I'm Mary Jones. I'm the Treasurer at Union Pacific, and on Investor Day, I am part of the team whose job it is to help keep us on track. You know, pardon the railroad pun. Welcome to all of you. Welcome. Is the webcast on? Welcome to those of you who are joining us on the webcast as well. My staff and Bill is in the back of the room, orchestrating the program from the top. We have many Union Pacific team members throughout the room, so if you need something during the day, if there's some way that we can help you with something, please just let one of us know, and we'll do what we can to assist. A few logistical items. First, let's do a quick safety briefing.
We are all here gathered in the room. The exits, obviously, are all in the back of the room, here, here, here. In the unlikely event that we would have to evacuate the room and evacuate the hotel, go about through those doors in the back, and the exits to the outside are directly around the corner, either directly to the left or directly to the right. So it's a quick egress if necessary. If there's some reason why we would have to shelter in place, we will do that in the ballrooms, which are directly across the hall from this conference room that we're in. In the event of an emergency, Mike is gonna call 911 for us. Anybody know CPR in the room? I know we have several.
So just, just to take note, in case of emergency, we'll alert you. There's an AED located out at the front desk. Restrooms, if you haven't already found them, they are out the back and directly to the left. As for the meeting itself, the meeting agenda is in the binders that you should all have. The agenda is behind tab two. We're gonna follow it as closely as we can. We're gonna have time for questions after each of the segments, particularly to focus on the questions around the topics that were covered during the segment, and then we will also have questions. We'll have a more open-ended Q&A session with the senior team at the end of the program.
So if we don't get to your question in the intermediate term, hold that thought, and we'll try and get to it at the end. When we do the questions, we are webcasting, and so we would ask that you raise your hand, wait for a mic to come to you. Let us know your name and your firm, and that way, we can capture the information, capture the question for the web as well. Also in the binder, behind tab 3, you'll find our cautionary information regarding our forward-looking statements. It's also posted on the webcast presentation right at the front. We will be making a few statements about the future today, so please read that information.
Along those lines, we have not yet, as you probably have noticed in the binders, we have not yet included the slides that accompany Rob Knight's presentation. We will provide those slides. There is a place in the binder for them, so, as we get to that last break, we will distribute those slides, and we will post them on the web at that time, and that should be around 4:45 P.M. or so, roughly according to schedule, if you're listening and wanna plan. So that is, I think, it for me. Mike, if I missed anything, we good? Okay.
Then, we are going to kick it off, get everyone's juices flowing with a velocity-filled movie, and then we will turn the stage over to Jack Koraleski, our CEO and, and Chairman, to get the program started. Roll the tape.
All right. That's our recruiting film now. We get all our recruits into a room, we show them that, we measure their heart rates. If it goes up, we move them on in the process, and if not, we give them a really, really nice recommendation to the BNSF. But okay, just kidding. Sorry. Mary said, stick to the script. Hey, good afternoon, everybody. Let me add my welcome to all of you for joining us this afternoon to Union Pacific's Investor Days for 2014.
Title of the video we just saw is Union Pacific Heroes, and we couldn't think of a better way to kind of kick off the meeting and talk about the activities and to highlight the men and women of Union Pacific who are out there day in and day out, making this company do all the things we're needed to. They're dedicated, hardworking, well-prepared to capitalize on the tremendous and growing opportunities that we see ahead for our company. So we thought that was a great beginning. Throughout the afternoon, you're going to be hearing a lot about the opportunities that we have from a whole variety of perspectives. So just to set the stage for you at a very high level, it's all about creating value for our customers and our shareholders by really developing the full potential of the Union Pacific franchise.
It all starts with growing our Total Safety Culture, because safety is job one for us. We want every one of our employees to go home safe every single day after running a reliable railroad. Growing opportunity also means growing our ability to meet future demand by investing in our franchise. So you're going to hear from Lance Fritz, our President and Chief Operating Officer. This investment today is as important as it has ever been for us. We've seen volume levels that are nearing our all-time highs. It's critical that we have the resources and the infrastructure in place so that we can safely serve the growing needs of all of our customers. And as you'll hear today, we're pretty excited about the opportunity. In order to take advantage of the growing opportunity, we'll also need to continue to grow our network capability and our efficiency.
This means effectively aligning all of our critical resources within the context of our business planning process. So Cameron Scott is our Executive Vice President of Operations, and he's going to discuss service excellence and network performance this afternoon, and how we create value for our customers while leveraging that volume that moves across the network. Great service and strong productivity are both critical to growing our value proposition for our customers. So to talk about that today, we've got Eric Butler, our Executive Vice President of Marketing and Sales, and he has his team of business leaders, and they're going to talk to you about how we drive that value proposition, excuse me, across our diverse franchise. We fundamentally believe, you heard us say it before, that we really do have the best franchise in the railroad industry.
So it's up to us to identify the opportunities, to innovate for our customers, to compete effectively, and to bring those opportunities to reality. And finally, last but not least, we'll have our Chief Financial Officer, Rob Knight. He's going to bring it all together in translating our growing opportunity into growing financial results and returns for our shareholders. So our last Investor Day was about two years ago. A lot has certainly happened in the world, since we met with you back then. We continue to see a lot of disruption and uncertainty in the global economy. There's been things like the soft European markets, there's been the whole situation in the Ukraine, war in the Middle East. Even here in the U.S., we went through the showdown of the Fiscal Cliff.
We suffered through the sequestration, even saw the U.S. government shut itself down for 16 days last fall while the Congress wrangled over the whole debt situation. On the energy front, we saw spot natural gas prices get as low as $1.95 back in 2012, to a high point of $6 a little earlier this year, and we've continued to see the evolution of the shale formation and the shale energy potential that we see in front of us. In the agricultural world, we saw the worst Midwestern drought in 25 years back in 2012. That carried over in the first three quarters of 2013.
That's been followed by the harvest in 2013, which was near record-breaking, and 2014, which looks like it's going to be an equally strong year, if not stronger, for us in terms of setting the stage for our agricultural business. Two years ago, almost to the day, our friends in the East, some of you are here today that weren't with us two years ago because you were dealing with the aftermath of Superstorm Sandy. Then, of course, we had the polar vortex earlier this year with its tremendous weather impact in the North, and particularly here in Chicago, where we're gathered this afternoon. Meanwhile, though less visible than all those kind of dramatic events, the U.S. economy has just continued a nice, slow, steady growth, and we feel really good about that.
From a UP perspective, when we met with you two years ago, we were coming off an extended period of flat volumes. In fact, the five-year average annual growth rate at that point was a little more than -1%. Today, we're looking at a year-to-date volume growth of 7% for 2014, and hopefully continued momentum as we look into 2015 and beyond. We've been strengthening the network, adding resources, and doing everything we need to successfully handle that growth. On the regulatory front, there's been a number of issues that we've been focused on. First, on the list of issues are those that the Surface Transportation Board is dealing with today. The STB is reviewing a proposal by the NIT League that would allow a railroad open access to customers on another railroad, and we've been very clear about that.
We think that would absolutely destroy efficiency. It's gonna create operational disruption that's not gonna get better when the snow melts. It'll be there permanently, and it'll make terminal investment unattractive for the host railroads. And so we've been very, very forthright and honest with the STB and our customers as to the possible unintended consequences of moving further down that path. The STB is also looking at a revenue adequacy standard, which was established over 30 years ago as a part of the Staggers Act. Staggers is a great American success story because by deregulating the rail industry, at least partially, it allowed railroads to improve productivity to compete for a fair return in the marketplace. That's enabled what was once a failing industry to grow healthy and strong enough to serve the transportation needs, not only of our customers, but also of our country.
So it's absolutely critical that we continue to be able to earn our adequate returns, particularly on a replacement cost basis. We need to be able to continue to invest to serve the growing needs of our customers and our country. So again, we're working hard to ensure that the Surface Transportation Board and our customers understand that if you cap railroads' ability to earn an adequate return, then you're gonna reduce the much-needed investment by this industry and infrastructure and the ability to grow. Crude oil. Crude oil is another one of those things that's front and center in D.C. right now, and you'll hear that from all of us today, but we want to be very clear that we support the goal of enhancing the safety of transportation for all flammable liquids.
However, some of the changes under consideration today by the Department of Transportation would have far-reaching, unintended negative consequences, not only for the country, but for the railroads, for our shareholders, for our customers, and for our employees. So we've submitted a formal response to the DOT and talked to them about their proposals. We're actively working with our customers to educate them because we're actually on a campaign to get our customers to weigh in with the Department of Transportation as well. We think that's a sound strategy to pursue. Industry consolidation's been a hot topic in recent weeks. From my perspective, it kind of fits indirectly under the whole topic of regulation and regulatory concern. Some of you heard during our third quarter call, as I said, I just don't think that rail mergers make sense at this point in time, especially in this environment.
We believe that the regulatory hurdles for future consolidations are pretty significant. The STB has made it clear that future combinations have to enhance competition, improve operations for the customers, and they will also have to consider triggering effects of additional consolidation. So they'll look down the pike to see what would happen next if they approve that deal. So we think that's a pretty significant challenge, not only at this time, but for future, as you think about consolidations as well. In fact, we believe there's a great deal of work that can be just accomplished by two willing railroads working together. If you really want to get something done, you can roll up your sleeves, and you can do that without regulatory risks or without the complications that would come with mergers.
Lastly, as most of you know, the rail industry has been required to install Positive Train Control by the end of 2015. We've all been moving forward with that. We've been investing billions of dollars to make that happen. We're not dragging our feet in any way, shape, or form, but it's very clear that we are not gonna meet that deadline. So we're working hard to extend that date. I think there's pretty much a general understanding in the capital today that this isn't gonna happen by 2015, so they will change that mandate. And I'm pretty comfortable that we'll be able to get through that as we look into next year and before we come to the deadline. So those are just a few of the issues that are keeping us busy in Washington, D.C., today. So continuing a successful strategy.
Our teams continue to work energetically and creatively to meet the challenges and leverage the opportunities that we see today from a dynamic market environment with a really terrific franchise. The results of our efforts have been pretty encouraging. Over the past two years, our shareholder return has increased 94%. But we also realize that you're here today to get a better understanding as to how we can continue to meet the high expectations that our shareholders have set for us. Fundamentals of our strategy really remain unchanged. We're gonna continue to be agile and innovative as we implement a strategy in this changing marketplace. The top of the list is gonna be to continue our focus on safety first and foremost.
Then we're gonna focus on improving the fluidity of our network so that we can provide customers with the excellent service that they demand, but also that they deserve. Part and parcel of that is being committed to those service levels because that's really what drives the value proposition that enables market-based pricing at reinvestable levels. We're gonna continue to strive for productivity, efficiency, and innovation, and we're gonna continue to invest to strengthen and enhance the network while generating strong financial returns. Taken together, these efforts are gonna enable us to leverage the strengths of our unique and diverse franchise and achieve the benefits of the growing opportunity ahead, not only for our customers, but also for our shareholders. So we're gonna start digging in a little more deeply now. We'll invite Lance to come over and kick us off. Lance?
Thanks, Jack. Thanks, Jack, and good afternoon. A discussion about our future begins with what makes Union Pacific great today. It starts with our mission, being a team that's dedicated to serve. To fulfill that mission, we employ a strategy which starts with safety and focuses on delivering excellent service, high levels of service, increasing efficiency, and growing returns. Healthy financial returns enable us to invest the cash back into our business and perpetuate a safe, efficient, and reliable business. The foundation for our mission and strategy is the Union Pacific franchise. Our strategic assets, including our diverse business mix, our railroad network, and our people, differentiates us from the competition. We use a straightforward operating strategy to build the franchise. The goal is enabling growth while providing excellent service. Growth with excellent service.
On this chart, the objective is to move up and to the right, growing volume with higher levels of service. The chart's both a way to communicate our goal, and it's a proof statement. Each colored dot is the actual average velocity in seven-day car loads for every month from January 1999 until September of this year. Statistically, the data forms three natural groups, each with a best-fit line. We think of these lines as frontiers in the short term that describe how our network service performance looks at varying volumes. Most encouraging is that over the long run, the frontier lines are moving up and to the right. This year, our service performance has not met our expectations for a number of reasons, and you can see that where the 2014 dot, it's nowhere near where it should be.
Even so, I'm confident we're taking all necessary action to recover service and to get back on track. Now, let's go a bit deeper on how we implement this strategy. It all starts with a robust planning process, a company-wide effort that rolls up a comprehensive marketing forecast, analyzes our capabilities and constraints, and aligns our supply with demand. This is not something we do once a year and then put back into a drawer. It's an iterative process that we use continuously to ensure we have the resources to meet tomorrow's demand. Operating and marketing use the process to identify initiatives that improve service, productivity, and grow shareholder returns. Ultimately, the outputs are used to build our transportation, resource, and capital plans, helping us to anticipate and prepare for shifts in demand. Here's a look at plans for two of our five critical resources.
On the left is our hiring trend over the past few years. Hiring depends on a number of factors, including retirements and attrition, the need for surge capacity, an expectation of productivity improvement, and growth. We expect our workforce to grow with volume, but not at the same rate of increase, as volume leverage and operational initiatives generate productivity. This year, we've been short of train crews as growth outstripped our initial expectation, but we adjusted quickly, and we've more than doubled the hiring we originally planned. On the right is our active locomotive fleet for the same period. Fundamental to our plans is maintaining a store of available units for unexpected volume spikes or an extended network disruption. That strategy paid off handsomely in 2014, as we've activated all stored units and maintained a relatively fluid network.
We continue growing our fleet as we're acquiring a total of 261 new locomotives this year, and plan to acquire another 200 or so next year. Looking forward, we'll adjust active unit counts using the same logic we use for crews, including a plan to maintain at least 250 units or so in storage. While I haven't included them on the chart, the same logic and process is used for our freight car assets. With a lead time of 18 months-36 months, capacity investments are not the quickest solution to any constraint. However, we make capacity investments where sustained bottlenecks are evident, if they cannot be resolved in any other way, and if they generate an attractive return. The map shows our anticipated network bottlenecks in the coming five years.
You can see why we've been shifting our investment to our North-South corridor. Capital is going into the southern region for a diverse growth opportunities that include shale-related traffic, intermodal, automotive, and cross-border traffic. This year, we accelerated capital spending in our northern region to support frac sand and growth in grain. Our investments over the next 5 years will continue to be concentrated on the eastern one-third of the network. At the same time, we'll advance other network strategies, like investing to grow grain train length to the Pacific Northwest for intermodal manifest and bulk trains, and double-tracking the Sunset Route, where currently 77% of the 760 mi route is double-tracked. There are a number of smaller projects we'll complete in the next 5 years that unlock a pinch point or generate productivity.
I want to take this opportunity to highlight a major capacity investment we recently announced, which is a new classification yard in Hearne, Texas. This network yard will connect to some of the largest and fastest-growing markets in North America, including cross-border traffic originating from Mexico. The classification yard and associated track infrastructure are projected to cost around $600 million. It'll have an initial capacity to process 2,500 cars on a daily basis. While we're still acquiring property and finalizing design, we expect it to be complete near the end of this planning horizon. As a network yard, it'll classify cars from inbound trains, trim them to outbound trains destined to the north, the east, and the south. The facility is located in the convergence of seven UP main lines, which creates great utility for our manifest network and reduces the risk of the investment.
As our newest terminal, it's designed to handle traffic very efficiently, which enables growth at a lower incremental cost, with an ability to accommodate expansion should the need arise. Given the attention that Chicago has garnered this year and the fact that we are in Chicago, I thought I'd take a minute to explain why Chicago is so complex and so critical to network performance. First, there's the sheer volume of traffic that traverses through Chicago, and it's important to understand. As the nation's largest interchange gateway, it handles a quarter of total rail traffic and almost half of intermodal volumes. With around 13,000 daily interchanges, Chicago is more than two times larger than the nation's next largest gateway. In total, these volumes are transported via 1,300 daily train movements and through almost 80 terminal facilities in the Greater Chicago area.
An additional layer of complexity and importance is added with the presence of six Class I railroads, dozens of industry switching and short line railroads, two terminal companies, Amtrak, and a major commuter line. All of us doing business in Chicago have a vested interest in improving fluidity and throughput here. One of the primary initiatives is a public-private partnership called CREATE, the Chicago Region Environmental and Transportation Efficiencies program. CREATE aims to improve the Chicago gateway by constructing additional main line and connections and by grade separating conflicting routes. After completing 22 projects, the transit time through Chicago has been reduced by an average of about a half a day, or about 25%. An additional 15 projects have funding committed, and another 33 projects are in the planning phase. As you can imagine, building new capacity in Chicago is very difficult and very expensive.
The CREATE partners are dedicated to making it happen, and the projects are making a difference. The industry is taking other steps to improve freight and passenger service through Chicago as well. They include strengthening the joint tactical management of the operating terminal through the Chicago Planning Group and the Chicago Transportation Coordination Office, or CTCO. New systems have recently enabled rail traffic visibility for all participants, enabling automated decision support scorecards and an integrated flow control. Winter action plans have been strengthened, with protocols triggered by objective criteria before congestion impacts transfer and switching operations. Depending upon the severity level, the actions include diverting traffic to other gateways, using alternate terminals, and metering flow into and out of Chicago. All carriers continue to add resources to support traffic to and from Chicago, which is as important as the actions that are taking place in Chicago.
While progress has been made, clearly, Chicago can operate more efficiently and more effectively, and most in the industry are engaged productively to make that happen. A great example of CREATE's benefits is the project we refer to as Project B-2. That nomenclature means it's the second project on the Belt Corridor. It's a $81 million investment that improved the connection between two critical corridors in the Chicago terminal. The project consisted of a new grade separation, or flyover that connected UP's Geneva Subdivision and our Proviso terminal with the Indiana Harbor Belt Railroad, and the construction of 3.5 mi of additional third main line. That creates a better connection to and from all interchange partners and Union Pacific.
The infrastructure also improves the velocity through the area, providing critical capacity on our east-west route into and out of Chicago, and it improves the commute for thousands of metro passengers every day. In summary, everything we discussed this afternoon will drive the frontier of service and volume UP and to the right. That includes investing in the five critical resources to build and sustain the Union Pacific franchise, making changes to our transportation plan to optimize our service and mitigate the impact from interruptions, and leveraging investment with technology and innovation. This includes finding new and better ways of utilizing our resources and being productive with our capital investments. Now I'll turn it over to Cameron Scott to cover more about our Growth with Excellence operating strategy.
Lance talked about moving up and to the right, and this graphic illustrates Growth with Excellence, which describes how we move ourselves up and to the right. Growth with Excellence is foundational to what we're focused on in the operating department. Our mission is to grow the business by improving safety and providing great service to our customers. The only way we can achieve this is by engaging and empowering our 46,000 employees. It takes employees from every department to grow our business and improve service. We use this graphic to communicate Growth with Excellence to all our employees and help them understand how their work impacts the company. Lance talked about investment and resource agility. I'm going to walk through what we're doing to deliver world-class safety, reduce variability, and how innovation is delivering business results. Let's start by taking a closer look at our safety program.
Our safety strategy is based on people, process, and innovation. Ultimately, our safety success is determined by our professionals. We invest in our professionals through coaching, training, and equipping them with the appropriate tools to be successful.... As a result, our professionals are taking ownership through participation in Total Safety Culture and utilizing UP Way tools such as Standard Work, Visual Management, and Root Cause Problem Solving. Innovation is constant in our business. We continually work to improve process, tools, and infrastructure, utilizing analytics and R&M. Additionally, our investment in defect detection and hardening the infrastructure directly improves safety in the work environment. We have confidence that our safety strategy will continue to have positive results and ultimately lead us to an incident-free work environment. These charts illustrate the progress we have made in the last 10 years and also highlights the hard work ahead.
Employee safety is displayed as a personal injury rate per 200,000 employee hours, which is the equivalent of the number of FRA-reported injuries per 100 employees per year. We are at record low rates, reflecting the quality of our employee training programs, the use of standard work, and the relentless pursuit to identify and reduce risk. Rail equipment incidents per million train miles captures derailments, which are at record low, low, low rates. The improvement reflects investment to harden our infrastructure and the elimination of risk through targeted initiatives such as human factor incidents. I expect technology, wayside detection, and standard work to play an increasingly important role as we drive further improvement. We track public safety through grade crossing accidents per million train miles, which are also at historically low levels, although relatively flat for the past few years.
Driver behavior is a big factor in crossing incidents. However, we are focused on reducing incidents through community and business partnership, public safety campaigns, and a focus on high-risk crossings. Maturing our safety culture and executing our safety strategy should drive future record results towards an incident-free environment. Our service products has improved significantly in the last 10 years. However, we have taken a step backwards in 2014. The year started with a historic winter in the upper Midwest, followed by spring and summer rains that caused flooding and washouts. Additionally, volume growth has taxed certain areas of our network and our interchange partners. Fortunately, we're able to leverage our great franchise with alternative routing to relieve congestion. Surge resources allowed us to handle higher volumes and limit impact of a slower network.
Additional capacity cutovers, such as Tower 55, Santa Teresa, the Sunset Double Track, and many others, are improving service to our customers. Our local field management teams are doing an excellent job by processing cars through terminals and getting them to and from customer facilities. Industry Spot and Pull measures how frequently we meet commitment to spot or pull a customer's car. ISMP is at near record levels, despite tightening the standard that we hold ourselves accountable to. Our customers depend on reliable service product that creates value, and we are positioned to improve service with additional resources, targeted investment, and process improvement. This slide puts 2014 network interruptions into perspective. We define interruption days as more than 50 hours of train delay associated with weather or incident events.
The chart in the upper left summarizes January through September interruptions for 2014, 2007, and our average since 2005. 2014 is 56% higher than 2007, and 97% higher than an average. Despite these interruption challenges, our velocity is 2 miles an hour faster than in 2007, which is the last time we experienced similar volume levels for the first nine months of the year. We are attacking these interruptions with additional resources and winter planning that Lance referenced. Additionally, we are hardening the infrastructure to reduce the likelihood of future events. For example, we are reviewing our history of washouts to identify repeat locations and then determine what is needed to prevent them from happening in the future. We're not satisfied with this improvement.
We have a number of ongoing initiatives to move us up and to the right. One example is variability reduction. To reduce variability, we have broken it down into 5 categories: freight cars, locomotives, rail, signal, and track maintenance. We have cross-functional teams working to eliminate car, locomotive, rail, and signal failures by identifying the true root cause of it and eliminating it permanently. This is very challenging work, and the chart on the right side illustrates that the teams are making good progress. Since starting this initiative in 2011, our teams have reduced the event rate by 19%. Here is one such example of work performed by our frontline managers to reduce freight car variability, specifically reducing the number of undesired emergencies, or UDEs, as we call them.
