Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Kansas City Southern (NYSE:KSU)

Q3 2011 Earnings Conference Call

October 21, 2011 8:45 AM ET

Executives

Michael Haverty – Chairman and CEO

Dave Starling – President and COO

David Ebbrecht – EVP, Operations

Pat Ottensmeyer – EVP, Sales & Marketing

Michael Upchurch – EVP and CFO

Analysts

William Greene – Morgan Stanley

Allison Landry – Credit Suisse

Scott Group – Wolfe Trahan

Thomas Wadewitz – JP Morgan

Christian Wetherbee – Citigroup

Kanchana Pinnapureddy – Stern Agee

Ken Hoexter – Banc of America

Jason Seidl – Dahlman Rose & Company

Anthony Gallo – Wells Fargo

Neal Deaton – BB&T Capital Market

Art Hatfield – Morgan Keegan

Operator

Greetings, and welcome to the Kansas City Southern third quarter 2011 earnings call. (Operator instructions) As a reminder, this conference is being recorded.

This presentation includes statements concerning potential future events involving the company, which could actually materially differ from the events that actually occur. The differences could be caused by a number of factors including those factors identified in the risk factors section of the company’s Form 10-K for the year ended December 31, 2010 filed with the SEC. The company will not update any forward looking statements in this presentation to reflect future events or developments. All reconciliations to GAAP can be found on the Kansas City Southern website, www.kcsouthern.com.

It is now my pleasure to introduce your host, Michael Havety, Executive Chairman for Kansas City Southern. Mr. Havety, you may begin.

Michael Haverty

Okay, thank you, and thank all of you for joining us this morning from Kansas City Southern’s third quarter earnings presentation, coming to you from Kansas City Southern headquarters. Today’s presenters are Dave Starling, the President and CEO; Dave Ebbrecht, Executive Vice President, Operations; Pat Ottensmeyer, Executive Vice President, Sales and Marketing; and Mike Upchurch, EVP and CFO. On the telephone from Mexico is Jose Bautista, President and Executive Representative, who will be available for the question and answer session.

If you’re following on the website, if you would turn to slide number five the third quarter results. I’m not going to go through those numbers. Those are unadjusted numbers and throughout this presentation you are going to hear about a lot of adjustments as a result of the hurricane related insurance coverage – recovery. So there is no real reason for me to go into detail on that.

Let me say this about the adjustments. I think that the management team did a very good job of showing in the adjustments just how well the company has performed, exclusive of the hurricane related insurance recoveries. And I think the way you are going to see is an apples to apples comparison done by the management team. Just to remind everyone, the hurricane we are talking about was Alex that hit in July 2010; main line in Kansas City Southern was out for 24 days from July 1 to the 24. and not only did management do a very good job of handling this disruption for that period of time, but also in the settlement that followed because they had very good data, very good documents we ended up collecting, a little over $63 million in cash from the insurance companies not only for direct losses, but also for loss of business.

While this quarter has a lot of numbers that are affected by the hurricane, I think there are two things that you need to look at that really indicate just how well our company is doing, and that is if you look at the carloads which set a record, and also the revenues which set a record. So that is indicative of just how well this company is doing. That has nothing to do with the adjustments and to think that in the past quarters we have never handled this many carloads nor had these high revenues. I think it is a real testament where this company is headed.

With that I am going to introduce Dave Starling, our President and CEO. Dave.

Dave Starling

Okay, thank you Mike and good morning to everyone. We will start on slide seven. This is the chart that we showed during our second quarter earnings presentation, which provides a brief overview of how KCS is progressing relative to the guidance we have previously provided.

The left-hand column restates the guidance we gave in January of low double-digit revenue growth, based on mid single digit volume and mid single pricing increases. Based on those projections, we anticipate 100 basis points to 150 basis points improvement in operating ratio in 2011. On the second quarter call, we slightly adjusted our guidance for the year, and stated that the second half of 2011 was shaping up to be somewhat better than the first half. This was all the more impressive given the first half came in a bit higher than our original guidance.

KCS third-quarter results illustrate that we continue to deliver on our guidance. Our third quarter adjusted revenues rose 16% over adjusted third quarter revenues in third quarter 2010. Just to remind you as Mike said we have adjusted 2011 volume revenue and operating ratio numbers by taking out the impact of hurricane Alex, which virtually shut our railroad down in July of 2010.

With the third quarter revenues in the book, our adjusted year-to-date revenue growth is 15%. Third quarter adjusted volume growth came in at 7%, somewhat higher than our mid single digit guidance, and in line with our six-month number. It should be noted as Mike said that third quarter volume and revenue numbers are records for KCS, and reflect the growth we are experiencing along our entire network. Third quarter same quarter pricing came in at 6.1%, and year-to-date same-store pricing is 5.7%.

All in all we are comfortable that our entire 2011 (inaudible) pricing guidance we provided earlier in the year. And finally our adjusted year-to-date operating ratio improved approximately 1 point year-over-year. To amplify a bit on our operating ratio, go to the next chart, which illustrates the continued positive trend in the relationship between carloads and margins. As you can see KCS posted operating ratio was 66.6%. If you adjust for the hurricane settlement the number is 71.3%.

Adjusted carloads for the quarter were 7% better than the prior third quarter, and up about 4% from the second quarter. We have altered the next chart a bit to make it more meaningful to you. During previous presentations, we have gone back to 2009, basically to show you how we have come out of the recession. Now in the spirit of what have you done for us lately, we thought it would be more reflective of our recent performance to go back just 12 months, rather than to the beginning of 2009.

The good news story is it remains very positive. The gap between our rolling average quarterly linehaul revenue and our rolling average quarterly operating cost continues to widen. The main story behind the chart is that KCS is doing a first rate job of controlling operating expenses, as its linehaul revenue continues to grow and that means more profit falling to the bottom line. All in all, we are very pleased with the progress we made in the third quarter. We did what we said we will do and somewhat exceeded our first half performance in some key areas.

We accomplished this despite two of our primary commodity groups being negatively affected by heavy flooding along the Missouri river. The floods forced the ten-week closure of the primary grain and coal rail corridors serving us in Kansas City. This affected cost, volumes, and train schedules. We are especially proud of our success in maintaining service levels for those customers, whose businesses were most affected by the flood conditions, and also our ability to minimize the impact of additional expenses cost by the necessary train diversions.

The good news is full service was restored by mid-September, and we anticipate strong coal traffic for the remainder of 2011 and into the first quarter of next year, as some of the utility plants we reserve rebuild their stockpiles. For the first quarter, there were few other incidents that impacted employee, fuel, and casualty and insurance costs. However, we managed these expenses, and still were able to record an operating ratio that was not only better than a year ago, but also better than our second quarter.

I hope this gives you a level of confidence in KCS through these uncertain economic times. I know we’re confident we can effectively address those significant fast moving growth opportunities and periodic business downturns, or anything in between for that matter.

I will have a few words at the end of the presentation on what we’re currently seeing for the remainder of 2011, but really the message is that KCS is stronger today than it has ever been, and we will remain a strong company no matter what the short-term economy holds for all of us.

Now let me turn over the presentation to our executive vice president of operations, Dave Ebbrecht, who will take us through a few operating metrics. Dave.

