's largest refineries are. And I'll show you that on the next slide.

So we think we have a great network here to participate in this, whether it's originating out of Canada, out of the Bakken's or out of some of the Texas markets, tremendous opportunity for us. On that 1 bubble chart that I showed, fourth quarter crude oil grew 780%. I'm not suggesting that's going to continue at that kind of a level but just gives you an idea of what's happening.

This is an aerial of Port Arthur, Texas where we operate, and what we've illustrated here are a number of the oil companies that have refineries there. Six of the top 50 refineries in the world operate in this region. They import about 1 million to 1.5 million barrels of oil a day from overseas and the idea here is to ultimately have that replaced with oil coming out of Canada, the Bakken region or Texas. And so that plays very well to our rail network and the ability to serve this particular market.

We have, for 1.5 years or so, been working on a concept. The acronym here is PACT, the Port Arthur Crude Terminal. We were working until September of last year with a company called Savage that's in the logistics business to build a facility and then, the crude oil would be pipelined out to these refineries. Just a very efficient distribution method, bring it in with unit trains into the crude terminal, and then pipe it out. And there's a very robust pipeline network already built here where oil moves back and forth to these refineries, so it would be a very relatively simple thing to do. We don't have any contracts, nothing to formally announce. There's no facility that's been built, but we do think this has quite a bit of promise. And in all likelihood, something that would begin producing revenue in 2014 should we reach an agreement.

Likewise, we -- our frac sand growth if you recall was 35% on that bubble chart that I showed earlier. And we've again illustrated here where our rail network runs and where some of the basins and shales are, both oil and natural gas. So we've been a big participant in moving frac sand to these different shale territories. Again, another great business opportunity for us.

I'll set this slide up first but if you looked at a North American map and where the shale deposits are in North America, you'll see a lot of them extend into Mexico. And Mexico, at this stage, really has not developed that. They don't have the technology, they don't have the funding today. And what's exciting about that is the new president just took office in December. One of his key platforms was to open up the energy markets, which we will -- which we do think will happen in Mexico. It could take a couple of years but this is an area we came across on Google and all these white dots, this is the border here separated by the yellow line, this is Texas, all these white dots are drilling platforms. And this is Mexico, and you see nothing. And it just is an interesting way to illustrate what we think is inevitable that they will open up these markets and that could certainly allow us to move crude, it could certainly allow us to move frac sand into Mexico, but kind of an interesting aerial.

And I won't read these bullets but just in closing, maybe give you a few thoughts to think about and would be glad to answer any questions.

Question-and-Answer Session

Michael W. Upchurch

Yes?

Unknown Analyst

Could you discuss the impact of hauling coal and what's the [indiscernible] all of that in your railroad right now?

Michael W. Upchurch

Yes. Question is impacts of hauling coal in our business right now. I made a few comments that 2012 was a challenging year. We have one of our largest customers who operates in Texas that has 2 of their 3 units shut down right now. So the volumes that we've seen are relatively light. But the comps get a lot easier for us. And I think if you look at the latest AAR traffic reports, you actually see our Coal business begin to grow a little bit. It's down about 12% year-to-date. But again, those comps will get a little bit easier because that same utility was essentially shut down the first half of last year as well. And it happens to be a utility that is not regulated and they have to sell into the grid. So they compete with natural gas providers. And given where natural gas is today, they're just not as competitive. So it's not a high-growth area. It is only 10% of our overall revenue stream. And as I indicated early on, it was almost dollar for dollar offset by crude oil and frac sand revenues last year. Yes?

Unknown Analyst

Natural gas prices [indiscernible] money?

Michael W. Upchurch

Every utility is a little different in what they tell us. They all have different aged facilities. Length of haul comes into play, but this particular utility believes they need to be at roughly $4 or above on natural gas. So we're not quite where we need to be. Most of the other utilities would tell you, maybe in the $3, $3.50 range.

Unknown Analyst

Question about some of your contracts, the UP, interchanging at the border. My understanding is there's some contracts that may be coming up over the next year to 18 months whereby you actually may be able to achieve a longer length of haul going straight to the Midwest perhaps or other locations. Can you talk about the potential magnitude of those opportunities?

Michael W. Upchurch

Well, I probably can't talk about dollar magnitude. We haven't really talked publicly about that. But just to set that question up, the question is can we move more of the traffic coming out of Mexico on our own network and lengthen the haul instead of handing that off to UP or other carriers at the border. And the answer is absolutely, we have done a pretty good job of that over the last few years taking some of that share and longer haul is always more profitable business for us. You have to understand the dynamics of not having 100% ownership of the Mexican franchise until '05. And as contracts cycle out, you're able to bid on those. And one of the areas that we think we'll have a great opportunity are the new auto plants. We don't know exactly how many units they're going to produce or where they're going to end up. But there are no legacy contracts. So we'll be competing for all of that business and think we'll be pretty successful in doing that. But it's obviously, to our advantage, try to convert as much of that traffic as we can.

