Jul 18, 2013
Executives
John J. Koraleski - Chief Executive Officer, President, Director, Chief Executive Officer of Union Pacific Railroad Company and President of Union Pacific Railroad Company Eric L.
Butler - Executive Vice President of Marketing and Sales for Railroad Lance M. Fritz - Executive Vice President of Operations - Union Pacific Railroad Company Robert M.
Knight - Chief Financial Officer and Executive Vice President of Finance
Analysts
Christian Wetherbee - Citigroup Inc, Research Division Scott H. Group - Wolfe Research, LLC Thomas R.
Wadewitz - JP Morgan Chase & Co, Research Division William J. Greene - Morgan Stanley, Research Division Justin B.
Yagerman - Deutsche Bank AG, Research Division Ken Hoexter - BofA Merrill Lynch, Research Division Allison M. Landry - Crédit Suisse AG, Research Division Brandon R.
Oglenski - Barclays Capital, Research Division Matthew Troy - Susquehanna Financial Group, LLLP, Research Division Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division Jason H.
Seidl - Cowen and Company, LLC, Research Division John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division Walter Spracklin - RBC Capital Markets, LLC, Research Division Keith Schoonmaker - Morningstar Inc., Research Division David Vernon - Sanford C.
Bernstein & Co., LLC., Research Division
Operator
Greetings. Welcome to the Union Pacific Second Quarter 2013 Conference Call.
[Operator Instructions] As a reminder, this conference is being recorded, and the slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr.
Jack Koraleski, CEO for Union Pacific. Thank you.
Mr. Koraleski, you may begin.
John J. Koraleski
Thanks, Rob, and good morning, everybody. Welcome to Union Pacific Second Quarter Earnings Conference Call.
With me today in Omaha are Rob Knight, our Chief Financial Officer; Eric Butler, our Executive Vice President of Marketing and Sales; and Lance Fritz, our Executive Vice President of Operations. This morning, we're pleased to announce that Union Pacific achieved an all-time record quarter, generating an earnings milestone of $2.37 per share, an increase of 13% compared to the second quarter of 2012.
We managed our network efficiently and continued to show the agility of our strong and diverse franchise. When combined with solid core pricing gains, we more than offset the slight shortfall in volumes, generating a new best-ever quarterly operating ratio of 65.7%, translates into value that we're creating for our customers and increased financial returns for our shareholders.
So with that, let's get started. I'll turn it over to Eric.
Eric L. Butler
Thanks, Jack, and good morning. Let's start with how we're creating value for our customers, the cornerstone of our strategy.
It all starts with the industry's best franchise, which provides customers access to diverse and growing markets. Through targeted investments, we continue to enhance this franchise so that we can deliver the best service and support future growth.
Our passion for providing excellent service has allowed us to introduce innovative products that not only win business but also secure re-investable returns. And the capstone of our value proposition is our relationship with our customers, a key component that we work hard to develop and maintain.
Today, our value proposition is stronger than ever, as reflected by our customer satisfaction scores, which came in at 93 for the second quarter. We appreciate this recognition from our customers and continue to focus on providing excellent service and strengthening our value offering.
In the second quarter, volume was down about 1% compared to last year as strong growth in Chemicals and solid gains in Automotive were offset by declines in Intermodal and Ag. The drought-related decline in Ag continues to have a significant impact on overall volume.
Setting Ag aside, the other 5 groups were up about 1% in total. Core price improved 4%, with all 6 businesses posting gains.
Those pricing gains, along with some positive mix, were the main drivers in the 5% improvement in average revenue per car. With price-driven average revenue per car gains outpacing the volume decline, freight revenue grew 5% to more than $5.1 billion.
Let's take a closer look at each of the 6 groups, starting with the 2 that saw declines. Ag products revenue declined 8%, with second quarter volume down 10% and a 2% improvement in average revenue per car.
Last summer's drought continued to impact grain carloadings, with second quarter volumes down 22% from last year. Domestic feed grain shipments declined as tight U.S.
corn supply, especially in UP-served territories, led to reductions in livestock feeding and increased sourcing from local crops that are less likely to move by rail. Export feed grain shipments also declined with limited U.S.
supply and improved world production. Grain product shipments were down 1% as more DDGs were fed locally, driving a 17% decline in DDG's volume.
Ethanol shipments provided some good news, growing 3%, as production picked up to replenish low ethanol inventories. Food and refrigerated shipments also declined 3% as lower U.S.
sugar prices, driven by surplus conditions, reduced sugar imports from Mexico, and restrictions in Russia and China limited U.S. beef and pork exports.
Intermodal revenue was down 1% as a price-driven 2% improvement in average revenue per unit partially offset a 3% decline in volume. The lower volume was due to declines in International Intermodal, where soft West Coast imports reduced shipments by 8%, following strong first quarter gains.
With modest retail sales growth, retail has remained cautious about overstocking inventory levels. Volume fared better for Domestic Intermodal, where continued success converting highway business to rail in both dry and refrigerated containers drove volume up 3%.
Automotive volume grew 4%, which combined with an 8% increase in average revenue per car to drive revenue up 12%. Driven by replacement demand, favorable financing and an improving overall economy, vehicle sales continued to gain momentum with the seasonably adjusted annual sales rate reaching $15.9 million in June, the highest level since late 2007.
New models offering more features and improved fuel efficiency are compelling consumers to replace aging vehicles. In addition, upticks in housing and construction activity have increased demand for light trucks.
While overall auto sales continue to reflect strong growth, our finished vehicle shipments saw a more modest increase, reflecting a 2% gain as select OEMs faced downtime to deal with model changes and new product launches. Parts volume increased 5%.
Our pricing gains in the previously mentioned Pacer network logistics management arrangement increased average revenue per car. Chemicals volume increased 10%, which combined with the 2% improvement in average revenue per car to produce a 12% increase in revenue.
Crude oil volume was up 3% from the previous quarter and increased nearly 40% when compared to the second quarter of last year. Growth was driven primarily by increased shipments from Bakken, Western Oklahoma and West Texas shale plays in UP-served terminals in St.
James, Louisiana and the Texas Gulf Coast and Arkansas. Our petroleum products and LPG gas business was up 10%, driven by growth in residual fuel oil and asphalt shipments.
Strong international demand for potash led to a 7% increase in fertilizer shipments, while most other segments also posted gains, reflecting the continued strength of our Chemicals business. Turning now to Coal, you can see from the chart of weekly carloadings that the second quarter volumes began to stabilize and finished the quarter a little bit better than flat compared to last year.
