Burlington Northern Santa Fe Corp. Q3 2008 Earnings Call Transcript

Burlington Northern Santa Fe Corp. (BNI)

Q3 2008 Earnings Call

October 23, 2008 4:30 pm ET

Executives

Matt Rose - Chairman, President and CEO

Tom Hund - EVP and CFO

John Lanigan - EVP and CMO

Carl Ice - EVP and COO

Analysts

Tom Watewitz - JPMorgan

Randy Cousins - BMO Capital Markets

William Green - Morgan Stanley

Ed Wolfe - Wolfe Research

Arturo Vernon - Macquarie Research

Ken Hoexter - Merrill Lynch

Jason Seidl - Dahlman Rose

Gary Chase - Barclays Capital

Chris Ceraso - Credit Suisse

John Barnes - BB&T Capital Markets

Walter Spracklin - RBC Capital Markets

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the BNSF Corporation conference call, hosted by Matt Rose. At the request of your host, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to BNSF's Chairman, President, and Chief Executive Officer, Mr. Matt Rose. Please go ahead, sir.

Matt Rose

Thank you, Sandy. Good afternoon, everybody, and welcome to our third quarter financial presentation. With me here in Fort Worth today are Tom Hund, EVP, Chief Financial Officer; Carl Ice, EVP, Chief Operations Officer; and John Lanigan, EVP, Chief Marketing Officer.

Our presentation today is available by webcast. I'll start by directing everybody's attention to our first slide regarding forward-looking statements. The statement basically cautions everyone that any forward-looking information presented here today could be affected by a number of factors, which could cause actual results to differ materially from any forecast information we provide.

I'd also like to mention that we'll be providing non-GAAP measures today in our commentary, and ask that you refer to the Investor Relations page on our website for reconciliation to GAAP.

Taking a look at our results for the third quarter, BNSF achieved the best quarterly earnings per share in the history of our company, at $2 per share. This is a 35% increase over third quarter 2007 earnings per share of a $1.48. 2008 earnings included $0.09 per share related to a favorable tax settlement. Even excluding this item though, results were up significantly.

The improvement in earnings is a result of improved yields, declining fuel prices during the quarter, which resulted in a net benefit that Tom will describe, and continued productivity improvements offset by a modest decline in volumes. These results continue to reflect the strength of our diverse franchise.

Freight revenue increased 21% to $4.8 billion due to continued strong yields and higher fuel surcharges. Our bulk franchises, coal and Ag, were particularly strong. John will give you a detailed report of the results for each of the business units in his review.

Our operating ratio was 74.7%. Further, excluding the impact of fuel surcharges, the ratio was below 68%, which demonstrates the impact of higher yield in our continuing success in improving productivity. Carl will provide an operational update in his section, but first let's turn it over to Tom for an update on the financials.

Tom Hund

Thanks, Matt. As Matt already mentioned, earnings per share in the third quarter were $2, which is 35% higher than the third quarter of 2007. Earnings per share for this quarter included a favorable $0.09 tax settlement. But even when you exclude this item, EPS was up almost 30%.

Quarterly operating income was $1.207 billion, an increase of $206 million or 21% over 2007. An increase in operating income was driven by freight revenue growth and effective cost control.

Our operating ratio, as Matt said, was 74.7% for the third quarter, basically flat on a year-over-year basis despite the significant increase in both fuel expense and fuel surcharge. And if you simply treated fuel surcharge as a reduction of fuel expense, our operating ratio would have been below the 68% that Matt mentioned.

John will cover the details of revenue while I'll give you the details on expenses. Operating expense was $3.699 billion for the quarter, $631 million or 21%, higher than the third quarter of 2007. And fuel made up almost 80% of the total operating expense increase, and the increase in fuel expense was all driven by higher prices.

Compensation and benefits expense was $1.013 billion, up $76 million, or 8%, from 2007.

Headcount declined 1% from 2007, while compensation and benefits expense per employee increased 9%. This increase was influenced by several factors. About half of the increase was driven by higher incentive compensation accruals for exempt and scheduled employees. The other half was driven by wage inflation.

These increases were partially offset by productivity gains, as GTMs per employee improved by more than 2% compared to 2007. We have purposely introduced variability based on performance in our compensation programs, and the unusually large increase year-over-year in the third quarter was primarily driven by low incentive accruals in 2007. When we look at compensation benefits expense over the past two years, the annual increase has been about 2%, well below our wage inflation.

Finally, we expect a more normal fourth quarter increase of about 4% for comp and benefits compared to 2007.

Purchase service expense was $537 million for the third quarter, up $36 million, or 7.2%, in 2007, and almost 40%, or $14 million, of the increase was driven by our growing BNSF Logistics Company, which is offset in other revenues. The remainder was due to higher locomotive maintenance, as well as higher haulage expense, related to unit volume growth in Ag and coal.

Depreciation expense was $349 million, up $25 million, or about 8%, from last year as a result of continuing capital investment, as well as from depreciation studied on existing assets. These studies have generally increased our depreciation run rate modestly, due to our increased velocity and volume growth over the past several years.

Equipment rent expense was $230 million for the third quarter, down 2.1% from 2007 due to lower volumes as well as improved velocity. Material and other expenses, of $221 million, was essentially flat compared with the third quarter of 2007.

