Oct 23, 2014
Executives
Katie Cook - Director, Investor Relations Wick Moorman - Chairman and Chief Executive Officer Jim Squires - President Don Seale - Chief Marketing Officer Mark Manion - Chief Operating Officer Marta Stewart - Chief Financial Officer
Analysts
Bill Greene - Morgan Stanley Allison Landry - Credit Suisse Jason Seidl - Cowen & Company Tom Wadewitz - UBS Chris Wetherbee - Citigroup Scott Group - Wolfe Research Brandon Oglenski - Barclays Bascome Majors - Susquehanna International John Larkin - Stifel Justin Long - Stephens Walter Spracklin - RBC Rob Salmon - Deutsche Bank Thomas Kim - Goldman Sachs Ken Hoexter - Merrill Lynch David Vernon - Bernstein Investments Jeff Kauffman - Buckingham Research Keith Schoonmaker - Morningstar Cleo Zagrean - Macquarie
Operator
Greetings and welcome to the Norfolk Southern Corporation Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Katie Cook, Director of Investor Relations. Thank you, Ms.
Cook. You may now begin.
Katie Cook - Director, Investor Relations
Thank you, Rob and good morning. Before we begin today’s call, I would like to mention a few items.
First, the slides of the presenters are available on our website at norfolksouthern.com in the Investors section. Additionally, transcripts and downloads of today’s call will be posted on our website.
Please be advised that during this call we may make certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties and our actual results may differ materially from those projected.
Please refer to our annual and quarterly reports filed with the SEC for a full discussion of those risks and uncertainties we view as most important. Additionally, keep in mind that all references to reported results, excluding certain adjustments that is, non-GAAP numbers have been reconciled on our website in the Investors section.
Now, it is my pleasure to introduce Norfolk Southern’s Chairman and CEO, Wick Moorman.
Wick Moorman - Chairman and Chief Executive Officer
Thank you, Katie and good morning everyone. It is my pleasure to welcome you to our third quarter 2014 earnings conference call.
With me today are several members of our senior team, including our President, Jim Squires; our Chief Marketing Officer, Don Seale; our Chief Operating Officer, Mark Manion; and our Chief Financial Officer, Marta Stewart. I am pleased to report that Norfolk Southern achieved another very good quarter as third quarter financial results set records across the board.
Earnings for the quarter were $1.79 per share, up 17% compared with the $1.53 we earned during third quarter last year. These strong results reflect continued high demand in most of our business groups as overall volumes increased 8% driven by double-digit increases in merchandise and intermodal offset by a slight decline in coal.
For the second consecutive quarter, revenue topped $3 billion, up $199 million or 7% versus last year. And Don will fill you in on the revenue and volume details in a few minutes.
Similar to our second quarter results, our expenses were up only 3% and our resulting 67.0% operating ratio set a third quarter record. Now, while our financial results were very strong much like in the second quarter, the railroads velocity and operating metrics were considerably reduced year-over-year as we continue to be challenged by demand in excess of our forecast for the year.
This was particularly significant in terms of our crew base, which was sized for lower volumes. As all of you know, it takes from 7 to 9 months to hire and qualify new transportation employees.
And we are just now starting to see newly qualified conductors marking up in our critical areas. We continue to actively hire and have taken steps to accelerate our training cycle.
In addition, we have temporarily transferred over 100 train and engine service personnel to our busy Dearborn division from other parts of the network. We have the other special initiatives in place as well to help increase crew availability and we have a number of important infrastructure projects and new locomotives coming online in the fourth quarter as well.
Mark will go over our service metrics and our initiatives for improvement in more detail with you. While we have demonstrated our ability to successfully manage overall expenses, the network slowdown and recovery efforts have translated to some additional operating costs and Marta will go over all of them as well as the rest of the financials.
In spite of these operating challenges, we are excited about delivering another quarter of record results and we remain optimistic about our prospects going forward. And on that note, I will turn the program over to Don, then Mark, and then finally Marta, and then I will return with some closing comments before we take your questions.
Don?
Don Seale - Chief Marketing Officer
Thanks, Wick and good morning everyone. As Wick stated, we are pleased to report that the third quarter of 2014 was our second consecutive $3 billion quarter with record revenues in both our merchandise and intermodal sectors, which were partially offset by a weaker coal market.
Revenue growth of $199 million, up 7% versus third quarter of last year was generated by our merchandise business, which generated a $152 million, up 10% followed by intermodal, which was up $62 million or 10% over last year. In coal, weak global market conditions in the export sector and milder summer weather, which impacted coal demand, resulted in a decline of $15 million or 2% compared to third quarter of last year.
Volume increases in intermodal and merchandise accounted for $219 million of revenue variance in the quarter. Also positive year-over-year fuel surcharge revenue partially offset the negative mix effects associated with higher intermodal volumes and lower coal shipments.
Accordingly, total RPU was down 1% in the quarter as a result of this negative mix effect between and within our business groups, which I will discuss in more detail as I review each of the major business groups. Now, turning to the components of growth, total volume increased 8% due to 10% gains in merchandise and intermodal shipments, which offset a 2% decline in coal.
Across our merchandise business, very strong performance was led by increased chemicals, automotive and metals and construction volumes. In intermodal for the first time shipments exceeded 1 million units in the quarter, a gain of almost 92,000 units, up 10% compared with third quarter 2013 with strength in both domestic and international markets.
And in coal, volume declined by 2% as export shipments weakened due to continued global oversupply and sluggish demand. Now, moving to our individual market segments, starting with coal, coal revenue was down $15 million or 2% compared to third quarter last year.
Coal revenue per unit was flat in the quarter as declines in higher yielding export traffic offset the positive effects of increased longer haul traffic to our Southern utilities. With respect to utility coal, overall volumes declined by 3% as a result of milder summer temperatures with July in particular posting the lowest average temperature since 2009.
Lower natural gas prices also impacted coal burn during the quarter. This factor along with a competitive contract loss resulted in a 14% decline in shipments to our northern utility plants, while volume to southern plants was up 9%.
In the export market, third quarter volumes were down 16% as excess global supply and lower commodity pricing continued to impact the seaboard and coal market causing declines in both metallurgical and thermal coal volumes at our Lambert’s Point terminal. Within our domestic metallurgical markets, volumes were up 8% led by gains in coke shipments to the steel industry, which more than offset weaker domestic met coal volumes.
And finally, industrial coal volumes increased by 32% due to new business and organic growth with industrial customers as the economy continues to improve. Turning to intermodal, intermodal revenue in the quarter increased by $62 million or 10% to $667 million, which is a new quarterly record.
With respect to revenue per unit, positive pricing activity within the domestic intermodal segment was offset by higher volumes of lower revenue per unit international freight leading to overall flat yield per shipment. Domestic intermodal volume was up 8% driven by targeted highway conversions across all business segments as well as organic growth with large key accounts across our domestic book of business.
On the international side, strong volume growth of 15% was generated through organic growth with our existing shipping partners, new contract business and from new terminal growth. Moving to our merchandise markets, these five carload business groups also set a new quarterly record with $1.7 billion in revenue, an increase of $152 million or 10% versus third quarter of 2013.
Our merchandise markets also faced negative mix effects as strong volume growth within our metals, construction, and bi-level automotive segments offset gains in higher revenue per unit, agricultural and chemical commodities. As a result, overall merchandise RPU declined by $7 and was flat for the quarter.
With respect to volumes, growth was led by strong increases in crude by rail and natural gas liquids, which increased our chemicals volume by 17%. Automotive volumes were up 12% versus last year propelled by significant increases as we took advantage of the auto manufacturers’ summer shutdown period in July to reduce finished vehicle inventory backlogs that were a result of national car – railcar supply issues incurred earlier in the year.
And growth in frac sand, aggregates and steel increased our metals and construction carloads by a strong 12%. And the excellent 2013 corn crop continue to provide growth opportunities in our agricultural market helping to generate a volume gain of 6% in the quarter.
Finally, paper and forest products volumes were flat in the quarter with double-digit gains in lumber offsetting declines in kaolin clay and waste shipments. Now, I will conclude with our business outlook.
We see continued opportunity ahead to generate solid growth across most of our business units. The exception is coal.
So far this year, our utility coal shipments have been higher than expected due to elevated natural gas prices and the need to replenish stock piles. But the impact of milder weather and lower natural gas prices are now reversing some of that positive trend.