Core pricing gains led to a 12% improvement in average revenue per car and produced a 12% increase in revenue. Tonnage from the Southern Powder River Basin increased 1% as declining utility stockpiles and higher natural gas prices improved the demand for coal.
Powder River Basin stockpiles are estimated to have declined 21% from their peak in April 2012, swinging from 24 days above normal at that time to about 1 day below normal this May. New business also provided a boost, but these gains were offset by utility outages and the previously mentioned loss of a legacy customer contract at the beginning of the year.
Soft domestic demand, a weak international market for Western U.S. coal and mining production issues lifted limited shipments -- limited shipments of Colorado/Utah coal, with tonnage down 11%.
Industrial Products revenue increased 7%, even as volume remained flat, driven by 6% improvement in average revenue per car. Nonmetallic minerals volume was up 18% as continued growth in shale-related drilling increased frac sand shipments by 24%.
Growth in housing starts and residential improvements increased the demand for lumber, with shipments up 11%. Although the housing market continued to strengthen, lumber's pace of growth eased slightly in the second quarter as falling lumber prices, excess inventory and wet weather slowed lumber shipments.
On the downside, lower steel production and soft global demand impacted scrap steel, with volume down 17%. Rock shipments declined 5% as local sourcing impacted some of our short-haul business into the Eagle Ford shale play.
We also saw a steep decline in military shipments, with reduced deployments and training rotations to facilities on our network. That wraps up the second quarter, so let's take a look ahead at what we see for the second half of 2013.
Our current outlook is for the economy to show some improvement from the sluggishness we've seen in the second quarter. Although we'll continue to face challenges in some markets, our diverse franchise still provides opportunities to grow in others.
The diminished 2012 corn crop will continue to impact Ag products in the third quarter, but an improving export wheat market should offer some relief. The pace of decline for Ag Products should ease, with third quarter volumes expected to be down in the lower-single-digit range.
We hope to see a return to trend line yields when the new crop -- corn crop comes in later in the year, which should provide some opportunity. Global Insight has raised their full year light vehicle sales estimate to 15.4 million vehicles from 15.0 million at the beginning of the year, which should be good news for our Automotive business.
Crude oil should continue to drive Chemicals growth, but the growth rate will continue to ease against 2012's larger base. Most other chemical markets are expected to remain solid.
Moving to coal, the loss of a customer contract at the beginning of the year will continue to impact volumes. While we expect coal lines to increase sequentially in the third quarter, year-over-year volume quote for the quarter will depend upon weather conditions.
Industrial Products should also continue to benefit from shale-related growth, with increased drilling activity and a ramp-up in pipeline projects after a slow start to the year. The housing market continues to recover, which is expected to drive demand for lumber.
We expect continued success in converting highway business for Domestic Intermodal, and International Intermodal should pick up as the slowly growing economy is expected to produce a positive but somewhat muted peak season. For the remainder of the year, our strong value proposition and diverse franchise will continue to support business development opportunities across our broad portfolio of business.
Assuming an improving economy and a normal summer weather pattern, we expect to finish the full year with a slight volume increase, which, combined with pricing gains, will generate profitable revenue growth. And with that, I'll turn it over to Lance.
Lance M. Fritz
Thanks, Eric, and good morning. I'll start with our safety performance for the first half of the year.
Our year-to-date reportable personal injury rate increased 5% from 2012. However, the number of severe injuries declined to a record low, which reflects our work to reduce risk and the team's deep personal commitment to safety, something we call the courage to care.
Rail equipment incidents or derailments improved 1% versus 2012. Our continued investments to harden our infrastructure, as well as leverage advanced defect detection technology, have driven a reduction in track and equipment-induced derailments.
Moving to public safety, our grade crossing incident rate improved 3% versus 2012, reflecting our focus on improving or closing high-risk crossings and reinforcing public awareness. Our second quarter rate of 1.85% was a second quarter best and represented a significant improvement over the first quarter performance.
Incidence rate -- incident rates improved in each region of our network, including the South, where there is a higher grade crossing density than our overall network. Moving on to network performance, in the second quarter, the network remained fluid, but it does have room for improvement.
Overall, velocity was down 3%, and terminal dwell was up 4% in the quarter, both adversely impacted by weather interruptions and heat-induced slow orders in the southwestern portion of the network. Increased track renewal programs in high-volume quarters also played a role.
Weather challenges included flooding that impacted major gateways in Chicago, St. Louis and Eagle Pass, Texas.
As a result, we saw a 25% increase in the number of days with major service interruptions versus the second quarter of last year. Infrastructure investments that enhanced our agility and resiliency enabled us to rapidly recover after each incident, reducing the impact from these events.
Overall, our network remains solid and well positioned to handle volume growth. We continue to provide outstanding local service to our customers with a best-ever 96% Industry Spot & Pull, which measures the delivery or pulling of a car to or from a customer.
Our Service Delivery Index, the measure of how well we are meeting overall customer commitments, declined modestly compared to the second quarter of 2012. Half of the decline can be attributed to tighter service commitments to our customers and the effects of traffic mix changes.
Despite these challenges, we achieved sequential improvement in both service delivery and terminal dwell compared to the first quarter. Solid network fundamentals position us to operate at improved service levels going forward.
We are continuing to increase capacity across our network, most notably in the South, where volumes have rebounded to prerecession levels. Moving on to network productivity, slow order miles declined almost 30% to a best-ever second quarter level.
We've made substantial advancements in the South with process improvements that allow us to maintain the railroad while providing value-added service levels. As a result, our network is in excellent shape, reflecting the investment in replacement capital that has hardened our infrastructure and reduced service failures.
We continue to leverage existing resources in growth markets, as well as realize efficiencies in more challenging segments. During the second quarter, we turned the 4% growth in Automotive volumes into an average train size increase of 2%, running an all-time quarterly record of 65 cars per train during the quarter.
And despite the 22% decline in grain volumes, we were able to run near-record second quarter grain train lengths, with manifest and coal train lengths falling just short of quarterly records. Intermodal train sizes reflect the challenge of an 8% dip in International volume.
We continue to find ways to utilize assets more effectively through process improvement and targeted capital investment. A good example of this is the Fort Worth terminal, which is a major network yard that supports Texas oil and gas fields, Mexico, the automotive network and construction markets.
UP Way uses process improvement tools like value stream mapping and the A3 problem-solving process to find and apply countermeasures for process bottlenecks and service failures. More importantly, it engages those doing the work in generating these countermeasures, collecting and focusing the power of the team.
Through our UP Way initiatives, we are handling substantially more cars through a key network yard in Fort Worth at better service levels. Our capital investment strategy also plays a vital role.