Finally, fuel expense of $1.349 billion was almost 60% higher than the third quarter of 2007. The $501 million increased was driven by significantly higher fuel prices. Also this quarter, to be consistent with the rest of the industry, we have reclassified expenses for fuel used in vehicles and other miscellaneous fuel costs for material and other category to the fuel line.

As you know, fuel prices have been extremely volatile. Our monthly price per gallon ranged from $3.93 in July to $3.47 in September and prices have dropped again significantly in October. For the third quarter in total, the average fuel price per gallon was $3.72, and this compares to last year's third quarter price of $2.31.

Earnings include about a $0.10 per share benefit or tailwind this quarter, which represents the net change in fuel expense offset by fuel surcharges. A large portion of the fuel surcharges lag by up to two months, and last year's prices were rising while this year's prices were falling. But overall, as you know and as John has told you, in the past our fuel surcharge program is around 85% effective.

Overall, we expect fourth quarter total operating expenses to be up about 6% to 8%, with fuel expense accounting for the majority of the variability and of the increase. If fuel prices average in the $75 range for the fourth quarter, the tailwind is likely to be about double what it was is the third quarter.

The third quarter tax rate was favorably impacted by the tax settlement mentioned earlier. We anticipate fourth quarter tax rate to return to more normal levels.

We still anticipate capital commitments of $2.850 billion for 2008, unchanged from prior guidance, and we anticipate free cash flow after dividends of around $1 billion for 2008. This is higher than last quarter's guidance, primarily due to increased earnings and lower fuel inventory costs.

Finally, year-to-date, we have spent about $875 million on our share repurchase program.

Now I'll turn it over to John for a detailed review of freight revenues by business units.

John Lanigan

Thanks, Tom. In the third quarter, we achieved a 21% increase in freight revenue. Our units handled were down about 2%, with revenue ton miles up 2% due to the increased mix of heavier bulk commodities and longer haul moves. This increase was primarily due to improved yield in fuel surcharge revenue. Our third quarter performance surpassed all previous revenue records.

In spite of the continued slowdown in the US economy, we delivered an improved revenue performance, led by a price increase of 6%. Third quarter fuel surcharge revenue was about $570 million more than last year, driven by higher fuel prices as well as increased customer participation in the fuel surcharge program.

Turning now to the individual business units, the third quarter was an all-time record quarter for coal in both revenue and volume. And despite high stockpiles, demand for PRB coal remains strong in the third quarter. We also saw favorable mix driven by increased long-haul traffic, including moves to Eastern utilities.

In our agricultural products business unit, we produced an all-time record quarter for revenue, and a record third quarter for units. Volume increased more than 2%, led by growth in corn and ethanol. Corn volumes grew by 18%. Strong PNW corn exports and West Texas (inaudible) corn shipments offset weaknesses in other corridors.

PNW export volumes were up 31% for the quarter, driven by corn and wheat. Overall wheat volumes were down 6.7% compared to the very high volumes in the third quarter of 2007. This was partially offset by strong wheat exports to the PNW in Gulf. Gulf exports were up 21% during the quarter, driven by wheat. And ethanol volume continues to grow as government mandates and high gas prices drive blending.

Despite the sluggish economy, industrial products achieved an all-time revenue record driven by improvement in yield quality. Industrial products saw units decline by 3% in the third quarter. Construction products produced 32% revenue growth, led by an all-time record quarter in taconite, steel, minerals, and clays.

Demand for drilling materials led the increase in minerals and clays. Strong demand for natural gas to support Canadian oil sands drove the increase in petroleum products.

Building products revenue was up 3%, and units were down 7%, as we saw the continued impact of the housing decline. Lumber and panel volumes were down 31%. Consumer products achieved an all-time record quarter for revenue, up 16% on a 4% decline in units.

Domestic intermodal reported a 21% increase in revenue on 5% volume growth. International posted a 13% revenue increase despite a 10% decline in volumes. The volume decline was due to the slowing US economy and weak US dollar.

Our auto segment achieved a 6% revenue growth on 18% decline in volume.

Due to the soft economy, we are continuing to see slower volumes in specific sectors, and looking forward, we expect to see this trend continue during the fourth quarter of 2008.

In coal, continued strong utility demand and favorable yield will drive volume and revenue growth. Export coal continues to be a dynamic opportunity. Exported Eastern coal to markets like Europe is generating growth opportunities for BNSF to deliver PRB coal to Eastern markets.

In Ag, we expect to see continued strong domestic wholegrain and oilseeds traffic. This will mitigate general weakness and export whole grain. Industrial products should continue to feel the impact of the economic slowdown in the building product sector, offset by yield quality.

In consumer products, volume will be challenged by weak imports and slowing US auto sales, partially offset by growth in domestic intermodal accounts.

So overall, we expect revenue growth of about 8% to 10%. This is driven by continued strength in our bulk sectors, as well as yield growth from price and fuel surcharge. Our fuel surcharge projections reflect the fuel price outlook that Tom described.

Now, I'll turn it over to Carl for a review of operations.

Carl Ice

Thanks John. Good afternoon, everyone. Over the next few minutes, we'll be highlighting our continued focus on velocity, service, and productivity.

Our locomotive velocity shows the impacts of the floods early in the quarter and Hurricane Ike late in the quarter as we maximize line capacity for our reroutes. Car velocity had a 5.3% increase compared to the same period in 2007, resulting in an all-time record for car miles per day. As we go forward, we'll continue to work to bring improvements to our network.

