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Executives

Matthew K. Rose - Chairman, President and CEO

Thomas N. Hund - EVP and CFO

John P. Lanigan, Jr. - EVP and Chief Marketing Officer

Carl R. Ice - EVP and Chief Operations Officer

Analysts

Ken Hoexter - Merrill Lynch

Randy Cousins - BMO Capital Markets

William Green - Morgan Stanley

Thomas Watewitz - J.P. Morgan

Edward Wolfe - Wolfe Research

Gary Chase - Lehman Brothers

Walter Spracklin - RBC Capital Markets

Burlington Northern Santa Fe Corp. (BNI) Q2 FY08 Earnings Call July 24, 2008 4:30 PM ET

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'll 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 Chairman, President and Chief Executive Officer, Mr. Matt Rose. Please go ahead sir.

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

Thank you Pamela, and good afternoon everybody. Welcome to our second quarter financial presentation. With me here today in Fort Worth, Tom Hund, EVP Chief Financial Officer, Carl Ice, EVP Chief Operations Officer and John Lanigan, EVP and Chief Marketing Officer.

Our presentation today is available via webcast. So I am going to start by directing everybody to our first slide regarding forward-looking statements. The statements basically cautions everybody that forward-looking information presented here today can be affected by a number of factors which could cause actual results to differ materially from any forecast information we provide.

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

All right, for the second quarter, we reported earrings per share of $1 which includes previously announced unusual items that Tom will describe a little later in his section. Excluding the impact of those unusual items, our earnings per share would have been $1.34 per share, which was an increase of 12% over second quarter earnings per share of last year of $1.20. This was achieved despite the soft economy, higher fuel prices, and what we believe would be the worst flooding certainly in the last 15 years.

Freight revenue increased 16% to $4.3 billion, due to continued strong yields and higher fuel surcharges. Our ag franchise was particularly strong despite the flooding, John will give you a detailed report of the results for each of the business units in his review.

Our operating ratio was 79.2, excluding the unusual items. Further, excluding the impact of fuel surcharges, the ratio was about 480 basis points lower, which is slightly below second quarter 2007, again despite the flooding.

Network fluidity and service to our customers is fully restored, due the efforts of hundreds of BNSF employees and contractors.

Carl will provide an operational update in his section. Now I am gong to turn over it to Tom for the financials. Tom?

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

Okay, thanks Matt. As Matt already mentioned, earnings per share in second quarter was $1 as shown in the left side of the slide. The chart on the right reflects the adjustments in 2008 of $0.34 per share for an environmental charge and additional personal injury accruals both of which were disclosed in 8-Ks filed earlier.

When adjusting for these items, earnings per share for the second quarter of 2008 is up 12% over 2007. This increase is despite $65 million or $0.11 per share of fuel headwind.

Once again the left side of the slide shows our GAAP results for operating income. The unusual charges I reviewed are excluded on the right. Adjusted second quarter operating income for 2008 was $904 million, an increase of $63 million or 7% over 2007.

Our adjusted operating ratio was 79.2% for the second quarter. And if you remove fuel surcharges from both revenue and expenses, our operating ratio would have been 74.4%, which is slightly below last year, despite flooding. And as always, John will cover revenue and now I'll give the detail on expenses.

Operating expense was $3.764 billion for the quarter, $762 million, or 25% higher than the second quarter of 2007 on a GAAP basis. After adjusting for the unusual items in 2008, operating expenses increased $572 million over 2007, of which $474 million or 83% of the increase is due to higher fuel prices.

Compensation and benefits expense was $951 million, up $26 million from 2007. Head count declined 1% from 2007 while comp and benefits expense per employee increased 3.7%. The increase to comp and benefits per employee, was primarily driven by wage inflation and higher incentive compensation accruals for exempt and scheduled employees.

Purchased service expense was $540 million for the second quarter, up 6.5% from 2007. About 30% of the increase is driven by a growing BNSF Logistics company, which has offset in other revenues. The remainder is due to higher freight and locomotive maintenance as well as rerouting costs associated with flooding.

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

Equipment rent expense was $223 million for the second quarter, down 6% from 2007 due to improved asset utilization and lower volumes.

Materials and other expense of $456 million, was up $216 million over the second quarter of 2007 on a GAAP basis. After adjusting for the environmental and personal injury charges in 2008 materials and other expense was up about $26 million over 2007. This increase was mainly the result of lower gains on land sale transaction, increased fuel related road vehicle and machinery costs and property taxes.

