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Update on U.S. Rail Transportation Trends and Financials Presented at McCloskey Petcoke Conference 2008

This presentation by John Schmitter at the McCloskey Petcoke Conference in Houston provides a comprehensive update on U.S. rail transportation, focusing on trends in volume, service, financial performance, regulation, and future challenges. Key points include a decline in railroad volumes, significant drops in rail coke volumes, and record profits for major rail companies. The presentation outlines current legislation impacting railroads and highlights future capacity and pricing strategies as railroads navigate market fluctuations. For further details, contact John Schmitter at KEP LLC.

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Update on U.S. Rail Transportation Trends and Financials Presented at McCloskey Petcoke Conference 2008

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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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