Chicago, IL October 4, 2016

1. Update of the Freight Rail Bottom Line Report: Continuing Study of Freight Rail Supply Meeting DemandBriefing for SCORT Chicago, IL October 4, 2016

2. Revisit Premises of 2002 Freight Rail Bottom Line Report, Examine New Issues SCORT Premises • Private railroads are not responsible for solving national capacity issues. Railroads respond to market forces, which may not necessarily provide an incentive to add capacity at a pace to meet demand. • Rationing of capacity will impact some shippers worse than others • Public private partnerships are valuable capacity enhancing tools • State DOT’s can further develop and implement performance measures to ensure effective PPP’s • Conclusions of the 2002 Freight Rail Bottom Line Report are basically true, namely that relatively small additional investments in the freight rail system can be levered to provide relatively large public benefits

3. Study Tasks – First Four Work Items • Work Item #1: Proposed changes to the Scope of Work • Work Item #2: Review of the 2002 Freight Rail Bottom Line Report • The railroad industry now and then • The economy now and then • Work Item #3: Railroad Share of Freight Movement • Charting over the past 25 years and causes of shifts • Implications for the future • Work Item #4: Impacts of railroad market share • Proposed metrics used to assess impacts • Impacts from increasing rail modal share/disbenefits from decreasing rail modal share • Projected impact of forecast changes in rail modal share, impacts of increases 1%, 3%, 5% over forecast

4. Original Study Tasks – Last Two Work Items • Work Item #5: Which industries most likely impacted by rail capacity constraints • Work Item #6: Railroad public private partnerships for capacity projects • Overview of types of capacity improvements • Assessing the economic need for a capacity project • Benefit calculation techniques • Capacity models • Performance measures • P3 case studies • Work Item #7 and #8: Draft and Final Report

5. SCORT Study Tasks and Status Are Here Began June 2015 End 2017

6. Work Item 2 Themes: Freight Traffic Was Recovering from the Recession Cumulative Percentage Change in Carloads, Tons, Ton-Miles Source: Analysis of AAR Ten Year Trends

7. Work Item 2 Themes: Improved Class I Profitability Class I Railroad Combined Operating Ratio (Operating Expense / Operating Revenue) Source: Analysis of AAR Ten Year Trends

8. Work Item 2 Themes: Railroads Covering Regulatory Cost of Capital Class I Railroad Industry Rate of Return on Net Investment and STB Cost of Capital Source: AAR Ten Year Trends

9. Work Item 2 Themes: Railroad Investment More Than Doubles to 2014 Class I Railroad Capital Expenditure (Millions 2011 Dollars) Source: AAR Ten Year Trends

10. Work Item 2 Themes: Short Line Financial Growth Not as Strong Results from American Short Line and Regional Railroad Association Survey Source: American Short Line and Regional Railroad Association

11. 2015/2016 Brings a Chill Wind, But no Return to 2002 Capacity Constraints • BNSF: “While this year’s overall plan is $1.5 billion less than we spent in 2015…” • UP: “Total volumes decreased 9 percent in the quarter, more than offsetting another quarter of solid core pricing gains…” • NS: “Railroad operating revenues declined 12 percent compared with fourth-quarter 2014…” • CSX: “With negative global and industrial market trends projected for 2016, full-year earnings per share are expected to be down compared to 2015”

12. Work Item 3 Themes: Continued Railroad Specialization – Larger Shipments Sizes Source: Analysis of STB Public Use Waybill Sample

13. Work Item 3 Themes: Unspectacular Growth in Markets Traditionally Served by Manifest Freight Millions of Tons Moved by Rail – General Freight Products Source: AAR Ten Year Trends

14. Work Item 3 Themes: Ups and Downs of Unit Train Traffic Millions of Tons Moved by Rail – Commodities often Shipped in Unit Trains

15. Work Item 3 Themes: Strong Intermodal Growth Helped by Investment Changes in Intermodal Tonnage Source: Analysis of STB Public Use Waybill Sample

16. Work Item 3 Themes: Forecasts Suggests Loss of Rail Modal Share Due to Slow Growth of Underlying Commodities Ton-Mile Growth Rail Percent Modal Share by Tonnage Source: American Trucking Associations Forecast, 2015 Source: USDOT Draft National Freight Strategic Plan

17. Work Item 4: Mode Shift Scenarios

18. 30 Year Savings – Discounted at 7%

19. Main Points of Research So Far • The railroad renaissance: Over the past decade, Class I’s have been better able to invest • Rail mode share is driven by performance of rail service • Slow growth in manifest • Ups and downs of unit train • Investment helps intermodal • Freight rail yields significant benefits