A UDE is an unintended brake application that causes the train to stop, and in some cases, causes or requires the conductor to walk the train to correct the issue. Eliminating UDEs improves velocity because trains are not stopped unnecessarily and reduces risk because employees do not have to walk the train to fix the problem. The freight car team determined that coupler-mounted brackets reduce UDEs. These brackets are installed on cushion cars to stabilize the air hoses as the draft system moves during slowing or accelerating movements. The impact has been significant. We've seen a 70% reduction in UDE events on cars equipped with this bracket. This improves velocity because trains are not stopped unnecessarily and reduces the risk because employees are not walking the train. The end result is a better service product for our customers.
Another way that we improve service for our customers is through innovation and technology. We have shown you wheel profile detectors, ultrasonic wheel imaging, thermal wheel imaging, and many track defect detection technologies in the past. We are also aggressively installing wind monitoring devices across our network to reduce the risk of wind blowovers. Blowovers can be very costly in terms of lading, equipment, track, and network delay. Wind monitors notify us immediately when wind speed reaches certain thresholds, allowing us to take preventive action. We are also piloting the use of mobile devices for work orders. This will allow real-time reporting of pickups and set outs, which will improve customer communication, provide more accurate reporting, and enable better terminal planning to increase productivity. On the right-hand side of the slide are two photos. The top photo is the hardware for an imaging system straddling the track.
The bottom is a sample image that is produced by that imaging system. These high-quality images enable inspections prior to trains arriving in yards. carmen will be able to determine what needs to be repaired before a train enters the yard. This will reduce the queuing of trains waiting for carmen to finish inspections, and the outcome is improved dwell in our receiving yards, car connections, and ultimately, improved customer satisfaction are the end result. Innovation isn't only high-tech gadgets and systems. Process innovation is delivering significant benefits for us. Our terminals are performing at very high level, achieving record cars switched per employee. Every major terminal on system is using a mix of process improvement and investment to drive better results. We design our train plan for efficiency while ensuring we don't overload terminals. As a result, we are prepared to handle additional manifest business for our customers.
Train size is a key initiative for Union Pacific. Increasing train size allows us to take on more business without increasing train starts. This reduces the strain on resources such as crews, locomotives, and mainline slots. Through September, we are on pace to set record train length records for auto, coal, grain, manifest, and rock trains. The chart on the lower left highlights the significant progress we have made. This improvement delivers great productivity for our network. For example, increasing manifest train size by two cars reduces train starts by 2,200 per year. We still have opportunities to increase train size throughout our network. We are utilizing algorithms and optimized train length while considering associated costs, such as work events and resource balancing. Additionally, targeted investments are supporting these train length initiatives.
We are focused on achieving record safety results year-end, driven by a commitment to value safety above all. Effectively managing the network and critical resources will allow us to remain agile and deliver productivity results. Additionally, we are investing our capital wisely to generate a solid return on invested capital, and we will drive service and efficiency by engaging all 46,000 of our employees through the UP Way.
Great! We have time for some questions for our first crew. Let's see. Yeah, we have microphone runners. Do we have a mic down in the front here? Let's Mike, what do you—I'm sorry. Raise your hands again. Let's just start at the bottom here with Mr. Green, and we'll move our way back.
Thanks. Bill Greene, Morgan Stanley. Lance, I wanted to ask you if you can talk a little bit about the lessons learned from what happened at BN, and how railroads in general, as this growth continues, can avoid what's going on there, so we don't end up with huge kinds of CapEx? And then a second question: there have been some debate in the industry about these mileage-based pay agreements for the unions on the, the running trade side. Can you talk about how you think about it? Is that an interesting idea for Union Pacific? Is that something you would be willing to explore, and what are your thoughts? Thanks.
So let's start with the first question, which was, what can we learn from the BNSF? As opposed to talking to their experience, let me talk to our experience, which from my perspective, looks very similar in the 2004 and 2005 time frame on us, as what, from an external perspective, looks like is happening to them. Our learning from that is we have got to have agile resources, and which typically means for us, a store of surge resources in some of our critical—five critical resources, to be able to handle unanticipated spikes in demand, or, as I mentioned, unanticipated disruptions, long-term disruptions in the network. We do that. I mentioned it, and it's critical to bear in mind when we came into this year,
... let's put it at September, October of last year, we had about 800 locomotives in storage, serviceable, and we had about the like number of crews who were either only partly occupied or on furlough. We've consumed all of that in the first four or five months of this year to a point where we have nobody in a, in a alternative work board or, or in a furlough status and no serviceable locomotives in storage. That is what's enabled us, in our belief, to at least manage the kind of volume that we're seeing right now at the level of service we're providing right now. And you saw in Cameron's chart, like year to like year, volume to volume, 2007 to today, we're about 2 mi an hour faster today in handling that kind of volume.
So that was a critical lesson for us. Another critical lesson for us was utilizing that very robust business planning process I mentioned. There is strong connectivity between our operating team and our commercial team and all other functional service providers in the company in terms of routinely and periodically verifying that we've got a handle on what demand looks like and what our resources are up against that demand. That doesn't mean we're perfect. We're imperfect this year. We've been surprised by the level of volume that's on us right now, and we were able to react to that pretty quickly at the beginning of the year. So as we talk right now, we're graduating 300-400 crews a month and beginning to be able to get on top of that, get ahead of the volume.
So that's the lessons we've learned, and that's how we're operating our business, and that's now part of how we operate the business as we move forward. I, I apologize, I forgot your second question.
Pay versus mileage.
Pay versus mileage is trip rates versus hourly. We are, we're very happy with the concept of trip rates. What, what it helps for us is, simplify our relationship with our, with our work teams, and, we, we anticipate trying to continue to simplify and stabilize, from a contractual basis, our work teams. Is that what you're trying to get at?
Yeah, well, yeah. So as you know, there's a big debate about whether that drives tremendous productivity. If you get an agreement that eliminates significant number of work roles, it pays the workers quite a bit more for that flexibility. Does it allow you to do things on an efficiency side that are unthinkable given the kind of construct we have now with mileage caps, so to speak?
Yeah. Clearly, fewer work roles is better. Also, and very important to us, is stability is better. Stability, what I mean by that is having agreements that allow an employee who trains and becomes competent on a job to stay on that job for a period of time, and also gives everybody in a particular pool stability in maintaining a job that, you know, is one that is attractive to them and that they know how to do and they stay on for a while. We view that as being a productivity issue and maybe more paramount, a safety issue.
Okay.
Thanks.
Let's try UP on... We'll do some geographic diversity here and try UP on the-
Good afternoon, everyone. Brandon Oglenski from Barclays. Jack, just hearing Lance say that, you know, we've gone through all the surge capacity this year. With all the service issues that are compounding, another good harvest coming, pretty good demand outlook that I'm sure Eric's gonna highlight soon, are we just... And maybe I'm getting ahead of myself, but are we in a phase here where CapEx has to come up significantly to meet these challenges, to put in that extra surge capacity going forward? Or to some extent, have, you know, are we closer to a peak than maybe we think?
You know what? I don't believe that we are. So if you look at what's happening to us right now, even at volume levels, and we've hit weeks of 198,000, which is kind of right up the top, we're continuing to improve our statistics. And as we improve our statistics, our volume picks up and continues to improve. We're gonna spin out assets. We're gonna go back and restore some locomotives into a surge capacity level, and I think we're gonna get ahead of that. Right now, we need to get those crews that Lance talked about graduated, the locomotives are, that are still coming online. We're gonna be fine with that.
The infrastructure is solid, the capacity of the network is fine, and I think, quite honestly, when we say that we're gonna stay in that 16%-17% of revenue, I think that's gonna keep us ahead of the capacity projects, and it's also going to allow us to keep up with volume as it continues to get above 200, 205 thousand, whatever those numbers get to be. We think that trajectory, as we look out over the five-year planning horizon, those kinds of capital expenditures, without having to go to extraordinary ranges, takes care of us just fine.
Okay. Let's try down here.
Great, thanks. It's Chris Wetherbee from Citi. You talked a little bit about Chicago, and I guess I wanted to get a rough sense. I mean, part of the problem, it seems, with the Chicago interchanges is the amount of volume which you highlighted going through there at this point. Isn't part of the solution pulling volumes out of Chicago? I mean, obviously, there's gonna be capital invested in the area as well, but pulling volumes out of that. I mean, how much business can you realistically pull away from Chicago maybe to go through other interchanges and, and kind of what are the processes of getting that done?
So, Chris, clearly, there are multiple ways that we are working on to improve Chicago. One of those could include alternative gateways or alternative routes. One of the core issues with that is the traffic that's going through Chicago right now naturally wants to go through Chicago, right? It's the most efficient route, the most direct route, where many of the assets that interchange partner carriers have to be able to handle the traffic. Union Pacific, because we've got a beautiful franchise, and that one that surrounds Chicago, we have alternative assets to Chicago, where when we need, we can employ them to be able to interchange traffic or process traffic for our interchange partners.
I think we're working on all the right things to remedy Chicago, and I would emphasize, part of the work is in Chicago, you know, better visibility to the traffic patterns, quicker reaction to changes in those patterns. At the same time, continued investment in CREATE projects to decongest the terminal, and as an individual railroad and all our peer railroads, making sure we have the resources outside Chicago so that traffic fluidly can make its way into and out of the city. I view those, both those items as equally important.
Just one up on the corner mic.
Hey, thanks, John Barnes, RBC Capital Markets. Lance, you just said that you were surprised by the level of volume in the system this year. You know, if you go back and look at your slide about your planning process, is that the input into the planning process where you were most inaccurate, and what have you done to maybe fix that planning process so you know, you kind of work those inaccuracies out of it on a go-forward basis? And I do have a follow-up on the surge capacity.
Sure. So let's address that. I think our commercial team, I know our commercial team does yeoman's work, the best they can in terms of trying to divine what the market's gonna be delivering to them in demand. And as hard as they work at that, you know, every year we're not quite right. This year, we came in, if you remember, the late last year, there was still quite a bit of question on just how healthy was the U.S. economy going to be in light of a global economy that looked really poor. And to generate 7% or 8% volume growth in an environment like that would be really... That's pretty difficult. That's a pretty difficult call to make.
So I think our sales and marketing team continues to learn year-over-year over year, quarter-over-quarter, month-over-month, how to be a little bit better at, at their forecast accuracy. They get a little bit more granular. They're using a little bit better tools, and I think their forecasts are reflecting that. It just so happens that this is a pretty unique environment we're in this year. What's your second question?
Yeah, so the second question on going back to the commentary around surge capacity. You used it all up. You talk about you started the year with 200 units in surge capacity. How do you get back to that level, especially with, you know, the market going to a, you know, kind of a single provider of locomotive capacity for, you know, at least a short period of time? Thank you.
Sure. You know, Jack mentioned this perfectly. It's not necessarily about us acquiring into additional stored surge. We have the ability to generate locomotive assets as our velocity increases, and Cam and his team are doing everything they should be and need to be doing to make that happen. We've been showing slow but incremental improvement through the third quarter, and my expectation is we'll continue that, and at some point, we'll get out ahead of the volume and be able to generate surge resources.
One right here.
Thanks. Allison Landry from Credit Suisse. Jack, you mentioned that regulation is clearly still one of the risks, and in particular, with respect to the revenue adequacy hearings. I was wondering if you think that that's an opportunity for the industry to revisit the idea of replacement costs, and has the industry sort of worked on coming up with a model that the STB could use? I think that that's sort of been one of their issues or pushbacks.
I think that certainly if the Revenue Adequacy hearings, and if they continue to build momentum, that will be our opportunity to lobby very hard for and to demonstrate the need for replacement costs in that equation. We've done some preliminary work. The industry itself hasn't completely coalesced around a final plan as to how we would do that, but that will definitely be our venue as we go down that path.
Yeah, Tom Wadewitz with UBS. So just, I guess we've seen a pattern, I think, Lance, you referred to 2000, you know, the prior period of time when you had some challenges. It seems like a pretty good analogy. That's certainly the way I'm looking at it, and I'm wondering if that plays out, you probably could see outsized volume growth for more than one year. That's kind of what happened to BN last time, that a couple of years of pretty outsized growth. So if that happens with you guys and, you know, you see 6%-8% volume growth next year, can you handle it? And also, do you have... You know, I think last time you put some mechanisms in your contracts to limit certain customers on volume.
Do you have kind of relief mechanisms if, you know, you have another year of, of particularly outsized volumes? Thank you.
So, you know, going back to our business planning process, Eric and team, and Cam and team, and the rest, have been working diligently on trying to figure out what next year is going to hold for us. We think we have a pretty good bead on it, and we're pretty confident, very confident, that we'll be able to handle that at an acceptable service level for our customers. So, I don't believe we're concerned about what volume might be next year, from a planning perspective and a can we handle it perspective. From a, you know, what we do specifically with customers' perspective, of course, we don't comment on any of our agreements or how they're structured. I can tell you that we are very happy with the volume that we're retaining and shipping on our railroad.
... we'd like to be providing a better level of service to those customers, but we are happy with the returns that they represent and being able to handle that volume fluidly.
You know, Tom, if you go back to the 2004 time frame, so you'll recall back then, we had better than 60% of our business tied up in multiyear contracts at that time with very little flexibility. Our model today is about 40% in multiyear, thirty percent in one-year contracts and 30% that are tariff-based. That gives us a lot more flexibility in terms of what we might do in the event that we did see an unexpected surge going forward, that we needed to reduce some volume on the railroad. Gives us a lot more flexibility than what we had back then.
Yes.
Well, that would be a form of flexibility that we didn't have back then.
But, of course, we're not affirming or agreeing with-
Of course, we're not
predicting a volume level of any kind. Let's do Scott, and then we'll go in the back to Ken.
Thanks. Scott Group from Wolfe Research. So, one on train lengths, and then, a follow-up, for you, Jack. So I, I think train lengths has been kind of like the great productivity story for the rails. What inning of that do you think we're in? Is there a lot more to go on, on train length? And you kind of had all the different, train types. Maybe do you have any targets of where that could get to?
Want Cameron to answer that?
Yeah.
Sure. Go ahead.
Okay. So you saw the record performance this year. In the manifests network, we are using some brand-new algorithms and modeling that we have not used in the past, and we think we have significant headroom if we can figure out the right day and the right train to bring growth that Eric's team right on top of our current train network without adding additional train starts. The same exists in intermodal, the same exists in our auto network. Grain is a little market customer driven, and coal, we think we're pretty well maximized, although there's still opportunity there. So there's some, there's some very nice headroom for us on train size.
The other thing we've done, Scott, is we've been a little more aggressive in terms of launching some new service products, and when we launch the new service products, they don't necessarily have the kind of volume levels per train length because we're counting on Eric and the team to fill it out and build it over time. So our position on that is, if we think the market's there, the demand is there, we think we can build it into it, we're gonna go ahead and launch the product because part of the proof for a customer, a prospective customer, is the reliability and the consistency of the service. So we're gonna go ahead and launch that. That would have the tendency to lower your train sizes.
We saw some of that in our intermodal offerings that we ramped up in the last year or so, but it still gives us great opportunity to grow the network.
Thanks. And then, Jack, just a follow-up for you on your comments about M&A. So you said it's not the right time, and then you also said there's other things we can do with the rails. So not the right time, is that based on conversations with the regulator, or is that kind of just conjecture on your part? And then in terms of other things we can do, are you sensing a change in the discussions with the other rails, where there may be something coming that is transformational, that's not a merger that could create, can solve some of these issues?
It's not based on any discussions I've had with another railroad. It's based on our interpretation of how the STB changed the merger rules that now require... In the prior set of rules, it used to be that you had to be able to maintain competition. Now the rule says you have to be able to improve competition. And then the whole idea of considering what would be the triggering events for a downstream consolidation. So we're not exactly sure what that says, but it wouldn't take very much to say, if these two companies got together and all the next step is these two companies, the next step, the next step, and how you would bring that into some sort of a rational perspective from a regulatory perspective is all up in the clouds at this point in time.
I think there's huge risk associated with that, and I don't think that it's risk that we need to take.
Partnerships.
Well, certainly partnerships in terms of how two carriers might want to work together in order to accomplish other things. You know, you look back to the CN-BNSF kind of announcement that took place years ago, what happened was, Union Pacific and CSX, we used the same modeling. We changed the routing of our protocols. We improved service for customers. We did it on a working together for interline business basis. We did the same thing with the Norfolk Southern. We did the same thing with the CN. It's just two railroads looking at what's the most efficient and effective way to provide customers with the best service, and you don't really need to merge in order to have that happen.
Okay. I see Jeff got the microphone, so we'll let ...
Had to tackle someone for it.
Then we'll do Ken.
Hi, Jeff Kauffman from Buckingham. Jack, Lance, with the Republican victory yesterday, and you're gonna have a change in the committee heads in the Senate, you spent a lot of time talking about the political regulatory landscape. What do you think the Senate victory for the Republicans could change, and what do you think it won't change?
You know, there's a lot of speculation that's taking place.
... It's been very difficult to have a bill debated on the Senate floor. Hopefully, you know, there's been a lot of discussion about the fact that they're gonna go back to the debate. That'll be good. If Senator Thune takes over the Commerce Committee, Senator Thune introduced the bill to extend Positive Train Control, that would certainly be a plus for us if it, if it now got some traction and started to move, given that the deadline's at the end of 2015. You know, it's, it's just basically, we're gonna have to wait and see what happens in terms of the level of cooperation and the ability to reach across the aisle, and for people to actually start moving some debate and getting some decisions made for us.
We think that right now, it looks about as good as it's looked for the past several years.
Martin, let's go to Ken down here for one more question, and then we'll-
-made for us. We think that right now, it looks about as good as it's looked for the past several years.
Martin, let's go to Ken down here for one more question, and then we'll take a break. But hold your, hold your thought. We'll get to you down the line. All right. Ken is, I keep promising him, and I gotta give it to him.
Thank you, Mary. Good morning, and it's nice to be here without the big snowstorm of last time. Can you talk just to follow on Scott's question on the train lengths? Is—you talked about expanding them. Are we at a network capacity issue on the sidings that is stopping the growth of some of these record levels from increasing? And then my question follows on the same thing on capacity of the network. You've talked a lot about 190-200,000 cars per week. You mentioned some weeks you're running at 197.
So as you think about the next year, if you do get this 7% growth continuing and you get this strength maintaining itself, another record crop, crude comes back, some of these other things flowing, what is-- is that a capacity of the network that stops you from growing? Or what can you do to enhance the capacity in the interim? And then does that mean you have to, to the CapEx question before, do you have to go back in and enhance-
Sure.
the capital budget to meet that?
So what I was trying to communicate with the frontier of best fit lines is that, our network, with all the activity that Cameron and I talked about, variability reduction, making sure we have the right resources at the right place, targeted innovation and, technology investment, capital investment, the UP Way, all of that activity is built to move that frontier out and up. And so when we've talked historically about 195,000 or 200,000 seven-day car loads, that was a construct that, at the time, I think it might have been in the 2004, 2005, 2006 time frame, fit our network at that moment in time.
If you look at our network today, through all of those activities and billions in investment, we're a network that can handle that kind of carload at a much better service level. So as we look forward, as opposed to putting a stake in the ground and saying, "We're a 210,000 7-day carload company," we look at how rapidly can we be pushing that frontier out. In the short term, we tend to run on it. In the long term, our job is to keep moving it out so we can grow and grow with very good levels of service. That's what gives the commercial team the opportunity to get value for the service that we're providing. And Cam, you want to talk about train length?
Manifest at 91 is an all-time record for Union Pacific.
Basically, that's a 6,500-foot train. Our system is being built and designed for 8,000-9,000 ft. Now, that's not true in every single corridor, but it certainly is true in the vast majority of our network. So there's plenty of headroom in the manifest network to achieve train size productivity.
We would tell you, we do not think there's, as Jack had mentioned already, that there's some kind of significant incrementing capital that we're facing in order to keep moving the network in the right direction. Jack had mentioned the 16%-17% that Rob has guided to, and I think that, you know, that is our guidance.
If I could just make one other comment on the train length, Ken. You know, it's a working product, an evergreen effort between the commercial team, the operating team, and our customers. I mean, sometimes, to your point, you know, what keeps you from being able to expand a train? Sometimes it's the market, it's the service that's being put in the market, as Jack talked about. Sometimes it's our siding, as Cam and Lance have discussed, and sometimes it's the customer's siding or the customer's ability to unload. I mean, those are all factors that play a role in how long that train will be, and all of those are kind of on the table, if you will, in terms of us looking for operating efficiencies.
Just to clarify, Cam, you only mentioned the merchandise. Are the other ones still less than that, or is the intermodal or coal or grain still less than the 8,000-9,000 at the sidings, or are any of them bumping up against that physical limitation?
Coal, as Rob just mentioned, coal, we think, is optimized. There are opportunities to go towards 150 cars per train in coal, but that is really customer driven. Do they have the facilities necessary, and can they take it? Grain, again, is some market driven, some is customer driven. The good news is that if customers and the marketplace want larger coal trains and grain trains, we're ready to do it.
Do we still have one more question down here in the front? Then we'll go to a break, and then we'll come back with the next, for the next group.
Thank you. Herb Lowenthal from Hartline Investment Corp in Chicago, as investors in your company and for many years, I would like to just ask, with you based in Omaha, Nebraska, why is it that Warren Buffett decided to invest in Burlington Northern Santa Fe instead of your company?
That's my question.
I'll take a shot at that, Jack.
I think he thought it was a better buy.
Yeah. I mean, it's, as many of you in the room, perhaps not you, who have heard me say when that all happened, I was the happiest guy in Omaha, by the way, when that happened. And I say that because I think what it represented was, one, recognized that rails were a good investment. He looked at Western railroads. He took one of the other two Western railroads sort of out of play, if you will. So if, as the whole world paid more attention to, the-- what was happening in this rail industry, which has been a very successful run since then, what's happening in this rail industry, and you look further at the Western rails, had great opportunities, which we think our franchise is second to none.
It kind of brought a great deal of attention from around the world in terms of investors looking at what's going on with this rail story and what's going on in the West, of which I think we have proven that it's a very strong benefit. But you'd have to ask him in terms of why he made that investment. But I will tell you, as a CFO, I was the happiest guy in Omaha when that happened.
I think all the UP employees and shareholders-
Yeah.
second that motion.
Yes, I'm sure you all do.
On that note, let's take a break, come back at 2:15 P.M. The web will play a little soothing music in between, but we'll be back.
I'm too busy answering questions and I'm not paying attention to my job here. We need everyone to take their seats so we can let the next teams have the, have the floor. Whose is this?
