The document summarizes the state of the US rail transportation industry as presented to a petcoke conference in 2008. It notes that overall railroad volumes and rail coke volumes are down in 2008 compared to 2007. It also discusses railroad profits hitting record levels, rail stocks performing well, pressure from investors to improve returns, challenges around capacity constraints, potential legislative changes, and the future outlook around capacity expansion and pricing.

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
KEP LLC
Economic and Management Consulting

2. Agenda
• Volume
• Service
• Financials
• Regulation
• Pending Legislation
• Future
– Capacity
– Pricing
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3. Overall Railroad Volumes are Down
Railroad Unit Volume
17,500,000 14,000,000
• Carload and intermodal unit
17,400,000 12,000,000 volume dropped in 2007
17,300,000
Intermodal Units
10,000,000
17,200,000
Carloads
8,000,000
17,100,000
17,000,000
6,000,000 • 2008 YTD Carload volume up
16,900,000
4,000,000
2,000,000
1.1% from 2007
16,800,000
16,700,000 -
2001 2002 2003 2004 2005 2006 2007
Source: AAR Carloads Originated Intermodal Units Originated • 2008 YTD intermodal unit
volume down 3.2% vs. 2007
Railroad Unit Volumes
YTD Through May 24, 2008
8,000,000
6,768,156 6,839,694
• Grain, coal, chemicals,
7,000,000
6,000,000
metallic ores driving volume
2007 2008
5,000,000
4,785,303 4,633,948
in 2008
4,000,000
2007 2008
3,000,000
2,000,000
• Declines in forest products,
1,000,000 construction, automotive
-
Carloads Originated Intermodal Units Originated
and...
Source: AAR
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4. Rail Coke Volumes Are Down Significantly in 2008
Railroad Unit Volumes of Coke
YTD Through May 24, 2008 • Rail coke volume down 33%
140,000
YTD 2008 vs. 2007
117,887
120,000
100,000
2007
80,000
78,360 • 2007 was down 4.5% vs.
60,000
2008 2006
40,000
20,000
-
Carloads of Coke Originated
Source: AAR
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5. KEP LLC
Hours MPH
Economic and Management Consulting
5/ 5/
25 25
/2 /2
Source: AAR
Source: AAR
00 00
0
5
10
15
20
25
30
0
5
10
15
20
25
30
7 7
6/ 6/
25 25
/2 /2
00 00
7 7
7/ 7/
25 25
/2 /2
00 00
7 7
8/ 8/
25 25
/2 /2
00 00
7 7
9/ 9/
25 25
/2 /2
00 00
7 7
10 10
/2 /2
BNSF
BNSF
5/ 5/
20 20
07 07
11 11
/2 /2
5/ 5/
20 20
CSX
CSX
07 07
12 12
/2 /2
5/ 5/
20 20
07 07
NS
Train Speed - Manifest Trains
NS
System AverageTerminal Dwell Time
1/ 1/
25 25
/2 /2
00 00
8 8
UP
UP
2/ 2/
Service is Holding Up
25 25
/2 /2
00 00
8 8
3/ 3/
25 25
/2 /2
00 00
8 8
4/ 4/
25 25
/2 /2
00 00
8 8
5

6. Service is Holding Up
Railroad Performance Cars on Line
350,000
300,000
Cars on Line
250,000
200,000
150,000
100,000
50,000
0
5/25/2007
6/25/2007
7/25/2007
8/25/2007
9/25/2007
10/25/2007
11/25/2007
12/25/2007
1/25/2008
2/25/2008
3/25/2008
4/25/2008
Source: AAR BNSF CSX NS UP
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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
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8. Rail Stocks Are Doing Great
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9. Wall Street Pushing Hard on Class I Railroads to Improve Returns
Single railroad access at Limited Capacity to Grow
most plants and customers Volume without Cap Ex.
Higher Prices and
Selective de-marketing Industry Not Earning
Cost of Capital
Investors Pushing for higher Earnings
Growth
If current management won’t push yield, Wall Street will find someone who will
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10. Despite Being Monopolies or Duopolies Only 3 of 7 US Class I
Railroads Are “Revenue Adequate” as Calculated by STB
US Class I Railroads 2006 Return on Investment
16.00% 14.36%
14.00%
Industry Cost of Capital 9.94%
11.60%
12.00% 11.43%
STB 2006 ROI
10.00% 9.31% 9.47%
8.15% 8.21%
8.00%
6.00%
4.00%
2.00%
0.00%
BNSF CSX KCS NS UP GTC (CN - SOO (CP -
Source: Surface Trans portation Board
US) US)
• 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
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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
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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
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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
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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
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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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