And finally, fuel expense of $1.245 billion was about 62% higher than the second quarter of 2007. And the $474 million increase was driven entirely by significantly higher fuel prices.

Looking a little closer at fuel, in the second quarter, average price per gallon was $3.58 before hedge and after hedge was $3.51.

Turning to our hedge position, we're about 10% hedged for the third quarter and about 6% for the fourth. In the second quarter, fuel expense reflects a $65 million headwind I described earlier, and this headwind is the net impact of higher fuel prices, partly offset by increased fuel surcharges and hedge benefits.

Fuel for the past few weeks has been extremely volatile as you know, but using $4 a gallon, we would have a net headwind of about $40 million in the third quarter of 2008. And at this price level of $4 third quarter 2008 fuel expense would increase about 80% versus 2007 and drive a total operating expense increase of about 25%.

Interest expense for the second quarter was $140 million, up 8% over 2007, due to increased debt levels. Other expense for the quarter was flat year-over-year. The second quarter tax rate is 38.5%. We anticipate third quarter tax rate to be about the same.

Our capital plan for 2008 is now $2.850 billion, which is about $275 million higher than our previous guidance due to three factors. First, we incurred about $70 million in capital costs related to the floods. Second, we're taking advantage of an opportunity to acquire 75 additional locomotives, which are about 15% more fuel efficient than the locomotives being replaced and will qualify for bonus appreciation.

And finally, we're accelerating some projects to be completed in 2008 to take advantage of bonus appreciation. We anticipate free cash flow after dividends of around $800 million for 2008. This is lower than last quarter's guidance primarily due to additional capital spending and significantly higher fuel inventory costs.

And finally, year-to-date we spent about $640 million on our share repurchase program.

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

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

In the second quarter we've achieved a 16% increase in freight revenue, despite a decline in volume. This increase was primarily due to improved yields and fuel surcharge revenue. Our second quarter performance surpassed all previous revenue records.

In spite of challenging weather conditions during the quarter and the slowdown in the U.S economy, we delivered an improved revenue performance led by same store price improvement of 6%. Second quarter fuel surcharge revenue was about $400 million, more than last year, driven by higher fuel prices as well as increased customer participation in our fuel surcharge program.

Turning now to the individual business units, the second quarter was a record for coal and revenue due to yield growth from price and fuel surcharge. This record was achieved inspite of a 3.7% unit decline primarily due to challenging weather conditions in May and June.

PRB stockpiles remained high as we continued to focus on efficiency. Some customer deliveries were challenged by flooding but we are recovering some of that volume.

In our Agricultural Products business unit, we produced a record second quarter for revenue and units. Volume increased almost 10%, led by growth in ethanol, corn, wheat and soybeans. Overall P&W export volume was up 31% for the quarter driven by corn. Corn volumes grew by 10%. Strong P&W corn exports and West Texas speed load [ph] corn shipments mitigated weakness in other corridors.

Gulf exports were up 37% during the quarter driven by wheat and milo. And ethanol volume grew by 73% as plants continued to come on line. Despite the sluggish economy, Industrial Products achieved an all time revenue record driven by improvement in yield quality.

Industrial Products units declined by 2% in the second quarter. Construction Products produced 23% revenue growth, led by a record second quarter in taconite and an all time record quarter in steel, minerals, and clays.

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

Building Products revenue was down 5% and units were down 12% as we saw the continued impact of the housing decline. Lumber and panel volumes were down about 30%.

Consumer Products revenue was up 12% on a 5% decline [Technical Difficulty] domestic intermodal reported a 20% increase in revenue on 6% volume growth. Volume growth was driven by key accounts such as J.B Hunt, Schneider and Pacer.

International posted a 6% revenue increase despite a 12% decline in volume due to the slowing U.S. economy and weak U.S. dollar. Additionally, we continue to be impacted by last year's reduction in Transpacific service by a major international customer.

We will lap this loss in the third quarter. Our auto segment achieved a 13% revenue growth on a 2% decline in volume. Due to the soft economy, we are continuing to see slower volumes in specific sectors. However, as previously discussed, we are seeing strength in other segments as well.

We expect to see flat to modest volume growth in the third quarter. Additionally, as a result of higher fuel prices, fuel surcharge revenue will also increase. Coal volume will rebound from second quarter weather issues. In Ag, we expect to see continued strong exports led by corn and soybeans. Also strong grain products traffic led by fertilizer and ethanol, should continue.

Industrial Products will continue to feel the impact of the economic slowdown in the building product sector, offset by growth in Construction Products. Consumer Products volume continues to be challenged by weak imports, partially offset by domestic growth.