On the plus side, we estimate that stock piles at our utilities remain 19% below December 2013 levels going into the winter heating season. So the wildcard is what kind of winter demand lies ahead.
In our met and thermal export markets, we continued to see global oversupply and low commodity pricing. And the weaker Australian dollar which has declined another 6% since September 1 is making Australian coal even more competitive in the global marketplace.
Turning to intermodal, tightening capacity and rising cost in the trucking industry will drive continued volume growth in our domestic markets as we take advantage of opportunities the highway conversion and yield improvement. And we expect continued growth in our international intermodal business through organic growth and new services.
In our merchandise markets, we anticipate continued opportunities in crude oil and natural gas related products as well as drilling material such as frac sand and pipe. We also anticipate higher steel volumes to support the energy and automotive sectors, while housing expansion will help boost volumes in aggregates, lumber and construction materials.
In the automotive sector, volumes are expected to move higher with increased vehicle production and with new models coming online at several Norfolk Southern served assembly plants. Last, in our agricultural markets, expectations for another record corn and soybean harvest in 2014 will lead to domestic growth, as well as potential export opportunities in the months ahead.
Now, let me summarize, we expect revenue and volume growth in our intermodal and merchandise markets, while we continued to face challenging and uncertain conditions in the coal sector. As we move forward, we remain keenly focused on improving service to meet the expectations of our customers and to support our ability to price to market at levels that equal or exceed rail inflation.
In turn, we will continue to invest in equipment, locomotives and our network to provide better service today and in the future for our customers. Thanks for your attention.
And I will now turn it over to Mark for our operating report. Mark?
Mark Manion - Chief Operating Officer
Thank you, Don. Third quarter operations were heavily impacted by very positive traffic growth.
While we continue to target overall operating efficiency, network velocity and service performance have slipped. Initiatives to balance and effectively apply resources to those segments of a network that are seeing the most growth are stabilizing the operation and customers should start to notice improvements in service and service consistency during the fourth quarter.
More importantly, these efforts will position us for further growth going into 2015. On Slide 2, our nine months injury ratio stands at 1.18, down slightly when compared to last year.
But we have been seeing improving trends continuing into the third quarter, which had an injury ratio of 1.09. Train incidents for the first nine months are flat compared to the full year in 2013 at 2.4 per million train miles.
Crossing accidents increased to 4.0 per million train miles for the first nine months compared to 3.6 for the full year 2013. As I noted on my opening slide, service levels have been impacted by volume increases and particularly traffic increases across the corridor from Chicago to Philadelphia.
Consequently, as you see on Slide 3, our composite service performance dropped to 68.6% in the third quarter, well below customer expectations and the record service level of 2013. Moving to Slide 4, as you would expect, train speed and terminal dwell data show the same trend as the service composite, reflecting slower network velocity.
Train speed averaged 20.9 miles per hour in the third quarter and terminal dwell was 24.7 hours. Both were impacted by volume as we have discussed, but there were also a number of track works and PTC projects across parts of the Northern region.
These will be completed ahead of seasonal peaks in grain and intermodal. We have and we will continue to take additional steps that will bring measurable improvements to network velocity and service delivery.
Some of these initiatives are outlined on Slide 5. Aligning and positioning T&E forces with volume growth is our immediate focus.
To address crew availability in the short-term, we have offered various temporary incentives to our current T&E employees. 114 conductors and engineers agreed to transfer temporarily from various parts of the network to locations on the Northern region where volume growth has outpaced crew availability.
In addition, over 680 employees participated in a vacation buyback program. And we have also offered incentives to T&E employees who were eligible to retire, but defer retirement until 2015.
As discussed in my remarks regarding second quarter operating results, we stepped up hiring and training in order to bring T&E forces in line with expected volumes. Currently we have 1,453 new T&E employees in various stages of the hiring, training and qualification process.
In the third quarter, 206 new conductors were qualified and most of those were placed in the high traffic growth areas along the Chicago to Philadelphia corridor. In the fourth quarter, we expect that 596 will be qualified.
At the beginning of this year, we had 11,290 T&E employees in active or training status. By the end of this year that number is expected to increase to 12,006, which is a net increase of 716 T&E employees this year.
Several new infrastructure projects in the Chicago area and Upper Midwest have or shortly will be completed, adding more capacity and more flexibility in our operations in and around the Chicago area. Perhaps the most important of these is the expansion of the terminal in Bellevue, Ohio.
This project which nearly doubles the capacity of the terminal will ramp up in December. We will then begin a phased-in operating plan with full operations at Bellevue online during the first quarter of 2015.
In addition to more capacity, the Bellevue expansion will give us much more flexibility in routing of trains to and from Chicago and more bypass options during periods of bad weather. Now while Bellevue is the largest infrastructure project, other infrastructure projects are certainly worthy of noting.
The Englewood Flyover in Chicago completed just this month, separates NS operations from metro trains through Chicago and has significantly improved fluidity of our operation there. The new 51st Street connection near our intermodal facility at Chicago will be completed early next year.
When completed, the new connection will improve train operations and reduce time and handling for trains moving in and out of that facility. Our new connection at Goshen, Indiana will also be completed after the 1st of the year.
It provides a direct link from our terminal at Elkhart to the Mariana, Ohio branch for more fluid operations and greater flexibility of operations around one of the largest terminals. And six new receiving tracks at our convoy terminal in Pittsburgh will be in service by the end of the year.
This new capacity will improve service in this rapidly growing corridor that includes new crude by rail volume. Finally, in terms of locomotives, we will be taking delivery of 50 new EMVs, SD70ACe units beginning this month.
In addition, we recently reached an agreement to purchase 100 SD90MAC units and start taking – started taking delivery of those units in September. We expect to take delivery of 40 of these units by the end of the year.
With these, the number of units available for services reached historic highs in line with historically high volumes. Together with aligning our T&E forces for expected demand, these projects for additional capacity and growth in our locomotive fleet gave us a very strong position moving into the fourth quarter and 2015.
Moving to the next slide, with volume increase of 8% in the third quarter, crew starts, including re-crews, increased by 2%. This margin of difference is due in part to improving operating efficiencies, but also reflects efforts to conserve available crews through train combinations and train annulments.
We would still see very positive margin even with a more robust crew base. Our current crew base continues to be stretched, which is reflected in higher overtime hours, up 32% for the third quarter compared with the same period last year.
With hiring and other steps I have outlined, network velocity is expected to improve as we move into the fourth quarter and we expect to see that reflected in further improvements in operating efficiencies, particularly reductions in overtime. That trend should continue into 2015 when we expect that our crew base will be fully aligned with expected volumes.
A 1% improvement in carloads per locomotive reflects our ability to absorb higher volume with existing train operation. And fuel utilization was also favorable as gallons per 1,000 gross ton miles declined by 4% compared to the same period last year.
Thank you. And now, Marta, I will turn it over to you.
Marta Stewart - Chief Financial Officer
Alright. Thank you, Mark and good morning everyone.
Let’s get started with the summary of our operating results on Slide 2. Revenues exceeded $3 billion, up $199 million or 7% driven as Don mentioned by double-digit volume gains in intermodal and merchandise.
Operating expenses increased only $50 million or 3% resulting in a third quarter record operating ratio of 67%. Slide 3 shows the major components of the $50 million net increase in railway operating expenses, which you know were almost entirely concentrated in the materials and other category.
Now, let’s take a closer look at each expense categories beginning with materials and other on Slide 4. This line item increased by $45 million or 23%.
As in the second quarter, the largest reason was significantly higher usage of locomotive materials, which was up almost $20 million. As Mark discussed, we have all our surge fleet locomotives deployed and total units in service are near historical highs.
Also contributing to the rise in this category were higher casualty claims accruals and higher loss and damage costs. The relative increase in claims accruals was a result of favorable adjustments last year.
The increased lading damage costs were due to two derailments during this quarter, which damaged finished vehicles and totaled $10 million. For the fourth quarter, we continued to expect a high rate of locomotive material usage and we also faced an unfavorable comparison in casualty claims accruals relative to last year.
Turning to Slide 5, purchased services and rents were up $9 million or 2% largely due to higher volume-related activities, particularly in the areas of intermodal ops, equipment rents, and joint facilities. Next, depreciation expense for the quarter rose by $6 million or 3% reflective of our larger capital base.
We expect a similar increase in the fourth quarter. As shown on Slide 7, fuel expense decreased by a net of $3 million or 1%.