As you would expect from the improvements in velocity, on time performance also improved. Ag, industrial, and consumer all improved, while we maintained our strong performance in coal, leading to our best overall results since 2003. We continue to focus our efforts on delivering consistent reliable service to our customers.

Turning to productivity, our workforce in the third quarter was down slightly more than 1% coupled with about a little over 1% increase in gross ton miles. We drove a 2.2% increase in gross ton miles per employee. We saw record third quarter gross ton miles per employee. As we move throughout the remainder of the year, we expect to continue this trend.

The impact of our strong operation show up in the comparison of our online inventory to volume. Both active and total inventory decreased more than unit volume declined in the third quarter. Finally, in fuel efficiency during the period, we achieved an overall record for gross ton miles of 821. This is a 2.2% increase compared to last year and our fifth consecutive quarter of record productivity. We continue to anticipate improvement going forward.

In summary, our operations continue to respond with solid [performance]. As we look forward, we'll maintain our focus on service to our customers through maximizing velocity and asset utilization, and continuing our tradition of offsetting half of inflation through productivity improvements.

Matt Rose

Thanks, Carl. Turning to the outlook for the fourth quarter, we anticipate freight revenue growth of about 8% to 10%, again, depending on the price of fuel. If the fuel prices remain low, the revenue growth will trend toward the lower end of that range. The increase in revenue is due to continued higher yields on slightly lower volumes and higher fuel surcharges year-over-year.

We expect fourth quarter earnings per share to be in the range of $1.70 to $1.80 per share. If fuel prices remain low, we should trend toward the upper end of that range.

We'll continue to focus on controlling costs through productivity initiatives and leveraging the variable components of our cost structure. Despite the current economic uncertainty, BNSF has a strong liquidity and access to credit, and we're increasing our expectation for free cash flow after dividends to about $1 billion for 2008.

We continue to be committed to improving our return on invested capital. We also remain confident about the future because of the diverse revenue base, the favorable pricing environment, and our ability to leverage continued productivity improvements.

Despite the current financial volatility in the markets, we continue to have good access to the short- and long-term debt markets. Our financing costs have increased moderately. The liquidity has not been an issue.

However, we're certainly living in interesting times with lots of economic uncertainty. We're in the middle of developing our 2009 plans, including revenue, expense, and capital. We will discuss those plans with our Board in December and with you in January. I will say that our commitment is to keep the railroad strong, while flexing our operating expenses and capital expenditures depending on the volumes.

With that, Sandy, I think we're ready to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from the line of Tom Watewitz. Please go ahead.

Tom Watewitz - JPMorgan

Yeah. Good afternoon.

Matt Rose

Good afternoon, Tom.

Tom Watewitz - JPMorgan

Matt, you've indicated in your comments that you don't have the full outlook for '09 put together, so it's probably not fair to delve into that too much, but, do you have any kind of broad comments and how you would see pricing trending in 2009 and I guess in terms of what kind of visibility you might have at this point, contracts that have already been priced, maybe what percent of the book you would already have locked in for 2009?

Matt Rose

I'll let John handle the last part of that, then I'll talk a little bit about the first part of it, pricing that we have contracts locked in.

John Lanigan

About 65% of all our business is under contract, Tom. And we have about 70% or so visibility looking into next year on all the contracts.

Matt Rose

As far as '09, Tom, we really don't have a clue what it's going to be. We know we've got a lot of businesses that should continue to do really well. And I think, we will learn a lot quite frankly over the next 60 to 90 days. So we'll have the plans with our Board in December then announce what our thoughts are at least in January.

Tom Watewitz - JPMorgan

Given that you have the visibility that John mentioned, I mean do you think pricing trends will be much different, given what you know today or I think that's something that there obviously is interest and concern about whether rail pricing will change much as a function of commodity prices or volumes. And it seems that unlikely to be the case, but I wanted to see if you had any high level thoughts on that?

John Lanigan

Again, I mean, what we've always said and I don't think there's any difference at this juncture in our lives. If you look at revenue ton miles, we're actually up 2% on our property. So, people have this misnomer that there is this great excess capacity in the rail network and there is not.

And Tom, what I've said repeatedly is that we would have to have a deep prolonged recession to create excess capacity that would change the valuation at least in the way we think about what we need to do. We're just now to the point where we feel good about reinvesting in the railroad to the levels of capital that are going to be required in the future. And we know that it's a balanced approach with both volume, and price, and values to be able to sustain those margins.

First off, I don't see any deep prolonged volume decline here. Our railroads are, while we would like to have a little more volume, it's still on a relative basis a busy place.

Tom Watewitz - JPMorgan

Okay. One last one and I'll pass it along. In terms of the share buyback and the pace of that, are you able to still buy at kind of a similar pace to what you've been doing or do you slow that a little bit as a function of non-functioning or poorly functioning credit markets?

Matt Rose

Tom?

Tom Hund

Sure, No, Tom, the guidance we gave, we are actually pushing a little more free cash flow than we had. So our firepower will actually be a little greater. We do have some financings that we have yet to do, that we do expect to do yet this year. We'll just sort of play that by year, but a lot of that's just timing of when things happen in one quarter versus another. All in all I don't see any change.

Tom Watewitz - JPMorgan

Okay. Great. Well, congratulations on the good results and I appreciate the time.

Matt Rose

Thanks.

Operator

Our next question comes from the line of Randy Cousins with BMO Capital Markets. Please go ahead.

Randy Cousins - BMO Capital Markets

Afternoon.

