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Update on US Rail Transportation

Update on US Rail Transportation. Presentation to: McCloskey Petcoke Conference 2008 Houston, TX June 10, 2008. Presented By John Schmitter KEP LLC 303.862.4453 john@kepllc.com. Agenda. Volume Service Financials Regulation Pending Legislation Future Capacity Pricing.

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Update on US Rail Transportation

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  1. Update on US Rail Transportation Presentation to: McCloskey Petcoke Conference 2008 Houston, TX June 10, 2008 Presented By John Schmitter KEP LLC 303.862.4453 john@kepllc.com

  2. Agenda • Volume • Service • Financials • Regulation • Pending Legislation • Future • Capacity • Pricing

  3. Overall Railroad Volumes are Down • Carload and intermodal unit volume dropped in 2007 • 2008 YTD Carload volume up 1.1% from 2007 • 2008 YTD intermodal unit volume down 3.2% vs. 2007 • Grain, coal, chemicals, metallic ores driving volume in 2008 • Declines in forest products, construction, automotive and...

  4. Rail Coke Volumes Are Down Significantly in 2008 • Rail coke volume down 33% YTD 2008 vs. 2007 • 2007 was down 4.5% vs. 2006

  5. Service is Holding Up

  6. Service is Holding Up

  7. Railroad Profits Hitting Records • Q1 2008 • BNSF record EPS • CSX record earnings • NS EPS up over 2007 • UP EPS up 21% over 2007 • 2007 • CSX and UP Net Income up vs. 2006 • BNSF and NS down slightly from 2006

  8. Rail Stocks Are Doing Great

  9. Wall Street Pushing Hard on Class I Railroads to Improve Returns If current management won’t push yield, Wall Street will find someone who will

  10. Despite Being Monopolies or Duopolies Only 3 of 7 US Class I Railroads Are “Revenue Adequate” as Calculated by STB • January 2008 STB changed its method of determining railroad cost of capital • Likely most if not all RR will be determined revenue adequate in 2007

  11. Revenue Adequacy • May 1, 2008 AAR petitioned STB to institute rulemaking proceeding to adapt replacement cost methodology to determine revenue adequacy • This change would probably result in all railroads not being revenue adequate for a long time • Rates would be more difficult to challenge

  12. Potential Legislation • S.772/H.R.1650 Railroad antitrust enforcement act of 2007 • S.953/H.R. 2125 – Railroad competition and service improvement act • H.R. 2116/S.1125 Freight Rail Infrastructure Capacity Expansion Act of 2007

  13. Future - Capacity • Petcoke represents about 1% of total Class I Railroad carloads • Capacity expansion investments will be “Just in Time” • Possible temporary capacity issues caused by short term increases in demand • Unit train shipments where possible • Returns on all business will have to justify investments for railroads • Railroads will use price to ration capacity where necessary

  14. Future - Pricing • Constrained capacity will help railroads maintain pricing discipline • Railroads will keep pricing short term in order to participate in upside of any increases in price of petcoke • If prices of petcoke drop railroads will keep prices high enough to earn target rate of return • Fuel surcharges

  15. KEP LLC For Additional Information Contact: John Schmitter KEP LLC 16877 E Prentice Cir Centennial, CO 80015 303.862.4453 john@kepllc.com Thank you!

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