0

Texas TransportationForum

Freight Break-Out Session

A Rail Perspective

July 19, 2007

BNSF Railway

Nate AsplundDirector Public Private Partnerships

1

Discussion Topics

Introduction Benefits of Rail Growth will Continue Rail Capacity Drivers Capital Investment Options to Increase Capacity Take Away’s and Questions

2

32,000 route miles in 28 states and two provinces Moves one-fourth of the nation’s rail freight $2.5+ billion in annual capital investment (2007) Total employment 40,000

$3,933$1,772

$2,277

$2,448$312

BNSF Profile

AgriculturalProducts

17%

20%

25%

39%Coal

IndustrialProducts

ConsumerProducts

Traffic Mix –2006

3

BNSF Operations in Texas

7,300 employees, including corporate headquarters

17 rail yards

5 intermodal hubs

2,484 miles of track

2,471 miles of trackage rights

Over 700K Carloads Originated

Over 1 Million Carloads Terminated

Major Markets: Gulf Region, Dallas-Ft Worth, Mexico

4

Source: AAR

0

50

100

150

200

250

300

1964 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005

Revenue

Volume

Productivity

Price

Staggers Act Passed Oct. 1980

Index 1981=100

U.S. Freight RailroadPerformance Since Staggers

5

Benefits of Freight Rail

RailRail // TrucksTrucks

Sources: FMCSA & FRA / DOT & DOE / U of Iowa & DOT / Texas Transportation Institute & Transportation Research Board

0

2

4

6

8

10

12

14

Gall

on

s/1,0

00 t

on

-mil

es

1997 1998 1999 2000 2001 2002 2003

Fuel Consumption

HighwayHighway congestion congestioncaused by rail is minimalcaused by rail is minimal

0

500

1,000

1,500

2,000

2,500

Fa

tali

ties

/Tri

llio

n T

on

Mil

es

1997 1998 1999 2000 2001 2002 2003

Safety

$0

$1

$2

$3

Do

lla

rs/T

ho

usa

nd

To

n M

iles

1997 1998 1999 2000 2001 2002 2003

Congestion

0

1

2

3

4

5

Ratio

SO2 VOC PM10 NOx CO2

Ratio of EmissionsRatio of Emissionsper ton-mileper ton-mile

(2003)(2003)

Emissions

6

What is driving rail demand?

DriverShortage

AgriculturalTrade Growth

HighwayCongestion

TranspacificTrade

Fuel

CoalProduction

Capacity Investments

Growth

7

Major Freight Growth Projected(Domestic Tons All Modes)

90%

100%

110%

120%

130%

140%

150%

160%

2005 2010 2015 2020 2025

ATA DOT

AASHTO*

All figures indexed with each source’s 2005 traffic levels equal to 100 percent*AASHTO: American Association of State Highway and Transportation Officials

8

BNSF Capacity Drivers

People Locomotives

Track &Terminals

Equipment

Hiring3,600 in 200715,872 since2001

Increasing fleet150 in 20071,052 since 2001

New4,600 in 200721,037 since 2001

Expansion$.76 Billion in 2007$1.5 Billion since 2001

9

Excess Class I RailCapacity Has Been Consumed

0%

50%

100%

150%

200%

250%

300%

350%

1980 1984 1988 1992 1996 2000 2004

Class I Rail ton-miles haveClass I Rail ton-miles haveincreased dramatically withoutincreased dramatically without

growth in track milesgrowth in track miles

Source: Dept. of Transportation, National Transportation Statistics

Ton Miles perMile of Track

Ton Miles

Track Miles

10

What Customers Are Saying About Rail Capacity

“…the country does not need railroad capacity to grow at thesame pace as the growth of the economy or transportationgenerally: it needs to grow faster…the railroads’ share ofintercity freight has to grow.” – The National IndustrialTransportation League

“UPS recognizes the capital intensive nature of the railindustry and have witnessed the equity markets’ punishmentof railroads that aggressively invest in theirinfrastructure…public policy initiatives addressinginfrastructure improvements, adding capacity, improving railservice, and enhancing technology should be promoted.”– UPS

11

What Others Are Saying About Rail Capacity

“Railroads are not investing enough to meet rising demandfor their services. If they cannot keep pace, the result couldbe higher costs…demand that the railroads cannot satisfy ismost likely handled by trucks...”

“Building new track is costly…investing in it subjectsrailroads to the risk that demand will shift to other locationsand that the investment will not yield an adequate return.”

“Current user-tax policies appear to tilt the playing field infavor of trucking and water carrier industries…In contrast, therailroads pay for their rights-of-way and infrastructure andoften must pay local taxes on those investments as well.”

Congressional Budget Office Report:“Freight Rail Transportation” Long-Term Issues (Jan. 2006)

Continued . . .

12

What Others Are Saying About Rail Capacity

• AASHTO concludes that freight railroad investment must growsharply over the next 20 years just to maintain the current railshare of freight traffic.

• AASHTO, the Transportation Research Board, and others reportthat freight railroads are unlikely to be able to make thenecessary investments on their own.

• “Relatively small public investments in the nation’s freightrailroads can be leveraged into relatively large benefits for thenation’s highway infrastructure, highway users, and freightshippers.” -AASHTO

13

Railroading is extremely capital intensivecompared to other industries

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Sources: Census Bureau, AAR

Class I RRs

Avg. AllMfg.