Our targeted 2013 capital spend is still around the $3.6 billion mark. About $2 billion of that is replacement capital, with most of that to renew our track infrastructure.
We're on target for the year as more than half of that program work is now complete. Spending for service, growth and productivity will total around $1 billion.
Capacity, commercial facilities and equipment are the primary drivers. Spending on positive train control will total $450 million for the year.
Major projects include work on the Santa Teresa, New Mexico rail facility, which is slated to open in early 2014. This year's progress on the Sunset Corridor includes about 30 miles of double track.
Additionally, our capacity expansion plans in the South are increasing more than threefold from spending levels in 2011, helping support the efficient movement of growing volumes in that region. We're adding sightings, expanding terminals, double-tracking some routes and upgrading signals.
We're also purchasing 100 locomotives, 900 freight cars, as well as some domestic containers to replace units currently on lease or being retired. It's important to note that all of these projects have a positive safety impact, whether it's replacement or service and growth capital.
And the growth capital must meet aggressive return thresholds or we just will not pursue the project. Let me wrap it up.
We remain optimistic on our operating outlook for the second half of the year and our ability to realize network improvements on various fronts. We remain steadfast in our commitment to operate a safer and more efficient railroad for the benefit of our employees, customers, the public and shareholders.
We remain agile, managing network resources in response to dynamic market shifts and unexpected events. The network is strong and fluid, capable of handling volume growth at safe, efficient and reliable service levels.
Our continuous improvement efforts and particularly, the UP Way will continue to generate process improvements that add value for all of our stakeholders. To support our growth initiatives, we will continue to make smart capital investments that generate attractive returns, all of which will continue to enhance our overall value proposition.
With that, I'll turn it over to Rob.
Robert M. Knight
Thanks, Lance, and good morning. Let's start with a quick recap of our second quarter results.
Operating revenue grew 5% to an all-time quarterly record of nearly $5.5 billion, driven mainly by solid core pricing gains. Operating expense totaled $3.6 billion, increasing 3%.
Operating income grew 9% to $1.9 billion, also getting a best-ever quarterly mark. Below the line, other income totaled $23 million, up $2 million compared to 2012.
For the full year, we're still projecting other income to be in the $100 million to $120 million range, barring any unusual adjustments. Interest expense of $133 million was $2 million lower than last year, while income tax expense increased to $662 million, driven by higher pretax earnings.
Net income grew 10% versus 2012, while the outstanding share balance declined 2% as a result of our continued share repurchase activity. These results combined to produce a best-ever quarterly earnings record of $2.37 per share, up 13% versus 2012.
Turning to our top line, freight revenue grew 5% to more than $5.1 billion. Solid core pricing gains of 4% and positive mix of about 2 points, driven by a decline in lower average revenue per car Intermodal shipments, more than offset the slight decline in volume levels.
In addition, fuel surcharge revenue was down from last year due to a lower average diesel fuel price and lower volumes. Moving on to the expense side, Slide 22 provides a summary of our compensation and benefits expense, which was up 3% compared to 2012.
Inflationary pressures of about 2.5%, combined with shifts in traffic mix to more manifest business, which requires additional employees, drove the quarterly increase. Lower volume costs and productivity gains partially offset these increases.
Workforce levels increased 2% in the quarter. About half of the increase was driven by capital projects, including positive train control activity.
The other half was driven by a shift in traffic mix that I just discussed. Turning to the next slide, fuel expense totaled $863 million, decreasing $19 million versus 2012.
A 3% decline in the average diesel fuel price drove the reduction in the cost. Gross ton miles were essentially flat compared to last year.
Conversely, our consumption rate increased 2% compared to 2012. Moving on to other expense categories.
Purchase, services and materials expense increased 8% to $585 million due to higher locomotive and freight car contract repair expenses and joint facility maintenance expenses. As we discussed in April, we continue to incur logistics management fees associated with the new Pacer agreement, which are recouped in our Automotive freight revenue line.
Depreciation expense increased 1% to $438 million. The impact of increased capital spending in recent years was partially offset by a new equipment rate study that we discussed with you earlier this year.
Looking at the full year 2013, we now expect depreciation expense to be up in the 1% to 2% range versus 2012 due to the timing of asset purchases and project work completion. Slide 25 summarizes the remaining 2 expense categories.
Equipment and other rents expense totaled $302 million, up 1% compared to 2012. Increased container expenses associated with the new Pacer contract and growth in automotive shipments drove higher freight car rental expense.
Lower freight car and locomotive lease expense partially offset these increases. Other expenses came in at $219 million, up $29 million versus last year.
Despite the long-term improvement trend in our safety performance, personal injury expense increased compared to a tough comp last year. Our recent actuarial study resulted in a smaller reduction to our estimate for prior year activity compared with the second quarter of last year.
In addition, higher operating taxes and freight and property damage costs also drove expenses up compared to 2012. For the second half of this year, we still expect the other expense line to average around $225 million a quarter, barring any unusual items.
Turning to our operating ratio performance, we achieved an all-time best operating ratio of 65.7% this quarter, improving 1.3 points compared to last year. Our performance highlights the positive impact of solid core pricing gains and network efficiencies despite the slight shortfall in volumes.
Looking ahead, we remain committed to achieving a full year sub-65 operating ratio by 2017. Union Pacific's record first half earnings drove strong cash from operations of more than $3.2 billion, up 16% compared to 2012.
Free cash flow of $833 million reflects the growing profitability of the franchise, more than offsetting the 12% increase in cash dividend payments versus 2012. Our balance sheet remains strong, supporting our investment-grade credit rating.
At quarter end, our adjusted debt-to-cap ratio was roughly 40%. Opportunistic share repurchases continue to play an important role in our balanced approach to cash allocation.
In the second quarter, we bought back nearly 3.1 million shares, totaling $463 million. Since 2007, we've repurchased over 97 million shares at an average price of around $82 per share.
Looking ahead, we have about 9 million shares remaining under our current authorization, which expires March 31, 2014. So that's a recap of our second quarter results.
Looking at the remainder of the year, the economy will be a key driving factor. Assuming an improving economy and summer weather conditions that will drive coal demand and fall crop harvest yields, we're projecting positive volume growth for the second half of the year, which should bring full year volumes to the positive side of the ledger.
In the third quarter, we'll continue to see a year-over-year decline in our Ag volumes, however, not at the magnitude that we saw in the second quarter. As for our coal shipments, summer weather will be the determining factor.
In addition, we'll have to see how consumer sentiment and the economy impact the Intermodal peak season this year. However, we do think there are continued growth opportunities in other market sectors that have the potential to offset these uncertainties.
