FMR Joe Frye, Jr. Transportation Solutions, Inc. V.P. - PowerPoint PPT Presentation

FMR Joe Frye, Jr. Transportation Solutions, Inc. V.P. Transportation & Logistics Railroad Perspective: Past Defines the Future FMR Transportation Solutions

FMR Transportation Solutions, Inc. FMR Mission • FMR Transportation Solutions is a non-asset based consulting group located in Roanoke, VA offering transportation management, supply chain analysis, logistical strategies, and consulting services designed to enhance client- based operations. • Our goal is to offer single-source logistical support focused on transportation savings and improved asset utilization while increasing client value. • FMR’s business is based on building solid relationships with our customers while meeting their unique business requirements. • The cornerstone of the FMR organization is the dedication and integrity demonstrated by it’s founding partners. FMR Transportation Solutions

FMR Transportation Solutions, Inc. Presentation Outline Outline  Brief Railroad Regulatory History  Railroad Traffic Volumes  Issues Facing the Rail Industry `  2017 Outlook  Summary FMR Transportation Solutions

FMR Transportation Solutions, Inc. Forward-Looking Statements This presentation contains forward-looking statements. These forward- looking statements may include statements of goals, intentions, earnings expectations, and industry expectations. Forward-looking statements are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project” and other similar words and expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made. Because forward-looking statements are subject to assumptions and uncertainties, actual results or future events could differ, possibly materially, from those that we anticipate in our forward-looking statements. FMR Transportation Solutions

FMR Transportation Solutions, Inc. Quote From History “Those who fail to learn from history are doomed to repeat it.” Paraphrased statement of Sir Winston Churchill FMR Transportation Solutions

FMR Transportation Solutions, Inc. Significant Regulatory Actions Significant Regulatory Actions Impacting the Railroad Industry Transportation Act of 1958  Revised Sec. 15a of the Interstate Commerce Act (rule of rate making). Ingot Molds Court Decision (1965)  ICC determined rail rate to be unlawful since it did not cover fully allocated costs and because it impinged upon the low cost mode’s ability to assert its inherent cost advantage. Regional Railroad Reorganization Act of 1973 (The “3 - R” Act)  Interim funding for bankrupt railroads; authorized creation of the Consolidated Rail Corporation (Conrail). The Railroad Revitalization & Regulatory Reform Act of 1976 ( The“4 -R ” Act)  Established basic outlines of regulatory reform in the rail industry.  Gave final approval for operation of Conrail (effective 4/1/76). FMR Transportation Solutions

FMR Transportation Solutions, Inc. Significant Regulatory Actions The Staggers Rail Act of 1980 (and its continuing impact)  Rates ‒ ICC/STB maintained the authority to set maximum rate levels. ‒ Allowed for railroad contract rates. ‒ Today’s average rail rate is 42% lower (inflation-adjusted) than in 1980. ‒ Enabled rail carriers to reinvest > $600 billion into operations since 1980.  Ease of Abandonment ‒ Increased ease of Class-1 railroads to divest themselves of unprofitable and light density rail lines. ‒ Re-emergence of Short Line Railroads. ‒ Currently > 500 short line & regional railroads (approx. 48,000 total rail miles).  Safety (post 1980) ‒ Train accident rate reduced 78% (39% lower since 2000). ‒ Employee injury rate 84% lower (down 48% since 2000). ‒ Grade crossing accidents reduced 81% (42% lower since 2000). FMR Transportation Solutions

FMR Transportation Solutions, Inc. Overall Rail Volume Railroad Volume (Class-1) 31,459 35,000 29,997 30,221 30,625 28,830 29,440 29,209 28,375 26,587 26,005 30,000 25,000 20,000 15,000 10,000 5,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Carloads (000) FMR Source: Association of American Railroads Transportation Solutions

FMR Transportation Solutions, Inc. Coal Traffic Coal Volume • Steady decline 7,480 7,713 7,055 8,000 6,842 7,065 ( post 2008 peak ) 5,952 7,000 6,110 6,204 • Reduced export coal 5,442 6,000 • Impact of natural gas 5,000 4,000 • 300+ coal-fired units 3,000 retired since 2012 2,000 1,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Carloads (000) FMR Source: Association of American Railroads (2016 segment data unavailable) Transportation Solutions

