1. 0 Freight Rail Capacity, Funding, and PPP Overview May 19 th, 2008 Chris Bigoness Manager Public Funding, Network Development

2. 1 Today’s Discussion Topics Freight Rail Overview Impending Transportation Capacity Issues Public-Private Partnerships in Freight Rail Defined Areas of Opportunity and Challenge Example Projects Conclusions

3. 2 Freight Railroads are Critical to the Economy Indispensable link connecting markets here and abroad – huge global competitive advantage Generate billions of dollars per year in: Savings in shipping costs Taxes and purchases that support tens of thousands of jobs Avoided highway costs (maintenance and construction) Fuel savings

4. 3 Railroads are Moving More Traffic Today Than Ever Before… Carloads Intermodal U.S. Rail Traffic: % Change From Previous Year – Q1-01 to Q3-07 Source: AAR Weekly Railroad Traffic

5. 4 …Putting Even More Pressure on Rail Infrastructure Source: National Rail Freight Infrastructure Capacity and Investment Study September 2007 and AAR

6. 5 Year 600 Gap to Maintain = $50 Billion per year (through 2015) 100 200 300 400 500 200620092012201520182021202420272030 Year-of-Expenditure Dollars (in Billions) Gap to Improve = $107 Billion per year (through 2015) Revenue Cost to Maintain Cost to Improve Source: U.S. Chamber of Commerce National funding gap

7. 6 Source: Annual State of Logistics Report, Council of Supply Chain Management Professionals Total Logistics Costs Transportation Costs Inventory / Admin. Costs Inventory and administrativ e costs increased 13% over 2005 Transportation costs increased 9.4% over 2005 U.S. Logistics Costs as a Percent of GDP Rail = 6.7% of U.S. Transportation Spend What is the cost to the supply chain?

8. 7 Future Demand for Freight Transportation Will Grow Source: 2006 U.S. DOT projection Billions of Tons of Freight Transported in the U.S.

9. 8 Why we need more rail

10. 9 Capital Investment Rates Comparison Note: Utilities based on 1999-2004 Source: U.S. Bureau of the Census, AAR, EEI

11. 10 Railroad industry capital expenditures $ Billions Source: AAR Rate of Return on Net Investment 9.4% 7.6% 7% 6.9% 6.5% 6.8% 7% 6.3% 6.1% 8.5% 10.2%

12. 11 Capital CommitmentsCapital Commitments vs. ROIC $ Millions $2,258 $2,520 $2,265 $1,763 $1,608 $1,505 $1,726 $1,988 $2,179 $ Millions $2,670 ROIC $2,550

13. 12 The capital investment reality ROIROI If ROI > cost of capital: Faster, more reliable service Sustainability Stronger physical plant; more and better equipment Capital spending expands If ROI < cost of capital: Lower capital spending Weaker physical plant, equipment Slower, less reliable service

14. 13 National Rail Freight Infrastructure and Capacity Investment Study National Surface Transportation Policy and Revenue Study Commission requested a study to determine: Future freight rail infrastructure costs What portion of these costs must be paid for with other-than- railroad funds Findings Demand for freight movement is steadily increasing Railroad infrastructure requirements will increase even if market share remains the same Industry will need $148 billion between 2007 and 2035 2007 dollars, does not include property acquisitions Railroads will be unable to fund all improvements necessary to take full advantage of their potential to move more goods by rail

15. 14 Why PPPs are Necessary Source: National Rail Freight Infrastructure Capacity and Investment Study, September 2007 Future Volumes Compared to Future Capacity in 2035 without Improvements

16. 15 Will the investment be enough? $135 B Growth Productivity Shortfall $70 B $26 B $39 B Class 1 capital investments needed to meet 2035 freight volume demand Source: National Rail Freight Infrastructure Capacity and Investment Study September 2007

17. 16 BNSF Principles of Public Private Partnerships Defined: Projects which combine freight rail business goals with diverse goals of local, state, and federal governments Why? Permits both parties to achieve their goals faster, better, cheaper Key Points Private contributions commensurate with private benefits, and public contributions commensurate with public benefits Voluntary Coordinated timing Supports BNSF ability to meet customer service requirements Allows BNSF to grow its rail freight business to meet demand BNSF funding competes with all other BNSF projects for capital

18. 17 Public Private PartnershipsRAILFranchiseCapacitySponsorROICResourcesTiming PUBLIC SECTOR MandateBenefitSponsorFundingProcessTiming Success Requires Aligning Private and Public Objectives

19. 18 PPP Areas of Opportunity Multimodal and NAFTA trade corridor development Intermodal projects resulting in reduced roadway congestion Relocation of freight services from urban cores Grade crossing improvements, closures, separations Air quality improvement projects designed to reduce automobile and truck congestion Commuter rail and intercity passenger rail projects Driven mainly by public policy Freight railroads typically do not contribute funding

20. 19 PPP Challenges A recurring freight rail PPP challenge is accepting conditions attached by government to project public money to address social equity issues: Mitigation on affected adjacent land Mandatory passenger access Required use of “green” locomotives Railroad-funded quiet zones The offer of public money for a project does not guarantee a railroad’s participation In many cases, railroads cannot accept public money if the requirements: Erase the capacity gains that the project was meant to provide in the first place Lower the project’s return to unacceptable levels to commit private capital in lieu of funding competing capacity projects

21. 20 Various Forms / Various Public Goals - Southern CA Regional Rail Authority - CalTrans - Amtrak - Sound Transit - Metra - Northstar  Alameda Corridor  Kansas City Flyovers  GenSet Locomotives  Grade Separations  CREATE  Heartland Corridor  Crescent Corridor  Rail Bypasses  Line Capacity  Critical Infrastructure  Facilities/Connectors State Grants/Bonds and FTA Grants & Appropriations Alternative Financing / Loan Guarantees Clean Air Funding Regional, State, Federal and Private Funding Project Public Involvement

22. 21 Examples of Freight Rail PPPs and Public Benefits Chicago Regional Environmental and Transportation Efficiency Funded by the freight railroads, Metra, Federal Government, Illinois, and the City of Chicago. SAFETEA-LU funding - $100 million Public benefits: $1.1 Billion related to air quality improvements $595 Million related to motorists, rail passengers, and safety CREATE Brighton Park Reduction in highway needs and construction costs will yield more than $10 Billion in savings for the nation over 20 years

23. 22 Examples of Freight Rail PPPs and Public Benefits 20 mile “express lane” for cargo containers moving inland from the Ports of Long Beach and Los Angeles opened 2002 Funded by BNSF and UP through a joint- powers authority bonding mechanism Shippers pay their portion through container fees Eliminated more than 200 at-grade crossings Reduced idling car and truck emissions by 54 percent Cut locomotive emissions by 28 percent Reduction in train noise and elimination of horn noise in corridor area Increased efficiency of cargo distribution network Improved Metrolink commuter travel time at Redondo Junction Alameda Corridor

24. 23 What Benefits Does the Public Receive From Freight Rail?

25. 24 Conclusions Demand for freight rail capacity will continue to grow Freight rail offers “public” benefits to non-users Successful projects require public involvement – To meet public goals Goods movement Social/environmental To expand capacity to support economy To ensure freight rail can meet customers’ needs “Partnering” produces benefits for users, non-users