Burlington Northern Santa Fe Q1 2009 Earnings Call Transcript

Burlington Northern Santa Fe Corp. (BNI)

Q1 2009 Earnings Call

April 23, 2009 04:30 PM ET

Executives

Matthew K. Rose - Chairman, President and Chief Executive Officer

Thomas N. Hund - Executive Vice President and Chief Financial Office

John P. Lanigan, Jr. - Executive Vice President and Chief Marketing Officer

Carl R. Ice - Executive Vice President and Chief Operations Officer

Analysts

David Feinberg - Goldman Sachs

Thomas Wadewitz - JPMorgan

Randy Cousins - BMO Capital Markets

Jason Seidl - Dahlman Rose & Co.

Matt Troy - Citigroup

Ken Hoexter - BAS-ML

Edward Wolfe - Wolfe Research

Gary Chase - Barclays Capital

Christopher Ceraso - Credit Suisse

William Green - Morgan Stanley

Walter Spracklin - RBC Capital Markets

Presentation

Operator

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

Matthew K. Rose

Good afternoon, everybody. Welcome to our first quarter financial presentation. With me here in Fort Worth today are Tom Hund, EVP, Chief Financial Officer; Carl Ice, EVP, Chief Operations Officer; John Lanigan, EVP, Chief Marketing Officer.

Our presentation today is available by webcast. I'll start by directing everyone's attention to our first slide regarding the forward-looking statements. This 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 the 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 results for the first quarter we reported earnings per share of $0.86. This includes the impact of the Western Fuels' coal rate case decision of $0.19 per share and an $0.08 per share loss on interest rate hedges both of which Tom will explain in more detail.

Excluding these unusual items, first quarter adjusted earnings per share was $1.13 compared to earnings per share of $1.30 last year. Freight revenues were $3.31 billion compared to 4.14 billion last year on lower volumes, lower fuel surcharges, and the impact of the coal rate case decision offset by continued strong pricing. John will give more detail about the change in revenue as well as report on the results for each of our business units in his review.

The 19% decrease in operating expenses was driven by strong cost control as well as lower cost attributed to the variability built into our cost structure and a significant decrease in fuel prices. Excluding the impact of the coal rate case, our operating ratio was down 130 basis points for the first quarter of last year to 77.6% demonstrating the benefit of strong cost controls in a lower volume environment. Carl will provide an operational update in his section.

Now, I'll turn it over to Tom.

Thomas N. Hund

Thank you, Matt.

The left side of the slide shows our GAAP results or earnings per share. For the first quarter of 2009, EPS included a $0.19 per share charge related to the coal rate case decision and a $0.08 per share, a loss on interest rate hedges. When adjusting for these items earnings per share in the first quarter was a $1.13, down about 13% over 2008. Effective cost controls in the first quarter helped to mitigate the impact of sharply lower volumes.

This chart breaks out the impact of classification of the significant items previously mentioned. The coal rate case line items represent the amount we recorded this quarter for estimated reparations based on the STB's February decision. This brings the total approval to approximately a 150 million. The litigation over the way to implement the ruling continues before the STB. And we have also appealed the STB's decision to the Federal Court of Appeals.

Additionally, we recognized a $43 million loss on unwinding interest rate hedges in April on debt, no longer expected to be issued.

Adjusted first quarter operating income for 2009 was 765 million, a decrease of 110 million or 13% from 2008.

Our adjusted operating ratio was 77.6 for the first quarter, a 130 basis points lower than 2008. And as always, John will cover revenue and I'll give the detail on expenses.

Operating expense was 2.755 billion for the quarter, 631 million or 19% lower than the first quarter of 2009, and this decline was driven by strong cost controls, variable cost associated with lower unit volumes and lower fuel expenses resulting from decreased fuel prices.

As you will see on the charts to follow, excluding depreciation, every expense category was down year-over-year with declines ranging from 9 to 15%. And this also does not consider the significantly lower fuel prices.

Compensation and benefits expense was 868 million, down 115 million or 12% in 2008 and compensation and benefits expense per employee decreased 7% on a 5% decline in head count. These results were achieved despite a 4% wage increase for our scheduled employees, who make up the vast majority of our workforce. When considering the wage increase, compensation and benefits expense declined more than our volumes. And this strong performance was the result of cost controls, such as the fall off of more than 2,500 employees, overtime reductions and eliminating exempt employee wage increases. Additionally, we accrued low incentive compensation for exempt and scheduled employees.

Purchase services expense was 478 million for the first quarter down 47 million or 9% in 2008. The decrease was due to variable expenses on lower volumes which led to reduced cost in ramping, drayage and equipment maintenance as well as lower spending for professional and other services.

Depreciation expense was 370 million up 29 million or about 9% from last year, as a result of our capital investment as well as updated depreciation studies. Equipment rent expense was 201 million for the first quarter down 13% from 2008 due to improved velocity, lower volumes and the return of leased equipment. And Carl will describe improvements in velocity and service in his part of the presentation.

Material and other expense of 224 million was down 15% or 38 million from the first quarter of 2008, this decrease was the result of lower derailment and personal injury cost, reduced volume, and cost controls, partially offset by higher environmental costs.

Finally, fuel expense of 614 million was 41% or $431 million lower than the first quarter of 2008, this decrease was the result of lower prices of about 400 million, volume and efficiency and other changes also reduced fuel cost by about 140 million and these reductions were partially offset by hedging losses of 105 million this year versus a benefit of 10 million last year.

As you know fuel prices have been extremely volatile over the last year, our monthly price per gallon before hedge ranged from $4.01 in July to $1.37 in March. So the first quarter in total the average fuel price per gallon before hedge was a $1.52. This compares to last year's first quarter of $2.80.

Earnings include about a $0.10 per share benefit or tail-win this quarter which represents the net impact of fuel price changes on consumption hedges and surcharges.