Combined with continued real core pricing gains and our ability to leverage our diverse franchise, we expect to achieve yet another record financial year with best-ever marks in earnings and operating ratio. We're well positioned through the first half of this year.
Regardless of the hand that the economy deals us, we'll remain focused on our ability to generate improving returns required to strengthen and enhance our network, create value for our customers and drive increased returns for our shareholders. With that, I'll turn it back over to Jack.
John J. Koraleski
Thanks, Rob. As we move into the second half of the year, the economic outlook remains uncertain.
But from our perspective, the underlying economy in the second quarter seemed somewhat weaker than it did in the first quarter. We're hopeful that we'll see some economic improvement in the months ahead.
We are well positioned with our diverse franchise, our strong value proposition and our excellent service offerings while remaining agile in today's changing environment. We'll continue focusing on re-investable pricing, attracting new, profitable growth opportunities and running a safe, efficient and reliable network that generates greater value for both our customers and our shareholders going forward.
With that, we'll open up the phones for your questions.
Operator
[Operator Instructions] Our first question is from the line of Chris Wetherbee of Citigroup.
Christian Wetherbee - Citigroup Inc, Research Division
Maybe first, a question on the Coal business. You saw a nice sequential step-up in the coal yields there.
I guess I'm just kind of trying to think about how we should be thinking about the mix of what was previously priced legacy business and maybe what is kind of a current run rate business as we think out into the back half of the year. I guess I'm just trying to get a sense of maybe what the mix factors could be when we look at the Coal business in the second half of 2013.
John J. Koraleski
Chris, if you look at it, I think we have a $350 million in legacy up for renewal this year, and we retained about 80% of that. Majority of that was Coal business.
There's really nothing significantly changing as we go forward for the balance of the year. And the mix impact that you're going to see is really going to be dependent on the coal burn in the various customer regions and zones.
So there's really not much more clarification. Eric, do you have anything to add to that?
Eric L. Butler
No.
Christian Wetherbee - Citigroup Inc, Research Division
Okay. I guess I'm just trying to maybe get a sense.
You lost the contract earlier in the year, which, I think, that you had mentioned was about 5% of the business. So it would seem that the underlying business is obviously doing better than kind of the flattish volumes you're seeing there.
But that's helpful. Maybe switching gears with a follow-up, just on the back of crude-by-rail, when you think about the tightening differentials on WTI versus Brent, have you seen a deceleration in the pace of activity at St.
James, for instance? Just trying to get a sense of how we should be thinking about the sequential pace of crude-by-rail on the back half.
John J. Koraleski
We really haven't seen any impact at St. James.
We have had seen some minor impact in our Texas business, where there's a lot of pipelines. Eric, do you want to...
Eric L. Butler
Yes. The intrastate Texas short-haul business, we always take opportunistic opportunities to move some of that, which is pretty directly competitive to pipeline given the fact that it's pretty short-haul stuff.
And so we've seen some decline in that. But for -- that's really nominal.
For our base book of long-haul, Bakken, the St. James business, we feel pretty good about the continued opportunities with that.
Operator
Our next question comes from the line of Scott Group with Wolfe Research.
Scott H. Group - Wolfe Research, LLC
So I wanted to first just follow up on Coal. So if I remember earlier in the year, you guys were guiding to slight declines in Coal volumes for the full year, and I guess the implication was positive volumes in the back half of the year.
It seems like you've got maybe less visibility to Coal now. I just want to understand that.
Are you no longer confident that you're going to have positive Coal in the full second half of the year?
John J. Koraleski
Go ahead, Rob.
Robert M. Knight
Scott, we haven't changed our guidance, where we said that for the full year, that we still think Coal's going to be slightly down, given all the factors and given the fact that it was down 19% in the first quarter. So that does imply -- with the flat performance in the second quarter, that does imply strengthening in the back half.
Where we're saying there's lack of clarity, if you will, is, as always, weather will be a huge factor in how the summer burn plays out in our Coal business. And as Eric pointed out, at this point in time, inventories are about 2 days lower than normal, so we're well positioned if the weather, in fact, cooperates.
Scott H. Group - Wolfe Research, LLC
We're getting killed in New York with heat. How is the weather cooperating in your territories right now?
John J. Koraleski
Well, it's going to be 97 degrees in Omaha today, so we're doing high fives. But so far, at least, for the summer, it's been okay, was actually a cooler spring than what we had hoped for.
But the summer has heated up nicely, and we're hoping that that's going to stay through the balance of the season.
Robert M. Knight
Yes, I want to add that the Energy Department has put out estimates that suggest that electrical generation demand will be down 4% in the second half of the year. They probably don't have any better crystal ball than we do in terms of weather impacts, but that is the data point that's out there.
Scott H. Group - Wolfe Research, LLC
Okay. And just second question, why is International Intermodal so weak?
Is there share losses to BN? And do you think it's just the West Coast ports losing any share?
They just seem surprisingly weak, and I wanted to get an explanation for it and how you think that plays out in terms of peak season.
John J. Koraleski
Part of it may be they were surprisingly strong in the first quarter. But, Eric, you can clarify that.
Eric L. Butler
Yes. So our first quarter was strong, if you recall.
There's always significant competition between all of the ports up and down the West Coast and between ourselves and our competitors, but there's no significant share swings that have occurred. The real fundamental issue is retail indicators in this country, retail sales have really been mixed.
And you could argue even in the second quarter, they looked like they have softened a bit. Supply chain manufacturers and retailers are continuing to thin out the supply chain and trying to squeeze out inventories.
So you have actually seen lower volumes coming into all of the West Coast ports from Asia. Certainly, what's going on in China might also have an impact to that.
Certainly, near-sourcing to Mexico might have an impact to that. But you have seen lower volumes into all of the West Coast ports in the second quarter.
Scott H. Group - Wolfe Research, LLC
So why do you have improved international peak as a positive in the second half?
Eric L. Butler
Well, if you look at -- again, what we've said is the economy is what our outlook is dependent upon. If you look at inventory, if you look at some of the sentiment, it does suggest that later in the third quarter, the fourth quarter, there should be decent consumer sentiment for a strong retail season.
If that happens, you will need to move the business because there are not a lot of inventories out there, so that would suggest a pickup from where we are today.
Operator
Our next question is from the line of Tom Wadewitz with JPMorgan.
Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division
I wanted to ask you about the kind of look on coal beyond second half of this year and the weather comments. But if you look into 2014 and 2015, have you seen a kind of, I guess, new indication from utilities that there are more coal plants being scheduled for shutdown, or is that pretty much status quo?