David Ebbrecht

Thank you Dave, and good morning everyone. If we could start on page 11, this first chart illustrates our operating expense per crew start versus the growth in linehaul revenue. Our operating team is keeping expenses under control, even though we are seeing a consistent upward trend in volumes and revenues. The small uptick you see in expenses in the third quarter is related to the inefficiencies that the Kansas City gateway associated with the flooding connecting carrier lines.

The detours and surges in demand created a temporary imbalance, which has been rectified. We have been operating smoothly now for the last six weeks. On the next slide on page 12, I believe it is important to recognize that while we have been growing at record rates and volumes have exceeded prerecession levels, we have also accommodated that growth, while maintaining an efficient network.

As you know velocity in dwell metrics are the cornerstones of measuring fluidity in the operation. Our velocity in dwell have been consistently strong during the post-recession recovery, and they have also improved this quarter. And both metrics are reflective of our latent capacity in not only our infrastructure, but our resource space.

On the next slide, you notice that the headcount is one metric that continues to be a point of differentiation for our operations team. It reflects our ability to absorb additional carloads, with a relatively stable workforce. This chart clearly shows how we manage headcount at a relatively flat level and continue to realize our true network capacity. Given our current growth plans, we expect to continue this positive trend in the fourth quarter.

I will now turn it over to Pat Ottensmeyer, EVP of sales and marketing.

Pat Ottensmeyer

Thank you Dave, and good morning everyone. I will begin my comments on slide 15, with a quick recap of the revenues and volumes for the quarter. As you heard earlier, our revenues for the third quarter were $544.5 million. This is a new record for any quarter, and 24% higher than last year, which of course was negatively impacted by hurricane Alex flooding. Adjusting for the impact of hurricane Alex, our revenues were 15% higher than last year.

As Mike mentioned earlier, our volumes were also a new record, and for the first time we exceeded 500,000 carloads in any quarter. Moving on to the next slide, this illustrates the factors contributing to revenue growth for the quarter, and as you can see, every component of revenue change had a positive year-over-year impact for the third quarter. Last year we quantified the lost revenue impact of hurricane Alex at $33 million on a consolidated basis. So we’re showing the growth contribution from that adjusted level.

Same-store pricing contributed 16 million of the revenue increase over last year, and the pool of revenue related to same-store movements was $251 million or approximately 65% of our total linehaul revenue. So the effective core pricing impact in the third quarter was 6.1%. I will talk more about that on the next slide.

Increase in fuel surcharge revenue contributed 26 million or 5.9% of the overall revenue growth for the quarter. The foreign exchange fluctuation impact is a bit lower than in prior quarters, which is attributable to an increase in the peso dollar exchange-rate in September. The current exchange rates are the highest that we have seen since 2009. If the peso exchange rate stays where it is today, foreign exchange will likely be a negative factor in the fourth quarter.

Mike Upchurch is going to talk more about foreign exchange in a few moments. Our mix in other categories is somewhat higher than in prior quarters, due to part to the hurricane impact on length of haul. The next slide shows revenue for loaded car mile, which excludes fuel, mix, and foreign exchange on a same-store basis. As you can see, the same-store pricing was higher in every business unit, and overall increased by 6.1% over the third quarter of last year.

This also compares favorably to the second quarter of 2011 when we reported a 5.4% pricing improvement. I continue to believe the pricing increases will be in the mid-single digit range as we have said in prior guidance. Turning to slide 18, you can see the individual business unit performance in more detail. I’m only going to speak to the comps on as reported basis here as we have not previously broken out the hurricane adjustment on a business unit level.

Overall revenues were up in all areas, and volumes were higher except in coal and ag, which were both impacted to some degree by the weather in the third quarter. Consolidated total revenues were up 24%, volume increased 13%, and average rate per unit was 10% over last year. The revenue in RPU showed improvement in every business unit.

All of the business units reflect the positive year-over-year impact from increased fuel surcharge. Growth in chemical and petroleum was driven by increase in both price and volumes. Cross-border business in this group was at an all-time high, primarily driven by plastics, and organic products, soda ash used in the automotive industry. Additionally, petroleum growth was driven by higher volumes of crude oil and refined product shipments.

The industrial consumer business unit showed very strong growth in both volumes and RPU. There was a good message in this group regarding our cross-border thesis. As you all know the appliance industry is not strong, due to continued weak housing starts in the United States, however, our appliance revenues were up 44% on a 20% volume increase over last year.

Some of this increase was flood related, but the stronger factor was the increase in appliance shipments from Mexico to the US. In addition we continue to see strong paper and steel loadings. In fact July, August and September of 2011 were the best three months of the last three years for our steel shipments. While the agriculture and mineral business was positively impacted by pricing and fuel, however, weather-related service issues and strong Mexico harvest has continued to keep volumes down in the third quarter, particularly our cross-border shuttle train service, which you will see on our cross-border data on the next slide.

Coal continued to have strong positive pricing impacts. We did have the repricing of one contract in the second half of 2010, which helped the RPU. However, in the third quarter volumes were negatively impacted by flooding in the upper Midwest, as Dave mentioned, which caused intertrains disruptions and reroutes during the quarter. we are seeing a strong shipment so far in the fourth quarter, as some of this is purely timing related.

Intermodal growth was primarily attributable to increase in volume, specifically increase in cross-border truck conversion and Lazaro growth both of which I will speak to in a few slides. Additional increase in South American and trans Pacific container volume drove the increased business in our intermodal unit.

Automotive revenue grew significantly in the third quarter due to increase in both volumes and pricing. The auto business was also impacted by the flooding last year, but we continue to show strong volume growth particularly in our long haul cross-border business. In addition, we are improving the utilization of our auto max car fleet which is helping to drive the revenue per unit higher.

The next slide shows our cross border revenue trends, which did show a decline from the second quarter levels, which is completely driven by lower cross-border grain shipments. As we have explained in the past, this decrease is driven by a strong harvest, and high inventories in Mexico, along with low golf vessel [ph] rates, which have driven some of the grain consumption away from our cross border shuttle service. We have seen signs of this turning again in the fourth quarter to a more positive trend. Through October 20, our export grain volumes were almost double what we showed in the first 20 days of the third quarter of this year.

Except for the grain business, every other business unit reflected record breaking cross-border revenue in the third quarter. While year-over-year comparables are difficult to quantify due to the hurricane Alex impact, if you look at the quarter to quarter increases, industrial and consumer business was up 11%, with record-breaking volumes in appliances, lumber and metals. And compared to last year, our intermodal cross border was up 18%, and automotive was up by 11%.

The next slide will have a bit more detail on the intermodal portion of our cross border business. On this slide you can see that we’re continuing to experience rapid growth in the intermodal cross-border traffic with year-to-date volumes up 55% and revenues up 71%. This growth rate actually accelerated from the first half, where we saw year-over-year volume and revenue growth of 39% and 55% respectively.

Slide 21 shows growth in the third-quarter related to Lázaro Cárdenas traffic. In spite of the fact that Lázaro has shown impressive growth now for four years, and with the fastest growing major container port in North America last year, we are still showing very solid year-over-year growth rates with volumes up 31%, and revenues 35% higher than last year.

There are a couple of important developments going on at Lázaro that should provide the basis for strong growth here for many years to come. First, Hutchison Port Holdings is nearing completion of an expansion at their terminal, which initially will add more than 30% to their capacity, and ultimately will more than double current capacity. This next phase will open in January of 2012.