This slide illustrates the impact of the fuel surcharge lag on our head-win, tail-win calculation. As you can see rising prices in the first half of 2008 had a negative impact on our earnings and this trend flipped to a positive impact in the second half of the year as prices fell.

So that current forecasted fuel price is the net impact of lower fuel prices, hedging losses, and fuel surcharges is expected to result in a tailwind of about $0.10 per share in the second quarter.

And what the box on the right shows is, we had a lag benefit of about 260 million in the back half of last year and expect a minimal impact this year based on the forward curve. Now further, this 260 million from last year was split about 60 million in the third quarter and about 200 million in the fourth quarter.

This chart shows our current hedge position for the remainder of 2009. So to sum up, our operating expense discussion, we expect second quarter total operating expenses to be down about 25%.

Fuel prices are down significantly and we will continue to utilize the variability in our cost structure to control expenses.

Interest expense for the first quarter was $198 million on a GAAP basis. If we adjust for the interest components of the unusual items mentioned earlier, interest expense was 146 million in the quarter.

The first quarter tax rate was 37.4%, we expect the second quarter tax rate to be slightly higher at 38.6%, which is our more normal rate.

Our capital plan for 2009 is now 2,600 billion, which is $100 million, lower than our previous guidance. This reduction reflects improved labor productivity on our engineering capital gains as well as about 50 million in expansion and other spending.

Additionally, during the first quarter we did not repurchase shares under our share repurchase program due to continued uncertainty in the credit markets.

Now, I will turn it over to John for a detailed review of revenue by business unit.

John P. Lanigan, Jr.

Thanks Tom.

In the first quarter we had a 20% decrease in freight revenue. Units handled were down 14% with RTMs down 11%. Additionally, fuel surcharge was significantly lower due to decreased fuel prices.

Due to the continuing economic recession, we experienced decreased revenue performance primarily due to decreased volumes, partially offset by a price increase of 4%. It has some price questions relating to the fuel component of our cap, which is in some of our escalators. We choose not to breakout any components within the escalators, but had we broken out the fuel component of our cap, our price would have been over 5%.

The relative volume strength in coal combined with the weakness in our higher rated segments led to the overall negative mix. First quarter fuel surcharge revenue was about $325 million less than last year largely due to decreased fuel price partially offset by favorable lag.

Moving to the individual business units, coal revenues are down 91 million or 10% on a 1% decline in volume. This is due to the $96 million charge taken as a result of the coal rate case. Record volumes were achieved in two of three months during Q1 due to strong general demands in new third party business.

Even with a late March winter storm in the PRB, we shipped 73.5 million tones of coal during the first quarter at a record pace of 57.4 trains per day. This exceeded the year earlier levels by about 1%.

In our agricultural products business unit, revenues were down 22% on a 20% decline in volumes. During the first quarter, volumes for whole grains were down by 25%. Two key factors drove this. First, global crop production was high in 2008 leading to increased competition for the U.S., mostly in the wheat and corn markets.

Secondly, the global economic slowdown tempered demand for grain and grain products particularly those used for higher protein animal consumption. Grain exports to the Texas Gulf were down 43% and PMW exports were down 28% on lower global demand for wheat and corn.

On the domestic side grain volume was down 13%, in Mexico volume was down 5%. Grain products was down 13% in volume, half of the volume decline came in fertilizer down 30% where producers were reluctant to commit to higher production cost in the quarter, and ethanol volumes were flat.

Industrial products revenue was down 23% with a 26% decline in units. All five segments of industrial product experienced negative revenue growth reflecting the broad based recession.

Construction products had the largest revenue drop driven by steel and-- lower oil and natural gas prices led the decreased demand for drilling materials which in turn led to the decrease in minerals and clays.

Building products revenue declined by 28%, primarily due to lumber and panel which are highly correlated to housing starts. Lumber and panel volumes were down 41% and paper also declined by 25% reflecting lower demand.

Chemicals and plastic products demand declined 23% due to the recession.

And in consumer products results reflect the impact of the U.S. recession highlighted by weaker consumer spending. We saw a 24% decline in revenue on 16% lower volume.

Domestic intermodal reported a 19% decline in revenue on a 9% decrease in units as general economic weakness offset gains in new business.

International posted 25% lower revenue on a 20% decline in volume due to the impact of a global recession on trade.

And our auto segment saw a 43% decline in revenue on a 46% decline in volume driven by slow U.S. auto sales.

Due to the economic recession we are continuing to see slower volumes in many sectors and looking forward, we expect this trend to continue during the second quarter of 2009. Coal demand is moderating due to high stockpiles and lower electric generation demand. After a record 2008 agricultural products will remain challenged due to the impacts of the global economic slowdown.

Industrial products should continue to feel the impact of the slowdown, especially in construction and building products. And consumer products volumes will be challenged by weak demand for consumer biz and automobiles.

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

Carl R. Ice

Thanks, John. Good afternoon, everyone.

We would focus on velocity improvement and strong cost control. Those efforts are supported by many of our initiatives in velocity service and productivity.

In car velocity we had 11% improvement year-over-year which drove an all time record of 224 miles per day. Those improvements occurred across all of our business units.

As you would expect with that magnitude of improvement in velocity we also saw improvement in on-time performance having an overall on-time performance for the system of over 90%.

Going forward we're focused on delivering to our customers and are confident we have the right initiatives in place to continue to drive velocity improvement.

Locomotive velocity showed the impacts of mix, some of our faster turning units slowed down as well as some of the interruptions we had early in the quarter. However, we continue to match our locomotives to our volume and we have over 900 locomotives either stored or returned. And we expect this metric to show the benefits of that going forward.

In productivity, as Tom mentioned, we had a 5% reduction in our workforce. And although that did not exactly match or drop in GTMs, when you consider our overall compensation cost, you can see good linkage between our cost -- our people productivity and our volume declines.