Matt Rose

Hi, Randy.

Randy Cousins - BMO Capital Markets

One of the things that you guys have talked about in the past is the impact of revenue MTs on your average revenues in your international business and I noticed it's up 25%. I wonder if you could give us some sense is to what's happening with this revenue MTs issue, is this now something that's completely behind us?

John Lanigan

Well, thanks. Randy this is John. And things continue to be somewhat volatile, because actually exports are down somewhat in the third quarter versus the pace that they were up previously, so, you know that results in a little bit more movement of revenue MTs as well. This situation with balance is going to play out throughout this economic cycle and it's a little tough to predict where it's going to land, but obviously in the long run we would like to see a good balance in that area and we'd like to see continued export.

Randy Cousins - BMO Capital Markets

You guys have had, the Ag sector has been just absolutely on fire in terms of sort of pricing. With weakness in agricultural commodities do you guys see any risk to Ag pricing or do you have a sense that the Ag pricing is a function of what wheat sells for or corn sells for, how should we think about pricing in the agricultural commodities, to the agricultural sector?

John Lanigan

Over time pricing in Ag certainly has had some correlation to the pricing of the commodities itself, but also to general demand. And so, there is some balance between the absolute demand and the commodity pricing. And given the recent downturn in Ag futures a lot of the farmers right now are kind of stepping back and sitting back, sitting on their carry-out stockpiles and with the late harvest of corn particularly there's a little bit of a lull right now while the market is trying to right itself and understand where it's going to be going forward, but with lower commodity prices, increased demand is starting to appear in the marketplace. And so we're starting to see soybeans and wheat to Asia start to pick up as well. So long-term we think the Ag export and domestic prospects continue to be very bright.

Matt Rose

We were on record, Randy. We never thought those high commodity prices were helpful to the transportation piece.

Randy Cousins - BMO Capital Markets

And Carl one question for you, if we do have a down draft in volume on a sustained basis into 2009, can you still generate productivity growth or is it almost impossible to get when volumes are falling.

Carl Ice

We can get productivity growth improvement in falling time frames. We have done that in the past. What we will do is we build our plans, position ourselves to have some costs we can shed if there are changes. We will certainly build our hiring plan with some flexibility towards doing that.

Randy Cousins - BMO Capital Markets

Okay. That's it for me, thanks.

Matt Rose

Thanks.

Operator

We have a question from the line of William Green with Morgan Stanley, please go ahead.

William Green - Morgan Stanley

Yes, if I could just come back to that Ag question again. The ocean freight spreads are narrowing so, if the mix shifts more to the Gulf, isn't that a negative for you or is it not the right way to think about it?

Matt Rose

We have got strong markets in the Gulf and strong markets to the PNW. And obviously, long-term, we've had very strong markets to the PNW. But there's still about a $20 spread favoring the PNW and longer term that kind of a spread will encourage moving to the PNW as well.

William Green - Morgan Stanley

And so, if those spreads narrow is it the kind of thing where the profitability, that mix is materially different or are you somewhat indifferent the way you price?

Matt Rose

Somewhat indifferent, it really depends on what markets the ultimate grain is going to and what the demand is for the grain in the various markets. If it's a strong European pull, because of poor wheat crops in Europe, but that has a different impact than strong soybean pull to Asia. So, it really depends on the commodity and the market that it's going to.

William Green - Morgan Stanley

Okay. And of the 30% that you mentioned or I guess 35% that you don't have under a contract, I guess that's tariff business so, what kind of business is that?

Matt Rose

Vast majority is Ag.

William Green - Morgan Stanley

Okay. And how are the stockpiles in your service region?

Matt Rose

In which commodity, in coal?

William Green - Morgan Stanley

In coal.

Matt Rose

They're strong. The stockpiles are strong, but it has not dampened demand at all to this point. The utilities continue to nominate very strong demand on a monthly basis and the mines are producing to it. So, we have continued to set records in coal and don't see any indication that that's going to change any time soon.

William Green - Morgan Stanley

All right. Thanks for your help.

Matt Rose

Thank you.

Operator

Our next question will come from the line of Ed Wolfe with Wolfe Research. Please go ahead.

Ed Wolfe - Wolfe Research

Good afternoon, guys.

Matt Rose

Hi, Ed.

Ed Wolfe - Wolfe Research

Back on the grain for a second, this morning Union Pacific noted that they thought grain levels in '09 were going to be back to '07 kind of levels. Could it be that bad the way you see it in your world or do you think they're just looking at different grain than you are?

Matt Rose

I don't know what they're looking at, Ed. The only thing that we know is that right now the corn crop is projected to be the second largest corn crop in history this year and that will be the carry out for next year that we are working on.

Ed Wolfe - Wolfe Research

So what are you thinking when you look out to '09 for grain volumes?

Matt Rose

Well as we mentioned, we are still working on our '09 plans at this point. And so at this point we are not going to venture that guess.

Ed Wolfe - Wolfe Research

But directionally it sounds like you think it will always be positive, is that fair to say?

Matt Rose

We certainly think long-term that Ag markets are going to be positive.

Ed Wolfe - Wolfe Research

Okay. And can you talk a little bit maybe big picture Matt about the Safety Bill, now that we know the piece that we have in terms of less limbo time, PTC costs, training costs, is there anything here if you look at those pieces that's going to have to happen sooner rather than later and longer term, where the costs that you are going to have to try to offset?

