Private Sector Capital and Rail Infrastructure

1
Private Sector Capitaland Rail Infrastructure

• American Association of State Highway and
  Transportation Officials
• Standing Committee on Rail Transportation
• Coeur dAlene, Idaho
• August 30, 2005

2
Industry Infrastructure Usage
Thousand Revenue Ton Miles / Miles of Road
Revenue Ton Miles (Billions)
Revenue Ton Miles
Revenue Ton Miles / Miles of Road
Source AAR
3
Uses of Railroad Capital

• Replacement / renewal of facilities and equipment
• Capacity expansions
• Other purposes
• - (Safety initiatives, Environmental, Training,
  Regulatory and statutory requirements,
  Contractual obligations)
• Usually constitutes 18 - 20 of annual revenue

4
Categories of Railroad Capital Spending

• Infrastructure renewal
• Infrastructure capacity expansion
• Locomotives
• Freight equipment and freight handling equipment
• Information and control systems
• Other

5
Capital Spending TrendsCash Capital Capital
Leases in Millions
Total Cash Capital Spending Since 1997 17.053
Billion
2,100
2,048
2,044
1,940
1,876
1,820
1,780
1,750
1,696
1997
1998
1999
2000
2004
2001
2002
2003
2005 Est
Infrastructure Renewal
Freight Cars Other
Locomotives
6
Capital Equipment LeasingDollars in Millions
Total Capital Input to Firm Since 2001 11.828
Billion
Cash Capital Capital Leases
Long-Term Flexible Operating Leases
2,100
1,940
1,876
1,820
1,696
700
539
526
500
131
7
Constituencies and Their Objectives

• Shareholders
• - Cash flow, Growth
• Customers
• - Service, Market price, Long term commitment
• Employees
• - Safety, Employment and benefit security
• Public
• - Public safety, Livability, Conflict
  minimization, Taxability, Economic development

8
Capital Objectives

• Spend where returns are highest / longest run
• Adapt plant and equipment to market changes
• Renew / reconfigure plant and equipment to
  minimize ongoing operating cost
• Build new facilities / add new equipment to
  address business opportunities

9
Sources of Capital

• Depreciation
• Cash flow from ongoing operations
• Capital leasing
• Equity issues
• Borrowing
• External sources
• - Customers, Public entities, etc.

10
Annual Capital Process Demand Side

• Develop project lists
• - Engineering, Operations, Marketing, Systems,
  Equipment
• Develop economics of projects
• - Benefit analysis, Cash flow analysis, Multiple
  reviews by working teams, Multiple executive
  reviews
• Identify links between -
• - Capital and operating expense, Capital and
  revenue opportunities
• Develop priority listings of projects
• - By regions, By departments, For entire company

11
Annual Capital Process Supply Side

• Develop preliminary estimate of available capital
• Identify and quantify constraints on capital
• - Debt / equity ratios, Capital and cash
  coverage ratios, Bank / debt covenants, Stock
  market impacts, Cash flow goals
• Quantify capital / revenue / cost linkages
• Produce portfolio of potential capital spending
  plans and their related operating plans

12
Annual Capital Process Action Plan

• Determine list of prioritized projects fitting
  available spending limits
• Finalize linkages with revenue / cost plans
• Resolve conflicts
• Executive review and approval
• Board review and approval

13
Post Capital Plan Approval Reviews

• Detailed project work-up
• - Economics, Continued necessity, Timing,
  Financing options
• Review and approval of specific projects
• - Executive sponsors, Board (if required)
• Quarterly review of ongoing projects
• - Costs / economics, Project changes, Changed
  project environment
• Post completion audit of project results
• - Usually three to five years after project is
  implemented