And when you look at that, would you say, hey, there might be some impact in 2014 to demand from coal plant shutdowns, or do you think that's not going to be much of an effect?
John J. Koraleski
Eric?
Eric L. Butler
So as we discussed previously, coal shutdown plants in any amount that you might see, really, is not a factor because there's more capacity than demand. And you might hear about shutdowns that just kind of match capacity and demand.
The key issue is what market share coal has. Coal is hanging in there pretty solidly at the 38%, 39% market share of total electrical generation.
We see nothing on the horizon that's going to substantially change it. Certainly, there could be some environmental regulatory thing that could change that.
But right now, from a business economic standpoint, we see nothing on the horizon that's going to change that.
Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division
Okay, great. And then one on crude-by-rail, you commented on, I guess, the near-term trend.
It sounds like there's somewhat negative impact on the short-haul business but really not in St. James.
What about customer investment activity and the discussions that you're having that would kind of indicate how new terminals will be opened up looking out the next year or 2? Is there a change in discussions?
Are customers kind of slowing things down at all? Or is it pretty much the same as what you saw before, when crude spreads were wider?
Eric L. Butler
So actually, customer investment in destination terminals is expanding both -- in St. James, there's a project well underway to expand that capacity.
But more importantly, we've talked about this in the past. If you look at what's going on in California, there's significant activity in terms of expansion of destination terminals in California.
We've mentioned before, California is going to have a significant short-haul. Their local crude production is declining.
Alaska's slope is declining. And so they're looking to source from Canada, from the Bakken and also from the Niobrara and also Permian, and so they need destination terminals in California.
And there's a significant activity, significant investment going on. Some has been public, some is not.
John J. Koraleski
Yes, we have seen no diminishing in the enthusiasm for customer investment in the oil business.
Operator
Our next question is from the line of Bill Greene of Morgan Stanley.
William J. Greene - Morgan Stanley, Research Division
In spite of a relatively modest revenue growth rate, the OR this quarter was very impressive, I think, by any measure. And if we look at kind of how things change sequentially, typically, your third quarter is the best.
And I know you don't give guidance, so we're not sort of looking for that. But if you think about kind of anything in the third quarter or on a sequential basis, that means that we need to keep in mind something that's going to cause you now to be off.
Is there anything that you look at in this upcoming third quarter or even relative to last year that's important for us to bear in mind? Because this was pretty impressive and suggests that the long-term guidance will be achieved early.
John J. Koraleski
Bill, we don't see anything in the third quarter that would -- that we would consider to be unusual. There's always, in the rail business, unforeseens that could happen.
But at this point in time, we really don't have anything substantive. Rob or Lance?
Robert M. Knight
Yes. Bill, I would just say that one thing to keep in mind is always a factor in our business is mix.
Obviously, it can have a factor and so can fuel prices. I mean, if fuel price is up or down, that can obviously have an impact.
But no, there's nothing directionally that's going to change our commitment to continue to make progress on our operating ratio commitments.
William J. Greene - Morgan Stanley, Research Division
Okay, great. Now if you think about these long-term OR goals that you have, the ROIC has gotten to pretty good levels, certainly relative to history.
How do you think about the implications over time of being above the cost of capital? Is that -- do we have to start thinking about regulatory risks yet, or is this -- are we not really there?
Robert M. Knight
Well, Bill, as you've heard us say all along, I mean, we're proud of the fact that we've improved our returns. We're going to continue to reinvest in the business, which is how we are able to reinvest as much capital as we do.
And as you've heard me say many times, if you look at our calculation of our returns on a replacement basis, our returns are around -- Coal at 7%-ish. So clearly, room for us to continue to improve that on a natural replacement cost calculation.
So we're going to -- we're not going to change our behavior. We'll continue to run a safe, efficient network and price to value, where we add value to our customers, and continue to move forward in our returns so that we can continue to make these capital investments that we'd like to make.
John J. Koraleski
Yes, Bill, every chance I get in Washington, D.C., my message is very, very clear that while we earning good financial returns, we are investing record amounts of capital. We're providing great value and service for our customers.
And on a replacement cost basis, we're still not in the ballpark of where we need to be. And I think that message has been well reserved -- has been well received, particularly given that customers are relatively satisfied with our service offerings.
Operator
Our next question comes from the line of Justin Yagerman of Deutsche Bank.
Justin B. Yagerman - Deutsche Bank AG, Research Division
So I was curious on coal yields here when I look at things on an RPU basis. I mean, we saw volumes up nicely this quarter versus what we've seen at least for the past few quarters, and RPU declined sequentially.
And I'm just trying to get an idea as we look out to the back half and expect improvement from a volume standpoint year-over-year. How much of the prior legacy flow-through should influence RPU?
And would I be smart to expect stable, flat or down? And obviously, I'm assuming that we get a decent burn going on this summer and that volumes do increase on a year-over-year basis.
John J. Koraleski
Okay. Rob, do you want to take a shot at that?
Robert M. Knight
Yes. Justin, I mean, the simple answer to your question is it's difficult to give guidance on what you're asking in terms of the average revenue per car because mix plays as a key factor in that.
But you're right. Sequentially, the average revenue per car did come down, and it's driven primarily by the mix effect that Eric talked about, where volumes, as an example, were off 11% in our Colorado/Utah business, for example, while PRB was up in the quarter.
So that's an example of the mix effect. In terms of the pricing underlying what's happening in the Coal business, there's no directional change.
We renewed those legacy contracts that Jack talked about, and that should flow through to the balance of the year. So there's no change in that element of the average revenue per car, but the mix effect and the volume associated with those repriced contracts will clearly play a role as we move forward.
Justin B. Yagerman - Deutsche Bank AG, Research Division
Okay, that's helpful. And maybe a little bit on the longer-term view as we look out to the petrochemical projects that are coming online in your Southern Corridor.
Curious how we should be thinking about the timing. I know there's at least one cracker in 2014, and most of the rest of the stuff is beyond '14.
But what's the timing of that project, and how meaningful would you expect loads to start coming on in 2014 from that?
John J. Koraleski
Eric?
Eric L. Butler
As you're talking about the expansion of the chemicals production capacity due to low natural gas prices, I think there are roughly 8 announced plant expansions. Most of those have turnover to operation dates, I think, in 2016 or beyond.
And so we are working with them now in terms of developing transportation alternatives, working with many of those customers and try -- and helping them shift their inbound construction materials to build the facilities. But I think most of those will be late '15, early '16 or later.
Justin B. Yagerman - Deutsche Bank AG, Research Division
Yes, I think there was one, the Gruppo Mossi project, that had an estimated completion in 2014. So I was curious as to what kind of production you would expect that to see.
