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Freight Rail Capacity, Funding, and PPP OverviewMay 19th, 2008

Chris BigonessManager Public Funding, Network Development

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Today’s Discussion Topics

Freight Rail OverviewImpending Transportation Capacity IssuesPublic-Private Partnerships in Freight Rail

Defined Areas of Opportunity and Challenge Example Projects

Conclusions

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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 costsTaxes and purchases that support tens of thousands

of jobsAvoided highway costs (maintenance and

construction)Fuel savings

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Railroads are Moving More Traffic Today Than Ever Before…

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Carloads Intermodal

U.S. Rail Traffic: % Change From Previous Year –

Q1-01 to Q3-07

Source: AAR Weekly Railroad Traffic

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…Putting Even More Pressure on Rail Infrastructure

Rail Networks System Miles and Volumes

5060708090

100110120130140150160170180190200210

1980 1985 1990 1995 2000 2005

Rail - RTM Rail - Track-miles

Source: National Rail Freight Infrastructure Capacity and Investment Study September 2007 and AAR

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Year

600

Gap to Maintain = $50 Billion per year

Gap to Maintain = $50 Billion per year (through 2015)

(through 2015)

Gap to Maintain = $50 Billion per year

Gap to Maintain = $50 Billion per year (through 2015)

(through 2015)

100

200

300

400

500

2006 2009 2012 2015 2018 2021 2024 2027 2030

Yea

r-o

f-E

xp

end

itu

re D

oll

ars

(in

Bil

lio

ns)

Gap to Improve = $107 Billion per year

Gap to Improve = $107 Billion per year (through 2015)

(through 2015)

Gap to Improve = $107 Billion per year

Gap to Improve = $107 Billion per year (through 2015)

(through 2015)Revenue

Cost toMaintain

Cost toImprove

Source: U.S. Chamber of Commerce

National funding gap

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1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Transportation Inventory &Admin.

2%

4%

6%

8%

10%

12%

14%

16%

18%

1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

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?What is the cost to the supply chain?

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Future Demand for Freight Transportation Will Grow

0 10 20 30 40

2035p

2002

Source: 2006 U.S. DOT projection

Billions of Tons of Freight Transported in the U.S.

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Why we need more rail

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Industry Capital Expenditures as a Percent of Revenue - 1995-2004

3%

3%

3%

3%

3%

4%

4%

4%

5%

5%

5%

5%

12%

18%

Food Mfg

Transp Eqpt

Machinery Mfg

Wood Prod

Petro/Coal Prod

All Mfg Avg

Fabr Metal

Chem Mfg

Plastic/Rubber

Paper

Computer/Elec

NonMetal Minl

Elec Utilities

Class 1 RR

Capital Investment Rates Comparison

Note: Utilities based on 1999-2004Source: U.S. Bureau of the Census, AAR, EEI

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$8.4

$6.4$6.2$5.9$5.7

$5.4

$6.1$6.6

$7.2

$6.3$6.1

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Railroad industry capital expenditures

$ Billions

Source: AAR

Rate of Return on Net Investment9.4%

7.6%7% 6.9% 6.5% 6.8% 7%

6.3% 6.1%

8.5%

10.2%

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

Program Maintenance Expansion Mechanical & Other Locomotive

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

$2,670ROIC$2,550

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The capital investment reality

ROI

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

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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

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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

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Will the investment be enough?

Total Needed Sources of Capital

$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

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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

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Public Private Partnerships

RAILRAIL

Franchise Franchise

CapacityCapacity

SponsorSponsor

ROICROIC

ResourcesResources

TimingTiming

PUBLIC SECTORPUBLIC SECTOR

MandateMandate

BenefitBenefit

SponsorSponsor

FundingFunding

ProcessProcess

TimingTiming

Success Requires Aligning Private and Public Objectives

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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

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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 landMandatory passenger accessRequired use of “green” locomotivesRailroad-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

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Various Forms / Various Public Goals

- Southern CA RegionalRail 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

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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 millionPublic 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

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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 crossingsReduced idling car and truck emissions by 54 percent

Cut locomotive emissions by 28 percentReduction in train noise and elimination of horn noise in corridor areaIncreased efficiency of cargo distribution networkImproved Metrolink commuter travel time at Redondo Junction

Alameda Corridor

Alameda Corridor

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What Benefits Does the Public Receive From Freight Rail?

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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