Matt Rose

I think all the action Ed is on the PTC, the train control technology and for the industry it's probably going to be $2.5 billion to $3.5 billion spends on final installation. You hate to talk about costs and safety, because people think that you've got or you are thinking about it all wrong, but in reality, every piece of capital that we deploy in the railroad has a safety element or a lot of it does.

So we are going to figure out the right way. We still got to find the financing to implement this. It's going to be very expensive, but at this point in time, it is a mandate and we will comply. Everybody thinks that this technology is ready on the shelf, it's not. This is a major change for the railroad industry and fortunately at BNSF we've kind of taken a leadership position with our ETMS brand and we think that we will kind of be pushed out of the box in terms of implementation.

I don't really see any other changes in the Safety Bill. There are lots of things, some hours of service that are a little concerning. And it's just basically, a heavier brush of regulation in terms of if you go down and look at each part of that Safety Bill there's just stuff in there that, we again always believe we want to go to performance base type regulation versus what's in it. But we can live within it and we will implement it as we need to.

Ed Wolfe - Wolfe Research

Is there a potential to actually get productivity out of PTC that will offset the cost or maybe even more than or at this point you're just seeing it as a cost center?

Matt Rose

If you think about the evolution of PTC or Train Control Technology you start with the implementation of the safety overlay, which is what is mandated to implement. The second block of this, if you will, would be what the railroads refer to as movement planner. And there are potentially some efficiencies there, some dispatching tools that can be helpful.

And then the third is of course where the capacity improvements are potentially, and that's what's called moving block, movement planner is the second one, moving block is the third one. And moving block would be the removal of the signal system and run the trains through fully GPS and with a moving block system it would allow you to theoretically increase density on the capacity in which you have.

So I think the way that everybody needs to look at it is for the first, for the mandate that's in there it's really all about safety and unless we get some sort of offset improved productivity savings this will be a cost, not an offset.

Ed Wolfe - Wolfe Research

Thanks. Just a little clarification. In your fourth quarter $1.70 to $1.80, what's the WTI assumption in that?

Tom Hund

What I said was, if WTI was around 75, we'll have a headwind about double or tailwind rather about double, and that's in there. I would say, also as Matt indicated, if prices stay low, which is in that range, we'll probably be more toward the higher end.

Ed Wolfe - Wolfe Research

Okay. That's averaging 75 for the quarter, averaging 75 for the quarter.

Tom Hund

Average that, yeah. Right.

Ed Wolfe - Wolfe Research

Averaging 75 puts you up toward a $1.80.

Tom Hund

Towards there, yeah. Right.

Ed Wolfe - Wolfe Research

Okay. And then, John, on intermodal, where is the domestic intermodal strength coming from? I mean is this conversion, where do you see it? And second part to this question, as exports start to weaken as the dollar starts to strengthen, and we go back towards maybe imports overtime on easier comps becoming a bigger part and exports a smaller part, can you talk about the impact that might have as we look at it volume and pricing on intermodal?

John Lanigan

Well, the strength on the domestic side has clearly been influenced by conversions. And we continue to hear that from our direct customers, the trucking companies and the IMCs, and also from the underlying shipper, the consumer products companies and the retailers. Many of them have initiatives to significantly increase their use of intermodal over the coming years.

As far as the balance on imports versus exports, if you went back a couple of years when imports were really hot and we had the kind of balance that we had with revenue MTs versus the imports, potentially we could get back closer to that type of a scenario. It all depends on the order of magnitude on the growth of the imports going. And clearly, right now, that's very uncertain.

Ed Wolfe - Wolfe Research

Would you prefer that kind of heavy import, weaker export as opposed to the way we've been strong export, weak import?

John Lanigan

Yeah, certainly if it was on order of magnitude of what it was a few years ago because that was significantly higher volumes overall.

Ed Wolfe - Wolfe Research

Assuming that the volumes are the same, but it just swings more import versus less export, is that a worse scenario?

John Lanigan

I don't think it's a worse scenario. Again, we'd look at the balance characteristics, and its all speculation depending upon what the mix would be, Ed.

Matt Rose

Ed, I think one way you'll need to look at it though on a stronger import, weaker export market, you're going to have a higher value good and we're still going to move the MTs back. And if we price it right, it ought to work for us.

On a weaker import, stronger export, typically the stuff that goes container in export is lower value stuff. Its scrap, paper, waste, all that kind of stuff. So we like the stronger imports and that worked well for us. But when the dollar weakened, we saw exports in other product lines that worked real well for us as well.

Ed Wolfe - Wolfe Research

Thanks guys. I appreciate the time.

Matt Rose

Thanks, Ed.

Operator

Our next question will come from the line of Arturo Vernon with Macquarie Research. Please go ahead.

Arturo Vernon - Macquarie Research

Thanks. Good afternoon. You mentioned coal being supported out of East Coast. Is that actual PRB coal being exported or is that a take-up by Eastern utilities as they have to compete for Appalachian coal?

John Lanigan

Yeah, it's Appalachian coal being exported and PRB coal filling in behind to the Eastern utilities.

Arturo Vernon - Macquarie Research

Right. How is that conversion going? I hear that utilities have to do actual testing and retrofit of their burners and so on so that it's not a quick process. Do you see the testing and the conversion actually happening?

John Lanigan

Yes, that's exactly what's happening. You're correct. It does take some period of time because of the conversion of the boilers.