That's wh
at I'm using. Oh, okay. To get my notes. Okay. Is it, is it you? It's you. I introduce Eric Butler, our EVP of Marketing and Sales.
Thank you. As everybody's coming back from the break, again, I want to welcome and thank you for joining us today. I'm excited this afternoon to take the opportunity to give an update on our business and talk about our outlook and the planning horizon, and how each of our businesses contribute to our growing opportunity at Union Pacific. With me today are the six general managers of each of our separate business divisions, business groups. I'm gonna start off spending a few minutes giving you a broad overview of where we think our growth is coming from, and then they're gonna come behind me and dive into all of the specific markets. Anybody who's been around Union Pacific for a number of years has heard the story about our franchise that enables us to own and serve the business that we have today.
What's more important to us today is how our franchise will enable us to grow tomorrow. Our franchise gives us broad geographic coverage that allows us to participate in a wide variety of markets, and puts us in a great position to compete in the markets of tomorrow. Our terminal franchise is unmatched in the industry, we believe, and we have unparalleled coverage of ports in the Gulf and West Coast, opening us up to world markets. And our broad interchange coverage, which includes the industry's best access to Mexico, allows our customers to connect to virtually any market in North America. The strength of our franchise allows us to penetrate and grow diverse markets today and in the future.... One of our foundational strategies is to continue to strengthen and expand our franchise through new commercial facilities and industrial development projects.
This map is highlighting the regions where we have significant projects underway to enhance our franchise. Whether it's to do transload facilities, expanding origin grain locations, new intermodal facilities like Santa Teresa, or working with the ports we serve to handle demand in world markets, our team is always looking for ways to make our franchise even stronger. We have a great industrial development team that helps coordinate this effort with our customers and the communities we operate in. At any given time, we have hundreds of active projects across our network, and each year, we turn over to operations more than 300 expansion projects. A robust focus on strengthening the franchise is essential to growing our business in the future. One of the foundations for growth will be the increasing population in this country.
The Census Bureau estimates that almost 40 million more people will live in our country 15 years from now, and we think UP's territory is better positioned to serve more of that growing population. As you can see in the map, five of the top 10 growth states last year were in the territory that we serve. The population growth in those states alone was 1 million people, which is more than 40% of the total for the entire country. If you look at all 23 states UP serves, you'll find 60% of the total population growth occurred in those states. One DOT study estimated that each person in this country creates demand for 40 tons of freight to be moved each year.
This freight could be the cars that they drive, energy for electricity, food to feed more people, materials to build homes or goods to stock them. This growing population will be a foundational contributor to our growing opportunity in the future. In addition, there are a number of areas across the economy that have yet to fully recover from the 2008 recession. After a slow start in 2014, the economy does seem to be picking up as we head into 2015 and beyond. GDP and industrial production growth has been strengthening throughout the year, and the outlook for the next few years is solid. Housing starts are right at the 1 million mark, which is still way off from where we were pre-recession.
We think there will be steady growth in housing over the next few years, which contributes not only to our lumber and construction product shipments, but also for a variety of other markets, like base chemicals for paint, nylons for carpet, and furniture and appliances to stock the finished homes. Light vehicle sales have largely recovered, and as you will hear a little later, the market fundamentals there remain strong. It also looks like improvements to the unemployment rate may have good traction, and as you would expect, consumer sentiment is rebounding. This is really good news when you think about how much consumer demand impacts our economy. So from a domestic U.S. perspective, a fundamentally strengthening economy paired with a growing population gives Union Pacific a solid foundation for growth.
In the international markets, there are some uncertainties that we are keeping a close eye on. Political unrest in places like Eastern Ukraine and the Middle East could have a broader impact on the global economy, particularly if conflicts escalate. We're also concerned that the perceptions of the threat and risk of Ebola could have a negative impact on consumer confidence in this country. Economies in Asia, South America, and the EU are showing signs of slowing. Additionally, the emergence of the large ocean carrier alliances creates both some challenges, but we believe also some opportunities for us that we'll talk about a little later. There are a number of bright spots on the global front. In addition to positive macroeconomic signals in the U.S. economy, the economies of some developing countries around the world, like even in Central Africa, are strengthening.
On a more broad basis, world population growth and an expanding middle class in developing countries is driving demand for better food, which leads to seed grain export demand. Also, Mexico's energy reform and Brazil's new ethanol mandate create opportunities for UP as well. So while we're cautiously watching a number of fronts, we feel good about the long-term prospects presented by global markets. Turning back to the US, everyone knows that the emergence of the shale energy market has been a great news story, not just for UP, but for the entire country. By one estimate, shale energy could add nearly $700 billion a year to the GDP by 2020, and add 1.7 million jobs to the economy. At UP, we see the benefit in a number of our businesses.
We have three primary markets directly related to shale energy: frac sand, pipe, and crude by rail, and you'll hear more about each of these in detail as we present this afternoon. Frac sand has been one of the key drivers of our growth this year, and our franchise is very well positioned to serve this market going forward. As for pipe, volume has been relatively flat this year, but we're optimistic for the future as new manufacturing comes online in the U.S. and demand for transmission pipe increases. On the other hand, crude by rail volume has been a headwind for us this year, and our outlook is uncertain.
Oil prices have been one driver of the volume decline, though we think the natural transportation flow will not present a large crude by rail growth opportunity for UP. The great news about shale is that it has so many other positive benefits for Union Pacific. The expansion in natural gas production is driving new investments in plastics and fertilizer, manufacturing, something this country has not seen for decades. Also, each new well requires construction products, not just to build the well itself, but to support the roads leading to them. From a broader economic perspective, energy independence, job creation, and onshore manufacturing are all positives for UP. It means the growing population I mentioned earlier has even better prospects for jobs, which leads to more homes being built, more cars being sold, and so on.
Our focus on shale markets is to strengthen our franchise, so we're able to participate when there is demand for the products to move. Of course, if oil prices continue to soften for an extended period of time, it could create a headwind for that—for us. But with that said, and despite the fact that crude by rail is uncertain, we are well-positioned to benefit from shale energy demand going forward. As I mentioned a moment ago, energy reform in Mexico creates another potential growing opportunity for UP. The Mexican government passed constitutional reform in late 2013 that has the potential to transform the energy sector in Mexico. The reform will allow competition and private capital in a sector that was exclusive to the Mexican government for over 70 years. We think this reform will create opportunity for us in a number of areas.
In the near term, we should see demand from pipeline construction. The pipeline infrastructure in Mexico for both oil and gas is already constrained by existing production. Significant pipeline expansions are underway and being planned, some of which that are already underway to support the demand for natural gas imports from the U.S. As the energy reforms drive increased production of oil and gas, we should also benefit from increased demand for many of the same drilling materials we're transporting in the U.S. today. From a broad economic perspective, the reform should help moderate or reduce electricity prices to Mexico's growing industrial sector. Right now, electricity prices in Mexico are about 70% higher than those in the U.S. The reform could ensure that the level of foreign direct investment we're seeing today in Mexico and the resulting manufacturing expansion will continue.
All of this is good news for UP because the strength of our franchise and access to Mexico puts us in a good position to benefit from the demand. The last growth opportunity I'm gonna touch on is highway conversions. There are a lot of estimates out there for how many potential loads could be converted. Some estimates have even been in excess of five million loads. Regardless of the number, the point is the opportunity is huge, and we think it's an opportunity for all of our business groups. Traditionally, when you hear a railroad talking about highway conversions, you usually think about dry van intermodal. That is certainly true for Union Pacific, and we have the best intermodal network to support growth from the highways, which you'll hear about here in a few minutes.
We've invested in new facilities and put new products in the marketplace over the last few years to support our growth strategy in intermodal, and we will continue to invest in the business going forward. But the beauty of the UP franchise is that it gives us opportunities to convert freight off the highways in almost every market, using all types of equipment. When you include our network extension initiatives and subsidiaries like Union Pacific Distribution Services, Streamline, and Ship Cars Now, we have the products and capabilities in place to offer rail transportation as an alternative to almost anything moving long haul over the road. This year, we started to see signs of the tight truck market that everyone's been anticipating. We think that is a long-term trend, and when you add in growing highway congestion, highway conversions offer us a tremendous opportunity across all of our business groups.
So to wrap it up, the growing population and strengthening economy in the U.S. provide us a great foundation for growth. Add in opportunities in diverse markets across the globe, emerging and expanding markets here in the U.S., and the growing potential for highway conversions across our business, and the future looks extremely bright for Union Pacific. As Jack said, we have a number of regulatory issues in front of us. Any new regulation that impacts our ability to provide excellent service or invest in our franchise would impact our value proposition and could have negative consequences for all of our businesses. But with that aside, our franchise provides us a growing opportunity in diverse markets, and our value proposition enables us to convert those opportunities into new business.
Going forward, our team is focused on developing new business and pricing effectively for the value we provide to the marketplace. With that, we'll kick off the business team pre-presentations, and we'll focus first on our premium businesses. I'd like to welcome Linda Brandl, Vice President and General Manager of our Automotive business.
Thank you, Eric, and good afternoon. Our Automotive business has achieved $1.6 billion in revenue through the first three quarters of 2014. We have an outstanding premium network that enables us to continue to provide value for customers across all of our key corridors, including the Central, the Sunset, and the North-South. Our franchise is home to over 40 distribution facilities, which is more than our primary Western competitor. As Eric noted, we serve many of the fastest-growing states, and we directly serve five assembly plants. Union Pacific is also the only railroad to serve all six Mexican gateways, allowing us unmatched access to the growing NAFTA automotive markets. Our volume mix consists of both finished vehicles and auto parts in an approximate 55-45 split, and our auto parts segment includes both carload and intermodal units.
U.S. light vehicle sales is one of the key economic indicators for UP automotive shipments. On the chart to the left, you can see the Global Insight, history, and predictions for millions of light vehicles sold in the United States. In 2006, 16.5 million vehicles were sold. Fast-forwarding to 2014, the industry is just under that level, with a projected SAAR of 16.4 million this year, an increase of 6% versus 2013. You can see on the yellow predicted bars that the cyclical growth pattern we've seen over the last several years as vehicle sales recovered from the economic downturn, is beginning to taper, landing at a solid demand level of around 17 million vehicles annually.
In the chart on the right, you can see that the median age of a U.S. vehicle has converged for both light trucks and cars at just under 11.5 years, generating continuing replacement demand for a new vehicle. So while the projected SAAR growth trajectory flattens, the fundamentals for replacement demand, coupled with available credit, customer interest in new models, and population growth, support a healthy outlook for new vehicle sales. Global production trends are important as well, as automotive truly is a global industry. It's anticipated that there will be just under 88 million vehicles produced somewhere in the world this year. There are six global production regions represented on this map, along with global insight''s prediction of their relative adjustment in size over the next seven years.
These six regions represent over 80% of world production, and all of these production areas impact Union Pacific in some way or another. A desire to build closer to demand is creating a change in production patterns from Asia and Europe to North America. China continues to be a huge and growing production market, and as expected, we are still seeing much of the Chinese production consumed locally. We do believe that Chinese-built vehicles will enter the U.S. market at some point in the future, and we will be prepared to offer transportation solutions when that happens. Japan is expected to reduce production, and Mexico and the U.S. are expected to grow. Union Pacific's automotive business includes shipments of vehicles and parts in the U.S. as well as internationally.
Last year, more than 60% of UP automotive shipments crossed an international border, a large portion of which moved to and from Mexico. Traditional production regions such as the Midwest and Canada are collectively predicted to continue their sizable output over the next five years, while plants in the Southeast U.S. and Mexico will drive future North American production growth. UP is a very strong competitor in the movement of both vehicles and parts in the entire NAFTA corridor, and we will continue to provide our customers with a strong value proposition as production shifts and increases in key areas. In 2013, Mexico produced 2.9 million vehicles. That number is expected to increase to 4.7 million vehicles by 2019.
Announced foreign direct investment in Mexico over the past three years has been significant from an automotive perspective, with announced investments from automotive manufacturers and tier part suppliers totaling over $12 billion. Some of the new plants that have been recently added, expanded, or have been announced by the manufacturers, are depicted with the stars on the map. In addition to the new plant opened in Aguascalientes, Nissan, in conjunction with Daimler, is building its third plant at that same location. Mazda has built in Salamanca, Honda in Celaya, Volkswagen in Silao, Audi is building just outside of Puebla, and Kia recently announced its plans to build a new plant near Monterrey. New part suppliers are locating close to Mexico manufacturing plants.
In addition to supplying local production in Mexico, many of these represent a greater box car and intermodal opportunity to support auto plants that now may be sourcing parts out of Mexico for their plants in the United States. A main driver for all of this investment is regionalization. The manufacturers want to be closer to the market where their products are selling, and about two-thirds of the vehicles produced in Mexico are destined for the U.S. or Canada. Within this global supply chain, UP's North, South, and East-West service franchise provides integral connections to these key markets. Union Pacific offers manufacturers and their tier suppliers the value of the best premium automotive network in North America, with broad-based coverage that can get their product to market efficiently.
While we have strong relationships and an ownership stake in the Ferromex, we do connect with both Mexican carriers, the FXE, primarily in El Paso, Eagle Pass, and Nogales, and the KCSM, primarily in Laredo. Regardless of which Mexican carrier is selected by an assembly plant or tier supplier, a customer can connect their products to Union Pacific's wide network of distribution facilities and interchange locations to reach Western, Eastern, and Canadian markets. On the vehicle side, the geographic locations of our destination facilities provide advantages to our customers in terms of haul away to their delivery markets. Our routes and density create an efficient flow of vehicles across our network and premium automotive trains.
In addition, our significant investment in multi-levels, which is the largest fleet in the industry, gives us the unique advantage of being able to source empty equipment toward Mexico, assembly plants from our destination markets. All of these are key to a seamless delivery network. On the auto parts side, our premium north-south, intermodal and box car service has been connecting parts suppliers to Mexico and US production plants for years, providing a proven, consistent, and valued service for our customers that extends well beyond traditional rail line haul service. We know that crossing the Mexican border can come with customs and border challenges. Our national automotive sales team, our premium auto and Mexico operations personnel, and our dedicated international customer service center in Laredo, work together to provide our customers with the expertise and business relationships that make Union Pacific connections seamless....
Mexico is and will continue to be an important part of the Union Pacific automotive franchise, and we look forward to continued production growth in that region. The strength of Union Pacific's automotive franchise supports our ability to participate in the entire life cycle of a vehicle as we move up the supply chain. As most of you know, we are heavily penetrated in the shipment of finished vehicles. In this realm, a commitment to service, along with fostering an environment of continuous improvement and innovation, is critical. We are less penetrated on either side of new vehicle production. However, we're able to use our position and knowledge in the industry to support innovative service offerings and truck conversion opportunities with both existing and non-traditional rail customers.
On the production parts side, we have reasonable penetration in the North-South corridor to and from Mexico and have additional opportunity as truck capacity tightens. On the other end of the cycle, we see opportunity in the used car market. Ship Cars Now is targeting volume in the wholesale market segments that require transportation greater than 500 mi. This marketplace is dynamic and is impacted by lease returns, recalls, and vertical integration on the wholesale side. Even aftermarket parts transportation represents a supply chain opportunity for us as customers repair their aging vehicles. UP's wholly owned subsidiaries, Union Pacific Distribution Services, Insight Network Logistics, and Ship Cars Now, are all an important part of our ability to move up the supply chain, attract new customers, and add further value to our existing customers. So to wrap it up, U.S.
Light vehicle sales are projected to remain at high levels over the next five years on a moderating growth pattern. Global production shifts from North America, from Asia and Europe, coupled with tightening U.S. truck capacity, means that now more than ever, auto manufacturers will rely on the North American rail network for the transportation of vehicles and parts. In a highly competitive automotive transportation environment, Union Pacific is in a great position to serve markets and capture opportunities with our industry-leading automotive franchise, equipment, facilities, and market access. We see opportunities throughout the automotive life cycle, and we are promoting innovative approaches to effectively serving our customers. Thank you. And with that, I'll turn it over to John Kaiser, who will discuss our intermodal business.
Thank you, Linda. Well, I appreciate having the opportunity to be here and talk with you today about our intermodal business, which has achieved $3.4 billion in revenue through the first nine months of this year. Intermodal utilizes just over half of the route miles of the Union Pacific, and we and we route the freight between 32 UP-owned or operated intermodal terminals, as well as customer-operated on-dock rail facilities. We classify 52% of our volume as international shipments, which we define as moving in an ocean carrier's own marine container, and the balance of the freight is domestic, which will move in a 53-foot container or a variety of size of trailers, regardless of where it originates from a freight perspective. Now, more than any other commodity that moves on the railroad, intermodal is service dependent.
The bar chart shows us and summarizes the various service requirements of our different business segments, which we think of in terms of reliable average transit miles a day. So, for example, the international business requires a 400 mi-per-day average transit, while the domestic truckload business could require up to 600 mi a day in order to be competitive with a single driver truck. Now, I'd like to give you a quick overview of the key drivers of our international business, and as most people are aware, global trade growth drives the volume growth of this business as the U.S. continues to be an attractive market for both import and export markets for companies around the world. Now, I think everyone is also aware of the significant changes that have been occurring in the ocean carrier industry following the recent global recession.
One of the most significant is the dramatic growth in the size of the ocean vessels, and nearly half of all planned new capacity additions in the industry are now at least 13,000 TEUs, which is an industry term for 20-foot equivalent units in size. To give you an idea of just how large each one of these vessels are, we've shown you on the chart that each one is as long as the Empire State Building is tall. These are very large vessels. Now, efficient handling of these vessels has significant implications for the port infrastructure, and we believe that the West Coast ports that we serve are the best position to handle that. I'm gonna talk about that quite a bit in a couple of slides.
Now, as the vessels have gotten larger, carriers also often need to put more intermodal freight on those vessels in order to achieve the high slot utilization that are required to get the cost efficiency of the vessels. Now, the superior reach of our rail network from each West Coast port, compared to that of our competitors, allows us to offer the broadest range of inland intermodal services and positions us well to assist our customers to best fill these vessels going forward. Now, Asian importers continue to enjoy multiple options to move their volume into the U.S., which we provide an overview of on this chart.
The water transit times on the map are all via Shanghai, and as you can see, imports from Asia to the Northeast enjoy an 11- to 15-day transit advantage by using the water and going to the Los Angeles versus using an all-water route through either the Panama or the Suez Canal to go to reach New York. Now, we've talked several times in the past about the potential impact to our business of ocean carrier services that could use an all-water route compared to using the West Coast port to and our rail intermodal services. And our perspective on this hasn't changed, and we continue to believe that that we've been validated, really, in the fact that the Suez Canal is now handling over 50% of all Asia-produced import freight transiting to the East Coast of the U.S. as of earlier this year.
Ocean carriers are not waiting for the expanded Panama Canal to open in order to achieve the lower unit costs offered by their large new vessels and are taking them through the Suez Canal now... Even more troublesome for the Panama Canal is that vessels over 12,000 TEUs in size will not fit through the new expanded set of locks in Panama, even once they're complete, presumably in 2016. In the meantime, East Coast market share of Asian imports has remained stable at approximately 30% of all Asian import volume over the past five years, prior to what we think is a temporary diversion of freight this year due to the ILWU labor negotiations.
We continue to believe that approximately a third of the total share of Asian imports will move to the East Coast via an all-water route in the future, and so we estimate up to three points of additional import share shift to the East Coast could occur over time. Regardless, we expect any impact to be small relative to the overall market growth opportunity we see for this business. Now, in addition, Canadian ports continue to target US-bound freight from Asia, primarily for markets in Chicago and the Upper Midwest. Note that our inland markets to Texas, the Farm Belt, and the Southwest are not meaningfully impacted by either of these competitive options, and our best defense in all cases continues to be to provide consistent and reliable service.
Now, I'm going to give you a little more detail from our perspective on the current port infrastructure and how the new vessel-sharing alliances, or VSAs, are deploying their larger vessels. Our international customer base really consists of 18 primary customers. The industry's been faced with severe profitability challenges since the recent global recession, and now 16 of those 18 have formed into the four vessel-sharing alliances you see on the chart. Most of the expected cost efficiencies that these alliances are expected to drive are the result of deploying as large a vessel as possible in the carrier-shared trade lanes. A very rough rule of thumb that we've seen is that the daily operating cost per TEU of a vessel improves by approximately 2% for every 1,000 TEUs of additional vessel design capacity, and that's due to the economies of scale.
Now, however, only a small number of ports currently have all the required terminal infrastructure necessary to handle a new or super post-Panamax vessel, and that's industry terminology for a vessel of over 13,000 TEUs in size. So these necessary port terminal infrastructure requirements include the right water channel depth, air draft clearance, berth length, and the super post-Panamax cranes, to name a few, that most East Coast and no Gulf Coast ports currently have in place. This obviously has a significant impact on where the new 13,000 TEU vessels, which represent 44% of the industry's order book, will be deployed and in order for these alliances to achieve their expected savings.
Note that efficient handling of a single vessel requires at least six Super Post-Panamax cranes per berth, and that the berths and cranes currently in place at most ports are not able to efficiently work these large vessels. So if you look at the chart, you know, the L.A., Long Beach, and Pacific Northwest ports that we serve are well-positioned to handle the new large vessels, and the ocean carriers are once again not waiting for the infrastructure to be put in place before placing these new vessels in service. As shown on the chart, there's currently no vessels over 9,600 TEUs that are scheduled to call at any East Coast or Gulf Coast port, while every single West Coast port handles at least 10,000 TEUs, and of course, L.A., Long Beach is at 13,000 with the COSCO call.
Now, thus, the VSAs that are using the 13,000 TEU vessel in LA and Long Beach are achieving an estimated 8% per TEU per day cost savings by going to LA compared to using a VSA vessel going to one of the East Coast ports. These are significant savings in an industry that's very challenged for cost savings and are resulting in some significant volume shifts in between these different ports as these vessels are being deployed.
While developments within the current ocean carrier alliances remain dynamic, we believe that the significant cost savings available to the industry from deploying these Super Post-Panamax vessels is very likely to favor the use of West Coast ports for many of the new vessels through much, if not all, of our current planning period, and we believe that we're well positioned to handle the resulting volume growth. Now I'd like to shift gears a bit and talk a bit about our domestic business. Similar to our international business, our domestic business offers the largest intermodal network in the industry. The focus of this segment is on converting highway freight to the railroad, and the domestic business is experiencing record demand as a result of tightening truck capacity.