So overall, we expect revenue growth of about 20%. This is led by continued strength in our bulk sectors as well as yield growth from price and fuel surcharge. And our fuel surcharge projections reflect current fuel price levels.

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

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

Thanks John, hello everyone. Over the next few minutes, we'll be highlighting our ongoing focus on velocity, service and productivity. As you're all aware, there's been historic play in the Midwest, Matt, Tom and John have discussed the impacts. However, we thought it would helpful to give you some additional information.

Over the last two weeks of June, all of our areas, in the central part of the country along and near the Mississippi were impacted. This photo taken out of our Thermosat [ph] shows the extensive flooding. This is typically farm land.

In this slide, notice the rushing water, that's what drives impact on our rail road. This sub-division and several others had multiple wash-outs that was as long as 2000 feet and as deep as 40 feet deep. All in all it took us about 550,000 tons of rocks to restore the rail-road where we were really building a rail road in the standing water.

All in all we're proud of the way our team responded. We had many people who worked tirelessly to provide our roads back in service. Others were diligently and creatively do keep our eyes in service and across the rail-road our keen [ph] job of moving traffic that to ensure that the customer freights were moved and our network was fluid.

However, that did come with some impact on velocity, especially as you can see in locomotives. We added extra locomotives to the fleet to ensure that they wouldn't be a constraint as we moved over the lines and we're having more volumes just due to reroutes.

We did see some improvement in car velocity, and as you would expect the improvement in car velocity drove the performance, improvement in on-time performance. Service number [ph] and velocity remained one of our key initiatives, and we believe the right initiatives are in place and we'll see improvement throughout the year.

In productivity, we saw about a slight increase in GTMs per employees due to a 1% reduction in headcount in the quarter. We did have an unfavorable relationship of inventory as measured cars on line compared to our change in volume. That was a result of two factors: one, the reduction in volume of our fastest turning intermodal equipment and secondly, the reroutes make having coal sets be on line longer.

The fuel efficiency after three record quarters, beside slight increase, are actually relatively flat. We continue to have our fuel initiatives in place and actually have a bundle of new initiatives that launched already in this quarter.

So as we look forward, despite the challenges we've had I believe we had a strong quarter in operations where the network is restored at this point. And we expect a good third quarter.

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

All right. Thanks Carl. Turning to our outlook for the third quarter, we anticipate about 20% of freight revenue growth. About one quarter of the increase comes from the yield, remainder from higher fuel surcharges based on today's forward curve.

We expect third quarter earnings per share to be in the range of $1.60 to $1.65. Turning to full year, we expect freight revenue to reach approximately $18 billion compared to the $15.3 billion in 2007. The drivers of that growth are continued solid pricing and higher fuel surcharges on relatively flat volumes.

We're still expecting adjusted earnings per share to be a little shy of $6 which would be a meaningful increase over 2007, despite the economy, fuel prices and the floods. Earlier today our Board of Directors approved a 25% increase in our dividend. This follows a similar percentage dividend increases in the last few years. The annual increase since the mid 2003 time period has averaged 22%.

We expect free cash flow after dividends of about $800 million despite higher fuel prices, flooding and additional capital expenditures Tom described earlier. Despite current softness in the economy, we continue to be optimistic about the long term prospects, for BNSF given the strength of our diverse franchise, the value of our product offering and continued focus on yield and productivity improvement. And we'll continue to be committed to improving our return on invested capital.

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

Question And Answer

Operator

Thank you. [Operator Instructions]. Our first question is from Ken Hoexter with Merrill Lynch.

Ken Hoexter - Merrill Lynch

Great, good afternoon. Carl I guess, could we just delve into that gross ton miles per employee just a bit. It looked relatively flat there. And if I remember going back to a couple of years you used to be at a kind of 4% to 6% productivity improvement run rate. Is that something you think you can get back to? Is that down to this 0% CAGR because of the floods and recent incidents or can we see that re-engage itself?

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

I think we'll see more improvement than we saw this quarter. It was up a little compared to the second quarter last year, flat compared to two years ago, which is why you saw the zero CAGR. We'll improve it in the third and fourth quarter. I doubt we'll get back to the 4% to 6% in the near term, but we expect to drive improvement on this measure.

Ken Hoexter - Merrill Lynch

And then can you talk about, I guess you mentioned that 6% of that 20% or so is pure pricing. Can you delve into kind of what percent of contracts we've seen renew... that legacy contracts renew in this quarter, maybe what's left to come in the second half of the year, if any? And is that over 6% that you're targeting for the... in the estimates for the back half?