In equipment, we traditionally show you total inventory by giving the number of cars we have showed with our results so helpful to show our active inventory. And with the active inventory, you can see good matching between our changes in volume and our changes in inventory. And that clearly helps drive the expense control and equipment that Tom also talked about. And at this point, we have over 43,000 cars stored.

In fuel efficiency we were flat year-over-year, we expect to drive better improvement in this going forward as a mix on our fleet, operating practices and technologies come on line.

So on the near-term, we continue to be focused on strong cost control. As I mentioned, we have over 900 locomotive store to return over 43,000 freight cars currently stored and as Tom said, we have a reduction of our capital programs. All that adds up to going forward that we will continue our long-term focuses of services, philosophy, asset utilization, and productivity.

Matthew K. Rose

All right, thanks Carl.

Turning to second quarter, we'll continue to deliver value to our customers through our outstanding service and philosophy and productivity improvements. In fact, during the first quarter, we achieved a 12-hour reduction year-over-year in average transit for our domestic and international traffic, improving shipment availability in some lines by as much as 20 hours.

Additionally, our intermodal service reliability now rivals over the road service. This has been achieved partially due to lower volumes, but more importantly by process improvements, which will continue when volumes return.

Looking at earnings, we still have little clarity on volumes. But if volumes drops similarity to what we saw in the first quarter, we would expect that earnings per share would be about $1 per share in the second quarter.

As I told you last quarter, we'll continue to focus on maintaining a strong railroad. We're investing our infrastructure to ensure safety and efficiency. As Tom mentioned, we've reduced our 2009 capital plan by a $100 million to 2.6 billion driven by lower expansion capital and better labor productivity on these capital projects.

In addition overtime, we've made deliberate choices to add variability into our cost structure. We'll maintain a financial flexibility and liquidity during these uncertain times. We're focused on maintaining the strong reliable network and prudently managing our resources, and with the diversity of our franchise BNSF is well positioned to weather the recession and to take advantage of the opportunities which will be available when the economy recovers.

With that Sandy I think we're ready for questions.

Sandy you're with us?

Question-and-Answer Session

Operator

(Operator Instructions). And our first question is from the line of David Feinberg with Goldman Sachs. Please go ahead.

David Feinberg - Goldman Sachs

Good afternoon.

Matthew Rose

Hi, David.

David Feinberg - Goldman Sachs

Hi, how are you? Just one point of clarification when you are talking about the fuel surcharge and the tailwind and the headwind. I think, I picked up that you said during there was $0.10 tailwind in the current quarter and also there was going to be $0.10 tailwind in the second quarter that didn't seem to drive with what I saw in the chart and I just want to make sure I heard that correctly?

Matthew Rose

No, you've got that right. It's a benefit in each of the first two quarters this year and then it reverses on us when we move to next year.

David Feinberg - Goldman Sachs

Okay, thank you. Second question is can you tell us where the average number of employees with the end of period, number of employees was?

Matthew Rose

We don't have the exact number and we don't disclose that. But it declined modestly throughout the quarter. So little bit lower at the end and at the beginning.

David Feinberg - Goldman Sachs

And is that a trend that you -- given your comments if volumes continue to decline at the same rate in the first quarter, would you expect to take to further low or to continue to reduce head count?

Matthew Rose

We're not going to project that, but I think you seen we've done a good job of managing employee strength to volumes.

David Feinberg - Goldman Sachs

Okay. And then one question on the regulatory front. There's been a lot of talk about what may or may not be going on in Washington. Wanted to pear your thoughts in terms of how those conversations are going and what Burlington's version of compromise may or may not look like?

Matthew Rose

So well I am not going to give you any detail on what it may look like. I think the -- what we have done is had a lot of constructive dialogue with both the Senate and the House and that everybody realizes the role of the freight roads and the requirement that they make money so that they're going to reinvest. And so I think our principles that we've talked about in terms of prudent and rational regulation, at the end of the day we will be taken very seriously.

The last thing that any of these members, I think specifically the two chairmen, they want a very robust railroad. And so there's been a lot of discussion and debate around the process of how customers come into the STB and things like that. We'll continue to have those. So I think at the end of the day it will be something that we can find, that we can accommodate and live with and if we can't then we will express that and we will not accept it.

David Feinberg - Goldman Sachs

And then one last question if I may. Last quarter there were some talk about contract wins, particularly in the coal side and to a lesser extent on intermodal. Wanted to know if there's any updates, any new contract wins or losses in the quarter that we should be aware?

Matthew Rose

No, on that contract win, that was referred to in coal was with a third party that wasn't something that we directly picked up. Contract activity has been quiet this year.

David Feinberg - Goldman Sachs

Great, I'll turn it over.

Matthew Rose

Thank you.

Operator

Our next question will come from the line of Tom Wadewitz with JPMorgan. Please go ahead.

Matthew Rose

Hi, Tom.

Thomas Wadewitz - JPMorgan

Hi, guys. Good afternoon, everybody. So it really looks like you did a strong job on the cost side in the quarter I get about almost a 10% decline in operating expense ex-fuel. Is it reasonable to think that type of a number ex-fuel continues in second quarter or does that operating expense reduction accelerate a little bit assuming that the volume change year-over-year isn't too much different?

Thomas Hund

I think we stay in that neighborhood Tom. But I would not expect to be materially different either higher or lower again ex-fuel assuming that it get which you said on volume.

Thomas Wadewitz - JPMorgan

Right, right. Okay, and on the I guess on the per worker compensation benefit that was down pretty nicely also is that -- I mean I calculated about 8% per worker, is that something that you would expect to be down pretty meaningfully going forward or is that something where would be a fair bit of volatility in it?

