Ed McKechnie

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Ed McKechnie Comments to AASHTO SCORT 2005
Conference www.watcocompanies.com
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Watco CompaniesA Customer Relationship Company

• Welcome to Idaho
• Watco has about 60 of the shortline miles in
  Idaho and about 80 of shortline traffic.
• We expect network to continue to grow.
• Pacific Northwest Network of three shortlines and
  800 track miles
• Watco nationwide
• 16 shortlines in 16 states, 3,431 track miles
• Mechanical shops, and industrial switching

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Watco Companies A Customer Relationship Company

• Guiding Principles
• Improved Customer Satisfaction
• Improved Profitability Return on Assets
• Long-term Vision

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Watco Companies The Strategic Business Model
Watco Services Railroads Mechanical Switching
Class Is
Customer
Shortlines
Other Customers
Gov. Eco. Devo.
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Watco Companies A Customer Relationship Company

• Section 45g tax credit
• Work with NIT-League
• Future of shortline railroads

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Watco Companies Section 45g Tax Credit

• Section 45g tax credit
• Passed by Congress in fall of 2004
• Still no IRS regulations
• Provides 50 tax credit up to 3,500 per mile on
  rehabilitation and repair
• Can carry-forward for 20-years
• Has ability to be used by shippers and suppliers

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Watco Companies Section 45g Tax Credit

• How did it get passed?
• 267 co-sponsors
• Support of NIT-League
• Shipper Support Group SOS
• 25 of carload traffic O/Ts on a shortline
• SCORT, DOTs, communities
• The Bottom Line report was critical

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Watco Companies Section 45g Tax Credit

• Currently
• Rehabilitation projects are underway
• Need to measure these projects and demonstrate
  value
• ASLRRA is cataloguing these projects to tell the
  story

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Watco Companies Section 45g Tax Credit

• Future
• Reauthorization is No. 1 ASLRAA priority
• Demonstrating to key Congressmen and Senators the
  value
• Site visits
• Customer value

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Watco Companies Section 45g Tax Credit

• Future
• Railroad Day on the Hill 2006
• Major push will be 2007 Legislative session with
  a new Congress.

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Watco Companies Section 45g Tax Credit

• Why the need to reauthorize?
• Tax credit represents 500 million invest over
  three years is fully utilized
• Shortline industry has 1.5 billion in track
  needs and growing
• Does not count impending rail car shortage

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Watco Companies Work with NIT-League

• Work with NIT-League
• Customers are key to railroads success
• This summer NIT-League, AAR and ASLRRA formed
  three working groups
• Last Mile/First Mile
• Capacity and Asset Utilization
• Alternative Dispute Resolution

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Watco Companies Work with NIT-League

• Potential outcomes
• Shortline model
• Alternative Dispute Resolution
• Capacity bill that can replace S919

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Watco Companies Future of shortline railroads

• Gathering and distribution model must change
• Class I railroads will not have sufficient
  capital to meet volume demands
• Excess capacity leads to better and cheaper
  service
• Constrained capacity leads to interrupted service
  and higher pricing

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Watco Companies Future of shortline railroads

• Class Is must continue outsourcing secondary,
  non-core assets to be able to invest in core
  railroad
• Switching and local Gathering and Distribution
  will continue to be outsourced

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Watco Companies Future of shortline railroads

• States need to encourage outsourcing
• Customers experience greater satisfaction with
  shortlines
• States need to encourage creation of regional
  500-1,000 rail networks
• Intra-state capacity
• Alternative to trucks

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Watco Companies Future of shortline railroads

• Federal public policy needs to move away from
  bills by S919 and towards investments by Section
  45g
• Removal of paper barriers will curtail
  outsourcing

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Watco Companies Future of shortline railroads

• States can and should play a role in developing
  rail networks
• Educate highway side of department of the role
  rail can play in stretching limited
  transportation dollars
• State Rail plans should encourage regional
  networks

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Watco Companies Future of shortline railroads

• Freight rail demands are expected to double in
  next 18 years.
• Current capacity and capital restrictions will
  only meet ½ of that need.
• What will be left out will be the carload
  network.

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Watco Companies Future of shortline railroads

• SCORT, ASLRRA, AAR and others need to begin
  working today on next transportation bill
• In 2005 bill
• 566 million earmarked for bike paths and
  sidewalks
• 33.5 million earmarked for rail-like projects
• Committee staff worked hard to eliminate all rail
  funding
• Next transportation bill we should seek 500
  million in freight rail improvements

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Contact
Ed McKechnie EVP Strategic Development Chief
Commercial Officer Pittsburg, KS (620)
231-2230