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

John?

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

Yes, Ken typically contracts in our business in the rail industry are back end loaded from a standpoint of negotiation. So they take effect the following year. So, really from a contract perspective we're pretty much done for this year in any contracts, so that will have any impact on this year's revenues.

Ken Hoexter - Merrill Lynch

Okay. And then Tom, can you just delve into the charge into the Montana [Technical Difficulty], just a bit what that was related to?

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

Well, it relates to third party claims, which is property, not necessarily owned by BNSF because if you remember a few years ago, we took an actuarial charge for properties that we own because we have very good handle on that, have a lot of history with those. If this relates to sites, that would be others.

Ken Hoexter - Merrill Lynch

Okay.

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

I have to say... I am being a little a coy here I guess that on advice of council we really don't want to take too much about. The specifics of any other of the site or the nature of what we have accrued.

Ken Hoexter - Merrill Lynch

Okay. I will follow up later that. On fuel surcharge... I am sorry on fuel surcharge I just to want to clarify, is that on mostly on highway diesel or is there a component that's on WTI.

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

100% highway diesel.

Ken Hoexter - Merrill Lynch

Okay. Great, thanks for the time I appreciate it.

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

Thanks Ken.

Operator

Thank you. Next we'll go to the line of Randy Cousins with BMO Capital Markets.

Randy Cousins - BMO Capital Markets

Afternoon. I wondered if you guys can give us, some sense of earnings sensitivity to oil prices. We have extraordinary volatility in oil, it seems to go up 10 and down 10. Can you give us any kind of rough rule to use, as there's similar [ph] change in WTI is going to translate into $0.05 in earnings or something like that?

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

Yes, it wouldn't be that much Randy. I mean if oil came down to let's say $125, from [indiscernible] $138 to $140 that were at before, that would probably benefit us couple of cents a share for the quarter. And it clearly depends on when, I mean in the quarter with the lag and all that. But I am just sort saying we're there for the first quarter,

Randy Cousins - BMO Capital Markets

Okay.

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

That'sprobably a little more than $10 drop, and it could be something that, $10 probably is a penny or two.

Randy Cousins - BMO Capital Markets

Okay. My second question has do with materials and other, it's kind of catch all and that's where you've got your land sales. Can you give us any guidance as to how to think about that line item for the second half?

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

Yes. Clearly as we said that there was less land sales than it was a year ago. It probably is at least in the third quarter at a reasonably low level to what it was at in the third quarter... in the second quarter rather.

Randy Cousins - BMO Capital Markets

Okay. And then last question the Eastern rail-roads are getting quite enthusiastic about the prospects or baseline price increases. And you guys have gotten 6% this quarter, and are you feeling that there is more room to move in terms of baseline pricing given oil prices are sustainably above... seem to sustainably above $100 and more and more people are rethinking about how they move stuff around or manage their logistics?

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

I think we're going to maintain historically strong pricing going forward, Randy. We're very proud of the pricing performance we've had over the last several years and see no reason why we can't continue to move forward, in a range of where we've been.

Randy Cousins - BMO Capital Markets

Okay, great. Thank you.

Unidentified Company Representative

Thank you Randy.

Operator

Thank you. And next we'll move to the line of William Green with Morgan Stanley.

William Green - Morgan Stanley

Yes, I'm wondering if we can talk a little bit about the intermodal in the second half and if you... once you've lapped the loss for Transpacific business that went all water. How should we think about that growth? And also if imports don't rebound anytime soon here, have you kind of over built the intermodal system or how do you think about the cost of utilization of that?

Unidentified Company Representative

The big thing to watch in the second half of the year is the import numbers into the West Coast, because even though we're lapping that loss of the customer who withdrew, the fact is in the first half of the year and the projections for the second half of the year is that the gross imports in the West Coast are going to be down significantly.

So, lapping that comp just gets us back to that baseline from last year. So we're going to be watching those imports very closely to see if there is any strengthening demand with the typical holiday season, shopping peak that we have. But we're not getting any indications at this point if there is any going to be any significant peak season this year.

On the flip side as I talked about earlier, our domestic business had a very nice quarter, and we have a very nice trend going on the domestic business. And as the domestic trucking companies are looking at all of their input costs and activities clearly J.B. Hunt led the way in their recent call by saying that they were aggressively pushing more to intermodal from the road. And so obviously we're hopeful that continue on the second half of the year.

