1. Rail Renaissance: Returns, Capital & Capacity AB HATCH abh18@mindspring.comabh18@mindspring.com The Transportation Conference Toronto September 2008 ::

2. Railroads at historic tipping point The Railroad Renaissance is here – will it last? Capacity issues across all modes Volume increasing – right? Share, rates, service levels (yes) – and returns increasing But pushback (shipper/regulator/union) also increasing! A secular, not a cyclical story – right? Capacity and infrastructure – and competitor - issues remain Fully reflected in the market? Or is this just another cyclical slowdown? NET/NET- The industry is poised to go up – or down – based on decisions made here & now

3. Railroad Performance Class I Railroads Index 1981 = 100 Source: Railroad Facts, AAR (Based on a design by R. Gallamore) Productivity Volume Revenue Price

4. Street influence on RRs – and Why that affects ALL stakeholders Battle for cash Managements reactions to pressures Investors, competitors, regulators, politicians, labor – oh, yes, and customers Short term decisions/long term consequences Which bucket will they place their chips?

5. Show Me the Money Share Price is the Indicator – over time! Cash (Flow) is King High ROIC = High Stock Price And Vice Versa Key is the phrase through a cycle Old Model: Disinvestment New Model: TBD (But CP gives us a clue)

6. Simple Math Rates Returns Capital Expenditures Capacity Service ARE ALL CONNECTED! Virtuous Circle (03-07) or Disinvestment?

7. Sources of capital FCF – booming at most carriers (capex vs. ROIC) Governments – states, PAs, Feds, PPPs Governments – Canada as contrast Traditional Street sources & Banks Institutional investors Hedge funds Private Equity/Infrastructure Funds (still?)

8. New Sources of Capital – Threat or Opportunity? Fortress-RailAmerica/FEC (etc) Infrastructure Funds (Toll Roads) Hedge Funds & Activists (TCI) PPPs – Heartland, Natl Gateway, CREATE Share repos C-1 Buyouts (DM&E) JVs – Meridian, Patriot corridors

9. Threats to the Renaissance Cyclical vs. secular argument New Congress –impacting labor & shippers Mandated Reviews – STB, Canada Rereg – the MAD answer Execution: service Execution: merger Hedge funds? Liquidity?

10. Railroad Daily Stock Prices January 2, 2008 through September 16, 2008 Index Jan 2, 2008 = 100 Sources: Yahoo Finance (adjusted for dividends and splits)

11. Railroad Daily Stock Prices September 2, 2008 through September 16, 2008 Index Sept. 2, 2008 = 100 Source: Yahoo Finance (adjusted for dividends and splits)

12. S&P 500 and Railroads Monthly Data January 1980 – April 2007 Index Jan. 1980 = 100 Sources: MSN and CSI, Inc.

13. Railroad Return on Equity Class I Railroads Source: Railroad Facts, AAR n.m. n.m. = not meaningful (negative value)

14. RR CoC vs. ROIC – RR Stocks have done well but… they still trade at a discount to all stocks Source: Surface Transportation Board, 2007p based on AAR filing and Railroad Schedule 250s Note: Cost of equity estimation method changed by Board effective 2006.

15. Railroad Intermodal Revenue Growth Over 5% - Long Live the New King! - Source: Carload Waybill Statistics (includes non-Class I railroads) Coal Intermodal

16. *Data for BNSF, CSX, KCS, NS, and UP Source: Railroad financial reports Intermodal and Coal as a % of Revenue* Intermodal is the Top Source of U.S. Freight Rail Revenue

17. U.S. Railroad Intermodal Traffic (millions) Source: Association of American Railroads Weekly Railroad Traffic

18. U.S. Railroad Intermodal Traffic Trailers vs. Containers (millions) Source: Association of American Railroads Railroad Facts

19. Intermodal Growth Drivers Domestic and International Globalization Trade Railroad Cost Advantages Share Recovery From Highway Truckload Issues

20. Future Demand for Freight Transportation Will Continue to Grow p – U.S. DOT projection Billions of Tons of Freight Transported in the U.S.

21. Intermodals Enduring Questions Lots of moving parts The improved ROIC of RR Intermodal 03-06 is the essence of the Railroad Renaissance Long term volume growth rate of 5-7% Long term pricing growth rate 3-4% True International drives the train Will True Domestic join the party?

22. Truckload Issues TL surplus – perfect (ugh) storm in the short term Driver shortages – permanent? Tight capacity – a secular issue Q4/Q1 capacity and rates a temporary/cyclical issue (isnt it??) Transload increase to absorb some capacity? Stubbornly high fuel prices – growing price gap to intermodal Insurance costs Traffic congestion Net: better switch than fight?

23. Coal and Ag – Bulk Comeback New growth mode? Emissions and environmental issues Oil prices and coal Politics and coal; and grain/rereg Ethanol Exports Feed

24. New operating plans Cooperative alliances Working with customers Technology Massive equipment and infrastructure investment Additional employees What Are Railroads Doing to Increase Capacity?

25. Total Class I Employment: Jan. 2001-Mar. 2008 Rail Employment is Up for the First Time in Decades Source: Surface Transportation Board

26. Railroad Capital Expenditures Class I Railroads – and so far 2008 looks to be a paradigm shift! Billions Source: Railroad Facts, AAR

27. RRs and Investment Is growth affordable? Capex up 10% in 07? One rail cuts, 2 increase capex during 07 What will 2008 look like? (long term growth v short term weakness) Is additional capacity necessary? Desirable? Can the intermodal model extend to carload? Wall Streets constrictive role (fighting the last war) – is it changing? Is this disconnect between the Renaissance and the Street the opportunity of a lifetime?

28. % Growth in Trains Per Day From 2005 to 2035 by Primary Rail Corridor

29. Future Corridor Volumes Compared to Current Corridor Capacity 2035 without improvements Below capacity Near capacity At capacity Above capacity

30. Future Train Volumes Compared to Future Train Capacity 2035 with improvements Below capacity Near capacity At capacity Above capacity

31. Source: Association of American Railroads Net Income Capital Spending Class I Railroad Capital Spending vs. Net Income (Current Dollars)

32. 25% tax credit for projects that expand rail capacity Expense other infrastructure capital expenditures Leverage private investment Tax Incentives to Leverage Capacity Expansion

33. Railroad Rates- the old story Class I Railroads, Revenue Per Ton-Mile – another (related) New Paradigm Cents Source: Railroad Facts, AAR Current $: Down 1% since 1980 Constant $: Down 54% since 1980

34. Railroad Employee Productivity Class I Railroads, Ton-Miles Per Freight Service Employee Source: Railroad Facts, AAR Millions

35. Rail Service Cycles Is the recent improvement in the metrics sustainable? Systemic? Is it a product of huge capex injection and IT? Or, is it merely a product of lower volumes/less stress on the network…

36. Rail Regulatory Risk Biggest Uncertainty Entering 08 Safety Bill Competition Bill (M-A-D) Cost of Capital Revision Mandated STB, CTA Reviews AAR/RAC/ASLRRA have great D but hard to score on defense