Thomas Hund

No, I think it stays reasonable constant, there is a little bit, some of the timing of some of the incentive plans what we book last year versus this year, but it would still be down meaningfully in the second quarter, probably we are a little bit higher on some of those accruals, higher impact to some of those accruals and some of our stock plans in the first quarter than in the second, but it still will be significant.

Thomas Wadewitz - JPMorgan

Okay. And on the broad comment on guidance Matt I wanted to make sure I understood right you had said before $1 share in first quarter and you are saying about a $1 a share again in second quarter is that right?

Matthew Rose

Yeah, if these volumes are kind of where they are in the recent several weeks.

Thomas Wadewitz - JPMorgan

What would be I mean I guess volumes are maybe step down a little bit so maybe that's what you are implying but other than that would be worse in second quarter could typically you see a little bit of seasonality that makes the second quarter look better than the first quarter so is it just volumes a little bit weaker or is there something else we should be thinking about?

Matthew Rose

No, Tom I think first of all we said about a dollar so not even really guiding to that. The point kind of estimate but saying we'd be in that range so there is obviously there is a little bit of flexibility there. But I think also I talked about the incentive in the stock plan close a little bit more favorable I mean, maybe to put little more precision around that, that's probably now at least about $0.03 a share something like that, we also expect depreciation to be a little bit higher in the second quarter that's the time when both studies are done and when some of the assets came online and stuff like that so if -- that's a nickel issue something like that. Then there is a just a host of other things including the fact that it's not -- not a precise estimate of a dollar.

Thomas Wadewitz - JPMorgan

Okay. Great work, nice results in a tough market. Thanks for the time.

Matthew Rose

Thanks, Tom.

Operator

Our next question will come from Randy Cousins with BMO Capital Markets. Please go ahead.

Matthew Rose

Hi, Randy.

Randy Cousins - BMO Capital Markets

Good afternoon. I guess John couple of questions for you. I wonder if you can give us little bit more granularity in terms of sort of your outlook on the ag business and more particularly given pullback in some of ag prices whether you see that's going to impact on ag rates or was the rate ought that we saw in the first quarter kind of representative of how it's going to play out for the balance of the year?

John Lanigan, Jr.

I will try to talk about the balance of the year. Randy, at this point we are just starting to get this year's crop on the ground. So it's really very premature to talk about the whole year but the second quarter looks a lot like the first quarter and remember we are coming off of all time record comps in the first three quarters of last year.

Randy Cousins - BMO Capital Markets

What about on the rate side or arc side?

John Lanigan, Jr.

I think the second quarter is going to look similar to the first quarter.

Randy Cousins - BMO Capital Markets

So the pricing that we've seen in Q1 probably is sustainable through the year?

John Lanigan, Jr.

Again I'm not willing to go out into third and fourth quarter because of where we are in the crop year.

Randy Cousins - BMO Capital Markets

Okay. Next question has to do with West Coast intermodal business obviously volume seem to be a bit down the entire West Coast, some of the West Coast ports seems to be responding to let's call a competitive issues do you see any the traffic that may have gone to the East Coast or say up into Canada or south into Mexico coming back into the West Coast ports?

John Lanigan, Jr.

First nothing has really gone south in Mexico but we have seen moderation in any market share shift to the East Cost if you look at the various ports statistics there's actually been a very slight uptick in market share back to the West Coast and its tough to discern it all because of the overall steep decline in volumes but it looks to have stabilized that worse.

Randy Cousins - BMO Capital Markets

Okay. And when you go and talk your clients, sort of veered to your customers. Do you see any signs, like are there any point where you see some elements of encouragement, or reason to believe that Q2 will not be as bad as Q1 from a volume perspective?

John Lanigan, Jr.

In the near-term Randy customers are being very, very cautious and not seeing anything as very a near-term. Everyone is so focused on their own near-term cost and those sorts of issues that we're just not getting any headlights on any meaningful uptick in the near-term.

Randy Cousins - BMO Capital Markets

Okay, great. Thank you.

Matthew Rose

Thank you.

Operator

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

Matthew Rose

Hi, Jason. Hello, Jason.

Jason Seidl - Dahlman Rose & Co.

Hello, guys.

Matthew Rose

Hi, Jason.

Jason Seidl - Dahlman Rose & Co.

Sorry about that, so many complications there. John, I think my first question is for you. I think I heard you correctly price was 4% in the quarter, when I look back in my notes from the fourth quarter, it looks like you had about a 6% pure price comp, am I looking at that correctly?

John Lanigan, Jr.

What I did say today, Jason was that it was 4% price. But if we took out the fuel component of our cap, it would have been over 5%.

Jason Seidl - Dahlman Rose & Co.

Okay. So the fuel component of our cash was in the previous 6% number of that?

John Lanigan, Jr.

That's correct.

Jason Seidl - Dahlman Rose & Co.

Okay. That makes a lot more sense for that. And thank you for the clarification. Tom, you mentioned a little bit, you give us a little more color on that $0.10 number in the quarter between lag, consumption and hedge. But could you breakout just between the lag and consumption, because the hedges worked against you in the quarter, right?

Thomas Hund

Yes. But that is the $0.10 is the favorable impact of lower prices ignoring volumes. So just say if I just tell prices constant that was a benefit, hedges worked against us. And then the cost prices have come down fuel surcharge also -- yeah fuel surcharge also worked against us. But that working against us as part of fuel surcharge was then favorably buffered by the lag. All of those added together is a favorable $0.10, does that help?

Jason Seidl - Dahlman Rose & Co.

Okay. That helps a little bit Tom.

Thomas Hund

Ignoring volume fuel price, the impact of fuel price hedge and fuel surcharge.

Jason Seidl - Dahlman Rose & Co.

Okay. And I understand you guys kind of get around about that number of the dollars stay consistent for here. I can't remember now with that kind of model, I can't remember a second quarter that was below your first quarter results, is this just assuming things have got maybe a little bit worse on the volume side and will remain there for the remainder of the quarter?