We continue to add new train capacity in this business, which is focused on providing single driver truck competitive service, and I'll review a couple of our recent additions in an upcoming slide. Additionally, we feel we're particularly well positioned to serve the growing Mexico market, which I'm also going to cover in a slide. We'd like to share with you here that the extent and reach of our rail franchise, which results in a network that really does allow Union Pacific to provide the most connections between markets between the western United States, as well as connections to most of the major markets within North America. Our broader service network is the result of our ability to combine our extensive north-south service infrastructure with our long-haul east-west routes to directly connect a large number of overall markets.
The bottom line, we offer customers nearly twice as many intermodal service lanes as our primary western competitor. We share some examples on this chart, as we offer regular daily domestic service to 18 markets from Los Angeles, compared to half as many offered by our competition. And similarly, we serve 15 compared to eight markets from Northern California and 16 versus 11 from Chicago, and it's the same for other markets. Overall, customers simply have more domestic options when they choose to use Union Pacific. Now, a very important element of our ongoing ability to profitably capture highway freight is the addition of both new truck competitive rail services, as well as enhancements to the performance and capacity of our existing train network. This chart provides some examples of some recent additions to our product portfolio....
We've recently added new service or improved existing train schedules in the first three lanes shown on the chart, L.A. to Chicago, Oakland, and Portland. That's resulted in double-digit volume increases year-to-date in each of these lanes for us, while service and capacity for our standard truckload customers is also benefiting. While the margins on the standard business are less than those on the premium business, we expect that the higher reliability performance of these trains will enable us to improve the yield of our standard customers in the years ahead. Now, we're placing a significant focus on adding new lanes that connect the nation with products being produced or sold in Texas and Mexico. The other examples on this slide provide some detail on some of these new services.
The first represents the initial phase of New Mexico steel wheel services that we started in conjunction with the Ferromex or FXE. FXE has historically only moved intermodal auto parts between the US and Mexico, and we successfully introduced a joint intermodal product with them last fall, which we call Eagle Premium. This initial lane was between Monterrey and Chicago, and we've since added Los Angeles and St. Louis options for the Monterrey market. We've also initiated a new service between Laredo and Memphis, which connects Mexico with parts of the Southeastern United States. And in addition, as many of you know, we opened our new intermodal facility in Santa Teresa, New Mexico, earlier this year.
The new facility has been very well received as we continue to experience strong volume growth from the maquiladoras located in Juárez, Mexico, just across the border, and that, and that growth has been aided by the new lane additions shown on the chart. These new services highlight several of our significant new business development efforts, and we have a solid list of additional opportunities in the pipeline for the future. Now, we believe that Union Pacific offers customers the broadest market coverage and best service products available in the industry to serve Mexico. This chart provides some further details of our terminal locations and primary train flows that we use to serve the growing Mexico market. We interchange intermodal traffic over four gateways, which allows us to serve the major industrial, maquiladora, and consumption centers you see on the chart.
We provide a variety of flexible solutions to our Mexican customers, including steel wheel interchange services with both the FXE and the KCSM. In addition, we offer unique service products that allow us to provide rail service to US border terminal locations, such as Laredo or Santa Teresa, where customers can then combine their own truck pickup and delivery capabilities to serve the Mexican market. Or alternatively, they can also utilize our streamlined wholesale door-to-door subsidiary to execute the entire move on their behalf, if they prefer. We feel that we're well positioned to serve the Mexican market, which is the second-largest export market and the third-largest overall trading partner of the United States, and we're very optimistic about our growth prospects there in the future. In summary, we continue to expect the intermodal business to be a major driver of growth and value creation for Union Pacific.
We offer a superior intermodal network for both the international and domestic freight, with connections to more markets than our competition, while also offering shippers the broadest sales coverage in the industry. We're watching the evolution of the new ocean carrier alliances closely to determine what impact they may have on rail operations and customer port selection. We're cautiously optimistic that the existing infrastructure at U.S. West Coast ports that's ready today for the industry's new large vessels, combined with our broad inland intermodal rail network, is likely to be a positive for stronger import freight growth on us over the next several years. We believe there are significant opportunities to convert the long-haul highway freight to the railroad.
We continue to convert freight to the existing service products that we've established over time, and we have a robust pipeline of new product opportunities under development that our investment in track internal infrastructure is allowing us to introduce into the market. Now, the intermodal business is impacted by regulation a little bit differently than many of the other businesses at the railroad. And while regulations such as truck size and weight could be a headwind for our intermodal conversions, we're also benefiting as a variety of government regulations are negatively impacting motor carrier costs and driver availability, and they continue to be implemented. Overall, we remain optimistic about our ability to, to grow the domestic business at above GDP levels.
Now, whether the business is originating across the ocean, across the border, or somewhere across the country, the intermodal business at UP is well positioned to deliver the economy plus growth well into the future, at return levels that exceed the Union Pacific's cost of capital. And thank you, and I'd like to turn it over now to Mary, and I think we're gonna have another Q&A, right? Thanks.
Great. We've got mics? Let's try right next to you there. I can't see in the back. I'm sorry, I said me. In the very back row. I'm gonna start in the back row and work down this time. Thank you.
Hi, thanks. Justin Long-
Oh, Justin
... from Stephens. Just wanted to ask, obviously, we've seen a lot of volatility in oil prices here recently. How sensitive is your business to that when you think about the over-the-road conversion opportunity, particularly in intermodal?
Yeah, so let me start, and maybe John could join. So, the volatility in terms of, well, oil prices going down, the, if you look at what the Saudis are doing and, the production in this country, clearly, you have what appears to be, production outstripping demand, which is driving the price down. Certainly, we believe we have a stronger value proposition in terms of trucking costs, because we're more efficient than trucks. Railroads have steel wheels on steel rails, lower coefficient of friction than tires on cement or tires on asphalt. So we have a cost advantage over trucks. As oil prices come down, certainly that cost advantage shrinks. But we think that we still have a strong value proposition with, trucks, and, we're gonna...
continue to go after the growth markets with the opportunities that we've identified, and we don't see oil prices going down substantially altering our future growth opportunities.
Okay. So maybe just to be a little bit more specific, when you talk about that business, the domestic intermodal business growing above GDP, you know, are you still capable of doing that, you know, next year and beyond, if oil prices stay where they are today or even, you know, fall modestly?
Yeah, yeah. I'll add a couple comments there. Fighting a little cold here. You know, the observation I would offer is that many of the customers that are using intermodal today, it's, you know, it's definitely evolving from where it was 5 or 10 years ago, and that many have actually built intermodal into as the primary mode of transportation for certain lanes, particularly on large volume lanes that move. There just isn't, frankly, enough truck capacity readily available typically, to replace that in a major way. What I think it does do is potentially involve them at their willingness to for certain lanes, particularly on large volume lanes that move. There just isn't, frankly, enough truck capacity readily available, typically, to replace that in a major way.
What I think it does do is potentially involve them at their willingness to convert to additional volume lanes, which is maybe getting to your point. However, the other, I would tell you that the business growth that we've seen, they're just the driver shortages, I think, are. There's not been a time like this in my time in the business. The driver shortages appear to be very, very real right now, and we have, I tell you, a lot of people knocking on our door about intermodal. I think our challenge is to make sure we're picking the right business and put it on the railroad.
Cindy, I'm going to make you run down here to the third row, but run carefully. Safely.
No running.
Right, right there.
Well-
Thanks. David Vernon from Bernstein. Eric, could you help us think through a little bit about how truck rates should start to play into the commercial outlook for the carload business, which is traditionally less truck sensitive? Do you think that this higher congestion on the highways, higher truck costs, is going to drive more of a volume opportunity for UNP in terms of converting more freight from the highway to the rail? Or do you think it's also going to play into rates on the existing book of business? Do you think you're actually going to get pricing on these businesses that are already much more efficient than truck? Do you think truck rates will play into that?
Yeah. So let me kind of address a couple things that you said. The carload business has always been a competitor with trucks. Trucks have always been a strong competitor to the carload business. That's not new. It's always. In fact, in some respects, trucks are probably a stronger competitor in the carload business as strong a competitor as other railroads. If you look at the shortage of drivers, as John said, and you looked at the increased costs that trucks are having, we think that this adds to the value proposition that we have in the future, and we think that value proposition includes us being able to grow and includes us being able to price to market at reinvestable levels for our business. So on both of those measures, we feel pretty good about the future.
So no difference then, on the pricing versus the volume outlook. Do you think you can get volume and rate in things like long-haul grain that are, you know, obviously much more efficient than you would think truck would be?
Yeah, again, we are excited about our franchise. We think you got highway congestion, you got driver shortage, you've got trucking cost issues. We have a value proposition. We think we'll be able to grow our volume. We think we'll be able to price appropriately into the market.
Great. Let's go up in the top there, Mike, and give you a chance to... Thank you.
Thanks. Tom Kim from Goldman Sachs. And this is either for Eric or John. Can you talk a bit about the port congestion in L.A. Long Beach today, in view of the port struggling to handle the ULCV s and also the equipment challenges, the shortages, and then even the dray challenges, you know, presently, at a time when volumes have slowed materially, we're seeing the congestion actually deteriorate. Does this present a medium-term risk with regard to the amount of volumes that flow through there? Thank you.
Let me tell you.
Yeah, obviously, overlying a whole lot of what's happening in L.A. Long Beach and frankly, throughout the West Coast, we're seeing challenges within the PNW this week, is the ongoing ILWU discussions. I think that clearly puts a big kind of a pall over everything and helping all of us to understand just what is, you know, happening. Nevertheless, we, you know, I was with literally both the executive directors of L.A. and Long Beach in the last month, and, you know, the general perspective is, is that they have, they have actually put together a number of pretty good plans.
It looks like they're going to work together very well in addressing, and you might have seen, they've even gone to the Federal Trade Commission to have a joint discussion set of addressing, and they put some proposals forward with regards to chassis pools that'll start up in the first of the year, which I think will address the chassis issues in place. They're doing things with regards to the entire, the way the terminals operate, and I think there may be some adjustments to what happens with Pier Pass. So all those kinds of things, I think, are absolutely on the table and being discussed. But because of the sensitivity with labor, there's - it's very hands-off, almost feeling like they can't be addressed until that contract's resolved. I don't think...
I would tell you that there's been a lot of investment made there by us and the ports over the last few years, and I think they're going to come out of it fairly well. And certainly, when you look at it compared to the other coast infrastructure, I think the, you know, it's like, it's L.A. Long Beach's in particular to lose, that they're in a very good spot.
If I can ask a separate question. Linda, I'm just curious as to how your discussions with some of your customers are sort of thinking about the Veracruz option for an alternative port of distribution. Thank you.
... you know, I can't talk about specific customer interactions, but generally speaking, you know, there's export volume that goes out of Mexico as well, so some of that production is for export markets. Veracruz is a congested port, it needs infrastructure investment, but it's-- Mexico is a competitive environment. We're well positioned for what's headed to our market, and we're ready to compete.
Yeah, if you look at the production in Mexico, a portion of it is for the U.S. market, a portion of it is for the domestic Mexico market-
Right.
and a portion of it is for export.
Other markets
Both to Europe and to Asia and to South America. Probably a larger portion than what most people would expect is for export. So the things that are going to Europe or Asia or South America will probably be more likely to be exported through a Mexican coastal port than exports to the US.
We got there. Let's try that, right back there. John, thank you.
Thanks. Keith Schoonmaker with Morningstar. Eric, I recognize it's early to think about the effects of liberalization of the Mexican oil and gas markets, but in addition to opportunities for shipping pipeline materials, could you add some of your color on what you think might be other opportunities for the rail, in particular, how you fare compared to other rail franchises to serve the Eastern Shale region?
Yeah. So, the Mexican reform, and there are a lot of expert opinions out there, we don't profess ourselves to be expert, but, there are really two stages. Stage one really allows PEMEX, the Mexican entity, to select or have first right of refusals on properties, and then they could take a subset of those properties and have other private entities, international companies, really participate with them as a contractor, more or less, to try and do development in those properties. There are estimates out there that that might be appealing to some that may not, really, in and of itself, drive a lot of additional production in Mexico just by that structure.
Phase two are other properties that will be open for bid to international entities to drill and explore, and the expectations are phase two will likely drive more production. And so that's why in my comments, I said further down the line, you'll probably see production increases in oil and gas. And then, since we have the best franchise to Mexico, we would expect to be able to participate in that at a fairly good level.
And we, adding to Eric's statement, we love anything that opens up, modernizes, enhances the markets in Mexico for a more robust Mexican economy. And Eric had outlined some of those items in his prepared comments.
Do you want me to do Chris, right, right across the aisle there, and we'll kind of work our way back up, though.
Great, thanks. Chris Wetherbee from Citi. Just following up on Mexico, Eric, your comments around the energy opportunity, could you give us some rough timing of sort of when to expect some of these first steps? You mentioned the pipeline and then beyond that. That would be helpful. And then just follow up sort of more broadly on Mexico, can you give us a rough sense of maybe how the total portfolio in Mexico is growing relative to the rest of the business? Kind of put some numbers or some growth rates around that would be helpful. Thank you.
Yeah. So in terms of the Mexico energy reform, we think in the near term, the next couple of years, Brad will actually talk about this, in more detail. We think we'll be seeing some pipe opportunity, which is kind of what I alluded to in my prepared comments. Perhaps towards the end of the planning horizon, we might see other opportunities associated with other drilling materials. That's just our best estimates, at this point in time. Overall, with our Mexico business, we continue to see good growth. As you know, Mexico represents 10% of our book of business, and we continue to see growth in Mexico on average, equal to, as good as or better than the growth that we see in the domestic U.S.
Okay, so the timing then, it's sort of two to two years initially, then four years is kind of the next phase, if you will?
Yeah, there are a lot of external estimates. Again, we don't profess ourselves to be experts on Mexico energy markets. There are a lot of estimates out there, but that's how we would see it at this point in time.
Why don't you hand it behind you, please, to Bill, and then we'll keep moving. Did you have a question?
Yeah, yeah, yeah. Thanks, Bill Morrison. Eric, I wanted to come back. A question you and I discussed on the last conference call was just about this idea that, when the margins get to where they're getting, that there are opportunities to use that low-cost structure to win markets and to expand the total addressable market. And, you sort of said, "Yeah, I, I think we have a lot of huge opportunities here." And I'm wondering if you can just sort of touch a little bit on how you think that market has changed, how it's grown, relative to, let's say, what it would've been five or 10 years ago at another one of these events. Because I think that cost structure would give you huge opportunities to, to utilize it to grow.
But that doesn't mean discounting, it just simply means that there are markets that might not have worked from a profit standpoint previously.
Yeah. So at our last earnings release, the conversation was, we wanted to make sure that there's not any thought that we are going to look at price to grow market—lower price to grow markets. We are not to do that. I think the point that we were making is we have huge market opportunities, we believe, because of our franchise, all of the things we talked about, growing U.S. economy, international markets, and that franchise opportunity will allow us to grow our business even with improving margins as we go forward. We're not looking to shrink our margins to grow our business. We think we can grow our business with improving margins.
Great. You know what? We'll go to Scott and then Ken.
Thanks. So one for John and then one for Linda. So intermodal has been this kind of great volume opportunity, but we've kind of seen the rail struggle to get volume and yield growth in intermodal, and you guys have probably gotten more yield growth than others and less volume growth than others. Wondering if there's any changes in your strategy as you think about intermodal, if volume is gonna become a bigger part of the story, yield growth a little smaller part of the story?
No. You know, you know, just to kind of highlight, I think we touched on it earlier. We've been very focused on trying to bring on the right business for the domestic intermodal space. So we actually have consciously been, frankly, you know, growing slower than most in the industry for since 2009 or 2010, almost. So and our goal has been to get the returns of the business. We have been making significant investments in the business and continue to do so as long as we do that. So, I actually think in the given environment, that the yields are probably gonna get a little better, you would think, given where things are at this point, going forward, and we'll see how things work out on the volume.
I think the first focus is to make sure we're getting the returns.
Then, Linda, so on the slide with the automotive outlook, you've got the competitive environment as kind of a mix. I would've thought, given the BN issues, that would be a positive. So what's the offset there? Is that Mexico, or is it maybe losing some share on the stuff going north?
So-
I'm not sure what the negative would be.
There are many players in the automotive competitive environment, not just the BNSF. So that was a broad-based look at a healthy opportunity that's generated lots of interest and a position for us in that marketplace, where we feel very strongly about our value proposition and our ability to compete within that environment.
Are there places where you're worried about losing share in terms of the autos going north of the border?
Yeah, so one of the things that may not be apparent from our discussions, even in the earnings releases, is that a large portion of our automotive growth opportunity is on the parts side. And the automotive parts side really is very similar to the intermodal story. A large portion of the automotive parts growth is really intermodal auto parts, and that, as we've talked about, our intermodal business is a competitive environment. It will continue to be a competitive environment, but we think we have the value proposition to compete well. Our base automotive vehicle franchise, we think, is the strongest franchise in the industry, and we're going to price for the value that our franchise is, and we believe we could sell that value.
You used a term-
Uncertain
That always kind of makes me nervous, all the way back from when I was the head of marketing and sales, and that is, afraid to lose market share, and we're not afraid to lose market share. If we don't lose some market share at some point in time, then we don't know where the market is. And I, I provide Eric and his team advice and counsel all the time. If we do lose some market share, that's okay, because we have plenty of opportunities in all scopes of all six of our business, plus our Mexico franchise, to fill that hole, and we're not afraid of that.
Great. Ken, and then we'll take one more, broaden out the room.
Thank you, Mary. Eric or John, let me just—it may be a bit of a weird question, just given that intermodal carloads are at record levels. But when you think about Hub Group and UPS, some of your major customers, they've talked about increasing purchase transportation. So do you feel like you've lost any revenue given the service issues? And then, you know, recently, you mentioned kind of surprised at the speed and pace of which you've won some of the business, given some of the Burlington service issues. Is there any kind of discussion on stickiness of those revenues over the long term in terms of what has come to your network and what may or may not eventually go back once they fix some of those service issues?
I just have a quick follow-up after that.
Yeah, so let me start, and then John. So on the Hub issue, Hub is a great customer of ours and, you know, we don't talk in detail about specific customers. One of the things, and I think I said this previously, is that the intermodal opportunity set for the market is pretty large, and there are different channels that we use to address different parts of the market. There are large customers, you know, the big retailers and certain ones of our partner, IMC partners, are great for that channel. There are medium-sized customers, there are small-sized customers, and so we are holistically using a multiple channel strategy so that we could address the breadth of the intermodal market. And we have done that, we're gonna continue to do that, and really, we feel good about that.
You mentioned being surprised about the growth. I'm not sure I would use those words, that we were surprised. I would say you know, building off something Len said in the previous session, we probably had pretty aggressive beliefs about what this year would be. You know, like any good business, you've got to look at the risks and opportunities of that. The places where we did not predict our competitor struggling in some of the places that they're struggling, and some of the businesses, like part of the grain business we talked about, there's a small portion of intermodal business.
We did not predict our competitor would struggle, and some of that we would get, but that's the minority portion of the business that we're talking about and the minority portion of the growth that we're talking about. Like anything, we are developing strategies to try and make as much as that business sticky as we can. But as Jack said, we recognize we operate in a very competitive marketplace, and we are okay with business walking away if it's not at the price that we want.
On that, given the five million set, load set, addressable set that you talked about, what's the gating factor on that? Is that just time of educating those customers? What brings that volume onto the rail network over time?
John, you wanna talk about how we convert volume?
Yeah, so it's actually a pretty much of a cycle that takes place, and some conversions could be a matter of months, but it's not unusual for it to take a pretty common approach is you go to a customer, and you talk to them about a lane where they're usually having some challenges with finding some truck capacity. And they're also quite nervous about giving you large amounts of that at first, so they say, "Well, why don't we start with 5%?" Maybe if you're lucky, you'll get 10%. But you do that, and you have to go through a whole year in a cycle. But in that process, you build their trust and confidence in the reliability, capability of the product. And then they also start to see the value proposition of helping and providing.
So you and then you build on that, and then you go to, "Well, let's look at your additional lanes." And one of the big things that we've been pleased with is we've been able to have we now have had hundreds of some of the larger shippers have shared their full truckload book with us, all right? So we literally, they, they are turning over, we have to sign a confidentiality agreement, but we turn that over, and then we sit down together and talk about as a network, what works well for them, because it has to work well with their underlying truck providers as well. So because they have a network that they're setting up with them, and so we work together on how do we make that?
And then we just believe that over time, frankly, time is on our side, right? As we do this, we do it right, do it well. We don't have to buy the business. We don't have to go in and oversell or communicate it, but we get it, we earn the trust, get the value, and then build on it over time.
More and more, and we've mentioned this before, the trucking community is actively seeking our help in conducting their book of business.
Right.
They're seeing exactly what we see. It's their world. And they seek the commercial team's help in terms of addressing that.
Yeah, we're becoming much more of a partner with many of our customers, because the motor carriers in particular, because we tell them, they, you know, they've been in a situation where they hate to turn back a load. When they get the scorecards from their shippers, they hate—you know, there's almost always a thing: "Did you—how many of my loads did I tender to you, did you accept?" And if they turn back too many loads, they end up tending to move down the priority list. And so we often, and unfortunately, it's just the nature of the world, they, they'll say, "Hey, I'll give you 5 trucks this week or 10," but there's always a peaking at the end of the month, end of a week, end of a quarter. They don't want to turn back any loads.
We start with them and saying, "Okay, let's take your surge excess. I can cover you with that. And then, by the way, let's start phasing in and building it up over time," if that makes sense. So it really does become something we collaborate, and they, they gain confidence with the shipper, and then we're behind them to help support them.
Okay, let's go just one more, Fadi, in the middle here, and then we'll take a break, and we'll be back.
Okay, thank you. Fadi Chamoun, BMO. You've talked about the pricing opportunities potentially being better because the supply is tight, because the demand is strong. I'm wondering if there's a lever that you can also pull on, which is more of yield management, trying to favor maybe opportunities that can turn your assets faster, and this way, you can increase your opportunities on a per-car basis. Can you address that a little bit?
Yeah, there are a lot of, there are a lot of different facets to our commercial strategy, and, as was shown on the business plan slide at the beginning of the presentation, we look at all of the business opportunities. We look at which ones make sense, which ones provide us, an acceptable return. And, our approach is that for every business opportunity that provides an acceptable return, we're gonna go after it. And, you know, if we ever get to a point where there's business that's not providing that return, then, you know, we'll say, "We're not interested in it." But our approach is to grow our business, and as long as it has the right economics, we're going to, grow as much of the business as we can.
And the beauty, Fadi, of what Eric described, what Lance showed, and the business planning process that we have, that's not solely a commercial decision on our railroad. It's a joint decision with the operating team, the financial team, and the marketing team working together. And so prioritizations, operating efficiency, as well as the commercial aspects of that come into those decisions as to how we choose what business gets on our franchise.