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

Bill. as far as your heavy over-build the answer is no. We just won't be expanding as quickly as we otherwise would have until that volume does rebound.

William Green - Morgan Stanley

So when I think about sort of operating leverage in your business you had very impressive top line growth. And I realize fuel is obviously some of this. But the operating earnings grew sort of 7%-8%, so how do we get back to operating leverage? Is it just the fuel has to stabilize or volume growth has to be there? Or is there something more you can do maybe on productivity or how should we think about that?

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

It's Tom, Bill and I think the biggest thing is if fuel stabilized, so we were constant, I think you'd see pretty significant operating leverage. In the quarter you're right. Revenues ex-fuel, ex the surcharge were up about 6-ish percent, most of that was price as John indicated. EPS was up about 11%. I would expect we'd typically do better than that. If you carve out the fuel headwind I talked about, that 6% actually turns into an EPS of about a 25% increase. And that's... that adds pretty good leverage. So, that is, I guess, what we're saying is if fuel had stabilized, we'd have, you'd have seen significant leverage here.

William Green - Morgan Stanley

Okay. And just one last question, you mentioned the PRB stockpiles, were you referring to the stockpiles of the mines or are you seeing stockpiles in your regional utilities are high?

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

Stockpiles at the utilities are at about a five year high, at the end of June. However, the last several weeks, certainly, in the self and even up in the upper mid west, it has gotten a lot harder. So, obviously, we think that the burn rate with has picked up, so far this month. And hopefully, that will continue on for the quarter.

William Green - Morgan Stanley

Thanks for your help.

Operator

Thank you. And, we go next to the line of Tom Watewitz with J.P. Morgan.

Thomas Watewitz - J.P. Morgan

Yes, good afternoon. Let's see, on the coal comment, I just want to follow up on your last comment in terms of stockpiles. So, you know stockpiles have a pretty high level, you're optimistic that, I guess, you look third quarter, fourth quarter, you're going to see some strength in coal volumes. And also, what are aside from existing customers, is there an impact from test runs for new customers or export or that type of thing as well?

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

We think we should have some growth in the second half of the year Tom. Part of it will be a little bit of make up from the flooding situation, but then just general growth in the coal sector, and if we have a good warm rest of a summer, and forecast into the winner of a cold winner, then that'll drive some of their feelings from a standpoint of inventory. As far as test runs go, we are seeing some increased interest in test burns, we have a number of them scheduled in the second half of the year, and into the first part of next year. So, that's an activity that appears to be picking up a bit.

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

And Tom, just because stockpiles are relatively on the higher-end, we haven't seen any utilities, begin to say that they don't want coal, I think everybody would like build little more.

Thomas Watewitz - J.P. Morgan

Okay. And, I guess, two more in kind of marketing side of things. From an ag perspective, I mean, it's just been such a and a really tremendous story for several years. It's kind of hard to get your arms around, wind volume or revenue comps become a little more difficult and when you might see some slowing. Do you have at this point, any kind of visibility to what realistic volumes might be, when you look to the next ag year? I guess, kind of fourth quarter '08, 2009. Can you still see a high single digit volumes or should we be more low single digit volumes, is this the way to think about it.

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

Tom, I think, there is a couple of things. One, it's a little to early in the crop year to make those kind of predictions, because, we just don't know what the quality of the crop is going to be yet. So, this is one business where it's extremely difficult to project out until we see how that crop year plays out.

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

I think so, Tom, I mean, it's a timing dividend, we had our Board meeting today. We had the couple of ag customers and an ag experts coming in. We just went through the real game changers in ag in terms of the global demand and the issue with ethanol. And, how the rail road is situated and I've been anxious for a little while and I don't think we have ever been better positioned, in terms, of our ag franchise to take some of the cyclicality out of it. And, to make it more of a confident level of growth type business throughout the year. So, we're feeling very bullish about ag and we believe that where there is ocean spreads or high prices, all those things are really favor our franchise and a lot of things we been telling you through the years what China converting from a exporter to an importer. We see it's happening, and so, we think that we've got some long-term lags on this thing.

Thomas Watewitz - J.P. Morgan

Sure, yes it seems to be rock solid story. Last question, I'll pass it along. On the intermodal side, I think, you've been very good at driving efficiency, and focusing on the long haul and putting together the trains in a way that makes you efficient with long haul. I am wondering, do you consider changes to the way you offer your train service so that you might attract more medium haul routes, and truckload business, to the rail road as international has been slower. Or is that something that you really you wouldn't want to take the operational hit to do that?