Unknown Analyst

Is it fair to assume that there are some sizable contracts that are coming up over the next 18 months?

Michael W. Upchurch

Sure. That can -- I think, yes. Yes?

Unknown Analyst

Diesel has obviously been a cost factor for you and have you looked to doing any work on natural gas [indiscernible] price of diesel?

Michael W. Upchurch

Yes, question about diesel being a significant cost to us and whether we're looking at natural gas potential. It is a significant cost. It's probably not as big of a P&L management issue for us because of the fuel surcharge mechanism that we have. But nonetheless, in working with the locomotive manufacturers, and in particular, GE has had some discussions with us about natural gas locomotives. There are some challenges though. The FRA has some restrictions around what can be right behind a locomotive, what kind of freight and it prohibits today, the ability to have a natural gas tanker right behind the locomotive, to fuel. And so there are some issues in being able to -- I think you have to be 5 or 6 cars behind the locomotive of being able to push that into the locomotive. But they are working on it. They have talked to us. There are a few units actually operating today. I think BN may have a few that they've been testing and we are interested in it. But I think there are some issues to work out and it may be a few more years.

Unknown Analyst

I was just curious where you are on the PTC integration with you guys. Have you guys put anything in your budget for this year? Or what kind of -- like just to be curious to hear your thoughts about if you think the deadline is going to get extended or where you guys are currently.

Michael W. Upchurch

Yes. Are there any regulators in the room that are listening, yes? Obviously, PTC is something we believe at this stage is not going to go away. We've invested probably in the neighborhood of $40 million to $50 million already. We think our total investment will be somewhere in the $120 million, $125 million range. I'd be careful about what I say and in my personal opinions around PTC but clearly, there have been some accidents that have driven this. And we'd love to spend the capital hours elsewhere driving growth in our business but understand it's probably not going to go away. It is in our capital numbers, it's in our guidance. I don't think any particular year we're going to see a huge bubble in that spend. Whether it gets formally extended or not, I think it will have to because I just don't think that this is a massive effort with communication networks and systems that have to talk back and forth between the railroads. I just don't know that the industry is going to be there. But I'm certainly no spokesman for the industry. That's kind of my opinion.

Unknown Analyst

How much CapEx do you need to spend to capitalize on all these growth opportunities, and what kind of returns? I know it's very difficult to estimate. These are long-term projects but what are you thinking about those?

Michael W. Upchurch

Yes, in the last couple of years, we've been in the low 20% range in CapEx, which is probably roughly 3 points higher than what the industry would be spending. I don't see anything over the next few years in our 3-year planning cycle that would necessarily drive that significantly higher. We are going to have to continue to invest in equipment, to be able to carry the traffic. I mentioned early on for the auto industry we're investing in some AutoMaxes right now. The good news in the crude business is we wouldn't be building that storage facility. That would be capital logistics provider would have to invest in. We don't own the equipment there. The tanker cars are typically owned by the chemical companies, the oil companies. So it's really locomotives that we would have to invest in. But I don't think, sitting here today, we see anything that would be much beyond where we guided to 2013. Yes?

Unknown Analyst

[indiscernible] crude by rail opportunity that you're going to probably it's going to progress over the next year or so. Just in terms of capital expenditure. I mean, are you going to have the total availability getting tank cars or I know there's a big backlog today. Is there -- do you guys -- are you guys starting to prepare for that? Do you guys have a big delivery of it coming [indiscernible]?

Michael W. Upchurch

Well, again, the tank cars are really invested by the oil companies. We don't make that investment. But clearly, there is a backlog. I think it's fairly public, the lead times are extended right now and getting new equipment that could potentially, at some point, stump the growth a little bit. But it's not an investment that we would be making.

Unknown Analyst

So you're not going to make the investment?

Michael W. Upchurch

No. It varies depending on the commodity. We don't own the coal cars, we don't own tanker cars, we typically own containers. Although there are a variety of shared asset pools that are available. We own box cars in the grain business. It's a little bit of a mixed story. We own some of that equipment.

Unknown Analyst

With the new Mexican administration, do you anticipate any changes in regulation of railroads in Mexico that might impact you either positively or negatively?

Michael W. Upchurch

The only thing that has been mentioned so far that I'm aware of is building out more passenger rail. And so the question always becomes, well there isn't an existing passenger rail system in Mexico today, will they want to use our system, which is something that has lots of challenges when you try to think about managing passenger and freight. There are possibilities of building on our right-of-way. I think it's just too early to know for sure but the administration in general has been very pro-business. I think they'll continue what the prior administration did, which was really focus on attracting new investment into Mexico and from that perspective, we're not seeing a whole lot of change. One more?

Unknown Analyst

Yes. Some of the Port Arthur facility investments that you're planning there, do you anticipate that pipelines will eventually make it down there? And would displace whatever you would do in terms of rail?