The 2014 third quarter average diesel fuel price of $2.96 per gallon was the first sub $3 quarterly average in more than 3 years. This lower price accounted for a $21 million reduction, while higher consumption increased fuel expense by $16 million.
As Mark noted, this is only a 4% consumption increase on an 8% rise in traffic. Slide 8 details the $7 million or 1% decline in compensation and benefit cost.
As discussed in prior quarters, continued favorability and post-retirement medical and pension accruals coupled with slightly lower health and welfare costs resulted in a $44 million reduction in expense. Partly offsetting this decline were increased pay rates of $16 million, higher incentive compensation of $12 million, and $10 million more in over time.
With the exception of incentive comp, we expect these variances to continue at similar levels in the fourth quarter. Turning to our non-operating items, other income net was up $2 million on higher property sales and interest expense on debt was up $7 million related to last year’s debt issuance.
Slide 10 depicts our income tax accruals and the effective rates. Total taxes were $333 million, up $67 million largely due to higher free tax earnings.
The effective tax rate was 37.3% compared to 35.6% last year, which had the benefits from a state tax decrease and tax credit. Slide 11 displays our net income and EPS comparisons, which were both third quarter records.
Net income of $559 million was up $77 million or 16% and diluted earnings per share, was $1.79, up $0.26 or 17%. Wrapping up our financial overview on Slide 12, cash from operations for the first nine months totaled $2.3 billion covering capital spending and producing nearly $1 billion in free cash flow.
We distributed $511 million in dividends and $166 million in share repurchases. Thank you.
And I will now turn the program back to Wick.
Wick Moorman - Chairman and Chief Executive Officer
Thank you, Marta. Well, as you have heard, it was another very good quarter for Norfolk Southern.
However, as good as these results are, it’s clear that they could have been even better, if we have been able to achieve the network velocities in line with our performance for the prior two years. And not only did these operating issues have an impact on our financial performance, more importantly, they kept us from delivering transportation services to our customers at the level that they have come to expect from our company.
For that reason, we are very focused on getting back to the service metrics that we have posted in the prior two years as quickly as we can and then improving further from there. Mark outlined some of the steps that we are taking.
And while it will take a little time to reach our 2012/2013 velocities, we are very confident that we are on the right path and that the infrastructure and resources that we are adding will set the stage for us to grow volumes and provide even better service in the future. We have a great team at Norfolk Southern.
And I have every confidence in our ability to continue to provide outstanding service to our customers and outstanding results for our shareholders. Thanks for your attention.
And I will turn it back to the operator for your questions.
Operator
Thank you. We will now be conducting the question-and-answer session.
(Operator Instructions) Thank you. Our first question comes from the line of Bill Greene with Morgan Stanley.
Please go ahead with your question.
Bill Greene - Morgan Stanley
Yes, hi there. Good morning.
Wick or Mark, I wanted to talk a little bit further on the service issues, is it just as simple as adding locomotives and employees, is it really a resource constraint? I am sure you are aware of the other argument that M&A is a solution there.
So, can you sort of talk about what leverage you can pull on? How you sort of see this?
Mark Manion
Yes. I am sure Wick will talk about the M&A side of it.
In priority order for us, it’s a crew issue. I mean, the reality is you need a sufficient number of crews in order to handling your volume.
And our volume just outpaced the crew. So, as I have said, we are ramping those up and we start to turn those crews on Bill in a bigger way in November and December and that will be very helpful.
But we are already seeing improvement from those temporary folks that I spoke of that went to our Northern region. Now, in addition to crews and as far as locomotives go, I mean the reality is we have got enough locomotives right now, but when you get into a lower velocity situation that eats up your locomotives, so you get to the point where you can’t hardly have enough.
So, it will be helpful to have these additional locomotives coming on and they already are coming on. So, that will be good.
Now, another important factor here is these infrastructure projects. As businesses ramped, these projects and I won’t go through them again, I mentioned them they will be no one project by itself fixes it, but you combine those projects particularly with our Bellevue infrastructure project that just plant gives you more capacity.
And that’s the sort of thing that from a standpoint of being sustainable and allowing for more growth going forward, that’s what those infrastructure projects get you. So, we are really looking forward to that.
And then the last thing I would mention is that we have been doing a lot to find some routes around Chicago. And just one, for example, as we have got aligned, it’s immediately south of Chicago, we refer to it as our Streator line and we are taking a hard look at what we are actually starting to use that in a greater way for more interchange of traffic, but we are even looking at increasing our infrastructure on that route in the short-term.
So, those are the kind of things that bulk you up to be able to handle more traffic and operate more effectively than we currently are. Wick?
Wick Moorman
Well, I will say too that the problems that we are experiencing are not unique to Norfolk Southern there are lot of issues across the industry, which are well documented and everyone is talking frankly about them. That does have some impact on us, certainly the Chicago Gateway has been congested and erratic over the past number of months, but all the carriers are trying to address that and I think that collectively we are all taking the right steps to address that.
The simple fact about Chicago is that, there is an enormous amount of rail infrastructure from both the east and the west that just points that way. That’s where a lot of railroad capacity meets.
And we are always going to do a lot of business through Chicago. We – and there are lots of different opinions about it, but we are looking bilaterally and as Mark mentioned with other carriers in terms of thinking about alternative locations, when that’s possible, but it’s not always possible for a number of reasons.
And the other thing I will say is that we have seen very positive impact over the past two years in Chicago from CREATE. It has opened up a lot of real congestion points for us, former congestion points and not just CREATE but projects like the Englewood Flyover, which effectively gave us 6 to 8 hours more access to our mainline everyday are really important.
So, every franchise is different, Bill, as you know, but when we look at the issues that we are facing – have been facing and we do the analysis and we have done a lot of analysis. It comes right back to what Mark would say.
Bill Greene - Morgan Stanley
Let me ask one follow-up to this and if I missed this in your prepared remarks, I apologize, but have you quantified what the service challenges have cost this year or maybe even include weather. Just so we have a sense for look there is this much embedded in the cost structure this year that if it goes according to plan won’t be there next year?
Marta Stewart
Well, in the third quarter, it is difficult Bill. This is Marta.
It is difficult, Bill to kind of tease it apart from the volumetric increase, but generally speaking, rough numbers you can assume that most of the increase in over time, which this quarter was $10 million and last quarter was a similar amount. Most of the increase in over time is related to that.
And I say that the other biggest item would be the increased locomotive materials, because Mark’s folks have had to fix the heavy bad order locomotives. And so I would estimate for this quarter you take all of the over time at $10 million somewhere between 0.5 to 3 quarters up to $20 million increased locomotive materials and that would be about the impact the service had on our expenses.
Bill Greene - Morgan Stanley
Okay, fair enough. Thank you for the time.
Wick Moorman
Thanks, Bill.
Operator
Our next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your question.
Allison Landry - Credit Suisse
Good morning. Thanks for taking my question.
So, in spite of the service issues in the third quarter, you guys were able to post pretty strong incremental margins, but looking at and granted it’s only three weeks, but if we look at the recent volume data, it suggests that there has been a pretty material slowdown in growth. Is this sort of a direct result of not having enough crews and obviously the outlook for coal isn’t positive, but do you expect a return to growth in automotive and ag once you get some of these qualified employees in the network?
Don Seale
Good morning, Allison. This is Don.
We are not seeing a slowdown in our business. What we are seeing is the lapping of very strong comps in the fourth quarter from last year.
As you will recall, our merchandise volumes in 2013 in the fourth quarter were up 8% and our intermodal volumes were up 6%. So, we are beginning to face tougher comps year-over-year.
The second thing I would add thereto is that we are seeing a deceleration in coal volume on the export side and we are seeing weaker utility volumes as I pointed out due to natural gas prices dropping and milder weather. We also saw our intermodal business peak fairly early toward the end of September.
And that is predominantly on the international side with consumer goods coming in for the holiday season. So, I wouldn’t read too much into the year-over-year volumes other than the comp and the fact that coal was decelerating somewhat and that we probably have seen our fall peak even though it was a small fall peak in intermodal.
Allison Landry - Credit Suisse
Okay. And as a follow-up question, on the post-retirement and pension expense for this year, could you parse out the difference between the two ends, I know that you made some changes to the post-retirement plan?
So, how do we think about what will persist in terms of a tailwind for next year and what are your initial expectations for pension expense in 2015?
Marta Stewart
Okay. Well, I will take that in two pieces.
First of all, with respect to this quarter in the post-retirement and pension, the bulk of that is post-retirement $31 million and the pension was $8 million. So, both of those were decreased compared to last year.