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

I think Tom, one thing we just reported 6% increase in volume on the domestic side for intermodal, so, I think one of the points you just made is playing out and that's more volume coming from the highway to the rail. From the standpoint of short haul and intermediate markets, I think you really have to look at the demographics of the West versus demographics of the East.

We're really a long haul market because that's how the population centers line up and some of the shorter haul market have to be coast wise markets and so a lot of the traffic that goes in to those markets comes directly in to the market and is distributed locally like the L.A local traffic or Oakland local traffic. So we where someone might say could you run intermodal up and down in the I-5 corridor, certainly there might be some intermodal but a lot of that freight comes in via ocean right to those consuming markets and then distributed locally.

So we are looking at the some of the intermediate markets in the West but there is just not a lot of them because of the way the population centers play out.

Thomas Watewitz - J.P. Morgan

Great. Okay, great. Thank you for the time.

Unidentified Company Representative

Thank you.

Operator

Thank you. And we'll move next to the line of Edward Wolfe with Wolfe Research.

Edward Wolfe - Wolfe Research

Hey good afternoon guys.

Unidentified Company Representative

Hi Ed.

Edward Wolfe - Wolfe Research

Just a little follow up Tom, can you.... the Montana charge, is there a cash component of that, and I apologize I haven't gone through the whole cash flows if it's there?

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

No I think in the 8-K we filed I... I think we said this would be, this is an undiscounted number to be paid out over about 10 years. So it's... point being is undiscounted it's not, its not about 135 after tax number, so after tax while talking about something that's about 100 spread out over 10 years, so no material. I mean like something paid issue but nothing of any material amount.

Edward Wolfe - Wolfe Research

You won't feel it and then the second charge the $50 million for additional personal injury accruals. Can you talk a little bit about that, and why that's one time in nature?

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

That was a specific case; we filed an 8-K on that one also. And it was about $15 million about $0.03 a share and was unusual in its size for one individual case.

Edward Wolfe - Wolfe Research

And so there is an impact just in this quarter that's not ongoing?

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

Correct.

Edward Wolfe - Wolfe Research

And you see these kinds of cases a lot. But the thought process is something of this magnitude comes around X numbers of years?

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

Yes, we have cases continually but not of this sort of magnitude.

Edward Wolfe - Wolfe Research

When was the last time you saw something like this?

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

I am going to say, I think I have been CFO nine years, I think we have seen one beside this bit size.

Edward Wolfe - Wolfe Research

Fair enough.

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

Something like that.

Edward Wolfe - Wolfe Research

I appreciate. On the headcount side it just feels like the volume hasn't been here for a while and the headcount is down but it's down less than we have seen. What is your thought [ph] process going forward on headcount?

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

Well, it has -- we will project out our volume... volumes going forward, we have been under less volume for a period of time now. This quarter we didn't have people that were down... more of retention boards that we used in some of the areas that we rerouted to.

So, we'll continue that product... play productivity as I mentioned a moment ago, and I expect it'll be better in the third quarter and fourth quarter. It will have better clarity on that once we have more certainty whether our '09 plan looks like in terms of volume.

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

And Ed the way it reflects off obviously we'll look at our hiring plans, we just won't be hiring where we don't need it.

Edward Wolfe - Wolfe Research

Just attrition I am guessing but if you...

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

We've hired only... it's about half of attrition in our train crews for two years in the row. So, we've been pretty strong here in terms of making sure we control in late counts.

Edward Wolfe - Wolfe Research

Yes, I know you have been but I just noticed that, that has changed a little bit and I was trying to understand that maybe saw an inflection of volume coming or if it was just 0.9 versus minus 2.5 last quarter, that's nothing in your mind and don't read too much into it.

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

I would say don't read too much into it, but we are always careful that we keep hiring balance so we can go either direction which is, what we're doing that too.

Edward Wolfe - Wolfe Research

Okay. Hey John, on the intermodal side, and just big picture I certainly, didn't foresee two or three years ago, that you could have imports as weak as they are and exports as strong as they are. How does that change in the world impact, forget about volumes but the profitability your boxes, can you talk a little bit about heavier and more exports versus fewer or lighter weight intermodals what that means for the profitability per box?

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

The inbound, going from the West Coast to the East was obviously, the strength of the growth over number of years and so as that, suddenly shifted with the downturn in the economy and the weakening dollar and stimulating exports, now those exports become loads as well. So I don't think from a revenue per unit standpoint there is a big impact Ed, because kind of load is a load. And I think the bigger impact is they're not all coming back to the West Coast, a lot of them were exiting the East Coast because exports are still being purchased by Europe at a stronger rate than they are from Asia.