And I know that one that you guys have called out before in presentations.
Eric L. Butler
Yes, we don't -- as you know, we don't list production from individual plants and individual customers. We do have a very strong Chemicals franchise with a lot of great value, and we believe that there's upside.
I think what we might have called out in the past about the Gruppo Mossi facility was a 2016 start. I think that's what we called out.
But we don't list individual opportunities in individual plants, but we are excited about all of the upside.
Operator
Our next question comes from the line of Ken Hoexter with Merrill Lynch.
Ken Hoexter - BofA Merrill Lynch, Research Division
You talked earlier about International Intermodal. If I can switch to Domestic Intermodal, you're looking at -- I guess volumes were up about 3%.
Would you anticipate that to grow faster on that? I mean, you've talked about it.
I think it was about 10 million addressable loads plus, I think, out of 2 or 3 from Mexico. Do you expect the conversion rate to pick up, or is the 3% kind of your targeted run rate?
John J. Koraleski
Eric?
Eric L. Butler
So as we look at Domestic Intermodal, it's a rich target area. I mean, we have said publicly that there's probably 9 million, 10 million loads that can be converted from truck to rail.
We have, we believe, the strongest North-South Mexico franchise. We have 6 border points.
Truck business to and from U.S. and Mexico is growing rapidly this year, so we think there's a rich target area.
We have a number of strategies and initiatives that we're-- we have underway with our partners in the Intermodal industry to convert more truck to rail. And so we think there's lots of upside.
Converting, there are a lot of issues and a lot of things that need to be done to do that effective conversion. So I'm not sure I will give a roadmap in terms of what the number will be at what period of time, but we continue to believe there's significant upside in the Domestic Intermodal market.
John J. Koraleski
I'm pretty excited, Ken, about the opportunity that we'll have in 2014 with the opening of our new facility in Santa Teresa to be able to take -- in addition to that 10 million truckloads, there's another 3 between the U.S. and Mexico.
And that facility is going to really -- we're going to really focus on that and target that. So we're looking forward to having that facility up and running here in 2014.
Eric L. Butler
And I'd like to make one other data point. The new trucking CSA rule that went into effect July 1, we're not really seeing any impact from that right now, but we do expect over time that there will be an impact from that, which will make rail more competitive -- Intermodal more competitive.
Ken Hoexter - BofA Merrill Lynch, Research Division
You're talking about hours of service, right?
Eric L. Butler
Yes.
Ken Hoexter - BofA Merrill Lynch, Research Division
Okay. I guess my other question is -- I think Rob mentioned during his speech that more manifest will drive a need for more employees.
Should we see that pace accelerate, given some of the comments on the areas you're targeting, whether it's crude-by-rail or some of the other areas that might be more manifest? Should we see that pace of employees pick up now?
John J. Koraleski
Rob?
Robert M. Knight
Ken, it depends on the volumes, and the mix is a part of it, but I go back to our original guidance on headcount. We sort of put capital aside because, as I commented, some of our headcount was earmarked on the capital and specifically how the trains go.
But if you look at our -- our net headcount should flow with volumes. So if volume is slightly up, I would expect headcount net to be slightly up.
If volume is going to be slightly down, for example, which I don't hope -- I don't want that to happen, but if that were to happen, we expect headcount to be down, all of which not one for one because there is productivity in there. So I think while manifest itself carries with it a little bit more labor intensity, when you step back and look at it enterprise-wide, that doesn't change our view on our headcount guidance.
Operator
Our next question comes from the line of Allison Landry of Credit Suisse Group.
Allison M. Landry - Crédit Suisse AG, Research Division
I was wondering if you could provide any detail on the volumes that were associated with the utility outages and the new business that you mentioned for the Coal business. And specifically, did the new business that you were talking about include any legacy Coal business that was repriced for 2012 but did not move?
John J. Koraleski
Eric? Rob?
Robert M. Knight
Allison, if I understand your question you're asking, in the second quarter, what was the impact of some of the legacy repricing -- business that did not move, let me attempt to answer, and if I don't answer it correctly what you're asking, come back. We have previously said that as we reprice contracts, if the volume doesn't move, and we called this out in the second -- excuse me, in the first quarter that we didn't get Coal at 0.5 point price because the repriced business, the volume was down.
We're still experiencing that. Now while we had sequential improvement in our volumes in our Coal business, it's still not at the rate that -- the full load rate, if you will, back to historical levels.
So I would summarize by saying that if Coal volumes were to tick back up to historical levels, there's still some upside opportunity there. And depending on when it actually happens, it may or may not show up in how we report our pricing, but rest assured it would show up in our margins.
Allison M. Landry - Crédit Suisse AG, Research Division
Okay, that's fair. And is there any volume number that you could give us for the utility outage that you mentioned?
Eric L. Butler
No. I mean, it's in our numbers.
It's in the mix of our numbers. We don't call that out specifically.
Allison M. Landry - Crédit Suisse AG, Research Division
Okay. And then my follow-up question on crude-by-rail.
You talked a lot about the destination side of the equation. But I was wondering if you could speak to production ramping up in the Niobrara and how many rail facilities that you might serve there on the origination side.
John J. Koraleski
Eric?
Eric L. Butler
Yes. So as you know, production in Niobrara is ramping up, but it still is at much lower levels than what you see out of Bakken or out of some of the Canadian areas.
There are -- in terms of new -- or our customers and destination origin terminal owners, there are a number of large projects underway. I'm not going to call out the specifics, but a number of large projects, both on ourselves and on our competitors, that are underway in terms of origin facilities out of the Niobrara.
Those are really targeted to move Niobrara product into California.
Operator
Our next question is coming from the line of Brandon Oglenski of Barclays.
Brandon R. Oglenski - Barclays Capital, Research Division
I wanted to follow up from the question that Ken was asking on Intermodal. You guys mentioned your new Santa Teresa facility that you are ramping up.
Does that mean that Ferromex is going to jump a little bit more aggressively into the cross-border Intermodal business with partnership with UP?
Eric L. Butler
Yes. So our Santa Teresa facility that Jack was talking about is targeted to open in the first quarter of next year.
That facility is on UP, and that'll do a number of things for us. But one of the things that it'll do is it'll help us really penetrate the maquiladora market that is just south of the border and moving their products to destination in the U.S.
by long-haul truck. We'll be able to convert that to Intermodal and move to Intermodal.
And so that's not really an FXE play. It would not surprise me if the FXE is interested in growing the Intermodal business.