Okay, so let us take 10, basically, be back at 3:30 P.M., and give our bulk group, bulky group, a chance to share.
Give me this mic back. Okay, let's take our seats so we can give our next marketing team a chance. Oh, that's-- I'll talk to you about that later, actually. There is a reason. Careful. Okay, great. Take your seats, please. Jason, are you up next? I will introduce Jason Hess, our VP of Agricultural Products. He's one of our many new heroes.
Well, thank you, Mary, and welcome all. 2014 has been a very strong year for our ag products business, and that's reflected in the $2.8 billion in revenue and 14% year-over-year cargo growth we generated through September. Our ag story continues to be a strong and diverse network that serves markets at a high degree of volatility and variability. After the Midwest drought in 2012, 2014 has been strong, following on the heels of 2013's record crop. The steep jump in production has brought increased grain shipments, strong ethanol production, increased exports, and overall high demand for UP freight.... In addition, our UP Ag business has benefited this past year from market share shifts within the rail industry.
As the map shows, our network provides our customers access to major grain production, processing, feeding areas, as well as produce production and export gateways. Our market reach and extensive manifest networks are key strengths in our Ag Products business. Our business has split 58% manifest and 42% bulk, and about 72% of that bulk moves in grain shuttle trains. Ag Products includes three major segments of business. This year, our whole grains business represents 42% of our volume, grain products, 34%, and food and beverage, 24%. Our key destination markets are comprised of livestock feeding and food, which make up a combined 68% of the business. Energy, which is primarily our ethanol and biodiesel business, makes up 10% of our portfolio, and that's leveled off after a strong ramp-up that began in 2005.
Our export business is up in 2014, driven by stronger crop production and increased market share to the Pacific Northwest, Gulf, and Mexico. It all starts with world demand for food and crop production. The chart to the right shows that meat consumption continues to grow throughout the world, and China leads the world in the growth. As China continues to increase their appetite for protein, U.S. meat exports and demand for U.S. soybeans will continue to grow. With another strong crop this year, we expect to export 46 million metric tons of soybeans through U.S. ports between October 2014 and March 2015, and China is a key driver. The 13.9 billion bushel corn crop that was harvested last fall has led to nearly a 40% increase in grain shipments through September.
The increase in corn production is driving a 163% increase in U.S. corn exports, a 7.6% increase in ethanol production, and 18% jump in livestock feeding in 2014. The strong variance between the record crop production in 2013, after that 2012 drought, also proves just how volatile the ag business can be. Ethanol and biodiesel continue to be large consumers of the U.S. grain supply. While mandates are still in place for corn-based ethanol, record corn production and lower input costs have led to improved producer margins and additional demand from other countries. Increased margins have driven production above the 10% U.S. blend wall, with the additional production flowing into the export market.
Higher domestic ethanol blend rates in Brazil are consuming more of their local sugarcane-based production, and this increases the U.S.'s competitive position in the world market. Today, ethanol producers are no longer dependent on subsidies or mandates. However, market volatility can continue to exist going forward based on future crop production and swings in gasoline prices. Our food business continues to have the long-term potential to grow faster than the population, as our service products and equipment allows us to be more competitive with trucks in a service-sensitive market. We also see upside in our fresh food business as consumers move away from the center aisle of the grocery stores that hold canned and packaged products and look for more fresh produce and products.
Consumers are also changing their behavior preferences by moving to craft and import beer products, and this shift is driving solid growth in our Mexican import beer business. Now, grain remains a significant driver in our portfolio, with corn supply and demand having the largest impact due to the fact that corn yields over three times as much per acre production compared to soybeans or wheat. The base of the U.S. cropland has remained relatively static, but planted acres continue to shift to more corn and soybean acres, and higher yields have become the major factor in the increased production. The long-term corn yield trend is shown in the chart to the right. The higher trend is driven by biotech hybrid corn seeds, advanced farming practices, and fertilizer application that will continue to contribute to higher corn yields.
The forward trend line yield for corn on the chart has a fixed slope, but the variability year to year is high. A great example is the delta between that 2012 drought-stricken corn yield of 122 bushels per acre to a 2013 yield of 159 bushels per acre, and now we're projecting a record crop of 174+ potential bushels per acre this crop year. The 2012 drought had a significant impact on the livestock sector, with lower grain stocks and high input costs. The high feeding costs drove many producers to reduce their herd sizes. Going forward, we see a recovery in the livestock sector, driven by back-to-back bumper crops and stable to increasing livestock and meat prices.
The recovery of the livestock sector is important to our strong domestic franchise. Ethanol has solidified its position in the U.S. grain markets. The mandates and previous subsidies have supported higher corn demand and prices, which in turn, incented higher corn production. Going forward, mandates become less relevant as long as ethanol remains the lowest cost option for octane, and export demand remains strong, and input costs allow for adequate producer margins. With corn-based ethanol production leveling off in UP's grain origination territory, trendline yields and increased production will lead to additional opportunities to move corn to export markets. We see exports continuing to grow, but the growth will be volatile from year to year due to world production, exchange rates, and world GDP.
As production growth continues and more grain becomes available in our key origination states, we are working with customers to expand their train handling capabilities and build new greenfield locations in both origins and destinations. We are on track to open as many as five new greenfield locations in 2014 and early 2015, and we're having active discussions with customers on several potential locations beyond that time frame. Beyond volume growth, we're focused on efficiency and strengthening our grain network by continuing to work with customers to upgrade their facilities to 110-car unit trains. Over the last four years, we have increased the percentage of facilities that can handle 110-car trains from less than 60%- 85% of the facilities year to date.
Our domestic grain business is currently seeing solid growth as livestock numbers increase and recover from the 2012, 2013 drought. We continue to see long-term growth as export of U.S. meat is expected to increase to meet higher world demand due to overall population growth, as well as a shift towards more protein-based diets in developing countries. As I mentioned previously, we're seeing strong exports this year, with soybeans moving to the Pacific Northwest and strong demand and market share growth to Mexico. We expect the PNW and Mexico to remain strong through the first quarter of 2015, and opportunities to grow in future years, depending on U.S. production and world supply and demand. China will continue to rely on U.S. soybean imports, driving long-term growth opportunities at the U.S. Gulf and Pacific Northwest.
We expect the large inventory of US corn will eventually price into export markets, but timing remains uncertain with falling corn prices. Wheat exports will be down this year due to lower production in key growing states and strong production from competing countries, as well as US wheat quality issues. In 2014, our grain products business represents 34% of our agricultural business, and it's centered around our access to large concentration of oilseed and corn processing plants in the Midwest, and access to major feed, food, fuel, and export markets. The oilseed crushing industry in North America is a fairly mature network of soybean and canola processing facilities. Domestic consumption of meals and oils will experience moderate growth and will follow population and animal unit growth. Exports, US biodiesel production, and consumers' desire for healthier canola oil will create additional opportunities.
Canola meal shipments from the northern tier of the U.S. and Canada to our domestic feed markets continues to grow. We have seen canola meal shipments grow 39% over the last five years, and canola oil shipments have increased 30%. A recent Chinese ban on U.S. dried distillers grains, or DDGs, a co-product of the ethanol process, and high Chinese corn inventories, has shifted DDG exports into our domestic feeding rations. We are well positioned to handle the domestic feeding rations. Our domestic franchise is well positioned to handle that, as well as we have a good franchise to handle DDG bulk and container exports through our terminals. As I mentioned earlier, corn-based ethanol's recent growth can continue with a solid base of demand created by the octane requirements and mandates increasing to 15 billion gallons by 2015.
Growth can continue to take place without the mandates, as long as input costs remain favorable and margins allow production to exceed the blend wall and flow to the export outlets. Going forward, real opportunities depend on how the EPA handles the RFS provisions for advanced ethanol mandates, as well as opportunity to supply ethanol to the world markets. Part of this will be influenced by Brazil's growing domestic consumption for locally grown sugarcane-based ethanol and their inability to supply advanced ethanol to the U.S. and other countries. Additional U.S. domestic ethanol demand could arise with a shift towards more E-15 blends. Food is 24% of our agricultural business year to date, and with it, we serve all major produce-growing regions in the West and work in conjunction with eastern carriers to serve the large population centers in the East.
Our food portfolio provides a great mix of products, including fresh and frozen foods, beverages, canned goods, and bulk ingredients. Service is a key driver in the food business because a high percentage competes directly with truck, and a high percentage of the food business is perishable, which means fast, reliable, and consistent service is a must. As consumers desire the more fresh produce, we see additional opportunities in our food business. We've grown our food business by leveraging our service and refrigerated equipment. In addition to our strong manifest network, we have three primary services for our food business: Produce Rail Express, Express Lane, and Union Pacific Distribution Services. Produce Rail Express offers point-to-point, five-day service from Washington and California to the Northeast. That's equal to over 500 mi per day, which makes our service competitive with single truck drivers.
We recently introduced a new Rail Express service product to the Southeast US that will support continued growth in that area. Express Lane is our premium manifest service with CSX as our partner and moves 80% of our eastbound long-haul food volume. Our manifest network is the foundation of the food side of our business, and we extend it to our non-rail served customers by using our subsidiary, Union Pacific Distribution Services. UPDS One Plus is a program that utilizes a network of warehouses and transloaders to help us extend our reach beyond our physical network and to serve customers with smaller volume needs. The harsh winter and service disruptions have created delivery challenges for our customers this year. While we're working really hard to restore that service and regain customer confidence in our food product offerings.
As I mentioned earlier, consumer preferences for beverages have shifted, and we're seeing significant growth in our import beer business as a result of this shift, and changing demographics are also playing a part. For the full year, 2014, we're projecting double-digit growth in our Mexican import beer business. In order to grow our food portfolio, we'll be making strategic equipment investments to support the growth. Our long-term investments in refrigerated equipment provides us the competitive advantage in this market. Currently, we have over 60% of the refrigerated rail fleet in the U.S., and we have plans to upgrade and modernize this fleet. We also have plans to update and increase our food grade covered hoppers that move malt, milled rice, and sugar. In summary, it's been a very strong year for our ag products business.
The outlook for our ag products business is also positive. The prospect for higher U.S. grain production remains favorable, driven by positive trend in crop yields. Strong U.S. grain production creates opportunities for us to supply our core domestic franchise and fill the need for growing world food demand. We believe our wheat business will experience challenges in the months ahead due to lower production and quality issues, and the long-term outlook for wheat is also challenged due to strong competition from other parts of the world. While biofuel markets have matured and several unknowns remain, longer-term growth in ethanol exports look promising, and growing demand for grain products exports mirrors the same trends we are seeing with whole grains....
Increasing truck costs due to longer-term trends with the trucking industry will provide us with share growth in our food business as well as import beer, and more specifically, the Mexican beer. And as Mexican beer grows more US market share, we'll see more of that growth coming to UP. In the near term, we see challenges in our frozen meat business due to herd reductions that took place in 2012 after the drought. However, longer term, we see animal units returning with cheaper feed prices and growing world demand for protein. Overall, Union Pacific is well-positioned to meet the growing demand for food in the world. With that, I will turn it over to Doug Glass, our Vice President and General Manager of our coal team.
Thank you, Jason, and good afternoon, everyone. Union Pacific's $3 billion coal portfolio represents 18% of our commodity revenue through the first three quarters of this year. Our diverse coal franchise gives UP access to both bituminous and sub-bituminous coal, and provides connections to other rail carriers and ports, extending our reach across the U.S., including Canada and Mexico. While PRB coals continue to be preferred for their low cost, low sulfur characteristics, our Utah and Colorado coals are geographically well-situated to take advantage of long-term global demand for high BTU, low sulfur bituminous coals. So the map on the left side of the slide showcases the breadth of our coal traffic moving out of the western coal basins, primarily to the Southern and Midwestern states. But I'd also note that we are increasingly moving more into the Eastern and Southeastern U.S. markets.
This year, we have delivered coal directly or indirectly through our connections, eastern connections or through rail barge, connections to 34 states, Canada and Mexico, as well as to ports or docks for furtherance to global markets such as Europe, Japan, South Korea, and Mexico, to name a few. With changing marketplace dynamics, the flows of our coal business will shift as we grow our presence in the eastern and international markets. You know, in the coal business, we love hot summers and cold winters. However, we did not appreciate the winter of 2013-2014 and its impact on our network, as has been stated earlier. That being said, it did leave our customers with strong demand and low inventories, which points towards an extended period of inventory replenishment.
In fact, demand has exceeded early customer forecasts throughout the year and across all segments of our coal business. So we think the fundamentals in our coal market will remain strong through at least 2015, and support mild growth beyond that. According to SNL Energy, a global energy research enterprise, approximately 34,000 MW of domestic coal generating capacity is expected to permanently close or convert to alternate fuels sometime between now and the end of 2022, primarily due to environmental regulations. Of that figure, over 12,000 megawatts are expected to retire or convert to alternate fuels in 2015 alone. So as you can see from the map, most of the retirements and conversions are concentrated in the Eastern U.S. market.
We believe the impact on Union Pacific from plants officially scheduled for retirement is in the range of 5%-7% over our five-year planning horizon, but this only tells half the story. As long as coal generation remains in the money, coal generators can and will be expected to increase the capacity of the surviving plants, to fill in the gap left by those retirements. To support our view, and in 2008, and according to EIA, the Energy Information Administration, the US coal fleet ran at an average of 73% capacity. In 2012, it ran at a capacity rate of 60%.
So those same plants averaging 60%, we believe, represent the potential to increase our capacity to help offset the impact of online power plant retirements, particularly in the Western United States, where plants tend to be newer in age than in the Eastern and Midwestern markets. Last, I would be remiss if I did not address the EPA's Clean Power Plan. Released for public comment last June, the EPA plans to use regulations to reduce CO2 emissions by 30% relative to 2005 levels. While considered one of the most extensive and far-reaching regulations released by the EPA since passage of the Clean Air Amendment of 1970, many of our customers and many industry experts question whether such reductions in CO2 can be realistically achieved.
So accordingly, we think there's a good chance that the Clean Power Plan will be moderated. While widespread long-term growth prospects for coal-fired generation in the U.S. are limited, coal consumption is expected to stabilize and remain a major fuel source for electrical generation at 35% or greater for the foreseeable future. Union Pacific is uniquely positioned with access to low-cost, high-quality western coals to meet this demand. If capacity improvement opportunities at existing power plants are evenly allocated across the country, as I stated before, with that 13% gap, the gap in utilization, we think there's as much as 60 million tons of excess capacity in the PRB-served states alone that can help backfill for retiring coal plants around the country. Eastern coal conversions, or the substitution of PRB coal for higher price, higher sulfur eastern coals-...
have clearly slowed over the years as PRB penetration has matured and then with the growth of the Illinois Basin coals. However, we still see a nice pipeline of Eastern and import coal conversion opportunities we are working on, and we actually have one conversion we're actively engaged in with one of our upper Midwest customers today. Also, speaking of conversions, there are some large percentage of smaller mining operations around the country that tend to be higher cost and less efficient than the PRB. Some of these mines are owned and operated by generators who are beginning to question the value of remaining in the mining business over the long term. We believe UP and the SPRB producers can deliver coal competitively to these power plants, and we see meaningful opportunities over the next five years.
So turning to the international business portion of our business, UP's strategy in this challenged marketplace is twofold: patience, given the rather depressed state of international pricing, and deliberate actions to work with our partners to build capacity on our franchise to capitalize on expected future growth. Again, EIA, Energy Information Administration, projects global coal consumption to rise by approximately 2% annually through 2019. We believe this will increase coal demand by roughly 800-900 million tons globally. While China and India are driving nearly 80% of that demand, Japan and Korea also provide sizable opportunity, with more than 35 million tons of incremental coal demand over that same time period. With a projected three-quarters of the seaborne coal market destined to Asia in the next five years, all global coal suppliers will be needed to fill that demand.
In fact, Western U.S. bituminous coals are viewed by Korea and Japan, as well as Mexico, as a supply source valued for their consistency, delivered quality and reliability compared to other coal suppliers like Colombia and Indonesia, to name a few. In 2013, Union Pacific moved 8 million tons of export coal. The industry expects to see broad global supply cuts and pricing to improve in the next 24 months, and we still believe that our coal exports can double by 2017, a number that we've provided in the past, although volumes will be flat this year and next. In the meantime, we're focused on supporting capacity expansions with our customers.
So I think it goes without saying that coal is facing unprecedented regulatory and environmental pressure in this country, and I'm sure each of you can make your own arguments, both in support of or in opposition to the long-term value of coal-based electricity in this country. The question at hand is, how bad can it get, and what is the impact on Union Pacific? So consider a few facts. According to the U.S. government, in 2005, domestic gas reserves were in a state of decline and headed for depletion. Today, natural gas reserves are growing, thanks to the rapid advances in fracking technology. In 2008, not that long ago, monthly average of natural gas prices peaked at $12.78 and then declined to a low of $2.05 in 2012.
The Fukushima nuclear disaster changed the world's view of nuclear energy almost overnight and Germany, viewed as Europe's shining example of a green energy future, made huge commitments to renewables and then shut down most of its nuclear energy industry, only to see its electric power costs ranked among the highest in the world. So my point here is that there is no one perfect energy solution and no clearly superior substitute for replacing 40% of this country's coal-based electricity. Yes, there will be some retrenchment, but it will also be followed by a long period of stabilization. Coal still remains the fastest growing fuel on the planet, and half of the world's population still lacks proper energy access. 25% of the world's population is considered energy poor. The U.S.
Powder River Basin is among the lowest cost produced coals and has the most abundant reserves of any country in the world, and UP has access to 75% of those reserves. I'm not suggesting that this is a growth business, but it's a financially sound business with many opportunities available for those transporters with access to low-cost, low-sulfur coals. We have a full pipeline of new opportunities for both domestic and international, and the patience to monetize those opportunities over the next several years. So we view the five year future of Union Pacific coal - of Union Pacific's coal business as one of mild growth. For the shorter term, our outlook is bullish, and we are focused on delivering as much coal as possible through the rest of this year and into 2014 or into 2015.
Next up is Brad Thrasher, our Vice President and General Manager for the Industrial Products business. Thank you.
All right. Thank you, Doug, and good afternoon, everyone. Industrial Products represents about $3.3 billion of Union Pacific's revenue through the end of September. We serve literally thousands of customers in a variety of markets and industries across all the United States. Our shipments move between more than 27,000 different origin and destination pairs across the North American continent, and it's a true testament to our diverse portfolio and the strength of our manifest franchise. The shaded areas on the map represent just a few of the key markets that we serve. Upper Midwest, you can see that we have fantastic access to some of the world's premier frac sand sources to feed the demands of the energy industry....
We also have access to all the natural resources of the Western United States, such as copper, lime, and iron ore, as well as the rich timber and fiber baskets in the Pacific Northwest. In the South, we not only serve the large energy markets, but also a strong and vibrant construction industry. Within IP, we group all of these markets within into six major areas. Our Construction Products area, which is comprised of aggregates, cement, and roofing materials, is currently our largest in terms of volume. But as you know, this is relatively short-haul business, mainly within Texas, and is not representative on a revenue basis. It's followed by our Minerals and Metals groups, which generate about 40% of our volume, with lumber, paper, waste, government, and everything else making up the remaining 30%.
So far in 2014, the key end-use markets driving our business are predominantly construction and energy, totaling about 60% of our business, followed by manufacturing at 15%. Packaging and exports follow up with roughly 7% each. If you look at the map, and Eric touched on this a little bit earlier, it's clear Union Pacific has an unparalleled network to support our deep and diverse base of customers. The yellow circles on the map represent our extensive network of manifest network and regional yards, 7% each. If you look at the map, and Eric touched on this a little bit earlier, it's clear Union Pacific has an unparalleled network to support our deep and diverse base of customers.
The yellow circles on the map represent our extensive network of manifest network and regional yards, which allow us to very efficiently serve these thousands of customers that we have. The blue stars on the map represent our network of transloading terminals that move products to and from truck, which give us access to customers and opportunities that we don't directly reach with our tracks, but they wanna, they wanna be positioned to take advantage of our capacity and the cost-effective rail-based supply chains that Union Pacific can provide. We also have excellent linkages across the entire North American network, with efficient interchange options with all the Canadian roads, the eastern roads, and all of the points in and out of Mexico. In addition, we serve the largest number of bulk ports on the West Coast and the Gulf Coast.
Now, within Industrial Products, with the diverse portfolio of business that we have, we've got a multitude of market drivers that affect our business or could drive our business on a daily, weekly, monthly basis. It's global oil prices, value of the U.S. dollar, durable to non-durable goods production, changes in government spending patterns, global trade, or even cost of ocean shipping in terms of the dry Baltic index. These and many more play a part in shaping demand and creating opportunities for Union Pacific. But for today, I'm gonna focus on five key market drivers that are kind of cross-cut drivers that span many of Industrial Products', diverse base. First and foremost is the domestic energy shale play.
It most directly impacts my metals and minerals business, creating demand for frac sand, bentonites, barites, and drilling pipe for the development of the wells themselves. It creates demand for line pipe connectivity between them, as well as aggregate business for roadbeds and drilling pads. I cannot begin to try and quantify the other potential effects across the other lines of business, such as lumber and packaging and other types of manufacturing, but the broad economic effects of the capital spending by the oil and gas companies, as well as the real dollars going into the hands of the communities that we serve and the people within them, has to create demand for a wide variety of products that we move. We also have recovering markets and construction activity continue to slowly climb out of the depths of the recession.
The housing recovery has been great for our business so far, but we also think the continued recovery of automotive sales, commercial reconstruction, and infrastructure activity could continue to generate opportunities in lumber, metals, aggregates, and other lines of business. Reshoring and global trade patterns are two more key variables. We're seeing the benefits of low natural gas prices here in the United States and in a number of areas. Beth will talk about the chemical plant expansions in more depth, but as we speak, there are a number of our rock and cement terminals running full bore, providing the raw materials for construction of these major new products.
In addition, we're seeing more foreign direct investment here in the United States in new pipe and other manufacturing facilities, seeking to take advantage of the low energy costs and great infrastructure we have here in the United States. Lastly, much tighter truck and driver capacity continues to facilitate truckload conversion opportunities to rail-based supply chains across all of our market sectors. These aren't just dry vans, but also the flatbed and bulk trucking sectors, where we have customers reaching out to us to secure capacity and solutions in nontraditional areas. We're seeing the impact today and believe that there's future opportunity going forward to take advantage of our capacity and service proposition. Now I'll take you through a couple of major segments of our business where we're seeing these market factors play out.