Matthew Rose

Yeah, I mean, Jason, volumes have ticked down or touched and we're just assuming that volumes stay like where they are in the last two or three weeks, that's where we'll end up. And as Tom said, it's not a precise measurement. The number we're just trying to give you guys some--

Jason Seidl - Dahlman Rose & Co.

Some direction.

Matthew Rose

Yeah, some direction. And also, we have to look at last year, the quarters were actually pretty close to one and other while second was just a little bit more. But they were pretty much on top of one and other at $1.30, $1.34.

Jason Seidl - Dahlman Rose & Co.

Okay. And I guess my last thing, your Western competitor talked about seeing a little bit of the stimulus package start pushing out some projects that will probably come into fruition soon. Are you guys seeing some of the similar impacts there from the economic stimulus package?

Matthew Rose

John?

John Lanigan, Jr.

Yeah, we certainly are for example is just announced that we received some money to help upgrade our Burlington Isle.

Matthew Rose

I think some about freight movements.

John Lanigan, Jr.

On freight movements?

Jason Seidl - Dahlman Rose & Co.

I will take both information, John.

Matthew Rose

John will answer freight movement.

John Lanigan, Jr.

Okay, I will answer freight movement. Again, customers are being very -- very conscious from a standpoint of the stimulus really doing anything from a standpoint of any volume increases.

Jason Seidl - Dahlman Rose & Co.

Got you. And in terms of getting money from the government upgrades, you tried. Could you elaborate on that again?

Matthew Rose

John will not elaborate on that. There is some stuff out there and we're working it. So it's not going to be a big deal but we did importantly from a public policy standpoint. We got what we call flexibility in the stimulus bill. This is not a highway fund. These were general tax revenues and we felt like it was important for railroads to participate and yet the conventional methodology wouldn't have allowed us. So there is this flexibility we've got some states that are very interested in helping to help themselves if you will.

Jason Seidl - Dahlman Rose & Co.

So take it if you can get it in this environment. You guys appreciate the time is always.

Matthew Rose

You bet.

Operator

Our next question is from the line of Matt Troy with Citigroup. Please go ahead.

Matthew Rose

Hello, Matt.

Matt Troy - Citigroup

How are you?

Matthew Rose

Good.

Matt Troy - Citigroup

One quick update on the capital plan I know you trimmed that I think was less than 5% not necessary material but just curious in my other trim could you give us an update in terms of the 2.6 billion I believe it was how much of that is maintenance versus expansion or growth CapEx and if I look at the big buckets what are they what's the bulk of the remaining capital budget going towards in 2009?

Thomas Hund

Sure, our initial announcement was that 1.9 of the 2.7 was going to maintenance and right now we'd say that probably about half of this 100 is coming off of maintenance. So we still say it's about 1,850 billion something like that is probably maintenance related. Then locomotives has not materially changed I think in the release that was about 675.

Matt Troy - Citigroup

Yup.

Thomas Hund

So that leaves you with about a 100 in a quarter for expansion efficiency and other types of projects that's where the other 50 has come out of. So we are probably little less than a 100 on the all other we should means we're getting that down to a very, very small number.

Matt Troy - Citigroup

Got it. Question on the coal side we certainly heard from the other five major railroads about an incremental step down in coal that would be more fundamental driven as opposed to whether or one-off or two-off plant shutdown here which is one if you can give us a little bit more detail re-through on coal and what you are seeing and if you are impacted by particular closures or idling what that might look like growing off in the next couple of weeks or months or just generally what's going on in the end market for coal domestically that you are seeing?

Thomas Hund

Yeah. So I think there is a little bit of differentiation going on we're not seeing any of our coal plants that are losing their dispatch to gas which I think is a little different. We also don't have -- we have a very modest export program so we are not seeing the great declines there. What we've seen is just generally where utilities have above the last several years normal stockpile and so they are getting full of coal and their generation is down modestly versus what you would have expected 1 to 2% increase could be down.

And 1 to 3% and then you got some extreme cases on some utilities in the -- on the eastern side on the river that are down high single digit low double but PRB coal at the end of the day should compete above the fray with all that stuff.

Matt Troy - Citigroup

Right, certainly I understand and appreciate the secular view it should obviously everyone is playing blades of grass (ph) down here. But last question I have got it is just on the grain side. Given water borne rates to Asia I was wondering if you are seeing any kind of negative mix shift away from the PMW favoring the Gulf or that's panning out and what your outlook is for the PMW Gulf exports in the back half of the year? Thanks.

Matthew Rose

We are not seeing any degradation in PMW. The spreads are between 15 and $20 favoring the PMW rate now. And absent those spreads coming down and if those spreads stay that range which is kind of the historical range obviously was much higher a year or so ago but 15 to 20 has been a number that's been out there quite a bit over the last five to six years or so. At that range we think the PMW will stay relatively strong.

Matt Troy - Citigroup

And to refresh my memory please is it closer to $10 where the switching becomes a little bit more attractive or what's traditional break point on that?

Matthew Rose

Yeah, below $10.

Matt Troy - Citigroup

Below 10. Okay. Great. Thank you for the detail and time.

Matthew Rose

You bet. Thank you.

Operator

Our next question comes from the line of Ken Hoexter of Banc of America Merrill Lynch. Please go ahead.

Matthew Rose

Hi, Ken

Ken Hoexter - BAS-ML

Hi, great, good afternoon. On the domestic intermodal side, obviously we saw some pretty aggressive price reductions more so than the other categories, that's what we expect of it. Can you talk a bit about John maybe what you're seeing in the trucking environment now, how are they taking off as shorter hauls, where they're getting much more competitive, are you seeing it across the board, I just want to see where you're seeing more of that activity?

John Lanigan, Jr.

Well I like the haul even in domestic intermodal is doing well. We don't have a lot of shorter haul segments like the Eastern railroads do. So it's really on the margin from that perspective Ken.