They have a great franchise, as does the KCSM. And as I said before, there's a rich target opportunity there in terms of Intermodal, particularly to and from Mexico.
So it would not surprise me if that were the case.
Brandon R. Oglenski - Barclays Capital, Research Division
Okay. And maybe, Eric or Jack, if you guys want to respond to this one as well.
But I think the risk that could develop here is if the slow economy continues, do you think that Union Pacific can continue driving core pricing growth in the 4% range? I know there was some legacy contracts last year you're giving a little bit more benefit this year.
But it's our understanding that you don't have a significant book of business to reprice early in 2014. So do you envision that, if things kind of continue at the 2Q pace, you could maintain that level of pricing growth?
Or is there a little bit of risk to the economy there as well?
John J. Koraleski
Okay. Rob, go ahead.
Robert M. Knight
Yes, Brandon, let me just remind everyone what we've said. Again, we haven't given guidance on specific pricing number other than to say that we're confident we can still get real pricing, which some and many have defined that as sort of inflation-plus kind of pricing.
But as we talked before, we're focused on making sure that every piece of business is re-investable. But to your point of legacy, I have called out that 2014 is a "legacy-light" year.
But that doesn't change our overall focus on pricing and our commitment to get that real core pricing gain.
Operator
Our next question comes from the line of Matt Troy with Susquehanna.
Matthew Troy - Susquehanna Financial Group, LLLP, Research Division
Given the market's evident enthusiasm with the Mexican business, as evidenced by Kansas City Southern's multiple, it's always worth noting you guys have an absolute basis and equally sized -- somewhat equally sized Mexican business. Perhaps if you could just talk about, I know we've touched on Intermodal, but some of the growth that you saw in the second quarter, how that business is trending in terms of near-shoring and business development.
What does the pipeline look like in terms of what might be coming online in Mexico to drive further and future growth?
John J. Koraleski
Sure. Eric?
Eric L. Butler
So we are very excited about the Mexico market. And as you may or may not know, we are still the Kansas City Southern de Mexico, KCSM, largest interline partner to and from Mexico.
So we're excited about the franchise. We are excited about all of the opportunities.
There's immense growth on the Auto side of the business. There are a number of different automotive facilities that are being built and expanded in Mexico.
And between the KCSM and the FXE joining with the UP franchise, that's a sweet spot for us. The Mexican grain business is always very strong for us.
With the drought last year, we have seen some weakness. But as you have normal crop yields, that is always a target area for us.
And then Intermodal is really kind of the untapped area. There is a significant amount of Intermodal today in terms of -- for the auto manufacturers, but if you take the auto manufacturers out of the mix, there's Mexican North-South truck moves, and we believe that that's an untapped area for us to penetrate and grow our Mexico business.
So we're very excited about Mexico.
Matthew Troy - Susquehanna Financial Group, LLLP, Research Division
Excellent. I guess my follow-up question will be longer term.
We're starting to hear and see conceptual schematics and models of natural gas-powered locomotives. Certainly, the manufacturers are starting to talk about it more and potential for savings operationally of 20%, 30% in terms of running cost.
Again, this is all kind of theoretical at this point. But to what extent are you examining natural gas locomotives, beta testing, where are you in that?
And realistically, what might be a time frame to see something deployed on a commercial basis?
John J. Koraleski
Sure. Lance?
Lance M. Fritz
Sure, yes. So there is a lot of work both at Union Pacific and in the industry on natural gas-powered locomotives.
We are positioning ourselves right now to start running some beta testing. We have been partnered up with CN.
They used some of our equipment when they were beta testing and have seen their results. It is not a layup from the standpoint of earning a reasonable return out of the investment necessary to convert to natural gas.
There's a significant capital footprint on the network, and there's also a significant capital put into the rolling stock so that you can have tenders behind locomotives. However, it looks promising, so we're investigating and pursuing.
Operator
Our next question comes from the line of Anthony Gallo with Wells Fargo.
Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division
My question is on the Agricultural business. 2Q '13 volumes, I think, were the second lowest going back to 2007.
And so 2 questions, really. Has there any -- has there been any change other than, say, the droughts on your network with either customers coming on or off the network?
And then secondly, what have been the implications for you from an expense standpoint, and how does that resolve itself as volumes eventually come back?
John J. Koraleski
Okay. Eric?
Eric L. Butler
So let me talk about kind of the network. We actually have been expanding our Ag network footprint as we've gone through the drought period.
We have invested and have created with our customers more originations, and we have expanded our capability in terms of running larger, more efficient trains in our network. So while the drought has been underway, we have actually positioned ourselves for the future to grow the business.
If you look at the Ag business, yes, it was near record lows, but there are a couple of factors. We had the drought.
We also had, during this time, don't forget, we had the Russian and Chinese governments putting bans on some of our exports. We had our sugar exports being impacted also in terms of -- from Mexico.
So all of those factors have impacted the volumes while we've had this drought. In terms of our corn crop, everyone is focused on, so it's almost like a perfect storm.
But we feel pretty good about the future. Assuming normal trend line yields, our network is probably in better shape now than we were going into it in terms of being able to handle the upside.
Operator
Our next question comes from the line of Jason Seidl of Cowen and Company.
Jason H. Seidl - Cowen and Company, LLC, Research Division
A quick question on the core pricing gains of 4%. As we look into the back half of the year, sort of all things being equal, if you do get that lift from domestic coal, if weather does cooperate, will--could we see the core pricing numbers go up because of the previous legacy renewals?
John J. Koraleski
Rob?
Robert M. Knight
Yes, Jason, you could. I mean, just the math of it is as those, some of those legacy contracts that we repriced, if the volume increases, that's a benefit for us this year.
So we'll have to see how it plays out.
Jason H. Seidl - Cowen and Company, LLC, Research Division
And sticking with the Coal theme for my follow-up, how is the PRB looking in terms of sort of going to get some Eastern burn going forward? I know we've seen a little bit of a switch out from some of the Eastern plants Illinois[ph] basin.
Is there any room for PRB to pick up some steam?
John J. Koraleski
Eric?
Eric L. Butler
No. Eastern utilities, they have a choice between PRB.
They have a choice between Illinois coal. They have a choice between Central Appalachian coal.
And the decision is really different for different utilities based on where they are in terms of the scrubbers and other environmental investments that they've made, the materials that they would need to cleanse the coal, like lime. So I mean, it's a different equation for every utility, and I think every utility is looking at that equation and the mix of what they want to do.
In that context, we are continuing to have discussions with Eastern utilities.
Jason H. Seidl - Cowen and Company, LLC, Research Division
But do you think there's a good chance that that could pick up in the future?