Let's start with minerals, which has seen the most direct impact from the shale energy phenomenon. Frac Sand, which now represents about 80% of this line of business, has grown at a 30%+ CAGR since 2010. Other commodities in this line of business that are used in the drilling process include bentonites and barites, and we also manage lime in this segment. The demand for Frac Sand has been tremendous over the last few years, and we think there's continued room for growth as completion technology continues to advance. U.S. horizontal rig counts have grown 20% over the last year, while the number of production stages used in oil wells is up more than 30%. In addition, drilling productivity has increased significantly, allowing the E&P companies to stretch their capital dollars over more wells.
All of this has combined to drive greater frac sand intensity, and the average amount of frac sand used in fracking jobs has increased by more than 50% by some reports. At some point, these technological gains will begin to normalize, but current well completion plans continue to support more frac sand usage for a while. Our extensive network provides us access to the premier sand sources in the upper Midwest, with direct connectivity to the shale plays in Texas, Colorado, Oklahoma, and Wyoming, as well as interchange access to the formations in the East and the North. Our customer base really does see the value in the combination of UP's franchise and our service proposition, and we continue to see increases in the industrial development activity associated with the frac sand business. In fact, between 2011 and 2014-...
We saw an increase of over 50% in the number of frac sand production sources that we serve, along with roughly 100% increase in destination customer terminals scattered throughout the shales themselves. This value proposition has generated a 15-point market share gain in the Western market, in addition to the pure organic growth market that's being driven by increased frac sand intensity. Looking out over the next 12 months-18 months, we think there's potential for more additional tons of production to come online industry-wide, both on Union Pacific and the other rails that we connect with. Naturally, the overall activity levels and growth will depend on the complex interplay between well costs, technology, and commodity prices, but we're excited about the opportunity and feel that we're well-positioned to participate in this market.
While the shale play phenomena has had a huge impact on our minerals growth, it's also generated a lot of activity for our metals team. Pipe's a great example. Drilling, production, and transmission of oil and gas require a wide variety of, and volume of pipe, as well as inputs needed to make that pipe. When you look at the current landscape, Union Pacific has access to 75% of the active drilling rigs in the United States, that consume more than 6 million tons of pipe annually. Roughly 60% of that's being imported traditionally into the United States. With the competitive advantage provided by low energy prices, there's been a surge of reshoring and foreign direct investment in this space, particularly in the pipe manufacturing industry.
We're tracking 13 proposed new facilities across the country that are expected to bring on between 3-4 million tons of additional production over the next few years, and displace pipe currently imported into the United States. A handful of them are already constructed and will be ramping up production in 2015. Steel imports are another factor that we watch constantly. In 2014, we saw a dramatic increase in imported steel in the United States, up over 30% versus the previous year. As a result, there were some pretty significant trade cases settled a few months ago, involving oil country tubular goods and rebar, with rumors of more to come in the near future. In any event, our team is well positioned to address these markets, regardless of which direction they take.
With our sail-to-rail programs offered through Union Pacific Distribution Services, providing creative alternatives for importers, while our service and value proposition continue to make us a logical choice for domestic shippers. In addition to the ongoing potential that the shale plays provide, the U.S. continues to have latent demand in recovering markets, particularly in housing. The chart on the lower right shows the correlation between our lumber and panel shipments compared to housing starts. In the last three years, we've seen double-digit annual growth in this market, obviously off of depressed levels. Historically, many, many studies have, have pointed to the need for roughly 1.5 million housing starts on an annual basis to keep up with household formation and population growth. Based on Global Insight's projections, we're heading in the right direction.
However, there's a growing trend in multifamily dwellings outpacing single-family dwellings, so the dynamics may shift a little bit based on credit tightness or looseness or employment levels. Right now, new home construction only drives about 30% of our lumber business today, with remodeling and repair activity driving about 40%, and industrial and commercial driving the remainder. These percents shift from time to time, depending on the market, but as new home sales recover, we expect that to increase. We're also definitely seeing the effects of tighter truck capacity in this area as we continue to convert more business to rail weekly, supported by the value proposition that we have.
We can't predict exactly how this market play out, but we know that Union Pacific's network will continue to provide great support, especially to the fast-growing population centers in the United States. Moving on to construction products, it's another area where we see benefit from recovery markets, construction activity, and also new growth associated with the shale plays, where a single drilling pad can cover three to five acres and require thousands of tons of rock to support the heavy equipment. I mentioned the chemical expansions in the Gulf. These sit in the heart of our Texas rock network, which positions us well to handle the expansions and support them by supplying the construction materials needed to build the facilities. In addition to the ongoing potential the shale plays provide, we have significant latent demand that should provide future opportunities as housing markets recover.
Along with houses and lumber, comes the need for new highways, roads, shopping centers, and all other sorts of non-residential construction. This will continue to help drive our aggregates, rebar, structural steel, and other commodities within industrial products. It's just not about rock; there's growing demand for cement. We haven't talked much about it in the past, but cement has a significant presence in our economy. Demand is increasing with population growth, state highway funding, commercial construction, and drilling activity. That being said, the US has seen 18 cement plants shuttered since the 2009 economic downturn, with about 11 million tons of production going out of the market, with minimal capacity expansions expected in the near term. At some point, imports will be enticed in the United States.
So the chart on the right shows USGS estimates we have a few years before they really start to move in, but we'll be well positioned to participate in incremental growth through our extensive port access. As we look across the other market sectors, the United States is blessed with great natural resource base, copper, iron ore, wood fiber, just a few. They all support increased domestic production, as well as create export opportunities from the many ports we serve. We also see continuing opportunities in the waste markets, as shrinking local landfill capacities and local trucking challenges create a void that rail can fill nicely. Public construction also leads to remediation needs for moving contaminated soils. Paper is another market we serve. Newsprint, white paper, packaging, they're all part of our everyday lives.
And while the newsprint and printing paper markets continue to be challenged with long-term declines, we're seeing new opportunities with production shifts to brown paper used in various packaging and consumer goods. The wind energy market is also an area where our team has been focused on providing efficient rail transportation solutions. We remain the clear leader in handling wind components via rail in the United States, and in 2014, we'll move more than 1,100 turbines, which include domestic, import, and export business. Through our subsidiary, Union Pacific Distribution Services, we simply provide the best rail wind distribution center solutions to the marketplace, opening 6 new facilities in 2014.
The outlook for wind remains positive in the near term, with especially for a projected strong 2015, supported by the Federal Production Tax Credit, which is set to expire at the end of that year, so the future potential remains to be seen. Government shipments are also important to us. We're here to support our nation's military service and national defense during training and deployments. These opportunities, coupled with the great value that our service and network provide, will continue to facilitate truckload conversions, something we simply work on every single day. So if you look at our business groups and the market drivers I spoke of earlier, you can see how each of these drivers multiply impacts multiple business groups, from energy to construction, reshoring, global trade, recovering markets, and truckload conversions, they all play a critical role driving our business going forward.
Across the board, from lumber to paper to pipe shipments, our focus on continued truck conversions to rail will provide opportunities across every one of our lines of business. So to recap, we feel we have a great value proposition now and in the future in industrial products. We see a number of opportunities on the horizon across our book of business, many of them that we've talked about today. Shale plays that drive opportunities for minerals, pipe, and aggregates, and while we're anticipating future growth, we're closely watching the recent decline in oil prices and how that may impact future going activity. We're also not immune to any potential regulatory actions that may impact this business. Assuming continued growth in the economy and strength in the recovering housing and construction markets, we're well positioned to capitalize on the growth opportunities going forward.
As we've discussed, we should see opportunities in our metals market driven by shale, drilling, reshoring, new construction, and new manufacturing facilities expected to come online. The steel import activity is something we will always be watching, but we feel our network and service sets us up nicely to deal with these ever-changing market dynamics. Overall, we feel good about our future opportunities, and with our network, service, and focus on converting trucks on the road, we feel that we have a value proposition that will allow us to thrive across a wide range of market scenarios. Thank you for your time, and now I'll turn it over to Beth Whited, Vice President of Chemicals.
Good afternoon. Union Pacific's chemical franchise generated $2.7 billion in revenue in the first nine months of 2014 from a diverse group of markets. While some of our business moves mainly in unit train service, such as soda ash, potash, and crude oil, the preponderance of the chemicals business utilizes the strong manifest network available on the Union Pacific. Our infrastructure supporting the chemicals manufacturers is unparalleled in the rail industry, with a strong terminal network, storage and transit facilities, access to key ports, and a wide geographic reach, enabling our customers to hit their target markets both domestically and around the globe. Our key end-use markets are heavily weighted towards consumer goods, but we also have a pretty significant presence in energy markets, crop production, construction, and automotive manufacturing.
As Eric referenced earlier, much of the book of business is affected by shale development, and I'd like to spend the next several slides talking about those market impacts for us. Looking at the crude oil by rail first, as you've heard in preceding presentations, we do expect for there to be continued growth in crude oil production in North America throughout our planning period. While that production growth is a positive for us, there are a number of other factors that will help determine the potential for crude by rail on Union Pacific. First off, price spreads. They'll continue to be one of the primary determinants in crude by rail volumes. The chart on the left shows the relative volume shipped on Union Pacific from each shale from the time period 2011 through 2014.
As you can see, during 2014, we've seen a reduction in Bakken shipments to the Gulf Coast, as that region has seen an influx of light sweet crude from other shale formations, much of it transported by pipeline. This influx of crude has compressed the spot-price spread of LLS to WTI and Brent, and we've seen a corresponding decrease in light sweet imports to the Gulf Coast. With the expectation of increasing production in Texas, we anticipate the trend of lower Bakken volumes will continue into the future. There is the potential for Canadian and Niobrara crude to begin moving in more significant volumes to the Gulf and to California, but the arbitrage opportunity will be the driver for much of that volume.
Additionally, destination terminal development has become more challenging as permitting crude by rail terminals, especially on the West Coast, has become increasingly difficult for our customers. We've seen project delays and even cancellations. The Gulf Coast continues to be a bright spot, with terminals under development to source heavy crude from Canada for the Gulf area refineries. The proposed rulemaking outlined by PHMSA and the DOT has added uncertainty to the future growth of crude by rail, as virtually any outcome from it will have an impact on costs throughout the entire supply chain. With all of these factors and the complexity surrounding crude by rail, it is difficult to predict the future.
However, we do not expect to see much growth for the UP network over the next few years, as the Bakken volumes are apt to continue to shift away from the Gulf to higher-margin markets, and Canadian and Niobrara volumes are unlikely to grow quickly enough to backfill that loss. Our strategy will be to continue our focus on promoting our franchise benefits for crude oil shippers and developing origin and destination terminals in our served markets. Turning to fertilizer, in those markets, shale development and growing worldwide demand are providing opportunities. We expect fertilizer demand worldwide to be driven by all three nutrients: nitrogen, phosphate, and potassium.
Crop prices in the US could minimize growth in domestic consumption, but the world demand is expected to grow by 7% over the next four years as Eastern markets continue to expand food production and associated fertilizer use to drive greater yields as they strive to meet the demands of their growing population. Looking at the fertilizer markets individually, for potash, we have interline access to the large potash reserves in Canada, which helps UP reach into the growing international markets. Global demand for potash is expected to grow through 2018, with key end markets in Australia, Brazil, China, Japan, Korea, and Taiwan. Expansion of the potash mines in Canada is expected in order to meet this increase in demand. In the US, UP's franchise reaches some key phosphate and nitrogen fertilizer production facilities.
With the ready availability of low-cost feedstocks in the United States, we expect to see expansion of capacity in the US over the next few years and in displacement of some imported volumes. With the publicly announced nitrogen expansions displayed on the map, we will see more than a 25% increase to domestic production capacity by 2017. These expansions will provide our served customers with the opportunity to reach into new markets, both within the US and worldwide. Our strategy is to give our customers the option to participate in the domestic, import, and export markets, maximizing their returns. The other key area where we expect significant impact from shale development is in our plastics market, which represents just a little over 20% of our total book of business.
UP provides significant value to the plastics customers, with unparalleled service and infrastructure in the primary production areas along the Gulf Coast. Our volume mix for plastics is made up mainly of polyethylene at 68% of the volume, with polypropylene and PVC products about equal market share and make up the majority of the remaining shipments. Polyethylene production will expand in the U.S. over the next several years, as domestic costs are very competitive in the world. The chart on the right compares the cost to produce ethylene, the base building block for polyethylene, across the major production locations worldwide. You'll see that the U.S. is second only to the Middle East in cost per pound to produce and significantly lower than cost in China and Europe. This spread in cost gives U.S. manufacturers the opportunity to make significant margin in the world marketplace.
That profit opportunity is driving the development of a significant number of projects in the United States. Reflected on the map are the 22 plastics plant expansions that have been announced for North America so far. We know we have a hard time even keeping up with this map because there's so frequently we're seeing new plants being announced. Seventeen of the 22 are polyethylene. The locations highlighted in yellow represent the plants that are currently under construction. The others are either in some phase of internal investment decision-making, or they're working through the permitting process. Fourteen of the 22 facilities can be served directly by the Union Pacific, and we will continue to invest in our infrastructure to support this growth and the expanding needs of our customer base.
We're well aligned with the market leaders in this space, and we're working closely with them to understand their plans for domestic shipments of this product, as well as their export needs. With this expanding capacity, North American production is projected to significantly exceed domestic demand over, as the new plants come online. The excess product will require an export solution to the key consuming markets in Asia, South America, Europe, and Africa. Our franchise provides us with a great opportunity to develop service solutions, allowing our customers to export their products from ports on the East, West, and Gulf Coasts of the U.S., as well, potentially as the East and West Coasts of Mexico. We're working actively with plastics packagers, producers, and steamship lines to determine the best supply chain solutions to reach those markets.
This will be an active and ongoing area of development for us over the next several years and remains a great opportunity for growth for the Union Pacific. Before I wrap up, I'd like to spend just a few minutes talking about our other markets that are somewhat less directly linked to shale. Industrial chemicals is our largest sector, at 24% of our volume, and is made up of a number of smaller markets. These base chemicals support the manufacturing of more complex chemicals, crop protection products, paints and detergents, to name a few, and will grow based on the economic factors tied to those businesses. The uptick in the U.S. economy will be positive for those markets. We do also have some small, higher-growth markets in this area that include oil field drilling fluids.
On the petroleum and LPG side of our business, we've had a great year in 2014 with the opening of new propane and butane storage and delivery terminals on our network. Moving forward, these markets will be most impacted by refinery utilization rates, use of asphalt for road programs, and demand for LPGs in our served markets. Soda ash, used mainly in glass making, remains a key franchise strength for Union Pacific, as we're the only railroad directly serving the world's largest natural trona deposit. The U.S. producers have a strong cost advantage globally versus synthetic soda ash, and about 55% of the production is exported. Asia Pacific represents the fastest growing regional market for soda ash, while more developed economies will see only marginal growth going forward. This market is operating in a sold-out state and will remain a very stable part of our chemicals portfolio over time.
Putting all this together, here's our outlook for the chemicals market over the next few years. We see continued development in the shales as positive for Union Pacific Chemicals franchise. The cost of feedstock is very favorable for U.S. chemicals production, as indicated by the significant investments being made by the chemicals industry in the United States. We think we have a great opportunity to capture business from these chemical plant expansions, especially plastics. Our unrivaled infrastructure along the Gulf and access to interline carriers, Mexican gateways, and West Coast ports gives us an opportunity to help our customers meet both domestic and export demand. Union Pacific is also positioned well to help meet the need for the growing demand for fertilizer in the world, with interline access to major potash reserves and access to key nitrogen and phosphate producers.
As the only railroad with access to the natural trona deposit, we should continue to see a sold-out environment as producers continue to seek a cost advantage versus synthetics. We expect crude oil price spreads to stay compressed in the near term due to the influx of light sweet crude in the Gulf and the addition of new pipeline capacity. Over the longer term, as market factors drive spread changes, Union Pacific is well prepared to participate in crude-by-rail shipments and will continue to focus on ensuring we have a strong origin and destination terminal network. The proposed rulemaking from PHMSA and DOT regarding flammable liquids could have an impact. We're watching the situation closely and preparing for the various alternatives, but we will not know the extent of the impact until the final ruling is released.
Overall, the chemicals outlook is positive, with a customer base that includes worldwide leaders who will be expanding and growing to take advantage of favorable global dynamics. We believe we're well positioned to support this growth with our franchise. Thanks for your time. I'm gonna turn it back over to Mary for the Q&A.
Great. Microphone's ready. Let's start on this corner for now. Oh, upstairs. Sorry.
Thanks. Brandon Oglenski from Barclays. So Eric, if I could just maybe get you to summarize here, 'cause it sounds like you have some pretty favorable outlooks across most of your businesses, with maybe coal being the softest stable and maybe some questions around international intermodal. But nonetheless, where should we think about volume growth for your business going ahead? I know you're smiling, but is this a business that you think can grow above GDP, just given the advantages of your network and some of these very favorable end markets, including that whole discussion on Mexico?
Yeah. So Rob will give our official outlook here at the end of the day, as you know. We are excited about our franchise and the opportunities ahead of us. And, you know, unless there's some huge regulatory issue or some other significant world macroeconomic changing issue, we feel pretty good about the outlook ahead.
Okay, and maybe if I could just follow up, too, and, and I know it's coming back to some of the issues you've already discussed, but on Mexico, is there an ability to create a secondary gateway to Laredo, maybe in El Paso or Eagle Pass? Is there, you know, a concerted effort from Union Pacific or some of the other carriers to look at options to Laredo and growing the ability to import more traffic from that market?
I want to make sure I'm understanding your question. Right now, there are six gateways to Mexico.
Right.
Each one has different advantages and disadvantages, depending on the origin or destination in Mexico and where it's going to and from in the US. There are natural gateways that are more beneficial, depending on where it's going to and from. UP's franchise, we have access to all of them, and we are in various stages of projects, both with our Mexican railroad partners, the US Border Patrol, the Mexican Border Patrol, to have improvement, efficiency improvements in almost every gateway that there is. So I don't know if I answered your question or not.
Just wondering if there's gonna be, you know, because I know Laredo is significantly larger than some of the others.
Yeah, so-
With your Santa Teresa facility, is this a big opportunity?
So Santa Teresa, as you know, is by El Paso, which is a separate gateway, okay? So the El Paso gateway by itself has advantages depending on where it's going to and from. Laredo's a great gateway. There is a number of efficiency initiatives that are being planned there, as well as all the gateways. Okay.
Thanks very much. Walter Spracklin, RBC Capital Markets. I guess my question here is for Eric. On the energy market forecast you provided, you gave some forecasts for frac sand being above market or at market growth, but crude-by-rail below market growth, conceivably some of the same driving factors affecting both. Is that just really a reflection of your very strong market share positioning in the frac sand market and perhaps-
... you know, when we look at all of the more robust projections that the other rails are providing on the crude by rail side, are you just looking at that market a little bit more conservatively, or do you perhaps have a little, you know, less access to the source and end destination markets that they're looking at?
Yeah, I think what Brad and Beth both said, and I'll just echo this again, our strategy in both markets is to have a great franchise, origin facilities and destination facilities. So when, where, how the business moves, at what level, depending on what oil prices are and oil and spreads are, we can participate. So our strategy is to make sure we can participate. The crude market, the Bakken crude market, which is what much of Beth's comments were referring to, if you look at the production in Texas, the production in Texas is reducing, obviating the need to move Bakken to the Gulf because it's produced in Texas and moving by pipeline to the refineries in the Gulf, so there's no need to move Bakken crude to the Gulf.
That Bakken crude has to go somewhere, and that Bakken crude is going east and west. The vast majority of those moves that are going east and west, we're not gonna naturally participate in it, which is why you probably hear a different message from one railroad to another.
If I could just do a follow-up for Doug on the coal side. I know last time we were here, you talked a little bit about the export opportunity in coal. You were a little bit constrained by port capacity. You had thought back then there were some opportunities for port capacity to open up some export markets for you. I guess those have been mired a little bit. Can you give us an update, you know, on your five-year outlook? Do you expect any major opportunities in port capacity opening up in the next five years that would allow you to tap the export market for your coal?
Well, I still we're still sticking with our, our plans to double, you know, double our exports by 2017. We have capacity on the Gulf Coast and on the West Coast. You know, I would, I would put it at in excess of 18-19 million tons of capacity that's publicly available information. And, as I indicated in my presentation, we're working on we're constantly working on projects, like Eric said, to make sure that we're positioned, should private parties, other private parties, would like to add capacity that we're there to support them. So-
That 18-19 million tons, is that available capacity, or is that used capacity?
Yeah. So, I mean, I'll add. Today, there is enough capacity for us to double. There's more than enough capacity, so there does not need to be any more port capacity for us to double. We are excited because I think Doug and I both feel that we'd be surprised if we get to the end of the planning period, and there's not more capacity available, but there are permitting, environmental, a lot of different things that need to be resolved. But today, there's enough existing capacity for us to meet what we've said about doubling the business over the next several years.
If I could just clarify, and I know you know this number, but everybody else may not be tracking the doubling number. In 2012, we moved about 8 million tons export, and at that time, we said by full year 2017, we would expect with existing capacity to be able to double, so from 8 to 16 million tons with existing capacity by 2017. So that's where—and we're still firmly with that.
Let's just hand it over to Cheryl in there.
Thank you. It's Cheryl Radbourne from TD Securities.
Mm-hmm.
I just wanted to ask a question on agriculture. We've got another record crop, so it would appear that volumes there are gonna be well supported through kind of Q3 2015, but beyond that, we are subject to crop production. So I just wondered what your sense is of the percentage of your agriculture portfolio that's really sensitive to, you know, crop production.
It's fairly significant. If you think about it, our grain business is 42% of our portfolio. So but you also look just beyond grain. I mean, our produce business is sensitive to droughts in California. So, it's a pretty good chunk, pretty good percentage of our business. You know, and I think you said it right. When you look at the crop and production, you know, it looks very favorable this year, which is always good for grain shipments. You know, we're also going with comps year over year that, you know, three quarters of the year versus the drought in 2013. So, we get into fourth quarter 2014 and the rest of next year, the comp is a lot more difficult.
But it's a pretty good percentage of our business that is very sensitive to that.
If you look at the long-term trend line yields, because of the technology, seeds, all of that, those trend line yields, the variability around that is reducing. The drought of 2013, you know, was an aberration, but the trend line yields, the variability is decreasing, but it's increasing. So we feel, while there will always be a business with volatility, we feel good that the future is still gonna be projecting up with yields increasing.
Let's try Tom again. Fifth row up there on the left.
Thanks. Tom Wadewitz with UBS. So I wanna give Beth and Brad each a chance to give, give some thoughts here. What percent, roughly, of your book are you gonna touch in 2015? How much, you know, gets repriced at some point of the year? And how different are the pricing discussions that you've had over the last month compared-- or the last couple of months, compared to what they would have been a year ago?