Second the Mexican government is evaluating bids for a second terminal concession, which they expect to award in December, and the new terminal could be operational in 2013. The new terminal is expected to be about the same size as the existing Hutchison facility of roughly TEUs at full capacity. As I said before, we are very excited about the long-term outlook for our business at Lázaro Cárdenas.

Moving to slide 21, I want to briefly mention that earlier this month, we gained control of a private intermodal terminal in St. Louis (inaudible). This is a very strategic location, and a rapidly growing industrial market. (inaudible) is a great facility with ample room for growth in the future. Most importantly, as you can see on the map on the right side of this slide, this terminal complements our international intermodal portal very well. We now control facilities that effectively allow us to cover 60% of Mexico’s population, and about two thirds of its GDP. This is another important step in positioning our intermodal network to handle the significant growth that we see in the years ahead.

Moving to the outlook slide. You can see that the outlook for the fourth quarter and the full-year continues to be strong with five of our six major business units expecting to show double digit revenue growth in the fourth quarter, and for the full year. before I talk about the specifics, I want to reiterate that foreign exchange could change the outcome in some of these cases. If the peso remains at current levels, we could see weaker results in some of the business units. However, this should have a very limited impact on operating ratio as we would see an opposite movement on the expense side.

Growth in the chemicals and petroleum business will be impacted by a couple of factors unrelated to the economy, including a maintenance outage at one of the plants we serve in the Gulf Coast. However, even adjusting for those factors we currently expect the fourth quarter revenue growth will be in the mid to high single digits versus last year. Industrial and consumer products will be driven by continued strength in metals and appliances, both areas of cross-border strength for us. Ag and minerals will see growth in cross-border grain in the fourth quarter, but strength in the fourth quarter will not overcome the weakness that we have seen in the first part of the year.

This explains the single digit revenue forecast for the full year. As I mentioned earlier, we have already seen it get stronger and the cross border grain is moving at higher levels in the first few weeks of October. Coal will be positively impacted in the fourth quarter, by making shipments missed due to the flooding impacts in the second and third quarter, replenishment of low plant inventories and accelerated timing of shipments on a new coal movement beginning in 2012 will drive higher volumes and revenues in the fourth quarter.

Intermodal growth will be driven by market share gains as a result of truck conversions, Lázaro growth and growth in the overall market. We are finally beginning to see a bit of a seasonal surge in the US intermodal business and Mexico has remained stronger. And finally in our automotive business, we expect to continue to be very strong as Mexico production and production of plants that we serve in Mexico has grown more rapidly than the overall market. So putting this all together as Dave mentioned earlier, we currently expect revenue growth for the full year to be in line with the 15% we recorded for the nine months through September.

For the most part, our customers are telling us that they are not predicting negative impacts. In addition pricing trends are positive and new opportunities continue to develop on our networks. So I will wrap up with slide 24. Again we expect the economy in both the US and Mexico to remain in moderate growth mode for the rest of this year, and into 2012. There are certainly signals and the economy that are suggesting weakness, but our recent carload trends are continuing to show strength. In fact, two of the five highest weekly carload volumes that we have ever seen have been recorded in October of this year, certainly not indicative of the slowdown in our business.

We expect pricing to be in line with our mid-single digit guidance. Our intermodal business, especially the cross-border segment will continue to be very strong. We have seen an increased level of engagement from all of our major channel partners. Some of them have described the cross-border opportunity as the last frontier of the truck to rail conversion in North America. The investment made by KCS over the last three years, including our recent commitment to the inter-portal facility at St. Louis [ph] has truly changed the landscape for Mexico cross-border intermodal growth.

We have made the investment and it is now paying off. Our automotive business continues to perform very well, and the outlook is bright. We currently serve eight auto plants in Mexico and there are four new plants either announced or in site selection. Industry forecast show Mexico finished vehicle production increasing by more than 40% over the next four years. As Mexico continues to become a more significant producer, our cross-border business will continue to grow.

Finally our longer term outlook continues to be very positive. I have mentioned these three specific new business opportunities before, and each one of them continues to develop and will drive our volume and revenue growth in the future. I do want to point out that in addition to the intermodal growth at Lázaro Cárdenas that I mentioned earlier, there is a new commodity terminal being developed that will be able to handle iron ore and coal for exports. This facility will open in the second quarter of 2012, and we have seen strong interest from US and Mexican producers to use that facility as a gateway to Asia. We will report progress on each of these opportunities as they develop.

With that I will turn the presentation over to Mike Upchurch.

Michael Upchurch

Thanks Pat. I’m going to start my comments on page 26, and just highlight a few of the key items in our condensed income statements. Reported revenues increased 24%, while expenses were up 13%, resulting in a 57% improvement in operating income. Interest expense continues to decline year-over-year to 32 million, largely the result of refinancings, and the reduction in our gross debt repayment of roughly 465 million since the end of 2008.

In fact, if you look at the peak quarterly interest that we have been incurring, we have seen about an annualized reduction of $50 million, and given some incremental debt repayments that we will complete by the end of the year we should expect that number to continue to decline.

Foreign exchange losses were 7 million during the quarter that is reflected as a devaluation in the peso. This is largely offset by some tax benefits generated from the deteriorating exchange rate. When you look at our tax rate, our effective rate during the quarter was 30%, which is lower than prior quarterly rates this year, primarily due to the decline in the peso, which does provide a non-cash tax benefit to us related to our US dollar denominated debt that we have in Mexico.

And you may recall similar exchange or changes in our tax rates in prior years when the peso fluctuated, as we look forward to the rest of the year assuming a stable exchange rate and we use projections from the Central Bank of Mexico, we would expect the full year 2011 effective tax rate to be 34%. That is slightly down from the 35% to 37% range that we have been guiding during the course of the year.

And as you look at our 30% rate in the quarter, remember that GAAP requires us to estimate a full-year effective tax rate and then through that during the quarter, so the 30% rate was a little bit lower during the quarter because we went back and we were able to true up prior quarter’s tax rates that we have been recording. And just to give you a rule of thumb, all other things being equal, roughly 0.1% change in the exchange rate translates into about 50 basis point change in our effective tax rate.

So that may allow you to track for the rest of the quarter and see what impact we might have on our effective tax rate. One slide 27, I wanted to cover our overall expense trends. As we discussed earlier, reported expenses increased 13% and the table on the right side of the slide you can see the key drivers of the expense increases, including a couple of one-time non-recurring items, the $26 million in hurricane related insurance recovery that we recorded during the third quarter, and the third quarter 2010 post employment benefit adjustment that we took of $6 million.

But when you look at the rest of the expenses, fuel prices caused about a $17 million increase, our volume sensitive expenses went up 23 million, casualties increased 8 million, the majority of that derailment activity in the third quarter, foreign exchange, increased expenses by $4 million, and just to turn that back to the comments that Pat made, the net of revenue benefit and the expense increase essentially caused $300,000 impact to operating income during the quarter so very negligible. And then lastly inflation and some other drivers increased expenses by 9 million.