Michael W. Upchurch

Yes, I think pipelines will always have a role in moving crude and it's generally more economical to do that by pipeline. I think there are challenges getting approvals to build the pipeline. It could be a number of years ahead of us. It's also a fixed network that if you open up new refineries that you can't really move the crude oil like you can via rail network where you have many more options. If pricing changes within regions in the country, pipelines obviously, not flexible in redirecting, rail could certainly ship it to other locations. And I just think the amount of investment the oil industry has made in tanker cars and in some cases, loop track facilities at their own refineries, I think there's certainly a longer-term view here that rail will always be a participant in this. Could it get displaced to some degree with pipeline? Yes, I think that probably will happen. Okay?

Unknown Analyst

Since it's the last presentation, I don't know if you want to take a couple more questions. I'll leave it up to you, too. But as you think about the opportunities Intermodal Mexico and obviously, a lot of the intermodal companies are eager to have that business and there's been some discussions broadly in the U.S. about price competition amongst the intermodal service providers. Can you talk a little bit about the kind of terms that you're able to achieve? Are you seeing some favorable price points because of the growth opportunity there or would you say no distinction between what you may find in cross border Mexico versus in the U.S. right now?

Michael W. Upchurch

Yes, I would just say generally, the pricing environment is pretty strong. And again, if you think about the concept of avoiding a lot of that congestion and some of the incremental costs at the border, there is certainly an ability to make good money at intermodal. And our margins are quite strong in the Intermodal business. So nothing that I would see that would concern me from a pricing perspective.

Unknown Analyst

And then one last question. Just you talked a little bit about the potentially enhanced length of haul in the new auto plants. Is there any way that you can give us something in the directional sense of what type of incremental margins you could achieve on a longer length of haul from the newer plants versus the older plants? Just even not an absolute maybe just a spread type...

Michael W. Upchurch

I'm not going to quantify that. But just -- I understand that generally, the economics in this business, the longer the haul, the better it is. And if you just think about moving something from let's say Mexico City to the border and then from the border to Kansas City, you're probably [indiscernible] haul and that's going to have a very positive impact to our overall margin guidance. But it's also a competitive business and there are other carriers so who knows what kind of terms and conditions you get once those contracts expire.

Unknown Analyst

So with respect to crude by rail, obviously, we had a number of questions on that, but maybe you could throw Slide 33 which is the map? I was wondering if you could kind of point to where you're seeing a lot of volume growth opportunities in the near-term? And as I understand it, like 40% of your crude oil is actually coming from Canada which seem high to me but I was wondering if that was more coming from CN or CP?

Michael W. Upchurch

Yes, I think it's probably closer to 20% coming from Canada, roughly 60% from the Bakken region and then 20% in Texas. The Bakken region is certainly, from an infrastructure standpoint, a little further ahead than they are in Canada. We think that Canada will represent some better growth opportunities and the refineries in Port Arthur typically favor the heavier crude. And as you probably know, some of the Bakken oil is now coming to the East Coast. So I think ultimately, we'll probably see a little bit more growth coming out of Canada.

Unknown Analyst

So where would you say that your primary interchange point is, then? Is it Kansas City or for most of the Bakken stuff? I mean, I guess on the map it doesn't clearly state that.

Michael W. Upchurch

It's going to be largely Kansas City because 60% of it is coming out of the Bakken region. So, but we do interchange with CN today in Jackson so -- and that's all coming out of Canada.

Unknown Analyst

Okay. And then also related to crude, I think it was last week or so, Kinder Morgan announced that they're going to have a new terminal in the Houston area. And they're going to move some, I guess, it was a rail facility. They're going to be able to move some oil from Cushing out of West Texas, the Bakken, Western Canada. Kind of similar, is that something you'd participate in or is that something that would be competitive to the PAC Terminal?

Michael W. Upchurch

I'm not particularly familiar with that facility, so maybe hard for me to comment on it.

Unknown Analyst

Okay, that's fair. And then with respect to Intermodal, how does the new lanes that are coming up on the Norfolk Southern network going to benefit you or is there an opportunity there to extend your length of haul to new regions within the Eastern U.S.?

Michael W. Upchurch

Working specifically with NS?

Unknown Analyst

Yes.

Michael W. Upchurch

Are you talking about the Crescent Corridor or...

Unknown Analyst

So, yes, you can move up a lot of the train length to [indiscernible].

Michael W. Upchurch

Well, we have a great relationship with NS. We do a lot of business together. I think we're -- we jointly own 1,000 containers now that cycle back and forth between the U.S. and Mexico.

So they're certainly one of our better partners in moving freight out of Mexico into the U.S. and components down into Mexico.

Unknown Analyst

Okay, yes. There are no further questions and, thanks a lot.

Unknown Analyst

[indiscernible]

Michael W. Upchurch

The Fort Worth and Western Rail Road, they're short lines that you would go into their -- on their track into the facilities. Thank you.

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