... Why don't you go first?
Well, you know, the vast majority of my business is commodity-type business, whether it's scrap, paper, steel, and as a result, the markets are constantly changing.
So, let me also, Brad, and you can continue. What we said publicly is what Jack has always said, right? We have about, we've given a 40, 30, 30 in terms of the split. So that's all we're gonna give in terms of the split in our business, kind of publicly. But Brad, you can answer.
Or privately, let me just say, right.
Yeah, so we're fairly flexible. But we try and price the market every day. It changes dynamically where the markets are. Our job is to price the market, and that's what we strive to do every day.
I mean, is there any color at all you can give us with respect to the, how much the discussions change? Presumably, it's gotten a lot better. I know you're not gonna give us the pricing range, but, you know, is there any-
Yeah, we price-
Additional commentary?
We always operate in competitive marketplaces, as you know.
Right.
We price to the market. We price to get our value, and you should think that as supply tightens and as value proposition tightens, as the supply of available capacity tightens and the demand increases, you should assume that that helps the pricing environment be more favorable, as we go into the future.
I gave it a shot. Thank you.
Could you just hand it across the hall there? Across, please. Thank you.
Yeah, thank you. Bascome Majors over at Susquehanna. The PHMSA's regulations on the flammable liquids were intended to focus on, you know, trains carrying 20 or more tank cars of flammable liquids, and clearly, that's gonna impact ethanol and crude oil unit trains. Can you talk a little bit about what in your manifest network may also be impacted as perhaps an unintended consequence, and what you and your customers are thinking about as a way to cope with that?
So I don't know if Lance or Jack want to jump in, but we, I think, have submitted public comments to that proposed rulemaking that basically said the rules can impact a broad base of our business and network, because all the trains run on the same network. So it's not just gonna impact those trains. It's gonna impact every train following it and every train in front of it, so.
Yeah, precisely, the things that bug us about the PHMSA rule as it's written, is how inclusive it is, how impactful speed restrictions could be, and then there's some tank car standard controversy that's embedded in it as well.
Oh, my gosh! Okay, let's go down here in the one, two, third row, on the end. Good. Then third row. Mike, sorry. Yeah.
Thanks. Rob Salmon, Deutsche Bank. Doug, I think in your comments you had mentioned that there's robust demand for domestic coal in the near term, in 2014 and 2015. Have the run rates that we've been seeing with coal cars are pretty indicative of what the backlog is due to the very low inventories?
I don't... You know, I gave some guidance in terms of inventory replenishment opportunity. We would expect to get, you know, our fair market share of that opportunity, assuming that that reflects our customers' needs. I don't know that the run rate currently reflects that, but it's approaching that.
That's helpful. Thanks.
Why don't you just hand it, hand it right behind you there, please. Thank you.
Hi, Cleo Zagrean with Macquarie. Could you make an exercise in imagination and tell us, maybe please to know, which items that are not on the list today, would you highlight as the great promise of the next couple of years in terms of business lines? One such item, maybe, I don't know, if it's heavy crude, if that sparks an idea, or if I'm on it or not. And then, how do you plan the network for the commodity price volatility? You said you wanted to have origin and destination terminals that are fit for any price scenario. How do you include availability in your planning? Thank you.
So I think our goal for today, naturally, is to identify the opportunities that we think are of most interest and of significant interest to this audience, and that's what we've done. But we're always working on opportunities that, if at any one given time, we have probably in excess of $1 billion worth of $1 billion of equivalent revenue opportunities we're working on. Not all of those will happen, some of those will, and some of those won't, but we're always working on the pipeline. One example of something we didn't talk about today, but an example that we're working on is dealing with wastewater from drilling, right? So, we're always working on those things. Our whole team gets paid to do that at all times.
Okay. Go over here. Thank you.
Thank you. Allison Landry from Credit Suisse. In terms of the petrochemical opportunity, estimates are for about 40% of the incremental polyethylene production to be exported. I was wondering if you could comment on how much of that you think rail can capture. Are labor shortages still a concern with some of these major projects going through?
So I think that rail can participate in some of the opportunity for export, because it's not all going to be able to. We don't believe that it'll all be able to leave from the Port of Houston. The Port of Houston won't necessarily hit all the markets that the plastics demand is based in.
... So if you want to try to export to Asia, you're probably going to want to go someplace else. Maybe you'll, you'll go to the East Coast or the West Coast. So we think that at least some portion of that export volume will have a rail solution, and that's why we've spent quite a bit of time working on new products and services with the producers, the plastics packagers, and the steamship lines to try to launch opportunities for customers to, to go to a location where there's perhaps better access to steamship containers, that they can then put the plastic pellets in, package them, put them in the, in the containers, and then go to whichever port it is that they think makes sense for the market that they're trying to hit. So some of it, I believe, will have a rail opportunity.
Right now, the producers are still kind of working through their thoughts on, you know, which markets am I trying to hit? What port do I want to use, and how do we get there? And so we're just staying real close to them on that. And then, I'm sorry, I forgot the second part of your question.
It was just about the whether or not you see labor shortages as still being an issue with the major projects.
Yes, so that question was asked at the last quarterly earnings release, and I know a couple other entities have made that statement. We haven't seen substantial material impacts. There are a number of construction projects going on, whether it's the petrochemical space or even things like, as you may know, Exxon built this huge new corporate headquarters in Texas that was huge, multiyear, and still under construction. So, around the edges, there's certainly tight labor, but nothing material that I think would substantially delay the growth opportunity.
Reinforcing that, we've got a very large operation in the very same area, and we've been shopping labor ourselves, and we're able to find, we're able to find, the individuals we want.
Mike, let's give John a shot there in the second to the last, and then we'll go to Tom in the back.
Yeah, thank you. John Barnes with RBC. On the coal outlook, you talked about the growth potential, additional penetration in the Eastern U.S., with those utilities. Are you concerned at all about the portfolio change you're seeing among the eastern utilities? And you've got Southern Company that's going to bring on reactors three and four, Plant Vogtle, in the next 15 months. That's not going to sit around a surge capacity, so it's going to have to offset something else. You've got Tennessee Valley Authority has announced the shutdown of two coal-fired plants, replacing that with one natural gas. I mean, there's no coal-fired generation on the drawing board in the Eastern U.S. right now. Are you nervous at all that maybe that stunts the ability to gain that penetration?
You know, I've been working this side of the business for eight years, and I am constantly amazed at the opportunities that present themselves. I mean, you know, it's the old adage, when one door shuts, another door opens. And so we're, you know, we're pretty encouraged by what we see. I mean, that's not to say there isn't, there isn't some downside out there, too, but there's still opportunity left in this marketplace.
Yeah, and the only thing I would add to that is if you would talk in private to many utilities, and if people were not trying to manage the environmental perception surrounding coal, and you were just having conversation over a banana split, you know, in private, they would tell you coal represents the lowest risk, lowest cost, most stable, secure source of fuel that they have, and they want it in their portfolio.
Okay. And then one question on the petrochemical build-out on the Gulf Coast. I mean, there, there's a wide range of estimates as to how much is going to get spent. I think the world is in agreement that you don't need 10 ethylene crackers on the Gulf Coast, but some portion of them is going to get built. Do you have an opinion as to where in that range of investment, where we're going to finally settle out? I mean, is it the low end of the $45 billion or $50 billion, or is it closer to the high end, over, you know, well over $100 billion?
Well, there are already... In the Gulf, there are a number of them that are already under construction. So, I feel pretty good about those getting built. The rest of them are in, I think some of the more recently announced ones could be more speculative, just because they haven't necessarily located a site yet, or they don't have internal investment decision-making. So I think it's up to that group to decide whether or not they can make the economics work. But at this point, we feel pretty good about what's happening on the Gulf right now because there are a number of them going up, with what I'd call world leaders, you know, the Dow, Exxon, CP Chemicals, et cetera. So for us, at least what's happening so far seems pretty positive.
We've got time for just a couple more. Get Tom, I promised you, you get a shot. And then let's bring it down the third row there, right? That hand that's grabbing for you right there.
Thanks, Mary. It's Tom Kim from Goldman. I had a couple of follow-up questions with regard to coal. Doug, if I could ask you to perhaps comment a little bit more with regard to the shift in sourcing that you're talking about. Can you give us a sense of the size of that book of business that's growing to the South Atlantic, and what's the relative yield on that relative to the overall sort of book of business for coal, that is, obviously?
I can safely say that gets beyond the level of information I think we're willing to share at this point in time. So unless somebody else wants to weigh in.
How about the-
On yield and-
Well, leaving the US question aside.
Are you asking about—you're not, you're not asking about the margins. You're asking about the size of the business.
Yes, the first question was the size of the business.
Sure.
The second was the relative size or the relative yield. Just in rough terms, like, is it more, is it more-
So the margins by-
Not the margin-
Yeah.
But more on the overall yield, given that the length of—presumably, the length of haul is greater, right? So I'm just trying to get a sense of how does the yield look relative to the current book of business. I'm not specifically asking on the margin. But let's just first, I guess, get to the first question, which is: what is the relative size of the book of business that is shifting increasingly to the South Atlantic?
Size of the business.
Roughly, yeah. Big opportunities.
The size of... well-
Yeah.
Over- overall?
Yeah, to go, to go east, I think he's asking, yes.
Yeah. So if you look at it, I think in Doug's prepared comments, he was indicating we're not seeing significant growth in Eastern conversion. I mean, that's what his prepared comments were indicating. There are some notable projects out there, but if you go back five years and what we were talking about in terms of significant growth in Eastern conversion, we're not seeing that. Some of it is there's conversion to gas, some of it is they're converting to Illinois Basin coal. We feel pretty good that we've got a nice, stable outlook of our coal business. Some of that will be conversions, but it's not gonna be huge. In terms of the yield, you mean revenue per mile or revenue per turnaround?
Correct. That's right.
Our commercial strategy is not to differentiate yield by length of haul. I mean, we're gonna price and maximize our yield no matter what the geographic region or what the length of haul is, so.
Fair enough. Just with regard to the 5%-7% potential impact of the regulatory impact on your coal business, can you give us, I guess, some puts and takes around that? Because you mentioned that it was only with regard to what's already been announced. What's the downside of those plants that have not been announced? Presumably, you've done some work to help assess where that downside might be. And then also, conversely, with some of the changes with regard to the Senate, are there actually some positives now that you could see maybe a little bit of a pushback or delay in some of those announcements already?
You know, it's really tough to comment on, you know, the kind of the unofficial retirements, because what we found is it is constantly changing, and a lot of it, I'd just be speculating. I mean, we obviously study it, and we try to stay abreast of anything that's happening on the horizon. I mean, but for planning purposes, we have to stick with the meaningful retirements that we see. And your second question?
Is the price of some of the changes in the conference now?
Well, yeah, okay. So, well, I'd say, you know, it's – I don't want to get too optimistic, but it's a positive. It's certainly not a negative. You know, so I think somebody indicated, Jack or Lance indicated earlier that, you know, time will tell. We'll see what changes take place. I mean, Mitch McConnell got reelected. He's from a big coal state. I think that's a positive for the coal interests. So, I mean, I think we're cautiously optimistic, but we don't want to overplay our hand here.
Yeah, just to clarify on the retirements question, we don't believe, our opinion, that retirements is a driving factor in future coal usage because there's more than enough demand, even once you factor in the retired facilities. That was the 60% kind of current capacity of facilities. So future coal demands are not gonna be driven by how many retirements there are.
Let's take one more down here in the front, and then we're gonna have to-
Sure. David Vernon from Bernstein. Rob, I'll, I'll let you join the mix here. One of the things that seems to be coming up is that capacity constraints may be creating some opportunity to price capacity in a different way going forward. Could you talk through a little bit about how you would make that decision to determine, you know, if these four business unit heads all had a bunch of different business that was competing for that scarce resource, how you'd make those pros and cons? And then, you know, how should we be thinking about the fact that Lance and his team are investing enough to actually create that capacity, that it shouldn't be a problem, or do you think you're gonna need to be in that position in 2015 to be service discriminating on price?
Yeah, we just generally say that we work together as a team on that very question. I would say it's a high-class problem for Union Pacific because we have so many diverse opportunities for us. And that's always been the case, and it's no more the case than it is today. I mean, it's a great opportunity. As you heard the team talk today, we've got significant opportunities, we think, in many markets. Now, it's not always that all of them are hitting on all cylinders at the same time. It's typical that we might have a couple of them doing exceptionally well, a couple of them might be neutral, a couple of them might be down. But that's one of the beauties of the UP franchise, is that there is a very diverse business mix of opportunities for us.
So we take all that in. It's one of the real challenges here. We take all that into consideration as we make capital investment decisions. But I will tell you, that as the team looks to price to market, and that's how we look at it in every one of our businesses, we're well aware of, and we endeavor to learn what the market is and price each one of those businesses to market. And as many of you have asked today, I mean, I can assure you that without giving, because we're not going to give any more precise guidance on the pricing, other than to say that it's something that we, we understand, we endeavor to understand what the markets are.
I will tell you that with a strong demand environment like we're enjoying today, that's certainly a better situation for us as we are pricing to market than in an environment where it's not so strong. But all of those factors are taken into consideration, as the team looks through our opportunities.
So, the capacity utilization plays into that-
Absolutely.
What you think is the market rate opportunity?
Absolutely. It also plays into, as we make decisions today as to what we think the next 5, 6, 7 years of capital investment needs are gonna be. It's all part of that mix.
...All right, I'll take this one more question here, and then we're cutting it off because I've got to hand out some numbers.
I'd like to address the subject of speed of trains. I haven't heard discussion on that matter today. Having been in Europe when Air France went on strike, I was fortunate enough to be on a 250-mi-an-hour train from Provence to Paris. The reason I'm asking this question is if you can move freight at a faster speed, like they're able to do things in Europe, it could increase tremendously, it seems to me, your opportunities. Could you address that subject for me?
Sure. So let's address why we don't go 250 mi an hour. I'm teasing you. We, as you saw in the chart describing growth with service excellence, the frontier of near-term service performance at certain volume levels, our intent, our complete operating strategy, is designed around pushing that envelope out and up. And as you can see, in that same chart, we've made progress over the last decade, certainly since the last time we saw these kinds of peak volumes. And, a network that is operating at a higher velocity, generally speaking, is a more efficient, higher service network.
What we do is we're constantly trying to find that sweet spot where we're delivering the service that we've sold through Eric's commercial team and doing it reliably, safely, first and foremost, and being prudent and investing at a level that generates a really attractive return for our shareholders. We think we've been essentially hitting that sweet spot for some time now. We've got a bump in the road here in 2014. We have a strong understanding of why that is and what it takes to get out of it, and we're in the process of doing just that.
Okay. On that note, we are going to take a break. We need to be back here at 5:05 P.M. We need a little bit of extra time here. We have team members strategically stationed at the tops of the rows here at the door to hand out the slides that go, I think it's behind tab 13, which is Rob's section. We'll take a little break and then come back and hear from Rob. Oh, for those on the web, the slides are also posted. If you are watching on the web, you need to refresh so that you can get access to those.
... Give me that, oh, give me that mic. Thank you. Can we take our seats and give Rob a chance to share?
Yeah, no, I, I'm sure you do.
Oh, but okay.
Yeah.
All righty. This is probably the worst kept secret of the day, now that everybody's been doing their homework in the hallway. Throughout the day, you have heard from the team that the many great opportunities that we have going forward at Union Pacific. And let me take a few minutes now to walk through how these opportunities will translate into financial performance and shareholder returns going forward. To set the stage, let's start with what we've been able to accomplish over the last 10 years.... We ended 2004 with an operating ratio of 87.5, EPS of $0.71 per share, an ROIC of 5.3%, and our, as many of you know, our operating ratio was last in the industry at that point in time.
Since then, we have taken over 21 points off of our operating ratio, grown our EPS by 23% CAGR, and increased our ROIC to 14.7. These are impressive results, and they are a validation that our strategy has worked and that we are focused on the right things. Consistent with that strategy, we set some targets two years ago at our last Investor Day. Let's look at where we stand against those targets before we look ahead to the next five years. In 2012, we were forecasting modest volume growth, and while 2013 was pretty flat, 2014 has, of course, been a very strong year for us thus far. Two years ago, we said we were expecting to continue generating productivity and earning real core pricing gains, and we have accomplished both of these objectives.
We expected our capital spending to be in the range of 16%-17% of revenue, and that's about where it has come out. We projected increasing cash flows, and we set a declared dividend payout target of 30%. Cash flow generation is on track at this point, and our declared dividend payout for the full year 2013 was greater than 31%. Lastly, we targeted a sub-65 operating ratio on a full year basis by the year 2017. As we noted on our earnings call a couple of weeks ago, we are in a solid position to achieve this milestone for the full year, this year in 2014.
Union Pacific has been a great railroad for more than 150 years, and over the last 10 years, our goal has been to be a great investment as well. So how did we accomplish this financial turnaround over the last decade? It didn't happen by chance or luck. Pricing was a key contributor. Our annual core price increases over this time horizon averaged nearly 5%, reflecting our service-oriented value proposition in the marketplace, and this also included the benefit of bringing our legacy contracts to market. In addition to core price, fuel surcharge recovery played a part as well, allowing us to mitigate increases in the diesel fuel prices. Productivity was also a key contributor. Operating efficiencies, innovative technologies, and ongoing cost control initiatives were all drivers in partially offsetting inflation.
While total volume growth over this time period was minimal, we did see the benefit of opportunities in some of our markets. Going forward then, the question becomes: how do we continue this momentum? Well, the overall strategy has not changed. Pricing, productivity, and volume will still be the three key components. However, the mix of these three will likely be different from what we've seen over the past. We expect to see positive demand over the next several years. This means volume, pricing, and productivity will be more balanced contributors as we look out into the future. So what does all this mean for our operating ratio going forward? Today, we are at 64.2% year to date through the third quarter.
As I mentioned earlier, we're in a solid position to achieve our sub-65 operating ratio on a full year basis this year. But as I've said many times, we have never considered the sub-65 to be an endpoint. It's a target that we've been focused on achieving as safely and efficiently as possible. And now that we're just about there, we believe there is an opportunity to continue improving our margins over the next five years. So our new goal is to improve to the 60% mark, ±, on a full year basis by 2019. Of course, our ability to achieve this new operating ratio target will depend on several factors. These include a moderate economy and stable fuel prices. We must continue to achieve reinvestable pricing at levels above inflation.
We must continue to drive productivity, including safety, operating efficiencies, innovative technologies, and cost control initiatives. Lastly, we must continue to improve our service so that we can leverage our franchise strength. Our focus on operating ratio is one of driving returns. Another key focus is our capital investment. It's critical that we invest in our business for safety, replacement, service, and growth. We can't execute our long-term strategy without it. But capital spending is a precious use of our cash, and it's also critical that our growth capital projects earn a solid rate of return. As I mentioned earlier, return on invested capital has increased from 5.3% in 2004 to 14.7% in 2013. This is proof that our strategy is working and that we are trending in the right direction.
Of course, we are not where we need to be, if you look at it from an economic or replacement cost perspective, but we are making progress. And as you can see, we've taken a fairly balanced approach to our capital investment over the past several years. Over half of our capital spending goes to replacing our existing infrastructure and equipment. Another significant portion goes to acquiring the resources and investing in the capacity needed to grow our network safely, efficiently, and effectively. And of course, there is a required spending on Positive Train Control, and by the end of this year, our cumulative amount spent on PTC will be around $1.6 billion. We still expect the total price tag for the project to be around $2 billion or so, despite the delayed completion date.
We invest today for the growing opportunities we see tomorrow and into the future. These investments also support the core pricing and service initiatives that are critical to the value proposition with our customers. Going forward, we are reaffirming that we expect our capital spending as a percent of revenue to continue in the 16%-17% range on average through 2019. The increase in the profitability of the business has driven significant cash generation over the last several years. Along with that, as you can see, an increasing amount of cash has gone to shareholders in the form of dividends and share repurchases. Over the last five years, we have increased the quarterly declared dividend per share by almost 300%. Going forward, we expect dividends to continue to grow with earnings, with a targeted dividend payout ratio growing to 35%.
Since our share repurchase program initiated back in 2007, we have bought back 237 million shares, totaling almost $12 billion. This represents about 22% of the shares outstanding at the start of the program. We have over 95 million shares remaining on our current authorization, and we'll continue to be opportunistic in our approach to buying back shares. From a capital structure perspective, we are targeting an adjusted debt to cap in the low-to-mid 40s range and an adjusted debt to EBITDA of about 1.5+. So how will the cash pie look going forward? This chart on the left depicts the relative size of the cash allocation components over the last five years, which totaled more than $30 billion in aggregate. The chart on the right represents expectations for the next five years.
Of course, this is just directional, but as you can see by the relative size of the two charts, the amount of cash available is expected to grow significantly over the next five years. Not only will the size of the cash pie be greater, but the amounts allocated to returns to shareholders will be greater as well. This clearly demonstrates our continued commitment to increasing shareholder returns. So let's wrap things up with a summary of how we see the next five years playing out. A moderate economy supporting our diverse franchise opportunities should lead to positive volume growth. Our strong value proposition with customers will be instrumental in our ability to achieve real core pricing gains.
Volume growth, solid core pricing, and ongoing productivity initiatives will continue to drive our operating ratio to the 60% mark, ±, on a full-year basis by 2019. A capital program, which focuses primarily on infrastructure replacement, productivity, and higher return growth projects, will result in capital spending totaling 16%-17% of revenue. We expect to generate increasing cash, which will support an Adjusted Debt to Cap in the low-to-mid 40s, while maintaining a strong investment-grade rating. This will enable us to target a Dividend Payout Ratio growing to 35%, with continued strong opportunistic share repurchases. We truly believe in the power and potential of the Union Pacific franchise to deliver great returns for our shareholders over the next 5 years and beyond. So with that, we'll open it up for the final Q&A. Mary, I'll let you...
I'll let Mary come back up, and I'll take a seat.
Anyone have a question? All right, Bill. Bill, I'll go back to Bill.
Okay, so Rob, so we've been to a lot of these investor days now over the years, and you've had a lot of success in achieving the goals ahead of time. I think people will look at this, and they'll say, gosh, if they have a reasonable economy, pricing above inflation and productivity, these numbers look like they're 2017 numbers. Should we think about this as floor guidance? Should we think about this as very conservative? Give us a little bit more context because we're all gonna think that's-
Sure
... awfully conservative.
I was waiting for somebody to ask that question. You know, it's our best look at the way the economy is going to play out and the way the world will play out. So it's not-- we're not intentionally playing some game here. It's really what our best look at, at this is. And again, as we've talked all day, and as you've heard me say many times, you know, it's not-- We've got a very diverse franchise, but not everything typically lines up, and all the stars don't align in any one, in any one year. And so we take that into consideration when we set these goals. But I think hitting a 60 mark on the OR is no easy task.