On page 28, we want to provide a little bit more visibility into the reported and adjusted operating ratios. If you go back to the third quarter of 2010 we did discuss with you a couple of items, the hurricane loss estimate that impacted us by about 3 percentage points, and then the benefit from the post employment true up that we recorded benefited us by 1.5. so we will get a normalized OR in the third quarter of 2010 of roughly 72%.

If you look at third quarter 2011, obviously the big item is the recovery of our insurance on hurricane Alex, and that benefited the quarter by 4.7 points. So our estimated adjusted operating ratio is about 71.3 or a 70 basis points improvement year-over-year, and that is despite fuel challenges that everyone else in the industry is also surely experiencing, and that represents our best ever operating ratio.

On page 29, I like to review our compensation and benefits expenses. In the table on the left you can see our headcount continues to be relatively flat on a year-over-year. that represents continued operating leverage in Mexico with reductions in the workforce, offset by some increases in the headcount on the T&E side in the US, and we have been reporting really for the last 18 months, we have been hiring in the US to cover the volumes.

And wage inflation and volume increases contributed about 10 million to our overall comp increases. We obviously had the pension credit of 6 million back in 2010, which negatively impacts the year-over-year comparisons. And then finally two other items, incentive comp is up about 4 million and FX negatively impacted us by 2 million in the comp line-item.

One slide 30, fuel expense is up 40%, largely due to price and certainly volume contributed to that increase because while as you can see in the table on the left, FX negatively impacted fuel expense by about $2 million. Our average price per gallon in the US was $3.05, and in Mexico $2.55 per gallon. And for those of you tracking our gallons consumed, it was 15.3 million in the US and 15.7 million in Mexico.

And in the chart on the right we did have a slight benefit, lag benefit during the quarter of $2 million that represents a positive lag benefit in the US, and a slightly negative lag impact in Mexico, as Mexico was trying to increase prices from the second quarter to the third quarter, to get closer to world market prices. And again I will just remind everyone despite the rising fuel prices, we still had a record operating ratio for the quarter.

On page 31, I would like to cover free cash flow and some planned uses of that cash. You can see we did generate 170 million in year-to-date free cash flow. That is an increase of 35% over 2010. And as we previously communicated to investors and analysts, we continue to focus on delevering the balance sheet. We do plan to exercise our early call rights on the 13% US notes during the fourth quarter, specifically we will issue the call notice over the next few weeks, and we would look to retire that debt before the end of the year.

Also during the third quarter, we converted the conversion of a locomotive operating lease to owned assets, and we financed those purchases with the lessor. That asset purchase provides some substantial future tax benefits to KCSM both in lower withholding tax payments and a pretty significant benefit that will essentially avoid having to pay. We also get the benefit of improving our operating ratio going forward. So 2012, we would expect a nice operating ratio benefit.

We are also currently working with federal government to secure a RRIF loan to acquire 30 new locomotives that will be delivered this quarter. This financing could allow us to secure 25 year debt at long-term treasury rates, so something very attractive to us, which would lower our overall effective interest rate and also extend our maturities. But after we complete the retirement of the 13% notes, we believe we will have largely accomplished our debt reduction goals, and our credit metrics would begin to look much like an investment grade company based on published financial criteria that the rating agencies use and established as guidelines in rating company credits.

Our next priority for cash will be in investments in our business to continue to support industry-leading volume and revenue growth, CapEx for the year is expected to be about 23% of revenue, and just to provide some color on that we previously discussed the acceleration of some locomotive purchases, from 2012 into 2011 to be able to take advantage of the 100% bonus depreciation that is offered to us this year. That adds about three points to our CapEx to revenue ratio, and then the lease buyouts, the way we account for that in the cash flow statements with some of the cash deposits that we have made. That is roughly 2 points. So when you exclude those two items, we are really pretty consistent with long-term industry averages in that 17% to 18% of revenue.

And then lastly, as we continue to improve our free cash flow, we will be evaluating the possibility of a return to shareholders during 2012, but it is important to note that we have not made any firm decisions on that relative to any dividends or buybacks, and our immediate focus is to retire the 13% notes and continue to invest in our growth opportunities.

On slide 32 you can see our liquidity position continues to improve. We ended the quarter with liquidity of $617 million, representing $217 million of cash and $400 million in unused lines of credit. We did during the quarter renegotiate the US and Mexican credit facilities, increasing our capacity from 225 million to 400 million. and I think an important byproduct of renegotiating those facilities was obtaining enhanced flexibility to be able to provide dividends and also do debt buybacks.

It is important to note that of the cash on the balance sheet at the end of the quarter, we do plan to use 140 million of that cash to retire the 13% notes which are at par plus coupon. But we will end the year certainly with liquidity levels that we are very, very comfortable with. And then finally on slide 33, I want to briefly summarize the final details of the hurricane claim with you.

As we previously reported, we settled the property and business interruption claim in July for 66 million. That is prior to the $10 million deductible and then additionally at the end of the quarter, we settled the general liability portion of the claim for 7.6 million before the $1 million deductible. So included in our third-quarter financial statements is a $25.6 million gain related to recovery of the proceeds that benefited our OR by 470 basis points and EPS by $0.15.

So when you look at our final net accounting of the total impact of the hurricane, it is an approximate $0.04 loss and it is slightly better than the nickel estimate that we gave you last July when we reviewed the hurricane estimates.

With that I would like to turn it back to Dave to conclude the call.

Dave Starling

Thank you Mike. If you will turn to slide 35, just a couple of brief comments about the Panama Canal Railway Company. You can see that Panama is fully recovered from the recession, the volumes are up above the previously high volumes. Total revenue of $14.2 million and the operating ratio was 48, we had a slight uptick in the operating ratio due to the price of fuel in Panama.

Now I would like to make a few closing remarks, three years ago during our third quarter earnings call, we stated that we saw nothing in our car loading suggesting any kind of significant economic slowdown. Obviously we nailed [ph] that one. By the end of November, the North American economy was in a totally different place. With that as the backdrop, I feel obliged to tell you today there is nothing in KCS’ current car loadings, and nothing in the projections of our customers that lead us to believe that the economy is falling into another recession.

So why do you think we are saying today has any greater validity than we did in 2008. While we don’t have a crystal ball, I do believe KCS has become much more sophisticated in its analysis of the business environment than it was three years ago. 2008 we were fixated on our own car loading numbers, today we track dozens of economic indicators and see how they correlate to our business.

But even more than pouring [ph] over economic data, it is important to understand that there characteristics of our business market that are unique to KCS’ franchise. These give us confidence that we can grow on a soft economy. Let me briefly touch on a few of these. As Pat has stated, we continue to experience strong growth at Lázaro Cárdenas, where volumes are up 31% year-to-date. With Hutchinson currently expanding their concession to handle more demand, the Mexican government is moving towards a second port concession of Lázaro by the end of the year.

On top of that, the new bulk facility will be operational in 2012, and that means KCS will be moving something into or out of that facility, whether it be coal, iron ore, steel, or other heavy commodities. So don’t forget Lázaro Cárdenas grew at a double-digit pace during the last recession. A significant business slowdown could impact the exact pace of growth, but it will not eliminate it.

Secondly our international intermodal corridor is in full operation, which is markedly different than in 2008 and 2009, when there was no cross-border intermodal product offering. Year-to-date that business has grown 55%. Given the market to KCS is attacking its 2.6 million truckload, and so far we have still only converted approximately 1% of that market. There is no end in sight for us to experience significant growth.