So – and we have had similar amounts in each quarter this year relative to the prior year. Going forwards into next year, of course that’s going to be – we will be able to give you more visibility into that in January.
That’s going to be dependent on the interest rate as of the end of the year and where our pension assets stand. Thinking about it if we had to look at it as those items right now, we would probably have about even 2015 expenses in the areas compared to 2014.
So, in other words, we are not going to have the big letdown that we had in 2014, but we think we are going to stay about even.
Allison Landry - Credit Suisse
Okay. And is that basically because the changes that you made in the retiree medical plan could potentially offset any increase in pension expense?
Marta Stewart
Well, the change that we made is going forward. So, that’s – so with regard to post-retirement medical, the change that we made is a go-forward change, so that would impact 2014 and 2015 the same way, that’s why that’s the same.
And then the pension on its own, the asset plan, the assets have done very well and unless interest rates change markedly between now and the end of the year, that should stay flat to same.
Allison Landry - Credit Suisse
Okay, great. Thank you so much for the clarification.
Wick Moorman
Thank you.
Operator
Our next question is from the line of Jason Seidl of Cowen & Company. Please go ahead with your question.
Jason Seidl - Cowen & Company
Yes, good morning guys. Staying on the service a little bit, with all these new locomotives coming on, should we start seeing that locomotive increase expense from materials start abating in 4Q?
So, should that be a little bit lower than it was in 3Q?
Wick Moorman
Jason, I wouldn’t want to predict that it’s going to come down much in the fourth quarter, because they really – we start to see most of this power in the November-December timeframe, but certainly as we bring these new locomotives in and as velocity improves as Mark says, we are going to have the ability then to take hopefully a good number of these older, higher maintenance, less efficient locomotives out and put them back into our surge fleet and also put them back into the queue where we got a lot of them for our rebuild program.
Marta Stewart
And right now, Mark’s folks are estimating. They are going to do whatever it takes to fixing those locomotives.
But as you know the locomotive material was up $10 million in the second quarter, $20 million in the third quarter and they think they will be somewhere between those two for the fourth quarter.
Jason Seidl - Cowen & Company
Fourth quarter. Okay.
Thank you. And as it pertains towards all the merger talk we have and also all the talk about Chicago, Wick I think you mentioned that there is only so much you can do with the rails working together, but what can the railroads do short of a merger to sort of help improve some of the service levels through either joint projects or joint ventures?
Wick Moorman
Well, I think everyone is doing a lot of work on that Jason in line – along the lines of what we are doing. We are very – we work together in Chicago to try and manage the flows through there.
We do that collectively as you know. Every railroad that I am aware of is looking at additional infrastructure, if it’s required on their routes coming into Chicago.
Certainly that’s true in the West as you know. And I think that as we do that, as we make sure that we are resourced properly that we are going to be able to handle business and handle more business through Chicago successfully in the future.
I think what we – this is my opinion, I think what we have seen this year is something of an anomaly and that we had as you know an extraordinarily tough winter. And then we had a really very unusual kind of volume growth through a single gateway driven by the energy business and at some point that returns to more normal growth levels and we can manage through that.
So I am optimistic that as the great projects continue to come online and as we all work together that Chicago will always be a very, very busy place to operate. We will – it will occasionally be a tough place to operate.
Collectively we can make Chicago work in the current industry configuration.
Jason Seidl - Cowen & Company
Thanks for the commentary Wick. And thanks for the time guys.
Operator
Our next question comes from the line of Tom Wadewitz of UBS. Please proceed with your question.
Tom Wadewitz - UBS
Yes. Good morning.
Wick I guess I apologize for asking you about this again, I don’t know if you love talking about it, but just to be completely clear on this and you have probably said this in various ways. Do you think that it would be – are you essentially – do you have a position on rail combinations in terms of you think it’s a bad idea and you think regulators wouldn’t approve it or are you open to the idea and you think there are pluses and minuses or just what’s your kind of clear position on the idea of rail combinations, I know obviously you have talked around it a bit today?
Wick Moorman
Well. Tom, this is something that I have said in a lot of forms and I will go ahead and say it briefly.
And I will preface it by saying that different people in the industry have different opinions about this. And I will go ahead and say I have a very high regard and respect for the head of the CP, but this is just a place where I have a different opinion.
I think that a major railroad merger is not a good idea. It’s highly problematic for three reasons.
The first is that our history is that putting these big companies together is very difficult and at least historically has led to significant service problems for some period of time. The second reason is that while historically a lot of mergers were justified because of significant synergies.
If you put two big carriers together there aren’t that many overlapping routes. There aren’t that many redundant facilities.
You can save some money, yes, but it’s not necessarily order of magnitude that it used to be. And then third and most important.
I think it would go into the phase of a regulatory environment, which is not receptive in anyway to major combinations. And there are the new rules out there that it has to be pro-competitive, that is not defined.
And it could be defined in ways, that are very onerous and in which you could give up, all of the potential benefits and more in a transaction. So, I just think that – I just think they don’t make sense at this time.
And as I say reasonable people can differ on that, but that’s certainly my opinion.
Tom Wadewitz - UBS
Okay. Yes, that’s very helpful.
I appreciate you, giving a very clear response to that, that’s very helpful. I have got a question for Don, the yields in third quarter were weaker than we would have expected, I know you gave us a lot of detail on why mix is a headwind in various respects, what is your visibility to pricing and to yields if we go into 2015, discussions with customers, contracts, you have already signed for 2015, do you – can you give us some flavor and a sense of how much confidence you might have in stronger pricing and stronger yields when you look to 2015?
Don Seale
Good morning Tom. As you well know the capacity factor in transportation in North America has tightened significantly.
As we have said many times in the past, we price to the marketplace and we see increasing opportunities for price improvements ahead. We have about 15% – right at 15% of our remaining, pricing to do on the book for 2014 and we have about 50%, right at 50% of our book of business to be reprised in 2015.
And we will be taking that tighter transportation capacity into our strategy and you will see that in the results of our price activity. So we price to the market, the market is tight for capacity that enables us to have a more optimistic outlook on pricing ahead.
Tom Wadewitz - UBS
Should we expect the yield is going to – mix is going to continue to be a headwind in 2015 or some of the mix pressures you saw in third quarter maybe they ease up a bit, so the pricing flow through a bit more to the revenue per unit?
Wick Moorman
Tom, we have so many moving parts with respect to the different business segments. I even mentioned this morning that in our automotive sector, which was very strong in the third quarter, up 12%.
We had a much higher percentage growth in bi-level traffic, which is the cars – the railcars that transport SUVs and pickup trucks. The load factor is not as high for SUVs and pickup trucks on a railcar versus passenger cars.
And there is a differential of about 15% in the revenue per unit – revenue per car for those bi-levels versus tri-levels. That’s just an example of how the mix continues to play out in coal when our export market is down, that’s our highest revenue per unit business.
And when our Northern utility business goes up, for example, that’s lower. So I don’t know what all the combinations are going to be, in 2015 we will just have to see how it works out.
But we will continue to see negative mix if nothing else as we grow intermodal at a much faster pace and coal continues to either be flat or modestly down, which is the ultimate mix effect.
Tom Wadewitz - UBS
Right. Okay.
Thank you for the time. I appreciate it.
Wick Moorman
Thanks Tom.
Don Seale
Thanks Tom.
Operator
Our next question is from the line of Chris Wetherbee with Citigroup. Please proceed with your question.
Chris Wetherbee - Citigroup
Thanks. Good morning.
I want to talk a little bit about the service metrics and a little bit more about the timing I guess of potential improvements and maybe understanding a little bit better the sequential deterioration at least in the velocity metrics in the terminal Bellevue that we see publically, it seems like we are sort of ending the third quarter, beginning the fourth quarter at a low watermark, just want to get a rough sense. If you think Mark from your perspective that this is sort of November, December as you get those new crews onboard, you start to be able to turn those metrics a little bit more constructively and during the quarter if there was something specifically other than just a confluence of volumes that was causing that sequential deterioration?
Mark Manion
Yes. I think we have seen the trough on this and in fact the public metrics do lag a little bit and we are seeing improvement that’s going on more recently and something that we track is specifically where our velocity is at very – in various parts of our system.
And the reality is our Eastern region, our Western region that is two-thirds of our system has been operating rather well from a velocity standpoint. And the problems have been pretty localized to that East-West Gateway between Chicago and Jersey or really Philly.