Ken Hoexter - BAS-ML

Okay. So, it's across the board you're seeing this very competitive structure from the truckers?

John Lanigan, Jr.

Well, we don't see a big degradation and the volumes that we have access to. As we talk to our domestic intermodal customers, they are not diverting traffic away from intermodal, but you have a lot of smaller carriers out there that don't participate in the intermodal marketplace, there are really in tough shape financially, so, that's why I say on the margin there might be some competition, but not from our customers.

Ken Hoexter - BAS-ML

But you said it's not competition and I agree that you're not losing the volumes relative to what you are seeing in the other categories, but your pricing is down a lot more similar. Why would you be more active on reducing that price relative to your other average categories, or is that it's just more frequently and fuel has come down faster there than the others?

John Lanigan, Jr.

Well, I think everybody on the call understands the relationships that we have on the domestic intermodal side. As those rates fall because of the bids that are out in the marketplace from the beneficial owners of the shippers, as those rates come down from the trucking companies, there is a collateral effect on us as well.

Ken Hoexter - BAS-ML

Okay. If in the past we've talked about how coal and I know Matt you used to say coal is the worst as long as we've got some of these legacy contracts still outstanding in ag, ag, ag is the best as far as margins go. What are your thoughts now in this market especially with the recent court rulings, are you -- but yet you've still repriced a lot of your coal, any thought somewhere that stands now?

Matthew Rose

Well, no, I mean it still the same. We think that we've still got a lot of opportunity in coal. And we'll take advantage of those opportunities, our coal shippers have been as they want us to have those types of returns to reinvest in this business. So we're still -- it doesn't change our belief at all. And I guess I forget to mention we have appealed that case, so we'll see where that goes. But now we still think there are lots of opportunities in coal.

Ken Hoexter - BAS-ML

Okay, great. Thank you.

Matthew Rose

Thank you.

Operator

And our next question is from the line of Edward Wolfe with Wolfe Research. Please go ahead.

Matthew Rose

Hi, Ed.

Edward Wolfe - Wolfe Research

Hey, good afternoon. I'm just trying to I just want to clarify some things. The dollar-ish for second quarter versus the $13 assuming things stay kind where they are, they've got to assume the comment that you have in there that coal demand is moderating so coal volumes are worse in second quarter relative to first?

Matthew Rose

Yes, it does.

Edward Wolfe - Wolfe Research

Okay. And is that the biggest driver since fuel is flat or is it got some to do with the holiday the way it's fallen or you're being cautious or what are the bigger drivers of that?

Thomas Hund

Drivers of the coal or the other elements?

Edward Wolfe - Wolfe Research

Of the guidance that's slightly last one seasonally it should be stronger all things been.

Thomas Hund

Okay. I mean I gave a couple of things earlier which was some of the stock and incentive compensation things which will hit us. But certainly be continued to be favorable in the next quarter depreciation will higher I can't add of those together and so that's probably a nickel all by it self.

Edward Wolfe - Wolfe Research

Yeah.

Thomas Hund

And then from there I mean we'll probably also see our cap will be a lot lower next quarter so it will be little bit impact on rate and then -- just a lot of other things, I mean and it just at best a directional estimate.

Edward Wolfe - Wolfe Research

And Tom just one other clarification the $0.10 tail-win and the $0.10 tailwind I am guessing you lose some of the lag of the surcharge but you lose some of the hedge loss and those two things kind of cancel each other out is that the way you look at that?

Thomas Hund

Yeah, and then the change in price right you got it, I mean the size of each of the three pieces change a little bit. But they all met you get the same spot, you got them.

Edward Wolfe - Wolfe Research

Hey John, on the coal side, the winter storms in March where is the recovery in the PRB relative to their?

John Lanigan, Jr.

From an operation standpoint?

Edward Wolfe - Wolfe Research

Yes, load trains out of the PRB right now versus then kind of--

John Lanigan, Jr.

Yeah, we are back to full operations.

Edward Wolfe - Wolfe Research

Okay. And where is the breakpoint where PRB starts losing share to gas if there is one as you see it?

John Lanigan, Jr.

Yeah, as Matt mentioned a little bit ago we don't have the same kind of pressures on PRB coal in most of our serving territory that they have in the East. But theoretically below $3 gas, there could be some displacement but again we have a different make up of customers.

Edward Wolfe - Wolfe Research

Sure are you seeing less test phone calls and burns and things like that in the East at this point though with their issues over there?

John Lanigan, Jr.

Yeah, we're certainly having less test burns we are not -- the conversations have not ended in fact we've got one major potential customer that's going to come up to the PRB in the next quarter. And their continuing effort that to figure out what they want to do long-term. So the discussions are still there but the actual test burns have slowed down.

Edward Wolfe - Wolfe Research

And on the international intermodal side is there anything to point that to say that you can see inventory restocking up, points of stabilization or things coming back to LA because its got a lot of room. What do you see on the international side?

Matthew Rose

Well, just general thoughts as I mean, you can link that directly to what's going on the retail sector and other than Wal-Mart nobody else is growing right now. So really until the U.S. consumer starts to go back to the stores, we're not going to see meaningful increases in volumes coming out of Asia.

Edward Wolfe - Wolfe Research

Thanks for the time everybody.

Operator

Our next question comes from the line of Gary Chase with Barclays Capital. Please go ahead.

Matthew Rose

Hi, Gary.

Gary Chase - Barclays Capital

Hi, Matt. Good afternoon, everybody, a long day here. Can I just ask you to clean up a few things. First for Tom, you mentioned the incentive compensation and I think you sized the three roughly $0.03 sort of one-time impact looking forward outside of that $0.03 I mean your cost per hedge should be down there is going be on going incentive comp component as you move through the rest of the year correct?

Thomas Hund

That's correct.