Furthermore because of conversion from truck offers significant savings to shippers. intermodal has traditionally fared well during business downturns. We expect the same to be true in our cross border intermodal business. Shippers are also responding favorably to the fact that not only has KCS instituted single line cross-border intermodal service, but we own and operate all the intermodal facilities on our lines both in the US and Mexico. As Pat mentioned, interest in this market opportunity is growing and should continue to grow even with the slow economy due to the continued conversion of truck to internodal.

Since 2009 our automotive business has matured and expanded. We currently serve 8 plants, and there are four additional plants in the pipeline. Mexico has become the North American manufacturing center for smaller, more fuel-efficient and lower priced vehicles. The Fiat 500, Volkswagen Bug, and Jetta, the Ford Fiesta, are all popular and affordable and built in Mexico. Recently the Asian car manufacturers have acknowledged the need to move production to Mexico, in order to compete in the North American and South American markets. Like with Lázaro Cárdenas and cross-border intermodal, automotive for KCS is a growth area with a long growth trajectory.

Finally, the Asian car manufacturers are just one example of the near sourcing phenomenon which is occurring in Mexico. With Chinese wage rates approaching that of Mexico, with the high-quality work done in Mexico, and the significantly lower shipping costs, near sourcing is not just a fad, it is reality. these items I have mentioned are mostly

unique to the KCS rail franchise. We like everybody else would enjoy a strong economic tailwind. However, modest economic growth, or even a flat line is enough to allow KCS to prosper.

With that being the case, coupled with our ability to maintain stringent cost control, KCS should continue producing good results for the remainder of this year, and into 2012.

With that we will open it for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question this morning is coming from the line of Bill Greene of Morgan Stanley. Please state your question.

William Greene - Morgan Stanley

Yes, hi there. Good morning. You know, can I ask just a little bit about the guidance update that you provided on Page 7 there. If you look through some of the top line numbers there, they are either at or sort of above kind of where the guidance was, and the operating ratios towards the lower end and yet you've done an excellent job on headcount. And so is there something either in the other cost that are sort of affecting that or should we expect there is sort of just some timing of items and as we look forward, we're going to see a pretty big acceleration in margin improvement. How should we think about fourth quarter maybe?

Michael Upchurch

Yeah, Bill this is Mike Upchurch. You're absolutely right, although we're pretty close to that lower end of the range that we guided, but recall in the third quarter, we did have some incremental derailments, that is just a timing issue for us and I think you saw 8 million increase on a year-over-year basis.

So, that's something we wouldn't expect to continue at that rate. And then certainly while we didn't put a lot quantification against it, the third quarter was negatively impacted by some of the flooding certainly a loss of revenue and some incremental cost there that we should get a little more efficiency going into the fourth quarter. So, I think those are the couple of items that give us comfort will be back in that range for the full year.

William Greene - Morgan Stanley

And when you look to '12 can you quantify what the locomotive lease buy out will help or buy [ph] if there is some number that you can talk?

Michael Upchurch

About 40 basis points, Bill.

William Greene - Morgan Stanley

Okay, great. And then just on the headcount – sort of ask this almost every time, but like how much, sort of how much more productivity is there when I look at your sort of either carloads per employee or whatever metric you want to think about, it's getting to numbers where you start to say like what's left?

David Ebbrecht

Well, this is Dave. I know you've been asking this every quarter, but we still have more opportunities in Mexico. We have our intermodal trains that we've started down there for our growth. We still have a great opportunity to continue to fill those trains up, without actually adding train starts. So, we still have more leverage to go.

William Greene - Morgan Stanley

Yes, that is great. Okay, thanks for the time.

Operator

Thank you. Our next question is coming from the line of Allison Landry of Credit Suisse. Please state your question.

Allison Landry - Credit Suisse

Good morning. Thanks for taking my question. I was wondering if we could focus a little bit on the cross-border intermodal data that you provided, it looks like the volumes in the third quarter were up about 16% on a sequential basis, which seems pretty strong. So I was wondering if you could maybe provide some color on what drove the strength and maybe your expectations going forward.

Pat Ottensmeyer

Allison, this is Pat. As I mentioned in that comment it's just the level of engagement of a number of our key channel partners is just – at a very high level and increasing. They are all doing the right things in terms of resources, people, assets, marketing and it's beginning to really pay off.

Allison Landry - Credit Suisse

Okay, and then maybe following up on that, so you are talking about currently having about 1% market share of the cross-border truckloads. Where do you see this number going maybe over the next two to three years?

Pat Ottensmeyer

It's going to be a lot bigger, but we really haven't given specific guidance on that but you know, what I have said, what we have said is, we don't see any reason why the market share in the cross-border lane shouldn't be ultimately about the same as it in some of the more well-established lanes in the United States. So, the facilities are there, the partners are there, the engagement is there, the business is certainly there, and not only the market share conversion, it's the opportunity here that's certainly what we're going after, but that market is growing. So, again we haven't given specific guidance in terms of the target, but we think there is a lot of opportunity. All the pieces are in place and this should, know five years from now, ten years from now look like any other intermodal corridors established maturing intermodal corridor in the United States.

Allison Landry - Credit Suisse

Okay. That is very helpful. Thank you for the time.

Operator

Thank you. Our next question is coming from the line of Scott Group with Wolfe Trahan. Please state your question.

Scott Group - Wolfe Trahan

Hi, good morning guys. So, Pat you mentioned the expansion at Lazaro, I am just wondering how much of the current capacity at Lazaro is being utilized and within that how much of those volumes are you guys handling today, and if I can just add on to that, how much of that is actually going cross-border today?

Pat Ottensmeyer

Alright let us see if I remember all your questions here. How much of capacity? Well again as the capacity comes on, Hutchinson has told us that they are going to be able to increase their capacity by 30% in January. And ultimately, when they finish phase 2, it will more than double capacity. So as that capacity comes online, the utilization will obviously go down.

And right – based on the current capacity before the additions come on, it's been running probably in the 70% range as far as what Hutch has told us they believe the capacity is. So, there is obviously going to be a lot more capacity coming on in the next two to three years, as Hutch completes their build out and as the second concession gets built.

Dave Starling

One more piece of color there, Pat. This is Dave. You've got to remember for Hutch too, this is just phase 2 of their concession. They still got another phase that they can build out. So ultimately the numbers we've been told before were about 2.2 million on their final build out. That's before the new concession is awarded.

Pat Ottensmeyer

And the new concession is roughly the same physical footprint as the Hutch facility. So, we don't know the details of that yet. We expect the concession to be awarded in December, so hopefully at the fourth quarter call we'll have more to say about that. One thing that's happened at Lazaro, as it's grown, is that there has been more transshipment volume.

So that's cargo that never sees the highway or the railroad, it just gets loaded from one vessel to the other. Of the traffic that does move inland, our market share has actually been growing recently. It's year-to-date, it's in the 55%, 60% range and recently it's been higher than that. We've seen some new customers, some new business come on that's been exclusively rail.

And of the Lazaro traffic, very little of it still is cross-border. Less than 5%probably closer to 1% or 2%, but we are seeing a lot of interest, we're doing test loads for a major retailer and we're seeing interest in plastics moving to and from the Houston area coming through Lazaro. So, it is still very small, but we're seeing a lot of interest and still believe that particularly with respect to Houston, the Gulf Coast and the Southeast – some of the Southeast markets that that cross-border thesis is still very valid.

