1. Renaissance: Rails, Returns, Capital & Capacity Anthony B. Hatch – abh consulting 155 W68th Street NYC 10023 (212) 595-0457 ABH18@mindspring.com:: Indiana Logistics Summit November 14, 2006

2. Railroads at historic tipping point Capacity issues across all modes Capacity issues across all modes Volume increasing Volume increasing Share increasing Share increasing Rates increasing Rates increasing Services levels (yes) increasing Services levels (yes) increasing Returns increasing Returns increasing A secular, not a cyclical story A secular, not a cyclical story Capacity and infrastructure – and competitor - issues remain Capacity and infrastructure – and competitor - issues remain Not fully reflected in the market? Not fully reflected in the market?

3. Show Me the Money Share Price is the Indicator – over time! Share Price is the Indicator – over time! Cash (Flow) is King Cash (Flow) is King High ROIC = High Stock Price High ROIC = High Stock Price And Vice Versa And Vice Versa Key is the phrase “through a cycle” Key is the phrase “through a cycle” Old Model: Disinvestment Old Model: Disinvestment New Model: TBD New Model: TBD

4. Spending $: Mgmt.’s #1 Decision Capex for Maintenance – “base” Capex for Maintenance – “base” Capex for Capacity, Service & Growth Capex for Capacity, Service & Growth Dividends Dividends Share Buybacks Share Buybacks M&A – Strategic M&A – Strategic M&A – Non-strategic (conglomeracy) M&A – Non-strategic (conglomeracy) How management allocates indicates confidence & direction and impacts all stakeholders How management allocates indicates confidence & direction and impacts all stakeholders

5. Virtuous Circle 2006 Better returns (half finally earn returns equal to the cost of capital) Better returns (half finally earn returns equal to the cost of capital) Better stock prices Better stock prices Better revenue prospects – up double digit ’04-05 Better revenue prospects – up double digit ’04-05 Equals more investment – capex up sharply Equals more investment – capex up sharply Equals more capacity, better service Equals more capacity, better service …equals better returns and growth…. …equals better returns and growth….

6. Railroad Stock Prices January 2001 – October 2006 Index Jan 2001 = 100 Sources: MSN and CSI, Inc.

7. S&P 500 and Railroads Monthly Data January 1980 – October 2006 Index Jan. 1980 = 100 Sources: MSN and CSI, Inc.

8. *BNSF, CSX, NS, and UP Source: Business Week Even With Booming Traffic, Rail Earnings Are Substandard Median Return on Equity in 2005 (S&P 500 companies)

9. RR CoC vs. ROIC -stocks have done well but… they still trade at a discount to all stocks Source: Surface Transportation Board Cost of Capital Return on Investment

10. Railroad Capital Expenditures Class I Railroads Billions Source: Railroad Facts, AAR e

11. Capital Expenditures as % of Revenue Source: Census Bureau, EEI, AAR Food – 2.6% Transportation equipment – 2.8% Petroleum & coal products – 3.0% Wood products – 3.0% Average all manufacturing – 3.5% Chemicals – 4.4% Nonmetallic mineral prod. – 5.4% Paper – 4.7% Fabricated metal products – 3.5% Electric utilities – 11.6% Class I RRs – 17.8%

12. Railroad Performance Class I Railroads Index 1981 = 100 Source: Railroad Facts, AAR Productivity Volume Revenue Price

13. Railroads and the Economy Class I Railroads Index 1980 = 100 Sources: Federal Reserve System and AAR

14. Railroads and the Economy Class I Railroads Index 1980 = 100 Sources: Federal Reserve System and AAR

15. Railroads and the Economy U.S. Railroads Index 1980 = 100 Sources: Federal Reserve System and AAR

16. Railroad Intermodal Revenue Growth Over 5% - Long Live the New King! - Source: Carload Waybill Statistics (includes non-Class I railroads) Coal Intermodal

17. Intermodal Growth Drivers Domestic and International Globalization Globalization Trade Trade Railroad Cost Advantages Railroad Cost Advantages Share Recovery From Highway Share Recovery From Highway Truckload Issues Truckload Issues

18. Serious U.S. Transportation and Congestion Problems High Cost of Highway Maintenance and Construction High Cost of Highway Maintenance and Construction Interdependence of Modes Interdependence of Modes $67 billion per Year Drag on Economy $67 billion per Year Drag on Economy Demand for Freight Transportation to Double by 2020 Demand for Freight Transportation to Double by 2020

19. Coal and Ag – Bulk Comeback New growth mode? New growth mode? Emissions and environmental issues Emissions and environmental issues Oil prices and coal Oil prices and coal Politics and coal; and grain/rereg Politics and coal; and grain/rereg Ethanol Ethanol Exports Exports Feed Feed