Gary Chase - Barclays Capital

Would you be more in the side that or at least give us a sense of magnitude relative to other components you mentioned the fair lows the over time?

Thomas Hund

We do not disclose the incentive compensation but as far as relative magnitude it's I think it's a significant part of it but it is not a dominant part of it if that helps, so I mean it's -- certainly the overtime is you know about as big and then in the head count is probably even a little bit more significant. So I mean put all those together and then you have the net 4% wage increase for the scheduled folks those three things offset by the one I thing get you there.

Gary Chase - Barclays Capital

Okay. And then, sorry I do this to you but I feel will just be willing to isolate surely the lag impact within the quarter, in other words how much tailwind outside of the hedging and the other couple of things you mentioned there what is the impact of just having a lag mechanism in the surcharge for the quarter, for first quarter?

Thomas Hund

Yeah. It's certainly something probably it's -- less than the $100 million.

Gary Chase - Barclays Capital

Okay. And if I could just two questions on quick to very quick ones for John, you said you were back to full operation does that mean last week's volumes were sort of representative of what this moderation in demand you are refined to looks like?

John Lanigan, Jr.

We've had significant winter storms actually a couple of them. And so what we are getting is if we kind of move it around in bunches right now we're not exactly sure, we do know that demand is down, but we really can't see it in terms of what's happening in the basin, because of the kind of sporadic storms we've had and the tendency to punch all these coal sets up.

Gary Chase - Barclays Capital

All right. And were there any mix issues that affected the arc within the coal segment looked pretty strong for the quarter?

John Lanigan, Jr.

No, nothing significant.

Gary Chase - Barclays Capital

Okay. Appreciate your time.

Matthew Rose

Thank you.

Operator

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

Matthew Rose

Hi, Chris.

Christopher Ceraso - Credit Suisse

Thanks, good evening. A few things, first on some of these charges in the quarter, can you just clarify for us the 96 million just I am clear on what that is, is that basically that the present value of lower revenue on a go forward basis as a result of the case?

Matthew Rose

No, that's -- it's retroactive, reparations right, for the last, it's essentially 4.5 or four years and one quarter of reparations out of the 20-year deal.

Christopher Ceraso - Credit Suisse

Okay. So essentially what they have said you overcharged by in the past four years, not what you have to cut revenue by the four years?

Matthew Rose

Right, four years and one quarter, right.

Christopher Ceraso - Credit Suisse

Okay. And then on the other piece, the $0.08, I'm curious why you would call that out as a loss on a hedge. You're not doing that with the loss on the fuel hedge?

Thomas Hund

Well, because this is a one-time loss on the hedge and the interest rate hedge for a debt transaction we didn't do. Does that make sense while unwinding a position. The fuel hedge is then netted against fuel consumption. And it's got exactly the relationship that we would expect it to do. This is the first time we've ever done a hedge and designated hedge for a transaction, transaction didn't take place. If you remember, we bought $500 million in the fourth quarter and a lot of that was sort of looking at some of the problems in the financial markets and making sure we take advantage of liquidity.

The problem is when you enter into an interest rate hedge you have to designate very specifically what that hedge is for and that hedge was for a borrowing in 2010. We now are not -- we are certain that we would do a transaction that would comply with the specific requirements to that hedge.

Christopher Ceraso - Credit Suisse

Okay.

Thomas Hund

What did I say, I am sorry 2009 I have got my years mixed up. It was a borrowing in 2009 that was for unsecured borrowing in 2009.

Christopher Ceraso - Credit Suisse

Okay. You mentioned that if we pulled out the fuel piece RCAF the 4% price would be 5, what was the RCAF piece of RCAF so -- how much did RCAF ex-fuel way on price?

John Lanigan, Jr.

RCAF ex-fuel was down 2.1% and the fuel component of RCAF was down 21%.

Matthew Rose

Next quarter?

John Lanigan, Jr.

No the fuel component is still down in the--

Christopher Ceraso - Credit Suisse

So RCAF ex-fuel was way down your price by about 2 points. Is that right?

John Lanigan, Jr.

By one point.

Christopher Ceraso - Credit Suisse

By one point, okay.

John Lanigan, Jr.

Looking from four to five.

Christopher Ceraso - Credit Suisse

No that was the fuel piece you said.

John Lanigan, Jr.

Yeah the fuel piece, I didn't calculate for the full RCAF.

Christopher Ceraso - Credit Suisse

Okay. So then what did you say was 2% then?

John Lanigan, Jr.

Our RCAF, the full RCAF adjustment for the quarter was down 2.1%.

Christopher Ceraso - Credit Suisse

Okay, that's fair enough. And then just one last one. And this may trace back to RCAF but I noticed a big distinction between the revenue decline in coal and the volume decline and then in ag it was much closer. So in coal revenues were down 10, on a 1% volume decline, in ag revenues were down 22 on a 20% volume decline. Why the big difference in the coal business there?

John Lanigan, Jr.

It's the $96 million for the reparations was part of that number.

Christopher Ceraso - Credit Suisse

Okay, so, that's not the adjustment figure. All right. Thank you very much.

Matthew Rose

Thank you.

Operator

Our next question will come from the line of William Green with Morgan Stanley. Please go ahead.

Matthew Rose

Hi, Bill.

William Green - Morgan Stanley

Hi, there. Matt is it safe to say that sort of the magnitude this downturn has allowed you to operate in a way that maybe you have learned things where, when the volumes come back, you will be able to hold more of it than you otherwise would have? Or is this sort of just typical and these are the kinds of cost cuts you get in when the volumes come back a lot of it will have to come back just definitely?

Matthew Rose

Well, I think every time you have to take a lot of cost that you learn a lot and you find ways to do things better when it does come back. But we have, we've got a little more variable cost structure, I think than the average railroad given our product mix and what we can't do in terms of variable I think our product mix and if you look at our car fleet as a percent of our revenue it's the lowest car fleet in the industry if you look at our own cars as a percent of the total fleet it's lowest percent of own cars of any railroad.