So, we see much better fluidity in that area at this point, still very heavy. I mean, we have still got – we have still got all the business up there, because as far as the volumes go, that area has continued to have a lot of traffic.
And we see that – I think we see that sustained, but we will see improvement as we go forward in the quarter. And I think we said that last quarter that we will start to see our improvements in the fourth quarter, but as we said before, the people, the resources really come on more in the November-December timeframe, but we are already starting to see that tick up.
Chris Wetherbee - Citigroup
Okay, that’s helpful. Thank you.
And then switching gears down, if I could ask you about little bit about the coal side, just want to understand sort of the yield dynamic as we think about fourth quarter and going forward obviously, you have had some mix issues and export declining a little bit. You had a pop in the second quarter, which I think was driven by some of the longer haul utility moves, but as you think out to the fourth quarter with where the seaborne market is and where the utility demand is coming from, is this roughly the right way to be thinking about yield kind of what we saw in the third quarter?
Just want to get a rough sense on the mix potential in the shorter term, if I could?
Don Seale
Yes, I think what we saw in the third quarter will be what we are seeing in the fourth quarter predominantly sequentially coming from the second to third quarter, you will recall that we had a $43 million increase in coal overall, which was driven predominantly by a 23% increase into our Southeastern utilities that tended to weaken as the summer wore on and we saw milder weather, lower gas prices. So, our Northern utility business was down, but Southern utility was only up about 9% in the third quarter.
That did impact RPU. As far as expert goes, we pretty much see the same type of market condition, don’t see a lot of significant change, it’s weak on thermal and met coal and we don’t expect that to improve in the fourth quarter nor do we see any driver for improvement in the first quarter for that.
Chris Wetherbee - Citigroup
Okay. So, this is sort of the run-rate in the next couple of quarters at least on the export market in your view?
Don Seale
We hope so.
Chris Wetherbee - Citigroup
Okay. Thanks very much for the time.
I appreciate it.
Wick Moorman
Thanks.
Operator
Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Scott Group - Wolfe Research
Hey, thanks. Good morning, guys.
Wick Moorman
Good morning.
Scott Group - Wolfe Research
So, Don, that was helpful in terms of their coal mix and how you think about that going forward? I want to ask about intermodal mix with the peak you are saying kind of happening – happened already maybe international growth going to slow, does intermodal mix become more positive as domestic starts to grow faster?
Don Seale
We expect that mix to moderate that mix differential between domestic and international. International has been very strong this year, because of the West Coast ILWU negotiations that shifted business to East Coast ports.
We have also had some organic growth with our international partners and some new businesses through new terminals and new contract arrangements. We will start to lap those events as we get into 2015 and we will see domestic growth outpace international growth in my opinion going forward.
So, we will see that mix effect start to moderate.
Scott Group - Wolfe Research
It should probably reverse and turn positive, is that fair?
Don Seale
It will start to turn positive, correct.
Scott Group - Wolfe Research
Okay. And then one for Mark, so you gave a lot of numbers around your planning with headcount, I am not sure what it means for net overall headcount the way we see it.
What kind of headcount growth do you think we should be modeling in fourth quarter and 2015? And given the catch up in the headcount, you think we will have headcount up more or less than volume growth in 2015?
Marta Stewart
I will take the 2014 question and let Mark address the 2015 question. For 2014, we continue to think that we are going to end the year about even to where we were last year.
So, that would be – last quarter, we talked about being 900 up from the second quarter. As Mark said, we are up about 400 this quarter.
So, we couldn’t be up another 500 in the fourth quarter.
Mark Manion
And going into next year partly in terms of continuing to build our crew base to keep up with today’s business levels and then partly for more business opportunities that are coming up in ‘15 will add another net 500 to 600 people to what we have at the end of the year.
Scott Group - Wolfe Research
Okay. So, we should probably think about volume growth still outpacing headcount by a good amount next year?
Mark Manion
Oh, yes. For the first, it’s going to take us well really – we will be working on it through the first half, but keeping in mind that once we end the year and turned the corner into ‘15, the additional people we have are going to be very helpful in terms of improving our service product.
So, we won’t be completely done until we get into the latter part of the second quarter.
Scott Group - Wolfe Research
Mark, can I just ask what’s the difference in like the 1,900 people you talked about that you are training versus that 500 number, is that just attrition, is that the difference?
Mark Manion
Well, I want to make sure I understand the question. I am not sure about the 1,900...
Scott Group - Wolfe Research
I thought in your prepared comments and maybe it’s not 1,900, but you gave some, a large number of people currently being trained and adding another 500 people from here. So, that – is the difference just attrition?
Mark Manion
No. I spoke of – since the beginning of the year, we have started in training or have produced a total of 1,700 plus people.
And then I further defined what that – how that looks in the third quarter and what our net will be by the end of the year?
Wick Moorman
Yes. Scott, I think there are three things that go on there.
One is, some of this we continue to have attrition in the T&E workforce. So, you – that’s a number we have to take into account.
We have some very modest attrition even in the training program, not much, but there is some there. And then the other thing is at any given time, you are trying to take a snapshot of qualified employees and trainees.
So, when Mark talks about the total number of people in the pipeline, there are 500 people who come out, finish their training in the fourth quarter plus or minus. And then their additional people are in that bigger number you mentioned who are finishing their training later in the first quarter of next year.
So, it’s always hard to kind of pin down at any given moment what’s going on, but I think the net – the important message here is that we have a lot of people in the pipeline. We start – we are seeing, starting to see significant increases, but going back to your original question, our T&E staffing, once we get it to the point where we need for it to be, we will still be growing at a rate that’s less than our volume growth.
We still expect continued efficiencies in terms of train length and train operations in the same way that you have seen us produce them over the past couple of years.
Scott Group - Wolfe Research
That’s helpful, Wick. Thank you.
Operator
Next question comes from the line of Brandon Oglenski with Barclays. Please proceed with your question.
Brandon Oglenski - Barclays
Yes, good morning everyone. I know it’s been a long call, but I just, Wick, I want to follow-up on that commentary there, because it sounds like there is a lot of puts and takes as we look at 2015.
I mean, if you are adding all these assets and people, you should get better productivity as you just mentioned. Does that suggest that the sustainability in incremental margins like we have seen this year should extend into 2015?
Wick Moorman
I will let Marta comment on that too. I do think that as we increase – there is no question as we increase network velocity even whereas we add these resources that it’s a more efficient railroad, it’s a more productive railroad.
And in addition it augments our opportunities for volume growth because of the service component. So there is a lot of good news there.
In terms of incremental margins, Marta I think our expectation is they will – they will remain very strong, whether they will continue quite at the pace that we have seen them this year, we are not sure, but we except to continue to produce strong incremental margins in the business.
Marta Stewart
I agree with you. The only thing I would add to that is just a reminder and publicly already had this, Brandon but just a reminder that this year’s incremental margin is affected by the post-retirement medical and pension, which Allison asked about.
So if you back that out, we would get more to a – more closer to a run rate incremental margin.
Brandon Oglenski - Barclays
Well, completely understood. And I think that translates on a pretty bright outlook here for the company.
And so if I can just ask one follow-up here, I mean you guys have well over $1 billion in cash right now and I know you have some debt maturities, but it seems like your share repurchase program has really slowed down, you have a big authorization out there. With that outlook and arguably one of the cheapest valuations within your sector right now and in the marketplace why not be more aggressive on the share repurchase?
Marta Stewart
Well, as you know Brandon, I mean, we believe in share repurchases. We have been a long time buyer of our shares, other than the recessionary year 2009 we bought back a significant number of shares since 2006.
But over that time period and continuing into now, we moderate those share repurchases just based on overall market volatility. And so, all I can say is that we remain share repurchase, we expect to continue to remain that and we will just go into modulate it based on market conditions.
Wick Moorman
Brandon, let me add to that. As we always discuss, our first priority is capital expenditures to grow the company, we are in the middle of that process right now.
Our second is dividends, we have a very strong dividend track record and we will continue to have a strong dividend policy. And then share repurchases, as Marta said we are – we stay in the market, but I will also say it’s something that we constantly reevaluate.
And we will continue to reevaluate it and certainly the factors that you mentioned are very legitimate factors. So going forward, we will continue to look at that.
And if we see a point – see a certain point where we think we need to become more aggressive or change our policy we are certainly willing to do that and will.
Brandon Oglenski - Barclays
Okay. Thank you.