Food

Petrol. &CoalProd.

Capital Expenditures as % of Revenue: Avg. 1995–2004

Computers

WoodProd.

Transp.Equip.

ChemicalsPaperNonmet.Minerals

Plastics

RRs is 5x the average of US manufacturing

14

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 F

Program Maintenance Expansion Mechanical Other Locomotive

Capital CommitmentsCapital Commitments with ROIC

$ Millions

$2,258

$2,520

$2,265

$1,763$1,608

$1,505$1,726

$1,988$2,179

$ Millions

ROIC

6.6% 6.6%

7.9%

10.1%9.5% 9.7% 9.4%

7.2%

8.8% $2,670 $2,650

11.4%

15

Class I Railroad Cash CapitalInvestment Increasing

$5.7 $5.9$6.2 $6.4

$8.5

2002 2003 2004 2005 2006

Year

Source: STB R-1 filings

Class I RR Cash Capital Expenditures(Billions)

16

Increasing Investment Still Insufficientto Meet Growing Demand

0

5

10

15

20

25

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Bil

lio

ns o

f D

oll

ars

Maintain same

share of freight

Meet AASHTO target to

increase share of freight

carried by rail

Actual Investment

AASHTO projected investment;

reduced rail share of freight

Based on averages of AASHTO estimates adjusted for inflationActual investment levels from STB R-1 filings (Class I railroads cash capital)

Investment needed to…

17

How Do We Expand Capacity FastEnough to Meet Demand?

Current model Continue the current market-based regulatory system that

is achieving the desired capacity-investment outcome As volume growth continues and railroad returns improve,

more expansion capital will be put in the networks Direct government investment

Non-market driven investments by government couldcause disinvestment by rail industry

Supplement current model with stimulus Not enough to make a bad investment occur, but enough

to pull investments forward sooner in their cycle

Increasing the annual industry expansion capital fromaround $2 billion to $4 billion would have a tremendousimpact on capacity

18

A Stimulus: Freight Rail InfrastructureCapacity Expansion Act (ITC)

Investment Tax Credit (S.1125). Sponsors: Kent Conrad (D-ND),Trent Lott (R-MS)

25% tax credit for capital investment in new freight railinfrastructure where none currently exists

Examples include: New or expanded track and support infrastructure

- Customer-owned yards, sidings and tracks- Transload facilities, docks and wharves- Railroad owned mainlines, sidings and yards- Expanded bridges and increased tunnel clearances- New technology-based expansion, including signaling dark territory

Locomotives that increase fleet horsepower Tax credit only Tier two emission standards

Credit available to any taxpayer making qualified investments

19

Expensing of Capital Expenditures

Bill would allow any taxpayer to expense investments inqualifying rail infrastructure

Trucks and barges currently expense taxes and feespaid to support public infrastructure

CBO confirms that these modal competitors pay lessthan the full cost of using such infrastructure and,unlike railroads, do not bear risk of shifting demand.

Proposal also moves toward modal tax equityProposal also moves toward modal tax equity

20

Public Private Partnerships

KANSAS CITY FLYOVERALAMEDA CORRIDOR

21

CREATE – Chicago Region Environmentaland Transportation Efficiency program

Partnership with 6 Class 1Railroads, local, regional andstate government

$1.5 billion in capitalimprovements

Project includes: 25 new roadway O/P, U/P 6 new rail O/P, U/P Extensive upgrade of track,

switches and signal system Public Benefits - Enhance

passenger rail service, reducemotorist delays, increasepublic safety, improve airquality and create jobs

Private Benefits – Efficient andfluid rail network

22

Public Private Partnerships

RAILRAIL

Franchise Franchise CapacityCapacitySponsorSponsor

ROICROICResourcesResources

TimingTiming

PUBLIC SECTORPUBLIC SECTOR

MandateMandateBenefitBenefit

SponsorSponsorFundingFundingProcessProcessTimingTiming

Success Requires Aligning Private and Public Objectives

23

PPPs must be voluntary on both sides

Public and private funding for rail projectsshould be commensurate with public andprivate benefits

Coordinated state and federal transportationplanning for prudent public investments inthe national rail network

PPP projects must not adversely impactfreight services or capacity

BNSF’s PPP Principles

24

PPPs require a fact-based planning approachthat:

Describes project scope;

Assesses impact on current freight traffic levelsand future traffic growth;

Provides a cost-benefit analyses on an after-taxrisk-adjusted basis; and

Identifies public funding sources, timing,processes and probability of obtaining funding tomeet the public’s timeliness objectives andachieve the public’s goals.

BNSF’s PPP Principles (continued)

25

Take Away’s: Public Investment Options for Goods Movement

Public Impact and Concern Congestion Air Quality Delays and Costs Energy Security Global Competitiveness

Tradition: Public Investment in Highway

Maintainability of current system

Cost of adding thousands of new lane milesby 2020

Metropolitan area right-of-way constraints Energy, environment & safety impacts

Alternative: Public Investment in Freight Rail

Private maintenance after construction

More economical footprint for freightgrowth

System leverage from fixing bottlenecks

Energy, environment & safety benefits

26

Take Away’s

Railways are investing significant capital intothe rail network

Increasing rail’s annual expansion capital wouldhave a tremendous impact on capacity

Investment incentives such as ITC and PPP canhelp create rail infrastructure expansion, withsignificant and sustained benefits to the USeconomy and consumers

27