So, I think that's part of the story as well that kind of change the picture. We had all those MTs going back to the West Coast until this current economic period and that I think East Coast exports to Europe were up something like 30% over the last year or so.

Edward Wolfe - Wolfe Research

Is that trend flattening at all year-over-year or is it still ramping?

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

No I think that's flattening, it has been over the last couple of months.

Edward Wolfe - Wolfe Research

Okay. On the Ag side, can you talk a little bit about export grain and your sense of both why it shouldn't slow down... you sounded very high conviction that there is no slowdown for you guys with export grain. And I wanted to get a sense with Australia grain coming back on line, or at least wheat coming back online what gives you that great conviction?

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

To the P&W our strength is in corn and soybeans as to P&W and both those markets continue to be strong and look strong going forward. Lot of our read experts go through the Gulf, out to Europe. So even if Australia makes somewhat of a comeback or even a big comeback that is wheat and in fact in effect corn and soybeans, it may have some modest impact on wheat. But a lot of our wheat going out to Gulf again is going to Europe, so it may not have much of an impact there.

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

And Ed if you look at the ocean spreads for the P&W its close to 100 bucks. So I mean it's just a very strong global market, global demand and we're well positioned.

Edward Wolfe - Wolfe Research

And the corn and soybean view at this point is that things are going to be okay?

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

Yes, really our drawing territory was not really in the flood the flooded area. The flooded area impacted a lot of our true freight and intermodal, coal and all the businesses. But our drawing arc is more northern plains than it is the kind of traditional lower Midwest. And so we didn't have near the impact from the standpoint of our of the growers that we serve.

Edward Wolfe - Wolfe Research

That's helpful, last one I'll let someone else have it. What is your best guess at this point when year-over-year intermodal volumes turn positive?

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

Well again that's really going to be driven by the import picture. If imports are down as much as they are then that's just a tough hill to climb. We feel very good about the domestic performance in the second quarter and think that's going to hold going forward.

Edward Wolfe - Wolfe Research

Overall though it feels like at some point in '09 at this point?

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

That would be our best guess.

Edward Wolfe - Wolfe Research

Thanks a lot, I appreciate the time.

Unidentified Company Representative

Thanks

Operator

Thank you. And we will go next to the line of Gary Chase with Lehman Brothers.

Gary Chase - Lehman Brothers

Good afternoon guys.

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

Hi Gary.

Gary Chase - Lehman Brothers

Just a couple of quick clean up ones and then... well another one for Tom. If quantify the weather I apologize I missed it. Did you give a final estimate of what the weather cost you in the quarter?

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

No we didn't but we would answer it as probably in the $0.06 to $0.08 a share range.

Gary Chase - Lehman Brothers

Okay. And then, somehow rather we missed the fuel headwind twice when you said that it was almost kind of cut now, what was that final number you think?

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

$65 million, $0.11 a share.

Gary Chase - Lehman Brothers

$55million Okay.

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

65.

Gary Chase - Lehman Brothers

65.And then on the cost per head, I guess the cost per head growth was lower than we were expecting given what it had happened in the first quarter. Any explanation for that or was the first quarter something we should consider to be more anomalous, how does that look going forward?

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

Yes, first was a little bit high, some of this relates to the incentive comp accruals last year versus this year. Remember last was a low payout year for us. So, it's somewhat the timing on those. I think going forward we'd probably something like... probably little north of what we were this quarter but not as high as the first.

Gary Chase - Lehman Brothers

Okay. Thanks a lot guys.

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

Thank you.

Operator

Thank you. And next we go to the line of Walter Spracklin, with RBC Capital Markets.

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

Hi Walter.

Walter Spracklin - RBC Capital Markets

Hi there, thanks very much. And just a quick question for you on your guidance, what's your, call it WTI, as I know you're I think on highway diesel but what's your assumption perhaps for your on your diesel there? Diesel price?

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

Well when we prepared this forecast, it probably was in the high 130's probably about 135, 136, something like that. So, it's really come down from there. And that goes into question I answered earlier was the sensitivity drop by 5, 10, we'd probably pick up a couple of cents a share.

Walter Spracklin - RBC Capital Markets

Great. All right. And then, just looking at your CapEx spend, you gave us, good detail on the increase. And so, if we're looking out, I know you're not giving guidance only to next year. But, you'd talked at your investor day how sort of growth projects are on lower than average yearly basis. Considering that, looking out into 2009, and given the ramp up, is it fair to say that this might be a pop into 2008, relative to 2009 in CapEx?