Operator
Thank you. Our next question comes from the line of Bascome Majors with Susquehanna International.
Please go ahead with your question.
Bascome Majors - Susquehanna International
Thanks for the time. So the fuel surcharge program you introduced in 2008, I believe it kicks in at $90 WTI and oil has trended below that for most of this month, which would imply that at least fuel prices could fall further while at least some of your surcharge revenues are staying flat and I know that’s not your only program in summer based at lower levels, but can you give us an update on the fuel surcharge mix and how it trends among your business groups and how you expect lower fuel prices to impact your revenues on that front going forward if energy prices were to trend around where they are today?
Don Seale
Good morning. This is Don.
As you indicated, we have many different fuel surcharge formulas that have been negotiated with numerous customers in contracts and other instruments, so we do not have one fuel surcharge program. Our carload business generally is based off of West Texas Intermediate crude oil, while our intermodal business is based on highway diesel fuel.
So we don’t even have the same standards for all of the business because there are different characteristics of the business itself. So we have a 60-day lag generally on our carload business, a weekly lag on our intermodal business that will continue to move up and down with crude oil prices, diesel prices, crack spreads all of the things that impact fuel over time.
So I can’t give you a specific outlook for that, because frankly I can’t tell you where the forward curve will windup for West Texas Intermediate crude or on highway diesel for next year.
Bascome Majors - Susquehanna International
If oil were to stay in the low $80 range, is there a significant portion in your business where surcharges would be locked in at or not fall further?
Don Seale
I just can’t give you color on that because we have so many different formulas that have been negotiated with customers.
Bascome Majors - Susquehanna International
Alright. Well, thank you for the time.
Don Seale
You’re welcome.
Operator
Our next question is from the line of John Larkin with Stifel. Please proceed with your question.
John Larkin - Stifel
Thanks gentlemen for taking my questions.
Wick Moorman
Thank you, John.
John Larkin - Stifel
Just wanted to talk a little bit more about the application of incremental crews and incremental locomotives to solve the service issues that you have been grappling with here the last couple of quarters, it seems to me that as things play out here into 2015 that you are going to have enough resources to bring your velocity up, new terminals dwell down which effectively will create more capacity. Now, you said earlier that the new locomotives will be here and that will give you the opportunity the push to the more costly less efficient older units into the reserve fleet, how do you handle the crew situation at that point, if in fact you do rebound to previous velocity in terminal dwell numbers?
Mark Manion
Well, that would be a good thing. As far as the crew base goes, we are planning like I said on that 500 or 600 net add people next year.
But as velocity comes – as velocity goes up, it lessens the need for crews. So we can always throttle that back some if we need to.
John Larkin - Stifel
Okay. And then Marta, you answered a question earlier regarding the cost of the congestion and I was just wondering if there was a revenue component to that also if in fact service had gotten to the point in some parts of the network where customers have gone a different direction with their transportation needs until you can get this service back up to where it needs to be?
Don Seale
This is Don. On the top line side of our business, car utilization and available capacity to move more volume is probably the larger concern with respect to current velocity.
Obviously, we are having some pressure points with certain customers. We are working through those, but my larger concern is utilization of equipment and capacity of the fleet in general.
John Larkin - Stifel
Is it reasonable to assume that revenue growth might have been a point or two higher if you would not have those equipment availability problems?
Don Seale
We would have had some higher revenue in the automotive sector. Some areas like that, but I would like to maybe showcase that question and just point out that sequentially from the second quarter to the third quarter, the second quarter was our all time high top line revenue.
We only missed that by $19 million in the third quarter with coal being the swing of $58 million between the second quarter and the third quarter. We were up $43 million in coal in the second quarter.
We were down $15 million in the third quarter. So, sequentially we came close to meeting an all time record with coal swings of $58 million quarter-to-quarter.
John Larkin - Stifel
Got it. Thanks for the color.
Don Seale
Thanks, John.
Operator
Our next question is from the line of Justin Long with Stephens. Please proceed with your question.
Justin Long - Stephens
Thanks. And I wanted to ask my first question on pricing, as you have implemented some of the rate increases in intermodal that you talked about last quarter, have shippers been pretty receptive given the tightness in capacity or are you getting any pushback on pricing up in this type of service environment?
Don Seale
We are always sensitive to the timing of pricing, but capacity and tight capacity are the two things that are driving price improvement in today’s marketplace. So the price increases that we took in are domestic rail controlled containers.
In June and September have stuck and we continue to assess that market going forward for additional price opportunity.
Justin Long - Stephens
Okay, great. And as a follow-up on coal, I wanted to ask about domestic coal into 2015 and I know it’s tough, but let’s just assume normal weather patterns and based on the stockpile levels that you referenced in recent conversations with customers, do you think domestic coal is flat or down again in 2015 or is there a chance you could see some improvement?
Don Seale
Let’s segment the market with respect to export, with the Australian currency differential expanding and the benchmark met coal price of $119 a ton and a thermal index to Europe at about $72 a ton, if those two indices continue to be that low, U.S. producers will be very pressured to have any growth in export in 2015.
The wildcard as I mentioned on our utility call will be what kind of weather we have during the winter. We are 19% below stockpiles as of December 2013 right now.
And if we get anything like last year’s winter, we will see some increase in demand for utility coal during the winter and coming out of the winter, because I suspect natural gas prices will rise as they did last year and electricity demand will increase. So, those are export, we don’t see any significant driver in the near-term.
Utility would be the upcoming winter and what kind of weather we get.
Justin Long - Stephens
Okay, fair enough. I will leave it at that.
Thanks for the time.
Don Seale
Welcome.
Operator
Our next question comes from the line of Walter Spracklin with RBC. Please proceed with your question.
Walter Spracklin - RBC
Yes, thanks very much. Most of my questions have been answered.
I am just going to follow-up on one and that is on your buyback. I know, Wick, you were saying about reevaluating constantly that buyback and certainly it’s trended well below what we thought you would do when you announced your last program.
So, I see $1.5 billion in cash on the balance sheet, but also about $550 million of debt repaid. In that reevaluation aspect, what has caused you a little bit of concern about buying back your shares at these levels and if you do reevaluate, do we go to – what is the flex up that we could see, is it incremental or could you see a significant increase in your buyback next year?
Wick Moorman
Well, I don’t know that I would comment on what we would see in terms of any magnitude of the change. I would certainly think though that as we went into the year, we were looking at all of the factors around share price.
And as they have moved – and as factors have changed, valuations have changed, we will take a look and see if our program needs to be evaluated again as I mentioned. I think the important message is that this is something obviously that we actively discuss and that we look at where markets are and we will come to an opinion on what we need to do go forward in 2015.
Walter Spracklin - RBC
Okay. Just to slip in another one I guess on the crude by rail, we have heard the other companies talk about the factors and spreads and drivers in their specific origination markets that might – that the current volatility in the energy prices would cause.
Don, are you – what are you hearing from your customers in terms of their propensity to relax some of their shipments on crew that you either originate or carry by interchange, what’s your thoughts going forward on that market?
Wick Moorman
We are not receiving any input from our customers that the short-term Brent crude spreads that have become very close or within $3 a barrel right now are impacting their plans to continue to take Bakken and Western Canadian crude. We are being told that most of them have arrangements that go beyond short-term fluctuations in the market and their expectations are that the Brent and WTI spread will increase over the next several months.
Walter Spracklin - RBC
And barring that increase then we might see some action?
Wick Moorman
We are not getting that indication. At this point, our crude oil for example in the third quarter was over 12,000 cars.
Over the third quarter of 2013, we are now handling 30,000 cars a quarter, which is what the third quarter represented. So, we are seeing our crude oil business both from Western Canada and from the Bakken, the Williston Basin continue to show some robust dynamics.
Walter Spracklin - RBC
Okay, that’s all my questions. Thank you very much.
Operator
Our next question is from the line of Rob Salmon of Deutsche Bank. Please proceed with your question.
Rob Salmon - Deutsche Bank
Hey, good morning. Mark, you did a really good job in terms of laying out the expectations with regard to overall locomotives and crew that are coming on and how that should play out with regard to service performance.
If I could barrel in a little bit more in terms of your intermodal service performance, it looks like that’s taken a little bit of a harsher leg down and kind of the start of the fourth quarter relative to where we have been in the third. Could you talk a little bit about the dynamics and how you see that side of this segment kind of improving throughout the fourth quarter?
I realize a lot of this traffic is coming on that Chicago and to kind of the New England area, which is more heavily congested right now?