Scott Group - Wolfe Trahan

You hit all of them. Thank you. Just within that, just one follow-up there, what percent is moving inland, and what percentage is getting just transborder?

Pat Ottensmeyer

It's about two-thirds moving inland, and one-third train shipment.

Scott Group - Wolfe Trahan

Okay, great. And then just second line of question, when we think about a potential dividend or buyback next year, is this something where you think you would want to wait for a credit upgrade before you do it, do you feel confident doing it before a credit upgrade. And also with that if we do get a rating upgrade, is there something that triggers that lowers the interest expense even more beyond the debt payment coming in fourth quarter?

David Ebbrecht

Scott, you're getting your monies worth now, that's about six questions I'm still counting here. This is Dave. We're still evaluating the dividend and we will certainly consider all those factors but that decision has not been made yet. So, Mike you want to take the interest question.

Michael Upchurch

Yeah, Scott, those correlated benefit if we were to get to investment grade just because our metrics looks like an investment grade company, doesn't mean that the rating agencies are going to immediately move us to that level. And I would expect that there might be a bit of a waiting period there, we're at BB levels right now, I think it's realistic to think in the very short-term, we might get to BB plus, but then we'll have to continue to execute at those levels for a period of time.

But if we get there, I think there may be somewhere around the 2 percentage point opportunity, and you have to look at the economics of refinancing our existing debt to try to take advantage of that. But the other big benefit that we get at an investment grade level would be able to do much longer maturity debt, which today we're largely limited to maybe 10 years in the public market. So, I envy the other railroads that can do 30, 40, l00 year debt.

Scott Group - Wolfe Trahan

Thanks for the time. I appreciate it.

Operator

Thank you. Our next question is from the line of Thomas Wadewitz with JP Morgan. Please state your question.

Dave Starling

Good morning Tom.

Thomas Wadewitz – JP Morgan

Yes, good morning. Let's see I wanted to ask you kind of a mix related question and how you would think about margins. It was very helpful, Dave, when you highlighted kind of the reasons why the franchise is resilient and the drivers of growth. But a number of them are Lazaro cross-border obviously are intermodal, you talked about automotive, and I tend to think of those as being lower margin within the mix compared to some of the bulk traffic or perhaps carload traffic. How would we think about margins in let's say 2012 if all of the growth in volumes came on the intermodal and auto side, would you still see margin improvement or would it be more flattish margin performance just how would we think about that?

Dave Starling

Well Pat and I both will answer that one, but to start with, I think you're off on the automotive. The automotive is generally speaking both on the auto parts and the finished auto is very attractive margins. And then on the intermodal side since our competition is only truck, we have not had to discount into conversion in Mexico for the conversion. I mean, the economics are already there on the container or the truck. So, there is no real reason for us to have to do any market discounts to attract trucks to convert to intermodal.

Pat Ottensmeyer

I think the other thing Tom is, as we add volume and density to the train, we improve utilization, we've got a lot of capacity on the intermodal product right now and the cross-border opportunities that we're looking at are very long-haul opportunities. So you get the combination of soaking up what – excess capacity that we have today in improving the utilization and the length of haul. So as we look at it on incremental new business that we're putting on the trains, it is the margins, the contributions are very attractive.

Thomas Wadewitz – JP Morgan

So it's fair to think that you'd still see margin improvement with respect to even if the mix was skewed, where most of the growth was intermodal and auto?

Pat Ottensmeyer

Absolutely. Now what you will see and we said this in the past is, as intermodal continues to grow even with some of the long-haul, you might see some interesting trends in the revenue per unit, but the contribution in the margins will still be very attractive.

Thomas Wadewitz – JP Morgan

Okay, that's very helpful and then the second topic I guess. I don't think that you mentioned the crude oil has kind of Bakken Shale port out there opportunity on this call. Is there any kind of an update you can give on timing and size of that business looking at 2012?

Pat Ottensmeyer

We're still making very good progress with our partner Savage, talking to potential customers and subscribers. I have actually described that here internally a little bit like Thanksgiving dinner, the table is set, people are kind of standing around the table waiting to take their seat. There is a lot of interest, lot of activity, nothing specific that we can mention right now. I think the timing I really think we will have something in the next few months. The magnitude, we're not really prepared to talk about that at this point, but it's still moving along and I – as we continue to talk to people and interest develops, I think that is going to be a real opportunity for us and we'll hopefully have more to say about that in the next few months.

Thomas Wadewitz – JP Morgan

Okay, when you say you will have something you mean like a customer announcement or something like that?

Dave Starling

Yeah. Right now what we're doing is talking to a lot of potential customers, trying to gain some level of commitment or subscription for the capacity, and once we get to certain levels then Savage would begin to build the terminal at Port Arthur.

Thomas Wadewitz – JP Morgan

Okay, great. Thank you for the time. I appreciate it.

Operator

Thank you. Our next question is from the line of Chris Wetherbee with Citigroup. Please state your question.

Christian Wetherbee - Citigroup

Great, thanks. Good morning guys.

Dave Starling

Good morning Chris.

Christian Wetherbee - Citigroup

Just on the Hutchinson expansion down at Lazaro, Pat have they given any indication of securing new vessel calls, I was just trying to get a sense of how locked in some of that initial capacity growth is as you move forward into the next couple of quarters?

Pat Ottensmeyer

We do have one new vessel. MSC was serving Lazaro on a vessel sharing arrangement and just a couple of weeks ago they announced that they were going to do their own feeder vessel. But as they grow capacity, I think they will be in a much better position to more aggressively market one of the things that until this new capacity comes on there really is limited growth capacity to handle new vessels but that will change beginning next year.

As far as any others, nothing specific but we do know that there continues to be a lot of interest in shifting away from Manzanillo, Manzanillo got hit pretty hard in the hurricane recently and we did see some short-term maneuvering to shift traffic away from Manzanillo to Lazaro, and we're hoping that some of that might stay more permanently.

Christian Wetherbee - Citigroup

Okay, and when you think about the new intermodal facility is that more of a complement for Lazaro, is it more of a complement for the cross-border, is it a combination of the two – I don't know if you can quantify kind of what the bigger opportunity of that facility is?

Pat Ottensmeyer

I think it's really both, but until we know who the concession is going to be awarded to, we have a pretty good idea of who the finalists are, we think there are four. But until we can really get into the details and the timing of the build out, we just don't know very much about that.

Christian Wetherbee - Citigroup

Okay, fair enough. And then I guess, one other question, I want to think about your Mexican employee contract, I think you had one negotiation, I think on compensation coming up. I don't know if that's been, I guess, resolved or where you stand on that just quick update on that if I could?

Pat Ottensmeyer

I think that's being resolved this week actually the documents are being signed. So, that one has been concluded.

Christian Wetherbee - Citigroup

Okay, and we'll have some more details on that shortly?

Pat Ottensmeyer

Right.

Christian Wetherbee - Citigroup

Okay, good. Thanks for the time. I will keep it short. Thanks.

Operator

Thank you. Our next question is from the line of Jeff Kauffman with Stern Agee. Please state your question.

