1. KEP LLC Economic and Management Consulting PRESENTED TO: Usaee/iaee north American conference Pittsburgh, pa Rail capacity for transportation of energy commodities October 28, 2015 John Schmitter President

2. 2 KEP LLC Economic and Management Consulting Rail service to most locations is provided by one carrier 4 Main US Class I Railroads plus over 500 regional and shortlines

3. 3 KEP LLC Economic and Management Consulting Canada has 2 Class I railroads

4. 4 KEP LLC Economic and Management Consulting Us and Canadian railroads  Private companies  Own rail track, locomotives and other infrastructure  Labor are railroad employees  Rail customers own/lease about 50% of railcars  Light economic regulation by:  Surface Transportation Board in US  Canadian Transportation Agency in Canada

5. 5 KEP LLC Economic and Management Consulting energy carloads are mostly coal

6. 6 KEP LLC Economic and Management Consulting energy commodities make up 26% of railroad revenue

7. 7 KEP LLC Economic and Management Consulting Can energy industry afford the capacity? there is competition for railroad cash flow from investors

8. 8 KEP LLC Economic and Management Consulting And from other commodities but Railroad margins on energy commodities are above average Average All Rail Traffic 153% Source: STB, KEP LLC

9. 9 KEP LLC Economic and Management Consulting there will be periodic capacity constraints when volume increases quickly Capacity expansion is a “Just In Time” process It is difficult for railroads to cope with rapid volume increases Railroad Employment

10. 10 KEP LLC Economic and Management Consulting As volumes have declined, service has improved – for now Industry Weighted Average Speed (mph) Commodity Carload Volumes Customers are already starting to see service declines as railroads reduce capacity to match declining volumes Source: AAR

11. 11 KEP LLC Economic and Management Consulting Energy Industry Takeaways Capacity Railroads do have the capacity to handle energy commodities and will in the future Energy commodities provide good margins for the railroads so the industry can afford the capacity and should have priority Railroads will: Adjust capacity up and down to meet projected demand Have periods of congestion and relatively good service in response to volume changes Increase rates as market conditions allow Energy industry supply chain managers should: Recognize that sufficient capacity may not be immediately available when required Develop maximum flexibility in supply Modify inventory policies to incorporate inconsistent rail service Manage railroad relationships and rail transportation effectively