Matt Rose

I think a great example of that, you've seen FirstEnergy take an equity stake in a coal mine out in Montana that is going to produce about 8 million tons into Ohio, where in the past they used to draw Ohio coal as well as Central App coal.

Arturo Vernon - Macquarie Research

Okay. And do you see any diminished coal consumption from the utilities you're serving because of more gas burning as gas prices go down.

John Lanigan

At this point, we have not seen any large conversions. Obviously, we keep a close eye on that, but to this point we continue to have very strong demand for PRB coal.

Tom Hund

I don't think given the price of PRB coal, which never really ran like App coal did, you're going to even begin to see conversions of gas versus coal.

Arturo Vernon - Macquarie Research

And what about exports of coal out of the West Coast? Is there any potential, do you see that having any chance to happen in the next few years?

John Lanigan

We certainly see some potential. We're moving some small amounts now and it's a market that we will continue to watch and continue to learn and monitor what the progress will be.

Arturo Vernon - Macquarie Research

All right. One last question. When it comes to pension, do you define contribution or define benefit?

Carl Ice

We actually have both. We have a 401(k) defined contribution plan and we have a defined benefit plan for our (inaudible) which represents about 11% or 12% of our population.

Arturo Vernon - Macquarie Research

For that one, I guess, the funding could have been challenged after the recent turmoil. Is that something we should be worrying about?

Carl Ice

I mean, like every other defined benefit plan, we'll have suffered losses in line with kind of what the markets have done, and we'll have to see what happens with the markets. We were fairly well funded, although not fully funded, prior to the disruption this year. So there will be funding required if assets don't return back to previous levels.

That would happen over the next several years. We'll have to see what happens with the Pension Protection Act and was there any amendments to that. And so, I mean it's all within cash flows that we clearly will be able to handle. I mean, I guess, I wouldn't say that it's completely insignificant, but it's nothing that has us greatly concerned at this point.

Arturo Vernon - Macquarie Research

All right, fair enough. That's it for me. Thank you very much.

Matt Rose

Thank you.

Operator

Our next question will come from the line of Ken Hoexter with Merrill Lynch. Please go ahead.

Ken Hoexter - Merrill Lynch

Hi. Good afternoon. On the pricing increase, the 22.5%, can you break that down? I know you said 6% was kind of the same-store sales pricing. What was mix and what was fuel all of the rest of it?

Tom Hund

Fuel was almost all the rest of it.

Ken Hoexter - Merrill Lynch

Okay. Any reason why interest expense was so low during the quarter?

Tom Hund

Some of it was just the timing of what we were financing and some of it was driven by the tax settlement.

Ken Hoexter - Merrill Lynch

So the tax settlement is in --

Tom Hund

A modest amount, a very small amount, a few million dollars was interest. I described like its two now, it was more than that. I mean, a penny or two share was related to interest, probably a penny was related to interest net.

Ken Hoexter - Merrill Lynch

Okay. Last year you did $132 million, I think it was $140 million or so. I'm just trying to understand what level of debt you are increasing to use for your stock buyback.

Tom Hund

$132 million is what Ken?

Ken Hoexter - Merrill Lynch

I think where you were last year.

Tom Hund

Was that interest expense?

Ken Hoexter - Merrill Lynch

Yes. Sorry, you were $140 million last quarter, just trying to get a run rate on that one.

Tom Hund

I don't . Probably next quarter it goes back to kind of that level to where we were.

Ken Hoexter - Merrill Lynch

Okay. And then, John, on pricing on domestic intermodal noticeably lower than kind of all the other categories by 5% to 10%. Is that what you're seeing more trucking competition kick-in or has those levels already increased to your top return levels, just trying to understand why that noticeable difference on that line?

John Lanigan

I think a combination of factors, Ken. Obviously, with the growth that we have, we don't have a bunch of freight going back to the highway, but it's a very competitive situation on domestic intermodal and we have improved our returns over the last number of years and part of it is just the conversion of existing contracts and just highly competitive market.

Ken Hoexter - Merrill Lynch

All right, great. Thank you.

Operator

Our next question will come from the line of Jason Seidl with Dahlman Rose. Please go ahead.

Jason Seidl - Dahlman Rose

Afternoon everyone. A couple of quick questions here. John, you mentioned that you are a little bit optimistic for potential export coal out of the West Coast. It's my understanding that there is not really a lot of facilities in place to handle that. One, do you foresee any expansion for Western facilities, and two, what facilities are currently handling your export coal?

John Lanigan

Well, as with any markets, we look at any potential markets with great interest and do a lot of research and monitor and talk to a lot of people. Right now, the coal that we move for export to the West Coast almost exclusively goes to the Roberts Bank facility in Vancouver. And so, as far as other facilities, we don't know if any other facilities are going to be built in the near-term.

John Lanigan

Okay.

Matt Rose

Roberts Bank though has actually done some capacity improvements, and they can handle some additional coal. Not a lot. As John said, we will be looking at other alternatives on the West Coast to be able to provide if we believe that the market looks like it does today.

Ken Hoexter - Merrill Lynch

Now, (inaudible) be too far to try to connect to.

Matt Rose

I think you will see us with something in the lower 48.

Ken Hoexter - Merrill Lynch

Okay, that's what I figured. Quick question about automotive, the arc really jumped up in the model here. John, was there anything specifically going on in the quarter in terms of mix for the automotive arc to jump up so much?