Mark Manion
Yes, I would be glad to. And that fits right up with the comment I made about the fluidity on that East West corridor opening up so nicely here more recently.
And along with that while our intermodal terminals still have a lot of business, they are heavy. They are in a very – what I will call, a very orderly fashion.
So, they are able to process well in the intermodal terminals and our mainlines which as I have said before is our heaviest capacity mainlines we have got on the system. They are open for business.
So, I see that moving in a positive direction for our intermodal business as we go into the rest of the fourth quarter.
Rob Salmon - Deutsche Bank
Okay, that’s helpful. And I guess given the lower kind of overall fuel prices, obviously that does cage a little bit of the value proposition for the intermodal side of the business, Don.
If the intermodal velocity improvements are constrained, would that cage it all your optimism for the growth outlook for intermodal as we look out into 2015 at kind of current WTI levels or are the trucking capacity constraints such that you think you will be able to materially outgrow GDP even if the velocity is constrained near-term?
Don Seale
The latter is the case trucking and motor carrier capacity will be tight in 2015. We don’t foresee fuel prices at current levels changing that dynamic or changing the economic model.
So, we expect our domestic intermodal business to continue to show significant growth.
Rob Salmon - Deutsche Bank
Perfect. Thanks so much for the time guys.
Operator
Our next question is from the line of Thomas Kim with Goldman Sachs. Please proceed with your question.
Thomas Kim - Goldman Sachs
Good morning. I just had a couple of questions on the coal side.
In prior calls, you talked about export coal freight rates effectively bottoming out and I was wondering Don, if you could just give us a little bit of color around the third quarter export coal freight rates versus the second in the prior quarter and maybe year-on-year?
Don Seale
No change second to third quarter and we anticipate no change third to fourth quarter and for that matter based on what we are seeing first quarter as well.
Thomas Kim - Goldman Sachs
Okay, thanks. And then just with regard to the utility coal mix, can you talk a little bit more about how the sourcing has shifted maybe Q-on-Q like could you give us a breakdown of how much coal is coming from the App versus Illinois Basin and so on?
Don Seale
Yes. We are still about 34% of our originated coal coming out of Central App, 28% coming out of Northern App, 19% from the Illinois Basin, and 16% from the PRB.
The largest change as you know year-over-year that we described in the second quarter is the Illinois Basin now exceeding the originations that we handle from PRB.
Thomas Kim - Goldman Sachs
Thank you.
Don Seale
Welcome.
Operator
Our next question is from the line of Ken Hoexter of Merrill Lynch. Please proceed with your question.
Ken Hoexter - Merrill Lynch
Great. Good afternoon I guess by now.
Just wanted to follow-up on the efficiencies and I guess this might sound odd just given your operating ratio being at the 67, but looking at you talked about having more locomotives on the fleet now. If we go back a decade, you still haven’t hit peak volume, so kind of surprising you have got more locomotives, I just want to understand over the past years have we lost some of those efficiency gains?
Does it take a whole new operating plan or anything that has to shift in order to get the velocity and everything back up or is this just little bit by little bit just looking at with some of the other carriers we have seen making major changes to improve performance, I just want to understand, how we have gotten to this point of decreasing efficiency yet having more on the network, should we take some of that off in terms of locomotives, in crew and get that efficiency back up?
Don Seale
Well, obviously a big add on these locomotives these days is working our way out of a difficult situation with the velocity issue. So, we should see that improve as we go into next year like we have already talked about.
But in addition to that we have got to keep in mind that there has been a significant mix change over time. And with the – with our intermodal business growing the way it has that adds locomotives to the fleet.
And just looking at productivity in a little broader way also keep in mind that we are three years in a real concerted way working on various things from a productivity standpoint that has had the effect of lowering our overall cost structure and that’s why we see a more modest expense increase with all these other things going on.
Ken Hoexter - Merrill Lynch
But just to understand that when they will be more I guess unit trains, if you are running more intermodal and especially given that Crescent and Heartland Corridor build outs, say you have got kind of more point to point, I guess I am just trying to understand have you put too much onto create too much congestion and that’s causing that velocity, given the volumes, I am just trying to understand versus 10 years ago, where you had more volumes, and now you have got more locomotives and more infrastructure on the network today, I am just trying to understand is there something that needs to be overhauled in the operating plan or is it just continuing to add more assets?
Wick Moorman
Well, I think – let me add to what Mark said. If you go back 10 years, the railroad and the operations looked very different than they do today in terms of our mix of business.
And we have added substantially more intermodal business. It’s a big – much bigger part of our franchise and intermodal trains are dispatched with higher horsepower for trailing ton and that’s had a significant impact on our locomotive requirements.
The second thing that has happened to us is that our unit trains have grown significantly and particularly with the crude oil, but even before that with real emphasis on unit trains in Ag, automotive and grain. And all of that traffic is great traffic and it’s very profitable and we won it.
And that’s the way the customers want to ship it. But it has in some ways also impacted our requirements for locomotives.
Unit train movements in and of themselves require more locomotives for volume growth than just putting volume on the existing merchandise network. So we – listen, we tune our operating plan every year.
We have a significant number as Mark mentioned of operating efficiencies and plans for even more. And we will continue to achieve even more.
But as I think I said earlier, can every franchise – every railroad franchise is different and we do a lot of analysis on our franchise to ensure that we don’t have too many locomotives but that we don’t have too few.
Ken Hoexter - Merrill Lynch
Great. And Wick, if I can just revisit your answer to Tom’s question on the M&A side, you talked about history of putting them together was difficult and the mergers didn’t justify or might not have as many synergy opportunities and then the regulatory environment, what was your reaction though when you heard this news that you said no way, right away do you think, hey we have got to sit down with the Board and sit and look at opportunities because if CSX is taken off the board, do we need to think about how we lineup because yesterday obviously on Hunter’s call you kind of went over why the regulatory issue might not be as big, but it’s kind of finding a partner and gaining efficiency.
So just trying to understand what was your and perhaps the Board’s kind of view in terms if it does move forward, how do you think the industry changes or does it not and that’s just a one-off?
Wick Moorman
Well, I think without going into specifics, listen we are always thinking and always have about the industry structure and ways that it might change and we review that with the Board every year. As we go forward, if there are changes in the structure and as I said earlier, people have different views of what the potential is, what the likelihood of a transaction being approved is, we will evaluate it with our Board and see if there are actions that we need to take and that’s what we have always done.
That’s what we will always do. But I will say something I was – Jim Squires reminded me of and that is that we may not agree or may not agree with Hunter on everything, but there is something that Hunter and I agree on wholeheartedly as does everyone else in this business is that we don’t really have to mergers to have a very bright future here at Norfolk Southern and as an industry.
Ken Hoexter - Merrill Lynch
Wonderful. Appreciate the time and insight.
Thanks.
Operator
Thank you. Our next question comes from the line of David Vernon of Bernstein Investments.
Please proceed with your question.
David Vernon - Bernstein Investments
Hi, good morning and thanks for taking the question. Don, could you comment a little bit about how historically you have seen tighter truck capacity or looser truck capacity actually impact rates in the merchandise segment, obviously, excluding the coal and the intermodal business, just trying to think what percentage move in truck rates has turned into what type of base pricing kind of in your experience?
Don Seale
Well, certainly as the trucking market tightens, it has a positive halo effect on intermodal pricing opportunity, as well as the carload pricing opportunity. In our merchandised business, anything that moves in a box car from paper products to consumer products, to manufactured components, a lot of that business is directly competitive or driven by trucking capacity and that gives us an opportunity, so – and other components like automotive parts and vehicles, steel traffic, so there is a range of commodities that tighter truckload capacity.
And when I say truckload capacity, I am talking about everything from dry van to flat beds, to covered bulk trucking that gives us an opportunity. And I would add not just trucking, when we look at the barge industry right now, it is essentially sold out and agricultural commodities and with the crop being as large as it is we expect barge to continue to face that type of capacity constraints.
All of those are pointing to a market that’s more favorable for improving yields in our book of business.
David Vernon - Bernstein Investments
But I guess, as you think about how to dimension that and how you have seen it kind of play out in the past, is there anything you can share as far as orders of magnitude in terms of how impactful the changes in the trucking market are?
Don Seale
I can’t really put a number behind it or a past trend. I will just say that we see it as a positive opportunity in the marketplace.