Eric L. Butler
Eastern utilities, they're making these decisions. They're investigating Southern Powder River Basin coal as one of numerous options.
We are excited about that. We want to facilitate that, but there are a lot of factors that go into their decisions.
Operator
Your next question is from the line of John Larkin with Stifel.
John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division
Rob, would you care to talk about the magnitude of the fuel surcharge lag impact in the quarter? Could you kindly hang a number on that for us?
Robert M. Knight
Yes, John, I'd say it was a tailwind that, when you consider the recovery of the lag, the price of fuel, et cetera, it was a tailwind of $0.01 or so.
John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division
And so not a major factor in the quarter?
Robert M. Knight
Right.
John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division
And then also, on the expense side, in a world where volumes were down 0.5% to 1%, expenses were up 3%, which seems to run in the face a little bit of the company's long-running objective to try and offset cost inflation with productivity. Was the mix and traffic to more manifest the main driver of that, or was there something else going on?
John J. Koraleski
Rob?
Robert M. Knight
Yes, John. As I commented earlier, manifest was a part of it.
I talked about the personal injury item. While improved safety performance year-over-year, it wasn't as good as last year's prior-period adjustment.
So that's a factor. Headcount, we are hiring, as we talked about.
We're hiring partly manifest, partly just getting ahead of the curve on some other replacement activities was a part of the activity as well.
Operator
Our next question comes from the line of Walter Spracklin with RBC.
Walter Spracklin - RBC Capital Markets, LLC, Research Division
Mine are just 2 kind of follow-up questions. First, on Intermodal.
Can you tell us on the domestic side whether all of your growth right now is coming from conversions? Or is there any -- in other words, is the economy playing at all a negative, flat or a positive factor on your domestic side, or is your entire growth coming from truck-to-rail conversion?
John J. Koraleski
Eric?
Eric L. Butler
I would use an estimate 2/3-1/3, 2/3 conversion, 1/3 economy. So the majority of our growth is coming from conversion.
Walter Spracklin - RBC Capital Markets, LLC, Research Division
Okay. And in terms of your employee count, just a follow-up on that.
You had mentioned that you wanted to grow your employee count somewhere less than volume. It seems that it's growing at least more than volume in the first half, so is that to indicate that we should see a reduction in your employee count in the back half of the year?
Am I reading that right?
John J. Koraleski
That will be pretty hard to say. So if you look at it, Walter, right now, about half of that employee count was driven by capital spending, PTC investment and those kinds of things.
One of the phenomena that we're seeing right at the moment is hiring or the replacement of people who will be retiring and leaving the workforce. So we have probably a few extra people at this point in time because they're in training for the second half of the year and those kinds of things.
But I don't think it's going to change. I don't know.
Rob, do you see it differently?
Robert M. Knight
No. Mix will play a factor, but again, our overall guidance is a net effect of headcount.
When we said capital side, we'll be up or down with volumes with the assumption that we're continuing to get productivity behind that.
Walter Spracklin - RBC Capital Markets, LLC, Research Division
So roughly, how much of your guys here are capital people that are compared to last year? How many have you added for capital purposes versus last year?
John J. Koraleski
Rob said it was about half of our growth in headcount was capital and about half was driven by other.
Operator
Our next question comes from the line of Keith Schoonmaker of Morningstar.
Keith Schoonmaker - Morningstar Inc., Research Division
A follow-up on PRB. I think at the investor meeting in October, you mentioned export coal might be 7 million or 8 million tons this year.
Does that still seem reasonable, and could you add any color to that smaller part of the franchise?
John J. Koraleski
Sure. Eric?
Eric L. Butler
Last year, we had about 7.6 million tons of export, which, I think, was a record. We might have a couple of points higher than that.
We might end up at 7.8 million this year. Frankly, the export market was somewhat disappointing this year, given some of the economic difficulties, particularly in Europe, less so in Asia.
We do expect that as the world economy grows, that the export market should strengthen and there will be upside to that. But this year, it'll be a little higher, call it around 8 million tons averaging up.
Keith Schoonmaker - Morningstar Inc., Research Division
Eric, is that exporting through Houston to Europe? Is that right?
Eric L. Butler
We have exports from our network going to the Gulf, and we also have exports going off the West Coast to Asia.
Keith Schoonmaker - Morningstar Inc., Research Division
And then switching subjects to PTC, I guess as PTC spend is becoming more fully implemented and larger, do you, at this point, as you're getting close to this large spend this year, foresee any economic benefit from this?
John J. Koraleski
Lance?
Lance M. Fritz
Sure. The short answer is no.
So just a level set for everybody, PTC is an overlay system that sits on top of what we already have. It only is designed to do 4 things, all of essentially stopping trains in the -- prior to an incident.
There is no productivity benefit to that. As a matter of fact, we're managing the project very aggressively, so we don't get hit by productivity hit because the only thing that could happen is if the system isn't working well, it could reduce our effective capacity.
So we're working very hard not to let that happen.
Operator
Our final question this morning is coming from the line of David Vernon with Bernstein Research.
David Vernon - Sanford C. Bernstein & Co., LLC., Research Division
I think you mentioned that the third quarter guidance for Ag volume will be down slightly. And I guess what I was just trying to get some help figuring out how, if we get the crop that we planted for, that volume could recover kind of as we move into 2014.
John J. Koraleski
Eric?
Eric L. Butler
The crops really impact the fourth quarter. The harvest really doesn't start until late in the third quarter, late September.
So it's really crops coming in as a fourth quarter impact.
David Vernon - Sanford C. Bernstein & Co., LLC., Research Division
Okay. So the majority of the recovery there should start sort of end -- sort of mid-fourth quarter?
Eric L. Butler
Yes, that would be our expectation, David.
David Vernon - Sanford C. Bernstein & Co., LLC., Research Division
Okay, great. And then one last quick one.
With the mix of export moves that you have relative to utility, do you have a sense for the average length of haul between those 2 chunks? I know the total Coal business is in the 960, 970 range.
I was just really trying to figure out if export is longer-haul or shorter-haul than your average utility move.
Eric L. Butler
[indiscernible] down to Houston will be about the same and then be a little longer than California, but I don't think it's going to be a big issue.
John J. Koraleski
Tonnage is so small. It's just...
Eric L. Butler
Yes.
John J. Koraleski
It's just a small tonnage. I don't think it's going to move any of our numbers.
Operator
Mr. Koraleski, I'll turn the floor back to you for closing comments.
John J. Koraleski
Great. Thank you so much for joining us on the call today.
We're looking forward to speaking with you again in October.
Operator
This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.