FMR Transportation Solutions, Inc. Chemical Traffic Chemicals Volume 3,289 • Growth in Crude & NGL 3,349 3,205 3,500 2,912 2,814 ( 2012 thru 2015 ) 2,887 2,756 2,645 3,000 2,418 • Strengthened 2,500 petrochemical and resins 2,000 market 1,500 1,000 500 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Carloads (000) FMR Source: Association of American Railroads (2016 segment data unavailable) Transportation Solutions

FMR Transportation Solutions, Inc. Agriculture & Consumer Products Traffic AG Volumes • 2007 - 2008 record corn 3,304 3,377 3,218 3,174 3,227 3,161 3,500 3,087 3,047 2,993 demand 3,000 • 2012 & 2013 US drought 2,500 severely limited domestic 2,000 grain production 1,500 1,000 500 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Carloads (000) FMR Source: Association of American Railroads (2016 segment data unavailable) Transportation Solutions

FMR Transportation Solutions, Inc. Intermodal Traffic Intermodal Volume • Steady growth 11,167 10,636 11,234 10,964 12,000 10,478 10,401 10,042 10,127 ( pre & post recession ) 8,943 10,000 • Growth via highway conversions 8,000 • Increased CapEX 6,000 ( routes, new or expanded terminals ) 4,000 2,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Carloads (000) FMR Source: Association of American Railroads (2016 segment data unavailable) Transportation Solutions

FMR Transportation Solutions, Inc. 2015 Rail Segment Volume 2015 Rail Segment Volume Auto 1,522 • Intermodal comprised 38% of rail volume in 2015 AG 3,161 ( compared to 32% in 2008 ) Intermodal 11,234 • Coal comprised 19% of rail METCON volume in 2015 3,727 ( compared to 25% in 2008 ) Coal 5,442 CH 3,289 PPR 1,065 Carloads (000) FMR Source: Association of American Railroads (2016 segment data unavailable) Transportation Solutions

FMR Transportation Solutions, Inc. Rail Volume (‘15 vs ‘07) Segment Volume (‘15 vs ‘07) 30.0% 19.3% 20.0% 10.0% -0.4% -6.0% -3.9% 0.6% -27.2% -15.9% 0.0% -10.0% -20.0% -30.0% AG METCON Coal Paper/Forest Chemicals Intermodal Auto FMR Source: Association of American Railroads (2016 segment data unavailable) Transportation Solutions

FMR Transportation Solutions, Inc. Railroad Industry Issues Issues Facing the Railroad Industry  Political and Economic Uncertainties  Changing Commodity Mix  Increased Regulation and “Open Access”  Investment in Positive Train Control (“PTC”)  Electronically- Controlled Pneumatic Brake Mandate (“ECP”) FMR Transportation Solutions

FMR Transportation Solutions, Inc. Commodity Outlook 2017 Commodity Outlook Intermodal Industrial Products  Tightening truck capacity  Gains in plastics and associated feed stocks  Growth forecast above GDP  Continued crude and NGL headwinds ( pipeline s)  Challenged international market  Flat auto market Coal  Optimistic grain harvest ( increased  Coal comps encouraging with exports ) market normalization  Modest gains in construction & housing  Natural gas pricing pressures  Improvement in metals  Export favorable due to global  Phosphates/fertilizers growth supply pressure FMR Transportation Solutions

FMR Transportation Solutions, Inc. Outlook 2017 Railroad Outlook Operations Economic Picture  Reduced CapEX  2 ½ - 3% volume growth  Continued focus on productivity gains  RPU growth > rail inflation  Ongoing asset rationalization Investor Expectations  Continued alignment of resources with demand  Deliver shareholder value ( long-term )  Improved operating ratio  Judicious cost control management FMR Transportation Solutions

FMR Transportation Solutions, Inc. Conclusion Closing Thoughts While 2017 should show modest growth, the railroads are going through a difficult period and are somewhat reinventing themselves. The challenges of a changing commodity mix and potential regulatory mandates are significant, and any attempt to increase regulation will ultimately be detrimental to the rail industry. Today’s railroads are more efficient, productive and safer than ever before. However, increased regulation could impede the railroads’ ability to earn the capital needed to continue reinvestment in their infrastructure, which would impact service and safety. This would be harmful to the railroads, to rail shippers, and to the public as a whole. So as we look to 2017 and to the future of America’s rail system, let’s not ignore the lessons learned, or lessons that should have been learned from the past. FMR Transportation Solutions