20. Major Sources of Railroad Revenue Class I Railroads, 2005 Gross Freight Revenue in billions Source: AAR *Estimated. Some intermodal revenue is also included in individual commodities. Coal - $9.4 Chemicals - $5.4 Transportation equipment - $4.0 Farm products - $3.6 Food - $3.3 Lumber & wood - $2.3 Pulp & paper - $2.0 Primary metal products - $1.7 Stone, clay & glass products - $1.5 Nonmetallic minerals - $1.3 Intermodal* - $10.1

21. Railroad Rates- the old story Class I Railroads, Revenue Per Ton-Mile Cents Source: Railroad Facts, AAR Current $: Down 9% since 1980 Constant $: Down 56% since 1980

22. Pricing - the new paradigm Rates up 3% in ’04 – post-Staggers best Rates up 3% in ’04 – post-Staggers best Up 11% in ’05 (Secular rate of 2-3%?) Up 11% in ’05 (Secular rate of 2-3%?) Fuel surcharges similar to TL Fuel surcharges similar to TL Yet Price Gap to the highway widening, even in ’05 and ’06 YTD Yet Price Gap to the highway widening, even in ’05 and ’06 YTD Capacity (still) short across all freight modes, despite temporary surpluses Capacity (still) short across all freight modes, despite temporary surpluses Rails moving toward tariff and spot markets Rails moving toward tariff and spot markets Conclusion: Best Ever Rate Environment “The new Golden era” – cost of capital within sight; not there yet

23. RRs and Investment Is growth affordable? Capex up 10% in ’07? Is growth affordable? Capex up 10% in ’07? Can the intermodal model extend to carload? Can the intermodal model extend to carload? Is additional capacity necessary? Desirable? Is additional capacity necessary? Desirable? Wall Street’s constrictive role (“fighting the last war”) – changing? Wall Street’s constrictive role (“fighting the last war”) – changing? Is this disconnect between the Renaissance and the Street the opportunity of a lifetime? Is this disconnect between the Renaissance and the Street the opportunity of a lifetime?

24. Sources of capital FCF – booming at most carriers (capex vs. ROIC) FCF – booming at most carriers (capex vs. ROIC) Governments – states, PAs, Feds Governments – states, PAs, Feds Governments – Canada as contrast Governments – Canada as contrast Traditional Street sources & Banks Traditional Street sources & Banks Private Equity Private Equity

25. Railroad Issues Fall 2006 Economic/industrial recovery - durability Economic/industrial recovery - durability Service metrics – recovery or a meltdown (again)? Service metrics – recovery or a meltdown (again)? Trucking troubles also a secular issue Trucking troubles also a secular issue Capacity – coming shortage? Or “creative tension”? Capacity – coming shortage? Or “creative tension”? Intermodal – new king of the hill Intermodal – new king of the hill Coal and Grain: Comeback? Thanks to oil! Coal and Grain: Comeback? Thanks to oil! Is Growth Affordable? (Who will pay?) Is Growth Affordable? (Who will pay?) Alliances vs. Mergers? Alliances vs. Mergers? Hurricanes, other AoG Hurricanes, other AoG Labor – 1 Man Crews off the table? Coming shortage? Labor – 1 Man Crews off the table? Coming shortage? Safety and security – new risk? Safety and security – new risk?

27. “Big Six” Rail H106 results All six beat Street consensus All six beat Street consensus EPS up an average 58% vs. tough comps; range from +27% to +140% EPS up an average 58% vs. tough comps; range from +27% to +140% Revenue growth averaged 14% Revenue growth averaged 14% Estimated Yield growth (ex FS) was 6% Estimated Yield growth (ex FS) was 6% Fuel surcharges added another ~6% Fuel surcharges added another ~6% So Far Q306 5 for 5 beating Street; solid forecasts (DPS increases, share buybacks & splits) – operating ratios in the 50s?!? So Far Q306 5 for 5 beating Street; solid forecasts (DPS increases, share buybacks & splits) – operating ratios in the 50s?!?

28. Capital Expenditures 2005 Class I Railroads $6.4 billion for Roadway & Structures and Equipment Source: AAR and R-1 annual reports Excludes new operating leases.

29. New Freight Car Deliveries Railroad and Private Owners Beginning 1995, Canadian cars included with U.S.

30. New Locomotives Installed U.S. Class I Railroads Note: New locomotives may also be installed by Canadian, Mexican, or U.S. regional railroads.

31. Return on Total Capital by Industry 2001-2004 average

32. Railroad Return on Equity Class I Railroads n.m. - not meaningful (negative value) Source: Railroad Facts, AAR n.m.

33. Railroad Employee Productivity Class I Railroads, Ton-Miles Per Employee Source: Railroad Facts, AAR Millions