Rail Transportation Of Ethanol: Will There Be Enough Capacity?


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Biomass 2008 Fueling our Future Conference Presentation.

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Rail Transportation Of Ethanol: Will There Be Enough Capacity?

  1. 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.comKEP LLCEconomic and Management Consulting
  2. 2. Agenda • Background • Recent Class I investments • Projections • What will the capacity cost ethanol shippers • What could change the outlookKEP LLC 2Economic and Management Consulting
  3. 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 banksKEP LLC 3Economic and Management Consulting
  4. 4. Demand for Rail Service Has Increased Dramatically in RecentYears 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 BoardKEP LLC 4Economic and Management Consulting
  5. 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 utilizationKEP LLC 5Economic and Management Consulting
  6. 6. Despite Being Monopolies or Duopolies Most Railroads Don’t Earn TheIndustry 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 2005KEP LLC 6Economic and Management Consulting
  7. 7. Wall Street is Pushing Hard on These Companies to ImproveTheir 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 ExKEP LLC 7Economic and Management Consulting
  8. 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 expansionKEP LLC 8Economic and Management Consulting
  9. 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 necessaryKEP LLC 9Economic and Management Consulting
  10. 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 shipmentsKEP LLC 10Economic and Management Consulting
  11. 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 ActKEP LLC 11Economic and Management Consulting
  12. 12. THANK YOU KEP LLC 16877 E. Prentice Cr. Centennial, CO 80015 303.862.4453 john@kepllc.comKEP LLC 12Economic and Management Consulting