Spending $ to Make $ Freight Rail and the Power of Capex abh consulting NARS May, 2019

U.S. Freight Railroad Industry in One Chart (index 1981 = 100) 300 250 Productivity 200 Volume Staggers Act Passed Oct. 1980 150 100 Revenue 50 Rates '64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12 '16 Source: AAR

RRs and NAFTA  U.S. to Canada: intermodal, motor vehicles, chemicals, coal, food U.S. to Mexico: motor vehicles, intermodal, food, grain, chemicals Mexico to U.S.: motor vehicles & parts, food, electrical machinery Canada to U.S.: intermodal, chemicals, lumber & paper, motor vehicles, grains ASSOCIATION OF AMERICAN RAILROADS

Enduring (?) Railroad Competitive Advantages Labor Advantage (ex: Double-stack LA-Chi)* Fuel Advantage (4:1 ton/mile; AAR)** Infrastructure Advantage (after the HIS buildout; user-pay and capex to support changing logistics patterns – ex: transcon)*** ASCE Grade B (includes passenger) versus USA Grade D AV trucking? ** EV Trucking? *** Infrastucture Bill? (LOL)

So – What is PSR? Is it new? (car-focus vs train, etc) – components are not Is it a playbook or an attitude? Is it “just” cost cutting? Is it closing humps? Is it point to point? Can intermodal survive PSR? Is it key-man driven? (Change agent) Does it work? PSR and PHR! Is it too short term oriented? PSR & PHR!! Creates a New Shortline “Golden Age”?

The “Grand Bargain” In return for higher prices (& ROI), rails spend, increase capacity & improve service (2005-2012) – The unstated “Grand Bargain” Rails gain pricing power (~2003) & F/S Rails (re) Gain Market Share Rails Spend Cash “Disproportionately” on Capex (~18-20% of revenues) Promotes “Virtuous Circle” – all stakeholders benefit Under challenge, perceived and real – Vicious Circle?

Higher Railroad Profits Have Boosted Capital Spending (Billions) $25 $20 $15 $10 $5 $0 Capital Spending Net Income correlation = 76% '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: AAR 2

Railroad Capital Spending (Billions) $20 $18 $16 $14 $12 $10 $8 $6 $4 $3.2 $2 $0 $17.4 $12.4 $9.2 $6.1 80 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '17 Source: AAR 8

Growing Railroad Net Income (Billions) $25 $21 $20 $15 $14 $14 $14 $13 $13 $12 $11 $10 $9 $8 $6 $7 $6 $5 $5 $3 $3 $3 $3 $3 $0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: AAR

Much Improved Operating Ratio 90% 86% 87% 85% 84% 84% 85% 82% 80% 79% 78% 77% 78% 75% 73% 73% 72% 71% 70% 70% 68% 68% 68% 67% 65% 60% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: AAR 17

Rapid Intermodal Development (Billions of Dollars and Count at Origination for U.S. RR) 18 16 14 12 10 8 6 4 2 Spending Containers Trailers '90 '92 Source: AAR '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Close Correlation Between Railroad ROI and Capital Spending (Billions) $20 16% 14% 12% 10% 8% 6% 4% 2% 0% ROI (right scale) $15 $10 Capital Spending (left scale) $5 correlation = 58% $0 '08 '09 '10 '11 '12 '13 '14 Source: AAR '15 '16 '17 9 Note: ROI excludes accumulated deferred income tax credits.

Rail Industry Now Earns Its Cost of Capital Railroad Cost of Capital vs. Return on Investment 18% 15% Cost of Capital 12% 9% 6% Return on Investment 3% 0% '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '17 Source: STB Note: ROI excludes accumulated deferred income tax credits – and excludes Canadian & Mexican results! 1414

Return on Investment is Crucial  This slide illustrates the real world benefits and consequences of earning or not earning sufficient returns. If ROI > cost of capital: • Capital spending expands • Stronger physical plant; more and better equipment. • Faster, more reliable service • Sustainability Safety! If ROI < cost of capital: • Lower capital spending • Weaker physical plant, equipment • Slower, less reliable service • Disinvestment ROI ASSOCIATION OF AMERICAN RAILROADS

ABH Consulting/www.abhatchconsulting.com Anthony B. Hatch 1230 Park Avenue New York, NY 10128 (917) 520-7101 ABH18@mindspring.com Nov 21-22 2019 www.railtrends.com 16