Kanchana Pinnapureddy - Stern Agee

Hi, it's actually Kanchana Pinnapureddy in for Jeff Kauffman. Kind of curious if you could walk us through how a 10% moves and the peso would impact the top line expenses, the global line and the net income?

Pat Ottensmeyer

Yes, I mean, they are not necessarily correlated perfectly and what I tried to indicate was all things being equal if we saw a 0.1% change in the exchange rate, you might expect to see roughly a 50 basis points movement in the tax rate, but they are really two different issues. I mean the FX loss that we booked during the quarter GAAP requires us to revalue our net monetary assets and liabilities.

The benefit that we see in taxes relates to debt that we have in Mexico that is US dollar denominated and as the peso deteriorates, it requires more pesos to extinguish that US dollar debt. And the Mexican tax law allows us to take a tax benefit for that in the current period, even though it's unrealized. And the flip side would occur in periods of appreciation we'll have to bring that back into income. So, while during the quarter they netted, there is not a perfect correlation, but a rule of thumb that I did try to provide you there, hopefully that helps.

Kanchana Pinnapureddy - Stern Agee

Thank you, it does. And then kind of curious if you could – could you quantify for us what the impact from weather was in the quarter?

Michael Upchurch

We have not quantified it and we really – weather this is now to a business weather always impacts your results. I don't think there was anything material during the quarter, but quarterly some of the coal and grain shipments are being pushed out into the fourth quarter. And I think based on Pat's commentary we're expecting to see a pretty good quarter for both of those commodities during the fourth quarter.

Dave Starling

Yes, this is Dave Starling. You would have some non-standard costs like equipment turn times, locomotive turn times. We did have some trains that we diverted trying to care of our customers to keep them in business. So we shared some costs with them to divert some trains over the Canadian Pacific up to some grain origin. Again, we really didn't really substantiate the numbers, but it was enough to move the needle.

Kanchana Pinnapureddy - Stern Agee

Great. Thank you so much.

Operator

Thank you. Our next question is coming from the line of Ken Hoexter with Banc of America. Please state your question.

Ken Hoexter - Banc of America

Hi, good morning. You talked about, Dave talked about earlier the latent capacity, can you talk about how much you think you have and with CapEx up at 23%, where is the focus of the expenditures, is it on equipment, is it on network capacity to further enhance that capacity. Can you kind of delve into where the money is going?

Michael Upchurch

I'd say it's a myriad of all the things you mentioned. We currently have plans to purchase 30 locomotives and we will be receiving those all by the end of the year, this year between that addition and the additional infrastructure capacity that we've been putting in place based on our modeling analysis, I think that we have sufficient capacity to accommodate all our current growth plans.

We also have the resource base that's in place now and the hiring only to accomplish supporting attrition. Currently it will basically suffice for what we've seen in the near future.

Michael Upchurch

And Ken this is Mike Upchurch. Just keep in mind the lease buyouts, those are existing financial obligations. They just happen to be off balance sheet. They are operating leases. So bringing those on balance sheet and owning those, we pick up a portion of those cost as CapEx. To me, it's not really any incremental financial commitment that we're making there, but it's just the way it's reported in the cash flow statement.

Ken Hoexter - Banc of America

Wonderful. Thanks Mike. And then secondly, I just want to clarify what your earlier comment was. You talked about a slowing Mexican GDP earlier, and some of the impacts and you kind of highlighted your operating ratio was at the lower end of the target, are you reiterating that 100, 150 or are you suggesting that we're going to see it today go on, I just want to understand if there is going to be catch up coming this fourth quarter, where we'll move back into your target range.

Michael Upchurch

Yes, this is Mike again. You know sitting where we're sitting today and obviously you can't predict what's going to happen with things like fuel prices, but given a couple of the incremental expenses, we saw in the third quarter, particularly the derailment cost, we would expect some improvement going into the fourth quarter and be in that range. So, we are staying with our guidance of 100 to 150 basis points.

Ken Hoexter - Banc of America

All right. Great, thanks for the time.

Operator

Thank you. Our next question is from the line of Jason Seidl with Dahlman Rose. Please state your question.

Jason Seidl - Dahlman Rose & Company

Good morning guys. Thinking about sort of giving back to investors in 2012, could you walk me through sort of the thought process you have, you know, deciding between either share repurchase or a dividend policy, because you guys historically have not had a dividend, you've been thought of more as a growth company which has been borne out your numbers just with your results?

Dave Starling

This is Dave. The first thing that we're going to evaluate is our business requirements for 2012, and we're still a growth company, and as Pat has talked about Lazaro Cardenas and the potential growth there continued growth in also Port Arthur, we will be evaluating that going into 2012 on what assets we might need to continue to grow that business. That's going to be our first priority. Once we know we've got that covered, we're not going to effect the company growth then our first – our second priority would be certainly looking at the dividend. We have not got to the decision tree on a stock buyback. This is really going to be a choice on the dividend going into 2012.

Jason Seidl - Dahlman Rose & Company

Okay. That is great color. And quick question here for Mike. Mike, you mentioned some tax strips in the quarter. Can you give us some more details behind the numbers in terms of the exact dollar amount for the job?

Michael Upchurch

I'm sorry, right at the end, the exact dollar amount…

Jason Seidl - Dahlman Rose & Company

Dollar amount, yes, not sure?

Michael Upchurch

Well, I think we guided to 35% to 37% effective tax rate and for the quarter it came in at 30%, I think that, that may get to you about $6 million in lower tax expense and then that's offset by the $7 million FX loss, and if you tax effect that that's about $5 million. So, I think you get a net $1 million pick up in the quarter between taxes and FX.

Jason Seidl - Dahlman Rose & Company

Yes and on FX you guys said that if the rate stay at current levels you're looking at a similar or slightly greater FX rate in 4Q is I read that right?

Michael Upchurch

No, not necessarily, the Federal Bank of Mexico that's the projection that we use, and it remains to be seen whether we actually will see that materialize at the end of the year. But my guidance around the effective tax rate was 34% for the year.

Jason Seidl - Dahlman Rose & Company

And now I was referring to more of your foreign exchange loss in the quarter, and you said that if the rates stayed at current levels it could be a headwind in 4Q, are we talking of similar headwinds in 3Q?

Michael Upchurch

No, I think we're not going to get into trying to project what that FX rate might be. But my statement was all about the tax rate.

Jason Seidl - Dahlman Rose & Company

Well done guys. Okay, clear enough. Guys, I appreciate the time as always.

Dave Starling

Thank you.

Operator

Thank you. Our next question is from the line of Anthony Gallo with Wells Fargo. Please state your question.

Anthony Gallo - Wells Fargo

Yes, thank you. Congratulations. Mike I enjoyed your comments around accountability for making macro calls, may be more of us should do that. My question is on the bulk shipment opportunities at Lazaro. In the past when you've gone into some of these newer markets you've shared with us what you saw as the economic benefits of rail transportation were. So I'm just curios what do the numbers look like for customers who might choose to use Lazaro Cardenas for bulk shipments versus say some of the eastern rails. Can you just give us a rough idea of the benefits?

Michael Upchurch

It's a little too early to quantify that. We are still in pretty early stage discussions. Terminals not actually going to be up and running until probably the second quarter of next year. But the real – I mean ultimately it's going to have to be price competitive to get from whether it's coming – iron ore coming out of Mexico or coal coming out of the U.S. We've looked at some indicative pricing and rates.