John Lanigan

Nothing specific. It's just the continued decline of the domestic automakers and the relative market share of the import guys, and we're much more heavily weighted toward the import guys anyway. And so, that really plays to our benefit from a return standpoint.

Ken Hoexter - Merrill Lynch

So that's a shift we should see continue in the fourth quarter.

John Lanigan

I don't know how much it will change, but I think we'll stay in this kind of a trend.

Ken Hoexter - Merrill Lynch

Okay. Matt, my final question goes to you, asked a couple of your peers, the rail industry seems to be getting more positive on the 25% tax credit to be added into a stimulus package. I'd love to hear some color from you and then your commentary.

Matt Rose

I'm not enough bullish on that at all if it goes into the stimulus because I don't think they're going to be taxed. We're going to be looking at other things. We've got projects, we've got people that can be put to work. And so, we think that's a good combination. But I think the short-term stimulus, so Tom I don't think they're talking about tax strategy, but I may be all wrong on it.

Ken Hoexter - Merrill Lynch

Okay. Gentlemen, thank you for the time as always.

Matt Rose

Thank you.

Operator

Our next question will come from the line Gary Chase with Barclays Capital. Please go ahead.

Gary Chase - Barclays Capital

Good afternoon guys. Just a quick one for Tom and then one for John. Well actually, Tom first, we missed the fuel tailwind for the quarter, could you just restate that.

Tom Hund

We said it was about $0.10 per share.

Gary Chase - Barclays Capital

$0.10. Okay, thanks. And if you look at the guidance that you've got out for the fourth quarter, it looks like kind of a typical earnings progression, given what you reported in the third quarter, I would have guessed a little bit higher. Was there something in the third quarter that we ought to think was a little bit unusual beyond the $0.09 that you pulled out or is there conservatism in the fourth quarter guidance or is there something you're thinking in the fourth quarter as a risk that maybe we wouldn't have thought?

Tom Hund

I don't think so. I mean, I think third quarter, you've got the two pieces, which is the fuel and the tax, so you get $0.19 of unusual. And as we go to fourth, no I mean, I think it's inline with the revenue guidance that John gave. And I mean, on a year-over-year basis, last year we had a tax settlement that gave us about $0.02 pop. So, we won't have that this year at least we don't expect it now. So you have little bit about unusual comparison going the opposite way, but I think other than that, I don't think there's anything else unusual in it.

Gary Chase - Barclays Capital

Okay. And then, John. One of your peers talked a couple days ago about escalation factors looking forward that were a good bit better than what we had seen in the past. And I think the way they phrased it, it was more consistent with recent market trends. What can you tell us about business that's under contract and not going to be touched next year, how do the escalation factors look versus where they were a year, two, three years ago?

John Lanigan

Are we talking about like RCAF escalations?

Gary Chase - Barclays Capital

Well actually I think they were describing it as beyond RCAF. RCAF is going to be what it's going to be, do you have escalation factors that would be in excess of RCAF, do you have fixed escalation factors that are higher than where they were historically or is next year going to be predominantly RCAF escalations?

John Lanigan

If we got RCAF escalation on contract and that is the escalator for that contract. If we don't, then we may have some fixed escalators or in some contracts, some other measures like the PPI index or something like that. So it depends on where those go on, the fixed escalators are the escalators for next year, remarkably different than this year, the answer would be no, they are probably pretty similar.

Gary Chase - Barclays Capital

Okay. I appreciate it guys.

Matt Rose

You bet. Thank you.

Operator

Our next question will come from the line of Chris Ceraso with Credit Suisse. Please go ahead.

Chris Ceraso - Credit Suisse

Thanks, good afternoon.

Matt Rose

How are you?

Chris Ceraso - Credit Suisse

Good thanks. I apologize if you have already covered this, but of the contracts that you are repricing in '09. How much of those have already been negotiated in percentage terms and what sort of growth are you seeing in price, is it still 5% or 6% on the '09 price that you've already locked in?

Matt Ross

Well, the way we look at it Chris is, we look at what expires within that calendar year. So the contracts that expire within calendar year '09 have not been negotiated. The contracts that expired within this year have been negotiated. And we've maintained historically strong pricing in the contracts that we've closed out this year.

Chris Ceraso - Credit Suisse

You are not negotiating contracts now that will be in effect in '09?

Matt Ross

Well, certainly you negotiate ahead. You don't wait till the last minute. We're still in negotiations on a number of contracts that expire next year.

Chris Ceraso - Credit Suisse

Second question, maybe you can help me learn a little bit about the, from utilities standpoint, the power plants in your experience what have you seen in terms of the ability and willingness of the utilities to flex back and forth based on price between coal and natural gas.

John Lanigan

In the west, with PRB Coal there's none of that going on. You have to remember PRB Coal has not run like central App Coal ran. Central App went from $60 to $120 overnight, PRB Coal is gone from $6 or $8 bucks to $12, $14. And so, if you look at on a delivered basis cost per kilowatt, PRB it's the lowest cost of fuel out there. So we haven't seen any PRB burners switch between PRB Coal and natural gas. We see them switch the other way, we see them switch from Central App to PRB, but we haven't seen them switch off PRB to gas.

Chris Ceraso - Credit Suisse

That's helpful, thanks.

Operator

Our next question will come from the line of John Barnes with BB&T Capital Markets. Please go ahead.

John Barnes - BB&T Capital Markets

Hi. Good afternoon, guys. In terms of your intermodal traffic, do you have a feel for what diesel fuel price you'll start to see, maybe some of the intermodal volumes at the margin begin to shift back to highway?