David Vernon - Bernstein Investments
Okay. And then maybe just as a quick follow-up, you mentioned that the export rates had held in flat sort of sequentially, but it does look like the rate per ton is still down a little bit sequentially, is that just that mix in the underlying domestic because the overall length of haul doesn’t look like it’s changing all that much.
So I am just wondering is there any pressure on you guys to start thinking about pricing in that domestic market given the challenges and competition with lower price gas?
Don Seale
No, there are no pressure points that change from the second quarter to the third quarter. It’s all relative to mix.
We saw our Southern utility’s long haul traffic start to moderate in terms of its year-over-year increase because of milder summer weather and lower natural gas prices. And also within the export market, we saw a relative larger decline in tonnage over our Lamberts Point pier versus our Baltimore tonnage which is shorter haul.
David Vernon - Bernstein Investments
Alright. Thanks for the time.
Don Seale
You’re welcome.
Operator
Our next question is from the line of Jeff Kauffman with Buckingham Research. Please go ahead with your question.
Jeff Kauffman - Buckingham Research
Thank you very much and good evening everyone. Thank you for taking my question.
Well, first of all, congratulations on a challenging quarter. I would like to ask about two items which I think are more temporary in terms of weighing on earnings.
Marta, you hit the first regarding the cost of congestion, you talked about the $10 million and over time, you talked about the effect of locomotive maintenance. What you didn’t discuss is maybe what the effect of this congestion at slower train speed might be having on insurance and claims.
I know you did note the $15 million increase in personal injury reserve, what do you believe, Wick or Don, the impact of this congestion is having on your claims expense and do you believe this is more of a transitory thing and when fluidity gets better, we hopefully see that begin to come down? And how would you ballpark the impact of that financially?
Marta Stewart
Well, we don’t believe that the service is having any impact on our claims expense. I think what I was talking about there was the year-over-year last year in the third and fourth quarters, we had favorable claims experience and so the comp this year.
So, we have a comparative increase, but the cost themselves have not increased because of the service.
Jeff Kauffman - Buckingham Research
But your personal injury rates up above the last couple of years level and it’s up above the 9 months level, what would you attribute that to?
Marta Stewart
That isn’t in a serious injury area that would be impacting expenses in any significant way, but I will have Mark elaborate.
Mark Manion
Yes. As far as our – the injury rates this year, we had some higher injuries, actually January, February, second quarter was improved and now third quarter is improved as well.
And we have got a strong start on fourth quarter. So, that’s actually going in the right direction.
Jeff Kauffman - Buckingham Research
Alright. And then let me switch to Don, Don it seems like a lot of shorter term items are depressing the yield.
I know you mentioned coal may stick around for a while, but others are more mix related, but your revenue per car was up almost a percent last quarter, is down almost a percent this quarter. What do you think the underlying rate of core price increases are relative to kind of what the reported rev per car we are seeing is?
And when do you think we start to see a number that’s a little closer to what your core pricing is actually doing?
Don Seale
We see our core pricing continuing to exceed rail inflation right now. We think it will continue to get better.
The all-inclusive less fuel index, which is in a lot of our contracts in the third quarter only generated about 0.8% in terms of year-over-year increase, that is slated to increase in the fourth quarter up to about 1.8% and for 2015 is projected to be running about 2.5%, 2.6%. So, we will see the escalators in our base contracts and our re-pricing activity, which I have discussed relative to a much tighter transportation capacity market.
Those two in combination you will continue to see improvement in our overall revenue per unit and also our core price.
Jeff Kauffman - Buckingham Research
Okay, guys. Thanks a lot.
I know it’s been a long call.
Wick Moorman
Thanks.
Operator
Our next question is from the line of Keith Schoonmaker of Morningstar. Please go ahead with your question.
Keith Schoonmaker - Morningstar
Yes, thanks. You can’t knock the operating ratio, but long run are there strategic paths that would enable handling demand surges while maintaining high service or is this just inevitable nature of dealing with high demand?
For example, changes to work rules or single man crews that might enable handling a little more adeptly?
Wick Moorman
I think that’s a great question. One of the things that we certainly are doing right now as going back and looking through a lot of our processes and a lot of our practices to see – to take the lessons learned.
And clearly, one thing that we are very – I think very thoughtful about is adding some more what I would describe as resiliency to our network. And that can come in the way, shape of a slightly different, not radically different way in terms of how we think about our crew base, particularly in critical areas.
It can come in the form of making of having the somewhat bigger search fleet of locomotives. And it certainly comes in the form of doing something, which as many of you know we have systematically done.
We just think about continuing to look at pinch points on the network. So, I think that we will take these learnings and we will make some changes that will give us that additional resiliency.
Certainly, work rules are something we are always focused on. There is another round of labor negotiations that kicks off here soon.
And we will see if there are things that can be done there as well, but I think that we can do a lot in the shorter term to give ourselves the ability to handle situations a little better, but I will go back to what I said. I think we had a somewhat extraordinary set of circumstances this year with the very unusual weather followed immediately by significant surge in traffic beyond what we expected, but we will learn from that.
Keith Schoonmaker - Morningstar
Great. Thanks.
And just as a quick follow-up on service issues, do you believe that highway conversions was constrained or slowed due to service issues or does trucking capacity offset most of these decisions?
Wick Moorman
I think the overall intermodal network we saw growth that we would have seen. I think equipment availability would have been a little higher in the third quarter, which could have generated on the margin higher volumes and higher revenue in intermodal and automotive.
I will add automotive to that. I don’t think it was material.
Going forward, we don’t see in the fourth quarter and into 2015, we do not see a lot of excess trucking capacity that can take any diverted traffic from rail, not that we expect that. So, as our service continues to improve that really shouldn’t be a major concern going forward.
Keith Schoonmaker - Morningstar
Good. Thank you.
High quality problem to have.
Wick Moorman
Yes, thanks.
Operator
Your next question is from the line of Cleo Zagrean with Macquarie. Please go ahead with your question.
Cleo Zagrean - Macquarie
Good morning and thank you. Could you please comment a little more on same-store pricing trends in the quarter, perhaps put some detail into re-pricing for new business and how you see the balance of price and volume begin to shape for ‘15?
Thank you.
Mark Manion
As we have indicated, we are seeing our core pricing coming in, in excess of rail inflation. We expect that to pick up as we continue to re-price into 2015.
As I mentioned, we still have about 15% of our 2014 book to re-price at about 50% of our business next year in 2015 to re-price and our prices will reflect the tighter capacity in the transportation market as we complete that.
Cleo Zagrean - Macquarie
Thank you. And as my follow-up, we heard yesterday on the Canadian Pacific merger conference call, their view that the national network is about to hit some limits to capacity and efficiency, absent mergers which they see as the main solution.
Would you agree that absent mergers, the national network is coming up with some significant challenges? And maybe as part of your response, if you could help us with some quantification of impact of your infrastructure projects into next year’s results and into the longer term as much as you would like to comment?
Thank you.
Wick Moorman
Well, I am not really of the opinion that we are in any imminent danger of hitting significant capacity problems across the industry that will impact our ability to grow for the longer term. I think if you just look at Norfolk Southern and the things that we are doing in terms of everything that Mark mentioned the Bellevue expansion, a lot of work in our Chicago, Philadelphia corridor and a lot of work in other places to streamline the network to add capacity in critical areas.
I think that we have a very solid program as we have had for years and we will continue to have to strategically augment our capacity as we see volume growth. When we get into a period as I have said several times of unusual volume growth that was difficult for us to predict, we may get a little bit behind the curve as we have, but we are responding to that.
We have a lot of work underway. And once that work is in place, we expect our velocities to go right back up as we have said.
So, I think that – and I think every rail carrier looks at it that way. So, I think we have the ability to continue to invest, continue to add infrastructure and continue to grow the business without the need for our merger.
Cleo Zagrean - Macquarie
Thank you. So, to clarify, you do not see any structural thresholds or limits to growth for the industry given the current makeup of the players?
Wick Moorman
No, I don’t. I think that we can all respond as individual carriers and working together to handle what we think is, as I said before, a very bright future in terms of increased volume on the railroads.
Cleo Zagrean - Macquarie
Thanks very much.
Operator
Thank you. At this time, I will turn the floor back to management for closing comments.
Wick Moorman - Chairman and Chief Executive Officer
Well, thank you very much everyone for your patience and for the very good questions. We appreciate them and we look forward to talking to you again at the end of next quarter.
Operator
Thank you. This concludes today’s teleconference.
You may disconnect your lines at this time. Thank you for your participation.