And then we purposely have variable incentive comp for almost a quarter of our scheduled workforce I mean if you -- so as the volume comes back of course we'll do things in a different way. What we're also trying to do those to change how we are running the railroad to be more productive when that volume does come back so there is I think your point write lots of lessons to be learnt but part of it is, just simply that as volume drop we drop out the cost of the railroad as well.

William Green - Morgan Stanley

You mentioned when you talked about CapEx as well that there was a productivity component to that as well. So could we think of the capital lessens perhaps been learned is that maybe as we look forward the CapEx requirements of the railroad are lower because your productivity on the cost side maybe you can keep some of that. And then also now maybe you don't need as much capital as you thought, is that a fair way to think about it?

Matthew Rose

No, I don't think we need -- I don't it has anything to do on much capital we need. All we're saying is that a combination of better leadership and less volume we're getting more units per hour in the railroad, which is providing a nice productivity improvement, which is driving down our cost per on our capital which is allowing us to do two things quite frankly maintain the amount of units that need to go on the railroad, but take overall dollars out. But as far as ties wearing out on a different MGT per tie or per rail nothing has changed in it, it's just that there will be a few less GMGTs on the railroad this year and little less damage to railroad.

William Green - Morgan Stanley

Yeah, I guess I was getting you, as you have been able to cut the CapEx this year of course the volumes are down. And I was hoping that maybe there be piece of this where you could say, it doesn't have to come back as fast as you might think, where we can actually produce a bit more free cash flow, once things come back that we can harvest a bit, but maybe that's not--

Matthew Rose

I guess that's one way for that, the other we're going to be in good shape from both on expansion capacity. And we're going to be long locomotives for a long time. And we're going to be in great shape with the locomotive fleet given the new air quality standards we've got hit, but given also the quality of the locomotive fleet. We'd loved to have the locomotive decision back, but that's not going to happen. So we're going to be -- once we get through this current locomotive agreement, we will be in a great shape for a number of years, even as volumes come back to the railroad.

William Green - Morgan Stanley

When does the current agreement run out?

Matthew Rose

I think. We've got several more years on it.

William Green - Morgan Stanley

Okay. All right thanks for the help.

Matthew Rose

Thank you.

Operator

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

Matthew Rose

Hi, Walter

Walter Spracklin - RBC Capital Markets

Hey, how is it going guys?

Matthew Rose

Good.

Walter Spracklin - RBC Capital Markets

Hi, just on the volumes I know Matt you've mentioned there is lot of uncertainty out there. But if you look at and perhaps segment-by-segment, the once that you might see a little bit of silver lining, is there anything that you're seeing out there that, that has been depressed that is starting to take a bit of a change here and might be seeing a bottom?

And then on the other side which areas are you seeing the most degree of uncertainty when you look at you just have no idea where demand could shift over the balance of the year?

Matthew Rose

No, we really don't see any real break pattern near-term. And we are very, very close to our customers on an ongoing basis and probing them probably more often than they would like us to on any raise of sunlight. And whether they're just hedging at that or what we really believe is that they can't see forward either and can't see where that's going. And beyond that it's really difficult to talk about the back half of the year because when you have customers that are so focused on the here and now they are just not committing any kind of an upturn at this point so it makes some very, very difficult looking forward.

Walter Spracklin - RBC Capital Markets

Okay. And just last question here Matt, you have been spending some time in DC here and I understand in the confidentiality to talk to much better but can you talk a little bit about just your -- the degree of optimism you might have based on what you are hearing is your sense that we are trending in a better direction there where we were maybe three months, six months ago or is it still so kind of status quo in terms of how the negotiations are going or how the discussions are going?

Matthew Rose

Well, Walter I think communication and education is good for all parties involved in, and so I think that we have spent considerable time talking about the industry and I think that the staffs of both the Senate and the House have reached out to other people and looked at different models.

And I've said all along. This thing is not perfect and we don't ever see that and we know that it's all perfect system. But overall, it comes back to one issue and that is how is this, how are we going to pay for this to maintain the quality of rail network that our customers want and how we're going to pay to expand it. And overall net -- net I think when anybody stands back objectably and looks at it, the concepts have gotten us here so far have worked pretty good.

And these franchises, these railroads really have not made excess profits at all. You can look at it 12 ways a Sunday and they haven't really exceeded the S&P 500. And so given that, we will start taking about, when you start calling about, moving around rents from one group to another, it's either a net -- net neutral or net -- net loss. And so I think it has a lot of discussions have occurred everybody is understanding that this is not the highway system that gets paid for the American tax payer and that these capital commitments are huge and we're quite frankly the whole regulatory scheme that's out there is not even based on replacement cost which is a huge issue for this industry that we have got to be successful with public policy and regulators to make sure that they understand that bridges do wear out.

And if you have a bridge on your books for $3 million you built a 100 years ago that's not the real cost for replacement. So I think generally Walter I've been very pleased with the dialogue I have been very pleased with the desire on all parts to maintain the health of the industry I deal with a lot of customers and our most staunch pro railroad customer always comes back to one thing, they don't want to see harm done to the capital investments the railroads are doing.

And yet they are frustrated with issues that the railroads have whether BDSTB process or the time of the cost, or fuel surcharge or this or that and we understand that. And that's why been our self we've done few things after side. We're experimenting some things in Montana with arbitration. We try to do some things around fuel and things like that. And so we'll all -- just see where it all ends up.

Walter Spracklin - RBC Capital Markets

That's some great color. Really appreciate that. That's all my questions, thanks guys.

Matthew Rose

All right. Sandy have we done it?

Operator

Yes, you have.

Matthew Rose

Thank you very much. We'll look forward to talking to you all next quarter.

Operator

That does conclude your 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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