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

I think, what you should expect; Walter is that, given growth... given the volumes on the road, this year we won't have the expansion capital requirements for next year. On the locomotive side though, we're going to continue to take advantage of the options that we have. And this locomotive acquisition of 35 locomotives, you really need to think is a very opportunistic or 75 locomotives, is really very opportunistic, because of what we believe are going to be relatively systemic high fuel prices. So, we're going to be able to put a much more efficient locomotive against, and then get rid of a 35 or 40 year asset.

Walter Spracklin - RBC Capital Markets

Okay. Just two more quick questions here, just to your share buyback plans. Any update on what your plans are in terms of share buyback?

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

I think, it's more of the same. We're using cash flow metrics to be able to monetarily fit [ph] that we have available. Those are things like interest coverage as well as debt to cash flow. So, I mean, I think, it's just going to be more of the same.

Walter Spracklin - RBC Capital Markets

Okay. And just last quick question here. Coal yields are doing well and just always thought that they would trend the little lower given that you got some legacy contracts. I know they're not covered by fuel surcharge. What's explaining sort of the good yields to getting on good pricing and getting on your coal business?

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

A big part of it is on the legacy deals, Walter, the R cap factor was 20% or little north of 20% for the quarter. So, that certainly helped.

Walter Spracklin - RBC Capital Markets

Okay. So, that's kicking in. Got it. Okay. That's all my questions. Thanks very much guys.

Operator

Thank you. And we'll take our final question from the line of Jason Fidel with Daman Ross [ph].

Unidentified Analyst

Good afternoon guys.

Unidentified Company Representative

Hi Jason.

Unidentified Analyst

Couple quick questions. John, I think you were talking about peak season looking like it was going to be almost a non-event like it's been the last two years, is you peak season planning already over?

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

Well, I guess, from a standpoint of the way that we run the network, we run the network on a similar fashion on a year around basis, within the intermodal business. If we see we have headlights on, on unusual activities such as the all peak seasons that we use to have a few years ago. Then, obviously, we look at our equipment needs, and staffing needs, and those sorts of the things ahead of time.

So, it's kind of an ongoing process. There is no stake in the ground, we just continue to gather data and information. But, as we're going into this year, we are not gathering any information at this point that would indicate any significant increase.

Unidentified Analyst

And how many times have you been surprised from your initial thoughts if you look back over the last decade?

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

Very infrequently.

Unidentified Analyst

Okay. It sounds good. Any change in the Chinese Olympics to peak season patterns, I know you don't think so.

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

No, we don't think so.

Unidentified Analyst

Okay.

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

Beijing is not a manufacturing hub.

Unidentified Analyst

Yes, I figured that. On the intermodal side, have you signed up any more tilt carriers to partner with?

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

No one knew but what we're seeing is just a steady growth from our existing customer base.

Unidentified Analyst

Okay. Fair enough. Last question here for Matt, Matt, could you give us an update on Washington, in terms of the RERIG voices seem to have died down. Could you maybe comment on the STB looking at replacement costs and anything they want tax credit that might have come out.

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

Yes, I guess, in the reversal we're on the tax credit, there is one belief that says there will be a second stimulus bill. There is a lot of hope that this investment tax credit may be slid in there. We would certainly support that, because it could produce immediate jobs, and stimulate from an investment standpoint.

As far as RERIG, I don't it's... I think people are seeing the new small shipper issue at the STB, to see what impact that's going to have. I think, also though, it's interesting to see, as high fuel prices have occurred, and probably some sort of cap and trade or greenhouse gas legislation next year. More demands on Amtrak that people are really getting this on Gee, we need more rail capacity not less and so when we ask the basic question, is this somehow changing the regulatory structure? Is it going to incentivise more capital? I think, that's a... I think, it's a self-answered issue that people are saying we don't... they don't want to do anything that's going to hurt the industry from the return. And, I think, on the third one,

On replacement capital, we put forth a very compelling case. It's hard to think about not valuing replacement cost capital in a regulatory scheme. So, the FCB will be very thoughtful about this, and I am not trying to prejudge it all. But, I think it will be very difficult for them to ignore the case that we put forward.

Unidentified Analyst

Thank you, Matt. That was very helpful.

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

Okay. So, we appreciate everybody's interest, and we will talk to you next quarter. Thank you very much. Have a good and safe night.

Operator

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

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