Biomass 2008 Fueling our Future Conference Presentation.

1. Rail Transportation of Ethanol
Will There Be Enough Capacity?
Presentation to:
Biomass 2008 Fueling our Future Conference
Alexandria, VA
April 17, 2008
John Schmitter
KEP LLC
303.862.4453
john@kepllc.com
KEP LLC
Economic and Management Consulting

2. Agenda
• Background
• Recent Class I investments
• Projections
• What will the capacity cost ethanol shippers
• What could change the outlook
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3. About KEP LLC
• 30 years in transportation - rail, LTL, truckload,
intermodal, railcar management and maintenance
• KEP focus
– Supply chain strategy
– Rail and truck economics, operations
– Rail asset management
– Regulatory support
• Clients: chemicals, grain, energy, metals, investment
banks
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4. Demand for Rail Service Has Increased Dramatically in Recent
Years
Ton-Miles per mile of road owned have increased by 39% over 11 years
Class I Railroad Ton-Miles Per Mile of Road Owned
Millions
16
14
12
10
8
6
4
2
-
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Surface Transportation Board
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5. Railroad Competition
• Four major US Class I railroads
• Most points are served by one Class I railroad
• Class I are monopolies or duopolies in the markets
they serve
• All are operating at a high level of utilization
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6. Despite Being Monopolies or Duopolies Most Railroads Don’t Earn The
Industry Average Cost of Capital as Calculated by STB
US Class I Railroads 2005 Return on Investment
13.21%
14.00%
Industry Cost of Capital 12.20%
12.00%
10.32%
10.00%
8.89%
8.07%
8.00%
ROI
6.23% 6.34%
5.89%
6.00%
4.00%
2.00%
0.00%
BNSF CSX KCS NS UP GTC (CN - SOO (CP -
Source: Surface Transportation Board US) US)
Only NS was determined Revenue Adequate in 2005
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7. Wall Street is Pushing Hard on These Companies to Improve
Their Returns
Single railroad access at Limited Capacity to Grow
most plants and customers Volume without Cap Ex.
Higher Prices and
Selective de-marketing Industry Not Earning
Cost of Capital
Investors Pushing for higher Earnings
Growth
If current management won’t push yield, Wall Street will find someone who will
Tight Leash on Cap Ex
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8. Railroads are investing capital to expand capacity
• $9.4 billion total cap ex in 2007
• $8.6 billion total cap ex in 2006
• 2008
– BNSF $2.4 billion $600 million capacity expansion
– UP $3.1 billion $840 million capacity expansion
– NS $1.4 billion $339 million capacity expansion
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9. Future
• There will be enough capacity to handle the ethanol volume that
materializes
• Capacity expansion investments will be “Just in Time”
• Possible temporary capacity issues caused by short term
increases in demand
• Ethanol producers and terminals will be required to invest in unit
train capability...
• ... And track/railcar storage capability to absorb railroad service
inconsistencies
• Returns will have to justify investments for railroads
• Railroads will use price to ration capacity where necessary
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10. Pricing – What will the capacity cost?
• Market power, constrained capacity will help railroads
maintain pricing discipline
• Railroads will retain flexibility to change ethanol
transportation prices on short notice
• Fuel surcharges
• Pricing will favor unit train shipments
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11. What Would Change the Rail Capacity Outlook
• Poor ethanol industry profits
• Regulatory changes that
constrain RR pricing power
• S.1125/H.R.2116 Rail
Infrastructure Capacity
Expansion Act
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12. THANK YOU
KEP LLC
16877 E. Prentice Cr.
Centennial, CO 80015
303.862.4453
john@kepllc.com
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