Wednesday, March 3, 2010

$TLT Short Time for Short Line Credit? Senate Extenders Bill Includes 45G Track Maintenance Credit

• Short Line Credit Included in Senate Tax Extenders Bill — Today, Senators
Baucus and Reid introduced the American Workers, State, and Business Relief
Act, a tax extenders bill which includes a one-year retroactive extension of the
45G Track Maintenance credit through the end of 2010. As a reminder, in
December the House passed a tax extenders bill (H.R.4213) including a one-year
extension of the credit, also effective 1/1/2010. As initially proposed, the Senate
version includes high-profile extensions of unemployment insurance and health
care benefits that expired at the end of February, and a vote could come by the
end of this week.

• How Does the Credit Impact RA? — RA records the 45G credit as 1) an offset to
certain maintenance expenses included in operating income ($16-17M estimated
in 2010) and 2) an offset to capex on the cash flow statement ($5-6M estimated in
2010). Our full year estimates for RA assume the credit is passed during 3Q with
retroactive provisions. While timing differences may cause quarter-to-quarter
volatility in operating income (and hence EBITDA) vs. the catch-up expense offset
we currently model in 3Q, our full year estimates already assume the credit is in
place throughout the forecast period (2010-2012).


How Does the Credit Impact GWR? — GWR records the 45G credit as a reduction
to tax expense, with management indicating a sensitivity of 10% on the company’s
effective tax rate and $0.25 in EPS related to the credit. As with RA, our full year
estimates for GWR assume the credit is passed during 3Q with retroactive
provisions. While timing differences may cause quarter-to-quarter volatility in
earnings vs. the catch-up tax benefit we currently model in 3Q, our full year
estimates already assume the credit is in place throughout the forecast period
(2010-2012).

•What's Next? — The attachment of the 45G Track Maintenance Credit extension to
today’s Senate tax extenders bill is clearly a victory for the short line rails, as both
management teams and trade associations have previously indicated that finding
a vehicle for passage was one of the biggest uncertainties surrounding theWhile nothing
has been passed yet (and anything can happen in Washington), the short lines are
one step closer to an extension of this key industry benefit than they were last
week. While the passage of the credit wouldn’t drive upside to our annual RA &

legislation which enjoyed strong bipartisan support in both houses.
GWR estimates, as we already anticipate the credit’s retroactive extension in our
models, we believe it would remove a key point of investor uncertainty on both
stocks.


Short Time for Short Line Credit? Senate Extenders Bill Includes 45G Track Maintenance Credit -

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