That assumes we're gonna make great progress from here to there on incremental margins as we grow the business, and so it's certainly, in my mind, not a layup. You're right that we have achieved all of the goals when we started in 1987, and I gave the low 80s, and we said 75, and we said low 70. I'm proud to say that we got there earlier each time than we said, but it's not that we were sandbagging. It's just that the economy and all the service and the pricing and all those things came together properly. So it is... My summary would be, it's our best look at the way things are gonna play out over the next 5 years, and we're not gonna stop there.
If we can get there sooner, great, but our best look is that it's a 2019 timeframe.
All right, let's go over to Chris.
Great, thanks. Chris Wetherbee from Citi. Rob, I guess just sticking on the OR, when you think about sort of that plus or minus-
Mm-hmm.
Can you give us some rough sense of kind of what the variables that could get you
Yeah
... above or below that, in particular into the fifties? Just kind of curious to think about that.
Yeah. Nothing would please me more than for something to start with a five, by the way. But the things, you know, we think it's a relatively tight range as we look at that. That's why we sort of gave it a ±. But the things that could push us either side of 60, in my mind, would be certainly the economy and what resulting volume then are we able to achieve. Fuel prices are always a wild card in that. Recessions during that timeframe can always play a role, clearly. So it's really kind of the same old things that kind of push you either way, today, can push us on either side of that 60, is our best guess at this point in time.
Just to follow up on the fuel, do you have-
Yeah
... a specific fuel target embedded within that?
I'd say we've assumed somewhere in the $90, low $90s per barrel kind of number at this point.
Walter, let's go back. So let's work our way back.
... Yeah, thanks very much. So Walter Spracklin, RBC. You mentioned that the sub-65 was never an end target, it was a, you know, you know, on your path toward to where you're going. Is 60 an end target, target? I mean, we've seen this 60 now, the midpoint of a lot of rail guidance.
Yeah.
Is it a point where perhaps a regulator starts to look a little harder, your customers start to look a little harder? Do you start to look more at growth when you hit that 60, whether it comes in 2019 or 2017?
Mm-hmm.
Is it a floor for your company?
Well, it's a great question, and, you know, each step along this path, we've said, as, as you just repeated, that it's not the end point. But, but you raise a great point, which we're all well aware of, that is a theoretical sort of point out there. And I will tell you, though, we, it's not as if we walk away. We don't run the business to have a great operating ratio. We run it to have great financial results and great returns and provide great service to our customers. It just so happens that it's kind of an easy measure for us to guide internally as much as anything, is that operating ratio target. But, but we're not walking away from business that we think is good for the business because it doesn't maybe have a 60 operating ratio. I mean, we're mindful of that.
We're also mindful that the regulatory environment is very real, and that's why you heard us talk earlier about the need to talk about things like replacement cost in that calculation. So all of those are in the mix. We'll cross that bridge when we get to it, but at this point in time, we're focused on that, you know, that 60 mark.
And just a second question here. Looking at your capital structure, you know, if I look at your presentations today, I look how you weathered the recession, everything came out, you know, a lot better than many would have expected from a downside risk perspective. I look at your capital structure guidance, and it, you know, many would say that given your infrastructural, more infrastructure-like type of product offering, you're rather conservative. I mean, 1.5 times debt to EBITDA, low 40s debt to total cap. Isn't there a little bit more opportunity here to, you know, be a little bit more, a little less conservative on those metrics?
Well, we've been improving it, as you know, and so giving the guidance that I just gave of a low- to mid-40s on the debt to cap is moving in the right direction, I think you would say, and I get your point. We think that has served us well. Our primary focus is on generating the cash to begin with. I mean, to drive the business fundamentals is the first thing that has to fall into place, and then we'll continue to walk up the capital structure and the debt, as I mentioned. And the 1.5, I remember I said 1.5 plus, so how much more plus can we go? You know, we'll see. We're gonna move it all up in the direction I think you'd want us to move.
So that might not be the end target either?
That is... Maybe not.
Let's go back to Ken, please. I'll, I'll come back to you. Ken, right there. In the back row.
Thanks, Mary. Ken Hoexter from Merrill. Just to jump on that, is there a level of return on invested capital where you think you hit that or I guess, an OR level where you're hitting that, where you're comfortable hitting that replacement rate of level of capital?
I'm not sure I understand your question.
Does getting you to 60 get you to a, an acceptable, for yourself, level of reinvestable level of capital rate of return?
Well, I mean, it's moving in the right direction, as we have over the last X number of years. Again, I wouldn't call it an endpoint, but I think it would certainly move us, albeit probably at a slower slope than what we've seen going from a 5% ROIC to the roughly 15 we're at now. So I think it will... I mean, our expectation certainly is that it will continue to move the returns in the right direction.
Okay. And just to wrap up, within the target, when you think about, you said it's going to be evenly distributed, if I understand you right, between pricing, volumes, and productivity. Can you jump on the volume side? Are you looking at kind of a GDP type of growth? Is it still above, given intermodal, or does grain coming off of record levels kind of counter that? You know, are you looking at a GDP plus type of what's embedded in those growth levels?
Yeah. I wouldn't call it GDP plus, and maybe others can jump in with their views here. But the guidance we're giving, and I wouldn't get too—I wouldn't get the slide rule out on that. All, what I'm saying on that chart is that we think versus what we've seen over the last 10 years, is the combination of volume, price, and productivity will feel, we believe, our best outlook at this point, will be more balanced than it has been over the last decade. And that implies a little bit more volume than we've enjoyed over the last decade as a contributor. We haven't called it GDP plus, but what we're saying is it's a positive volume. We think our projection at this point in time is a cooperating economy.
All the great business opportunities that the team went through, you add all that up, us going after the right business at the right returns will result in positive volume growth for us.
Let's go to Tom, right there. And then we'll-
Yeah, Tom O'Rourke from UBS. So Jack, if I think about going back quite a ways, even to I don't know, analyst meetings prior to 2010, the formula was every piece of business has to be investable. You know, we have to price up and get productivity, and it really came through. That was the, you know, a big focus before you'd focus on growing volumes. As you look forward, Rob's obviously, you know, indicated there's probably more potential for volumes. Does that change the way we ought to think about incremental margins? Because you've, you've certainly surprised in delivering better margins, while you haven't had a lot of volume growth.
If the volume growth comes through and the system's already somewhat tight, does that cause us to be a little more muted in how we think margins can can improve?
I don't know that I would say that's specifically the case. What I would tell you is, as we look at the trajectory going forward, we're not changing our way of thinking. We talked about some of those issues today. We're not going out to get volume for volume's sake. The reinvestibility at the threshold, pricing to market with a belief that we can do better than inflation on our pricing perspective, is still the process that we're gonna follow as we look through to the future, to the planning horizon. We think, you know, the fact that we haven't had much volume wasn't because we didn't want much volume, it's because we hit the recession in 2008, and the market went kind of flat and those kinds of things.
We stayed disciplined in terms of our pricing and the business that we bring onto the railroad. That discipline continues.
... moving forward, nothing changes there. If the volume manifests itself and it's more balanced, that would be kind of a nice thing to have for us. If it doesn't, that still doesn't preclude that we can't get to our end game.
Okay. And then just a second one. In terms of fluidity, I assume that you, you've, you're baking in a higher velocity to, you know, throughout the plan. When do you think that, that tends to come in? Is that, is that, you know, kind of-
When are we going to be fixed?
Yeah. Is that... Well, not fixed, but-
I was waiting for that question. Go ahead.
If volumes are still relatively strong, can you see substantial velocity improvement next year, or is that kind of too optimistic?
We have a nice pipeline of people coming on board. We have some additional locomotives that we've prepared for and that we're taking on as well. Those are going to ratchet up. As we've said, we're improving even now, even in the weeks that we had 198,000 cars a week, our velocity is improving. As velocity improves, I'm gonna make up the number here, 200-250 locomotives for one mile an hour. Can we get another couple of miles an hour? Yeah, I think we can. That rebuilds the surge capacity for us. That, so you actually spool those assets out of operational use, which is efficient from a cost perspective.
It gives us the protection of having surge capacity for the next weather event or whatever happens on the railroad, and I think that's how we're gonna get there, overall.
Yes, so to be crystal clear, our expectation is we're gonna continue to improve as the assets that Jack mentioned come online. That would indicate that next year is gonna be a better year than this year in service, and that's our expectation.
Thank you.
Jeff, we'll just Jeff, we'll just keep moving back here. Yes, please.
Very much. Jeff Kauffman, Buckingham. Rob, I just wanna go through the numbers and make sure I'm understanding what you're saying. If I give you credit for the 40 OR and your CapEx budget, that's implying you're gonna get to about a $4-$4.5 billion free cash range at some point in the forecast period. If you're paying out the dividend at 35%, that's about $2 billion you'll be using for dividends. And if you're gonna buy back about 30 million shares a year to use up your 95 million by 2017, that's implying about $3-$3.5 billion, plus or minus, what the stock price does. Are you telling me... Does that use up more than your free cash?
Are you telling me you're comfortable going $1 billion-$1.5 billion a year in debt to fund the share repurchase program, and that's comfortably within your debt-to-cap range?
I'm not giving as specific guidance as you're asking, but what I'm telling you is we're comfortable growing our debt levels to that, you know, low to mid-40s debt to cap-
Cap.
Cap, adjusted ratio. We've given the guidance on the capital spending, the dividends. So, I mean, however those numbers play out, again, it all starts with generating the strong cash and the strong fundamentals on the front end. So what the numbers end up actually being, and it may not be straight lined, it likely will be somewhat lumpy over that time frame. You know, directionally, that's, that's what we're comfortable with.
That's all I wanted to know. Thanks.
Let's just hit the back row there, right?
Thanks. Justin Long from Stephens. Rob, you mentioned, you know, over the last 10 years, about 5% pricing, but you did have the benefit of some legacy contracts that came up for renewal. Going forward, over the next 5 years, could you just talk about that legacy book that's coming up? I know you've talked about 2015, but just beyond that, what's expected?
Yeah, what we've said on the legacy, that's the tail is kind of winding down. There's about $300 million of revenue next year, which tends to be front-end loaded, by the way. About $300 million of revenue that we will compete for, as we do in the marketplace, that we would put in the bucket of legacy for 2015. Beyond 2015, there's about another 100-140 million in the following year, and then it kind of winds down from there. So it's certainly not going to be the contributor that it has been as we look backwards. Next year, we though, will compete for that $300 million that's in the marketplace.
Mm-hmm.
So I would be careful, though. The caution I always throw out to all of you is not every legacy contract is the same. So I wouldn't take, you know, I wouldn't take the math and just straight line based on the legacy expectation compared to what we've done in the past, because each of those contracts are different. We will compete in the marketplace for them, but again, there is a, you know, sizable revenue opportunity next year relative to what it was this year.
We'll run side with-
Thanks. Brandon Oglenski from Barclays. You know, what's the risk here that maybe the rest of the industry doesn't quickly recover as fast as your plan here is at the UP? I mean, the STB is requesting these weekly service reports now. I think we've had them out for a week or two. Half the industry can't even calculate the data yet with the things they're requesting. So if the industry at large doesn't get everything together fast enough, just what can the STB do? Or is it more talk and not a lot of teeth?
Jack, let me, let me take the risk side. So we've said, in the neighborhood of high 30%, 40% of our business interchange with another carrier. And we've also said, at probably each of this year's quarterly earnings reports, that a fluid interchange partner ultimately is pretty important to us, fully recovering our service product. That's not the only thing holding back our service product, but clearly, it's an opportunity. So in the absence of other carriers also improving their service product over time, and as we enter next year, at some point, that becomes a bit of a headwind for us to get fully back to normal.
Yeah, I think it's an interesting question: What can the STB do? I suppose we could report more statistics.
... hardly,
Well, anyway, those are some of the things. You know, if you get to the root, there are some extreme things that the STB could do, but they have to do it under the context of the law and how they move forward. I suppose they could do directed service. They could do all kinds of things, but there will be a process involved with that, and I don't know that that's gonna be necessary. I think what you're gonna see is the improvement is gonna take place for the rest of the rail industry. We're seeing improvement now with our interchange partners. They're seeing improvement from us, so it's not like it's one-sided. I mean, I'm sure we have caused problems for others from time to time as well. And I think the industry is getting stronger and better.
As more assets come on board, I think you'll start to see that evolution take place.
Then getting back to the STB, the work that we have to do, the industry has to do, is to engage with the STB to really try to answer the question they're trying to answer for their constituents, which is: What's going on? What's your service product look like? And how can I know what to look at to know it's getting better? And at what point is it, quote, unquote, "back to normal?" And you know, our feedback to the STB and our letter in response to the first time we filed, the original filing, is, we're not sure that what you're asking for is getting at that, and we would love to engage you on a discussion to get at that.
I think they put a lot of data out, but very little information. And so even if you look at the Union Pacific data that's out there, unless you truly understand the flex within our transportation plan, unless you truly understand where we're holding a train because we don't have a customer ready to accept it on the other end of the railroad, and so rather than move it to the other end and let it block up, we're gonna hold it on the east end of the railroad, where it's out of harm's way, until we've got a clear sight to take it to the Pacific Northwest, for instance. All of that data that you have is not gonna explain that to you. I think it's gonna be more confusing than it actually is informative.
Matthew, a question? I know your hand was up, but...
Thanks. So, Rob, I think what people are doing is they're saying, "Let's put 3%-4% volume growth in the model and 3%-4% yield growth and 60% incremental margin." And I think that's how they're getting to that 2017 year of sub-16. So what— And I know you're not giving specific guidance like that, but which of those parts, if anything, feels aggressive, unrealistic, or does that all seem fairly about right?
I mean, that math probably works if you could straight line all that, and you'd probably book that if that were exactly the case. But that's just not our projection. That's not our guidance, and any number of things can kind of go bump in the night in terms of that would take it off that track. And that's not our guidance, that the volume's gonna look like that, and that's not our guidance, that the pricing is gonna look like that.
I can't think of any 5-year period in my 42-year career where we've had 3%-4% volume.
Well, that's fair point, too.
I think that's pretty aggressive.
I know.
Very aggressive.
Should we try up on the back here? John?
Thank you. John Barnes, RBC. One question on spending and one on the capital structure. From a spending perspective, even though PTC has been delayed, we would assume, I guess, at some point, that spending begins to ebb lower. Should we assume, given the needs of the network from a growth perspective, that that spending just gets reallocated towards the growth piece of the pie, or does that lower spending on PTC ultimately get thrown into another piece, maybe the, the return of capital to shareholders piece of the pie?
Yeah, let me, let me answer that. Our, our guidance of the 16%-17%, you're, you're right. That does include the PTC spend, which is about, you know, we'll call it $450 million this year. We'll see what the deadline ends up being, and that will dictate how much we spend in the out years. We've committed, by the way, that the total spend, regardless of what the deadline is, will still be in that $2 billion-ish range. I would love nothing more than when PTC is dwindling down, if there are growth and expansion projects for us that had the right returns, that we were confident making those investments.
I'm so confident in our process to scrub, if you will, those projections and those capital investments before we, before we make them, that the expected returns are, are very solid in our mind. So if the returns aren't there, then we won't make those capital investments. But we're confident in our guidance and in our five-year look here, that there will be such opportunities for us to make those spending, regardless of how much of that ends up being PTC.
And, Rob, you've said this before: It's not like we take sales, multiply by 16%-17% and say, "That's what capital is gonna be-
Yeah.
that we allocate to the business.
Yeah.
The other thing I would be very cautious of is to think that because they extend the PTC deadline for whatever reason, that we're gonna slow down our effort or to do anything other than complete the project as quickly as possible-
Yeah, good point.
... as efficiently and as effectively as possible to get it up, so that we have some time to test it and ensure that it does nothing to impede the capacity or the velocity of our network. So, I'm not sure if that really has any bearing on any extension, that we're gonna spend less or more or any of those. We're still thinking it's gonna be $2 billion-ish, and that we're gonna move forward as aggressively as we can to bring it up and to test it and to move forward with it, so we get it behind us and then can move on to the next phase of what we need to do.
Okay. And then one question on the capital structure. I hate to keep beating this dead horse, but, you know, given the relative low cost of debt, Norfolk Southern had a lot of ease putting out a 100-year debt. You know, we-
... I get what you're saying on your capital structure. Is there anything, you know, in the back of your mind preventing you from being maybe more aggressive in, you know, raising that debt level a little quicker, given those, you know, is it a concern around the liquidity crunch you went through in 2008, 2009? Is it, are you concerned at all that a wave of consolidation sweeps the industry, and you want your, your powder dry to take advantage of that? I mean, is there any of that in the back of your head?
Yeah, I would say none of those are factors in the guidance that we've given. I mean, we've been improving that structure, and our plan is to walk it up to that, you know, mid-forties, from low to mid-forties, and but none of those factors are influencing it at this point in time.
Leo, let's move down the line there.
Cleo Zagrean with Macquarie. With regards to your growth capital plans, you've explained to us that you are investing in a fungible network, and yet when all business lines come to you, which of them would you say have the highest claim on your available cash? And then, as a follow-up, with growing concerns about global growth, how do you look at the rest of the world as top opportunities and risks compared to, say, the domestic business base? And I know it's growth, it's tough to cut that out, but still, the best you can do for us. Thank you.
Let me take a shot at the first part of that question.
Sure.
When we make a capital investment decision, I mean, we again, as I re-referenced earlier, we have a very tight process that involves all disciplines of our company to really kind of scrub those capital investment opportunities. And again, one of the beauties of the UP franchise is we have a diverse set of business opportunities. So I wouldn't say there's any, any one business that has any, any greater stake on that. We look at what are the expected returns, and typically, when we make capital investments for growth purposes, it's an asset that's fungible. It's, it's shared, if you will, whether that's a locomotive or a piece of track that's used by more than just one business line, and that's part of the way we, we look at it.
So again, we look at it with an expected level of returns, regardless of which business is gonna tap into that capital.
Second part of your question, North America is clearly a bright spot in world economic markets, but our focus, our strategy, and our franchise is we're gonna play in both. And if in five years, the international markets are brighter than North America, we have the franchise to play in that, so.
Mike, just let's just keep moving on down the line there. One more.
Thanks. With regard to the investments that you guys are making in the network, what sort of expansion are you expecting to kind of take fruit because of the productivity improvements as well as the 16%-17% of revenue that you're spending in CapEx?
So let me answer that from, again, the standpoint of that, frontier of service and volume. What Cameron and his team are doing every year, working in conjunction with the commercial team and finance team and all their support, is trying to figure out, like I showed you on the map, where are our bottlenecks? Where is projected volume gonna create a projected constraint in the network, and alleviating that and enabling growth, productivity, safety, et cetera. So as we make those investments, we look at moving that frontier up and to the right. Cameron's success is a demonstrated, and it, and it's easy to verify, a demonstrated ability and track record of doing that over time. In the short run, he's trying to keep putting pressure on that line.
In the long run, he's trying to move those experience dots and that best fit line up and right. That's how we think about it.
If we're thinking about from a near-term perspective, obviously, there was a lot of network disruption days, so across the UP and year to date. If we're thinking about a disruption on kind of the East-West mainline or maybe the Sunset Corridor, could you give us a sense of what the cost is for one of those network outage days?
Well, I think the answer is no. So let's put a definition on what those network outage days were. Those were, the definition of that is a day where we've held 50 train hours for a weather event or an incident, and an incident is not a derailment. An incident is, like an earthquake in California. That was a bona fide incident that we experienced earlier in the year. And while we don't, you know, put math on that and talk about it publicly, what we really care about is reducing variability on the network so that we can spool up service product and make it reliable and safe and efficient, and dwelling trains is the negative of that. So clearly, Cam and team want to try to reduce it. Cam, you want to address any of that?
I think you covered it.
Okay. Let's go back up to Tom at the last row there, please.
Thank you. I wanted to ask about some of the productivity gains and if you can be maybe a little bit more specific. You talked quite a bit about improving train speeds, train length, all of which presumes that you're gonna need less labor to grow. Obviously, labor may grow, but may not necessarily need to grow at the same pace as your overall volume. Can you help us contextualize and what's embedded in your labor growth assumptions based on the new targets?
Let me take one broad answer, and then Cam can probably get into a little more detail. You're exactly right. Our projection in terms of positive line growth, and that does assume and imply that labor growth will grow, but not at a one-for-one rate. You're exactly right, because we are assuming, obviously, there's going to be productivity in that growth. But our overall assumption is that headcount and labor growth will grow with volume, but less than one for one in terms of the specifics.
We'll hire 3,600 TE&Y this year. Next year, our plan is for roughly 2,800, and that assumes a certain attrition rate, which is mostly retirement.
... We meet monthly to look at our carload growth, and you have to remember the timeline is at least six months out, but we're trying to make the right hiring decisions. And so we're trying to land in the right place to ensure that we maintain our productivity.
So hiring 3,600 TE&Y this year means our total hiring for the year is about 5,500?
Right.
Before attrition, of course.
Right.
That's the hiring, and then we've got roughly 4,000 of attrition, right?
Right.
You got it exactly right. We anticipate, as Rob has said many times, for headcount to grow at a slower pace than overall growth.
Great. Thanks very much. And if I could just add on or ask a follow-on. In terms of the overall asset turns, what other sort of assets do you assume embedded in the assumptions there that you'd be able to basically enhance your revenue growth while, you know, effectively sweating your assets a bit further? Can we assume greater efficiencies, or how can we, in terms of trying to model out the greater efficiencies, whether it's in locomotives or your overall car loads, your cars, how should we think about the incremental additional productivities out of your other assets other than human capital? Thank you.
There's no question. You've heard, you've heard the numbers several times today. 1 mile an hour in velocity is equal to 200+ locomotives. It also is 200+ people. As that velocity increases, you'll see us productively store locomotives and furlough people. And that is our objective.
Or higher or less.
Higher or less.
Higher or less.
Or higher or less.
Right.
Same is true of freight cars. Get productivity out of freight cars, and you get productivity out of, out of your overall network structure, terminals and mainline capacity.
Okay. Ken, one more, and then we will adjourn.
Thanks. I just have a real quick follow-up. Do you need service metrics to rebound in order to meet your targets? Are you counting on the service metrics getting back to certain levels operationally?
Yeah, I mean, embedded in the guidance that we've given on our financials is an assumption that we will continue to improve our service metrics, yes.
Okay. That's it. Thank you.
Okay. That concludes our program for today, so we will bid farewell to the folks who are listening in over the webcast.