20. What Have We Been Doing since February? • Delivered Technical Memorandum for Work Items 3 and 4 in March • Rescoping Work Items 4 and 5 • Interviewed railroads, AAR in March, June • Sent draft outline to committee in May • Talked to committee members in July • Sent revised draft outline in August

21. Revised Scope of Work Reflects Changes since the 2002 Freight Rail Bottom Line Report

22. So then What Are We Doing Here? • Reboot of the central message of the 2002 Freight Rail Bottom Line Report • Freight rail projects can be good public investments • Going beyond • Help states be smarter about public/private partnerships

23. Path Forward – Focus Less Specifically on Capacity Issues Original Scope • Work Item 5: Which industries most likely impacted by rail capacity constraints • Work Item 6: Railroad public private partnerships for capacity projects • Overview of types of capacity improvements • Assessing the economic need for a capacity project • Benefit calculation techniques • Capacity models • Performance measures • P3 case studies

24. Revisiting Scope of Work – Work Item 5 • Which industries most likely to be impacted by rail issues/benefit most from resolving rail issues • Purpose • Provide guidance of industries that would benefit from public investment in rail infrastructure • Help states to communicate industry rail needs with stakeholders • Understand better the dynamics of rail service, what drives the level of service shippers receive in order to inform state decisions

25. Revisiting Scope of Work - Work Item 5 Interviewees • Trade associations • Shippers • Agriculture • Chemical • Intermodal marketing • Materials handling • Steel • Forest products • Automotive • Food • Oil and Gas • Short line industry Types of Questions • Rail service issues • Shifts in the nature of rail service • Criteria for rail service • Railcar ownership • Determinants of rail service within industry • Usage of rail/truck modes, truck alternatives • Short haul intermodal usage • Volume shipped per shipper Result: Matrix of Industries and Rail Issues, Differences between Industries in Terms Resource Intensity of Rail Service, Likely Parameters of Service

26. Task 5 – Likely Hypotheses • Size matters – better service for larger shippers • Ease of serving matters • Unit train/big blocks of car require less cost/effort • Consistency of demand matters – easier to be a conveyor belt than constantly reacting to surges • The future matters • Growing source of business • Stable/predictable • Location matters • Underutilized portions of networks vs. mainline • Competition matters • How much is always a question

27. Revisiting Scope of Work Item 6 – Parameters of State – Railroad Public/Private Partnerships Defining the Parameters Public/ Private Partnership Opportunities

28. What the private sector would invest in Return on Investment • Revenue • Costs of service • Growth prospects • Cost reduction Other • Risks • Competing Opportunities • Fit with existing service • Fit with corporate growth strategy • Corporate governance

29. Considerations that indicate railroad might have invested without public involvement • Size of project relative to volume of freight impacted • Risks of traffic not materializing • Likely outcome if project is not completed, i.e. extent to which project is on “core” network or part of long-term strategy • Additional maintenance burden from project • Typical hurdle rate • Relative balance of public and private benefits • Financial context • Other factors such as competing investment needs, limited funds , which create uncertainty

30. What the Public Sector Would Invest In Drivers of Benefits • Volume of freight impacted • Likelihood of modal shift without project • Level of modal shift attributable to project Drivers of Economic Impacts • Job creation • Number of businesses • Land development, tax revenues, local economic health Other • DOT strategic plan, development strategy • Impacts on general public

31. Methods/Criteria Used to Evaluate Rail Projects Federal Discretionary Grant Programs • TIGER, FASTLANE • Implications of primacy of “benefits” • General implications of competitive discretionary grant funding sources State Programs • Different evaluations by type of project • Typical information requested of applicants • Agreement structure and “claw back” provisions

32. Recommended performance measures per national freight goals • Economic efficiency, productivity, and competitiveness • Reducing railway congestion • Reducing highway congestion • Improving safety and security • Improving state of repair • Advanced technology • Reducing environmental impacts Also, employment and economic impacts

33. Case Studies Content of Case Studies • Nature of issue • Economic need for the project • How project was evaluated • Performance measures used to monitor project’s success after completion 2-3 Big Projects, Several Small, Medium Projects Potential big projects: • Chicago CREATE • Colton Crossing • Tower 55 • CSX Winter Haven • Crescent Corridor • Heartland Corridor • National Gateway

34. Questions/Comments