Obviously the rail was only a portion of the move, you've got the vessel from Lazaro to Asia, but we think we can be competitive. But the real factor that's driving this interest is the lack of availability of capacity of the West Coast particularly. We're looking at Colorado coal and Illinois coal that wants to move to Asia that has a very few options because the West Coast has nothing.

Canada, there is a capacity in Canada but it's pretty tight. And when you look at the coal coming from the central part of the United States moving to Asia going to the East Coast you've got a very long vessel voyage. So, the total transit is much longer going off the East Coast granted most of that is on the vessel, but we think the numbers that we're working up and the economics and the contributions so far in our early stage of discussions with potential shippers and customers, they are still interested in talking about that. So, again, a longwinded answer to say, it's kind of too early to know, how to quantify the timing and magnitude of that, but there is very strong interest in going through that analysis.

David Ebbrecht

This is Dave. I might add that the rail tracks are being built into the facility is being set up for a rail to ship transfer. So, we're going to move something into that facility, and perhaps just trying to ensure it's the longest haul we could possibly get over the right gateway.

Anthony Gallo - Wells Fargo

There is a lot of details, and then last question, I thought I heard $8 million in derailment expense, is that correct and what does it normally run each quarter?

Michael Upchurch

Well, we talk about $8 million in casualties, so that is a combination of all of our different events there. The majority of it related to derailment expenses, but it was an unusual quarter for us. You know, you have to appreciate that can bounce around a little bit based on the experience during the quarter. We're just trying to point out it was little bit higher in this quarter than most quarters.

Dave Starling

And unfortunately it was two derailments and just so happened that they were both fully loaded trains, quite a few cars, so the relating damage was much higher than what we generally have in a derailment. So, it was very bad luck and consolidated into a short period of time. So, we don't like to talk about it and we generally are not going to look when we talk around about derailments, but this is something again it was a timing issue for us.

Anthony Gallo - Wells Fargo

Fair enough. Thank you gentlemen.

Operator

Thank you sir. Our next question is coming from the line of Neal Deaton, BB&T Capital Markets. Please state your question?

Neal Deaton - BB&T Capital Market

Hi guys. Congratulations on the strong quarter. Quick question on your utility coal, if I heard you correctly I believe you said that you feel like the outlook in the fourth quarter is fairly strong given where stock markets are some of the utilities that you serve. I guess just question is – is it across the board with utilities in the Southeast or there are just a few that have the lower stockpiles, as I know as a whole across the country, a lot of the stockpiles are still above average? And then the second question with that is of the utilities you serve how many of them have the ability to run natural gas and have already converted over to natural gas?

Pat Ottensmeyer

Neal, this is Pat it's not really across the board, it's probably at two or three of our major utilities where we're seeing little bit of catch up from the second and third quarter, I think that will pretty much all be made up by the end of the fourth quarter. I did mention that we are gaining a new contract in the first quarter beginning in January and their stockpiles are also low.

So, we are actually working to accelerate some of those shipments in the fourth quarter and we expect to move some coal to that plant before the end of the year and the new contract begins. As far as we don't really see a big threat for natural gas conversion at the plant that we serve, these are all really baseload plants and we've done the analysis and we think that the – we've got one customer in utility in Texas that is has some potential issues with the cross-border air pollution rules, but as far as loss of business to conversion of natural gas we don't see that as a real threat to our business for the utility that we serve.

Neal Deaton - BB&T Capital Market

Okay, and are most of those utilities updated with scrubbers and those kind of things and maybe are there going to be an issue it's kind of mirror with…?

Pat Ottensmeyer

As I said, there are couple that are not in Texas.

Neal Deaton - BB&T Capital Market

Okay, doesn’t impact this, okay.

Pat Ottensmeyer

Yes, we don’t see – we think those will get resolved and those plants will be producing at similar rates going forward. But there is political maneuvering with the EPA and some of that is yet to be resolved, but we think it will be a favorable outcome.

Neal Deaton - BB&T Capital Market

Okay, you don't see the volume falling off much there?

Pat Ottensmeyer

No.

Neal Deaton - BB&T Capital Market

And then just second question and I'll done, you know, it sounds like your intermodal performance in the US was pretty solid what's driving that, is it highly conversion [ph] with your IMC partners and is it stronger movements under the Meridian Speedway or what specifically are the drivers of that – of kind of the US only intermodal business?

Pat Ottensmeyer

We're seeing growth in the Meridian Speedway, we're seeing growth not only in the haulage business that we handle with Norfolk Southern but in our own business between Dallas and Atlanta, and then it's also the north bound portion, the US portion of our cross-border growth that you're seeing in our domestic US numbers.

Neal Deaton - BB&T Capital Market

Okay. That is good color. Thanks a lot. Congrats.

Pat Ottensmeyer

Thank you.

Operator

Thank you. Our next question is from Art Hatfield with Morgan Keegan. Please state your question.

Art Hatfield – Morgan Keegan

Thanks. My questions have all been answered. You guys have a good weekend.

Dave Starling

Hey, you too. Same to you.

Operator

Thank you. Our next question is from Tyler Brown of Raymond James. Please state your question.

Tyler Brown - Raymond James

Good morning guys. I was wondering if you could give some details on how the curfews and some congestion down in your track to drive between Beaumont and Robstown. How that's impacting your intermodal service and in fact kind of held you back at all on your cross-border?

David Ebbrecht

Yes, this is Dave Ebbrecht. I think that we did face some issues in the summer as the drought conditions throughout Texas were affecting some of the regions and putting some flow orders on some track that congestion in food for about six weeks period. I think once we got out of the drought period that service levels have restored back to a normal level, and we have not seen any congestion threshold exceeded since that time. So, we're flowing normally for about the past six weeks, and we expect to continue that way in the near future.

Tyler Brown - Raymond James

Okay, great. And then Dave on your fall demand letter you mentioned that you still have a couple of significant projects on the Meridian Speedway. I was kind of under the impression that that line was more fully computerized kind of humming. Can you talk about what those projects specifically are and will you make those investments or will MS help you in that?

Dave Starling

We're at the tail end of the capital investment of the MSLLC. I think we've got approximately $35 million to $40 million left, and these are projects that were already identified jointly by MS and KSC upon what we needed to do to expand. One was the Jackson switch tender with real low fully power and upgrade to cross-over, so we could go through that area at 30 miles an hour, which will help us and the CN. We also have some areas through Jackson yard that will be completed, but this is all still part of the master plan. There is nothing new in there that wasn't already agreed to when the MSLLC was formed. So, we're just in the final stages of (inaudible) and finishing it up.

Tyler Brown - Raymond James

Okay. So about 35 to 40, and then you will be grab it all up.

Dave Starling

That is correct.

Tyler Brown - Raymond James

Okay. Well, I will stick to two questions. Thank you.

Operator

Thank you. We have come to the end of our allotted time for question-and-answer session. I would now like to turn the floor back over Mr. Haverty for closing comments.

Michael Haverty

Okay. I think that everything was pretty well covered and got a lot of good questions, and then I think we'll close the session here, and we'll talk to you in January on the fourth quarter results. Thank you very much.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Kansas City Southern CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts