1. Norfolk Southern Corporation
Managing Growth
Thank you for the opportunity to talk about managing growth, particularly capacity planning, at Norfolk Southern.
The rail industry has changed dramatically in the last 5 years. I have worked in the rail industry for about 35 years, spent most of that time learning how to downsize people and assets to accommodate a declining business base. Got pretty good at downsizing. In the last 5 years we have all had to learn how to deal with dramatic growth.
August 16, 2007
Dan Mazur
Vice President - Planning

2. North American Rail Industry NS Traffic Mix Rail Vs. Truck
Agenda
North American Rail Industry
NS Traffic Mix
Rail Vs. Truck
Public Interest in Rail
Infrastructure Development
Today we will take a quick tour of the North American Rail Industry, focusing on a few key metrics.
We will discuss a general overview of Norfolk Southern’s franchise including our traffic mix.
Talk about the drivers of the change from a declining business environment to an environment of high growth.
We will discuss how railroads, and especially Norfolk Southern, have become a key part of the solution to Public issues involving energy consumption, congestion, and other environmental issues.
Last, we will discuss what Norfolk Southern is doing to prepare for dramatic traffic growth.

3. Six Class I Railroads in North America
East
Norfolk Southern Corporation
CSX
West
Burlington Northern Santa Fe
Union Pacific
Canada & US
Canadian National
Canadian Pacific
With consolidations over the past 30 some years, the Rail industry has become pretty simple..
2 in the east NS and CSX
2 in the west BNSF and UP
2 in Canada CN and CP

4. Route Miles Thousands of Miles
These figures and those on subsequent slides reflect results for the Year 2006
The two railroads in the east and west are fairly balanced in terms of total route miles, with the BNSF and UP each about miles larger than NS or CSX.
CN is slightly smaller than the NS or CSX but is larger than CP

5. 2006 Number of Employees
A comparison of the 6 railroads in terms of the number of employees is much less uniform due to differences in corporate structure.
UP has the largest number of rail employees while CP having the fewest.
NS is about in the middle of the pack.

6. 2006 Revenues
Billion
NS had about $9.4 billion in revenue in 2006, slightly less than CSX. CSX has historically had about $1 billion more revenue than NS. We anticipate that our revenue will exceed CSX’s in 2007.
The western railroads are about even and had significantly higher revenue than the eastern railroads.
CN had significantly higher revenue than CP.

7. 2006 Operating Ratio
Operating ratio is a financial term defined as a company’s operating expenses as a percentage of revenue.
Lower is better.
An operating ratio of less than 80% is desirable in the rail industry.
CN has the lowest operating ratio and NS has the lowest ratio, 72.8, among US Class 1 railroads

8. NS Volume 2006 NS 2006 Total volume= 7.9mm Units
Our business has changed since 2001, and growth in Intermodal has played a major role in our success. Intermodal’s share of volume has grown from 32% in 2001, to 41% in Coal’s shipments dropped from 26% of total volume in 2001, to 22% in Automotive and Chemicals both experienced slight declines.
This diverse portfolio of business that cuts across the entire domestic and global economy provides a strong market franchise that balances exposure to downturns in any individual market segment.

9. Rail vs. Truck
During the last three years, there has been a fundamental shift in the competitive environment between rail and truck
Shift primarily due to:
Increased fuel costs
Congestion on highway system
Reduced hours of service for truck drivers
Driver shortages
Shift appears to be permanent
Fundamental shift in the last 5 years in the competitive economics of truck vs. rail.
Shift appears to be permanent and is a function of factors we are all familiar with, increased fuel cost (rail is 3-4 times more fuel efficient than truck), congestion on the highways, new regulations reducing the number of consecutive hours that a truck driver can drive, and driver shortages due to demographic shifts and life style issues.

10. In spite of short term softness in current markets, we believe the prospects for rail transportation in general, and over our Eastern U.S. network in particular, remain very bright.
With 70% of domestic freight in this country moving over the highway, we have a very large target for growth and improved yields ahead. And clearly demographics, manufacturing concentration and related highway congestion in the Eastern half of the U.S. all point to greater demand for high quality rail transportation.

11. Revenue Effect of 1% Shift in Truck Industry
-1%
Trucking
$623 billion industry
Railroads
$48 billion industry
1% shift of trucking's revenue to rail
Top-line growth of 13% for railroads ($6.2 billion)
$623b
1% shift in trucking revenue market share to rail.
Based on 2005 numbers, trucking is about a $623 billion business, rail is about a $48 billion business.
A shift of 1% of market share from truck to rail, means a 13% increase for rail. This is one of the main reasons we have seen the tremendous growth in rail traffic over the last 5 years.
+13 %
$48b
Trucking
Rail
Data Source: AAR, ATA

12. Increased Public Interest in Rail
Increased awareness of rail as a solution to congestion, pollution, and fuel inefficiency
Increased motivation to invest public money in rail infrastructure
Heartland
CREATE
Green Power (Locomotives)
I81
There is an increased recognition that rail is part of the solution to key public concerns like congestion, pollution, and fuel efficiency.
Norfolk Southern has several key initiatives underway in cooperation with various public entities, in what we term public-private partnerships.
Heartland Corridor- improve the clearances on our route between here in Norfolk to the midwest to allow the movement of doublestack containers.
CREATE-improve the efficiency of the key rail interchange location in the Chicago area
Green Power Locomotives-hybrid locomotives with substantial reductions in fuel consumption and reduced emissions
I81-Crescent Corridor-Take 1 million trucks off the highway and put them on NS

13. In the last 20 years… Vehicle travel increased 78%
Road miles increased only 1%
Highway congestion is a fact of life, especially in urban areas, and is getting worse.
Over the last 20 years, vehicle travel has increased 78% while the miles of highway have only increased 1%
Traffic congestion costs the U.S. $67 billion annually

14. Congested Highway Segments - 1998
This is what highway congestion looked like in 1998.
Red denotes segments where traffic exceeded capacity. Not too bad, except in large metro areas.

15. Potential Congested Segments - 2020
This is what highway congestion is projected to look like in 2020, just 13 years from now.
Remember, red means exceeds capacity
A lot of red, spreading out into more rural areas

16. Population Growth ( )
This Eastern market, which we serve, encompasses some of the fastest population growth projected in the U.S. which bodes very well for continued expansion of consumer goods and transportation demand. Additionally, because of the concentrated population and manufacturing density in this region, it is estimated that over 80% of intercity freight tonnage in the U.S. resides in this market. We fully expect to capitalize on this trend going forward.
Annual Pop Growth % ( )

17. Options are Limited An all-highway solution:
Expensive
Environmentally damaging
Untimely
Freight traffic crosses state boundaries
Acting alone produces benefits outside the state
Acting alone creates problems at the borders
Rail intermodal can provide highway congestion relief in partnership with motor carriers
An all highway solution to this problem will be very expensive, greatly impact the environment, and take a long time.
Individual states cannot solve this issue because it is a network problem, not limited to any one state
Rail intermodal, in partnership with motor carriers can solve this problem.
The I81-Crescent Corridor project is a good example

18. Railroad Infrastructure Development
Network
Slow
Rapid
Moderate Growth, Peak
Rapid
Tran-
Mileage
Growth
Growth
and Decline (Maturity)
Decline
sition
250,000
200,000
150,000
What is NS doing to add capacity to prepare for traffic growth?
Need to put capacity planning in an historical perspective.
The rail industry in North America has been around a long time. Norfolk Southern recently celebrated our 175th year of operation.
Over this time period, the industry has gone through a classical cycle of rapid growth, maturity, and decline.
Unfortunately for me, the theme of my career was rapid decline.
And now, we’re in a period of transition.
Class I miles of road owned
100,000
50,000
1830
1850
1870
1890
1910
1930
1950
1970
1990
2005
Data Source: AAR, other

19. Capacity Improvementsf i l d G r n v D c a t u W m g o b A s h - S R B P H I p y C N b u s T o l e d A y r N e w O r l a n s M o b i c A t R k B u f D C h g F . W y m p K S L v d h a t n o g B i r m C l u b D e s M S v J c k d y N f P p / w L K x R
Columbus to Sandusky: $31.6M
Ft. Wayne to Decatur: $11.1M
Norfolk Southern’s infrastructure investments have been extensive and ongoing over the last decade. During that period we have invested a total of $277.4 million in new construction.
Although we know that certain areas of our network are still challenged, it is also important to recognize that some previously congested segments of the network are no longer experiencing capacity constraints. These segments are benefiting from past investments in infrastructure.
Previous projects have included new and expanded terminals; more sidings, longer sidings, double track and even a few clearances.
Capacity Improvements
$277.4m
Memphis to Chattanooga $24.4M
North Georgia: $79.2M

20. 2007 -2010 Infrastructure Focus
Intermodal growth to/from Chicago
Cleveland
Infrastructure investment over the next 3 years will be focused on the corridor between Chattanooga, TN and Jacksonville, FL, including significant investment in track capacity through the Atlanta Terminal area.
We also plan to invest in the corridor between Meridian, MS and Atlanta, GA to support traffic growth from the Meridian Speedway.
On the northern portion of our network, we will continue to monitor the volume growth on the Penn Route between Chicago and Cleveland, because we may ultimately need to add capacity there as volumes grow.
Support traffic growth in the Southeast

21. Summary Rail Industry is growing
Rail has become a viable alternative to truck
Spike in Public Interest due to
Highway congestion
Population growth
Environmental issues
Significant investment required to accommodate growth
Rail growing
Rail is a viable alternative to truck
High public interest in rail to address highway congestion and environmental impact of population growth.
We will need to make significant investments in capacity to accommodate growth.
The rail Industry has become a high growth industry after years of decline
The rail Industry, especially Norfolk Southern, represents a tremendous career opportunity for your best graduates.
Any questions??? .