Matt Ross

I really don’t think that way any more John. The reason that I don’t is, because so many of our direct customers, trucking companies have made fundamental changes in their infrastructures and their network that they just can’t bounce back and forth and if it they do it is on the margin, it's a few loads here and there, it's not really material.

And then if you talk to the underlying shippers, the consumer products companies and the retailers, they all have plans over the next several years to really pretty dramatically increase their use of intermodal, not only from a cost perspective, but also from an environmental perspective as well, as the value of the environmental advantage that rail has over truck becomes more and more recognized.

John Barnes - BB&T Capital Markets

Okay. Are any of your steamship company, your customers beginning to discuss a potential shift from the east coast back to the west coast and less all water service to the east coast and maybe some increased amount coming through LA and Long Beach again?

Matt Ross

There has been a little bit of noise in the press about some of that, because of the relative cost of fuel and crew costs, et cetera, to go all the way to the east coast. And I think, if you look at a map it takes an extra couple of weeks for a ship to get to the east coast versus coming to the west coast. So there has been some general discussion in public forums about that. And as far as any discussions we have with individual customers we have got to respect that confidentiality.

John Barnes - BB&T Capital Markets

Okay. In terms of your chemical franchise, I'm sorry, if I missed a couple of these, I got on a little late. Could you give us an idea of how much of are your revenue, how many of your customers are still offline that would have been impacted by the hurricanes are still coming back?

John Lanigan

There are only one or two facilities that are really offline at this point. The rest have come back at some level, some are still kind of ramping up, but, there is a couple of facilities that will be down until toward the end of the year, but to the most part, they're back up.

John Barnes - BB&T Capital Markets

Okay. And than lastly, as you look at '09 in terms of CapEx budget, can you talk a little bit about, just your initial thoughts giving what you know now, in terms of -- I know, you've got some visibility in the certain commodity types. I know there is some uncertainty in other commodity types with the economy. Just what's your thinking right now in terms of general idea on CapEx, relative to '08, is it down, is it flat, is it up and is there a major change in where those dollars may be allocated?

Matt Ross

Yes John. So w are not discussing 2009, because we haven't got anything, we haven't gone through with our Board, but just generally, we've got capacity on the railroad and so as we see uncertainty you will see us first off keep the railroad very strong from a maintenance standpoint. Second, then you will see us size down or up the expansion capital versus where we see these markets.

So we are just not in a position to talk about '09, but I would expect that you will see a very strong maintenance program and less expansion capacity, because we don't need it and quite frankly as Carl said we had best on time performance since we have had since 2003, velocity is up, we are creating capacity by doing all that good stuff.

John Barnes - BB&T Capital Markets

And the expansion CapEx, the vast majority of that is track expansion correct?

Matt Ross

Correct.

John Barnes - BB&T Capital Markets

So it would be less on cars and locomotives and would be more heavily weighted towards track?

Matt Ross

Yes. I mean in locomotives, we are not going to cut back on our renewal replacing locomotive. We will keep a strong locomotive program.

John Barnes - BB&T Capital Markets

Okay. Very good, thanks for your time guys. Nice quarter.

Matt Ross

You bet. Thanks, John.

Operator

Our last question will come from the line of Walter Spracklin with RBC Capital Markets. Please go ahead.

Walter Spracklin - RBC Capital Markets

Thanks very much, good afternoon. Just on capacity Matt, you mentioned that there isn't excess capacity. If you were to look at your network right now in this sort of environment of a little bit weaker demand, where are the bottlenecks that you see right now and if you could touch on LA/Long Beach obviously, but where are the major bottlenecks? And if you look at your overall network, how does that compare to your overall available capacity?

Matt Ross

If you look at the volumes that coal and Ag had they were really strong. We still got some bottlenecks in the coal network that we're remediating this year. This year’s capital plan will have a little bit less next year, but we're pretty much have the coal property the way we want it.

And then, you've got places the same old places where we have got a couple of single track operation left on the transcon Abo Canyon which we got our permit, but the basic transcon in terms of big picture we have a lot of capacity out there.

Walter Spracklin - RBC Capital Markets

If you were to put a number on it, just an estimate of available capacity on your overall system.

Matt Ross

We just can't because we have got 33,000 miles that we're operating. It's everywhere from, 30% capacity utilization to 99%. So if you really have to go through each lane and look at where we're at in terms of capacity and availability and that's what the Cambridge study did for the commission study that I was on. And it really did articulate that while the railroads are operating a lot better, if you just think about a couple percent growth every year the CAGR effect of that just takes all that any additional capacity and the railroads are going to continue to have to spend a lot more money on expansion and even given that we will still remain a very tight network.

Walter Spracklin - RBC Capital Markets

That's a good point. Okay. Just last question then on price expectation. I know you are putting together your ‘09 outlook, but I'm just wondering in the current context a little bit weakness are you seeing any push back against customers more so than you would in the normal course of a negotiation, because they might be struggling a little more and can't take the price increases?

Matt Ross

I think Walter you have kind of answered your own question. Certainly when customers are hurting, they're going to be more defensive and more aggressive from that standpoint, so obviously, the discussions can be a little more challenging.

Walter Spracklin - RBC Capital Markets

All right. Well thanks very much for your time.

Matt Ross

Thank you. With that Sandy, thank you everybody and we will talk to you in January. Have a great safe day.

Operator

That does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.

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