Trends in the U.S. Rail Network

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Trends in the U.S. Rail Network

Mike McClellan Vice President – Industrial Products

Southeast Association of Rail Shippers – Fall Meeting September 23, 2015

Orlando, FL

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• The Dynamics in US Rail Freight Traffic

• Update on NS Efforts to Enhance the Network

• Other Key Issues

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AAR Data – Total Train Speed

As reported publicly to the AAR

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AAR Data – Dwell

As reported publicly to the AAR

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So What’s Going On Here?

• Volume Growth?

• Conveyance Shifts?

• Commodity Shifts?

• Geographical Shifts?

• Regulation?

• All of the Above?

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Volume Trends – Carloads – Originated (in millions)

Data are Class I railroad originations. Source: AAR Freight Commodity Statistics

Class I carload originations are up 11% in the same period.

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'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

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Volume Performance By Big 4 US Railroads

Class I Financial Reports

10,637 10,275

9,852 9,625

7,901 7,675 7,358

6,922

-

2,000

4,000

6,000

8,000

10,000

12,000

2006 2007 2008 2009 2010 2011 2012 2013 2014

Units (000s)

Class I Volume Since 2006

BNSF UP NS CSX

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Volume Trends Class I Ton Miles (Trillions)

Data for Class I railroads. Source: AAR

Total Class I U.S. ton-miles are up 24% since 2001, and in 2014 set a new annual record.

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

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Class 1 Traffic – First 2 Quarters of 2015

Traffic Type 1Q 2015

vs. 1Q 2014

2Q 2015 vs.

2Q 2014

YTD 2015 vs.

YTD 2014

Eastern RRs

IM 3% 4% 3%

Carload (1%) (6%) (3%)

Total 1% (1%) --

Western RRs

IM (4%) 3% --

Carload 2% (7%) (3%)

Total (1%) (3%) (2%)

AAR weekly carload reports

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Geographic and Commodity Shifts in the U.S. Rail Network

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Intermodal Volume This Century Shipments originated (in Millions)

Intermodal volumes set an annual record in 2014.

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'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Containers

Trailers

Source: AAR Weekly Railroad Traffic

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Intermodal Volumes – East vs West

8,977 8,631

5,435

6,573

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2006 2007 2008 2009 2010 2011 2012 2013 2014

Units (000s)

Intermodal Volume Since 2006

IM-West IM-East

Class I Financial Reports

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Originated Carloads of Crude Oil on US Class I Railroads

Class I Railroads: Source: AAR

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20,000

40,000

60,000

80,000

100,000

120,000

140,000

2009 2010 2011 2012 2013 2014 2015

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Crude Oil as a % of Total Originated

0.0% 0.0% 0.0% 0.0% 0.1%

0.2%

0.8%

1.4%

1.6% 1.5%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

*First half of the year

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0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2009 2010 2011 2012 2013 2014 2015*

Originated Carloads of Industrial Sand on US Class I Railroads

Class I Railroads: Source: AAR

Frac sand is a major component of industrial sand and is considered responsible for the recent growth in industrial sand.

*First half of the year

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95,000

100,000

105,000

110,000

115,000

120,000

125,000

130,000

135,000

140,000

145,000

150,000

U.S. Rail Coal Traffic

(weekly carloads originated, 52-week moving average)

2007 2008 2009 2010 2011 2012 2013 2014 2015

Excludes U.S. operations of Canadian railroads. Source: AAR Weekly Railroad Traffic

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Shifts in Eastern and Western Coal Traffic

4,754

4,038 3,652

2,546

-

1,000

2,000

3,000

4,000

5,000

6,000

2006 2007 2008 2009 2010 2011 2012 2013 2014

Units (000s)

Coal Volume Since 2006

Coal-West Coal-East

Class I Financial Reports

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12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

U.S. Rail Grain Traffic

(weekly carloads originated, 52-week moving average)

2007 2008 2009 2010 2011 2012 2013 2014 2015

Excludes U.S. operations of Canadian railroads. Source: AAR Weekly Railroad Traffic

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Other Commodity & Geographic Shifts This Century

• Declines in Forest Product

Volumes

• Declines in Automotive Traffic

• Declines in Steel and Metals

Businesses

• Flattening Shale Related

Volumes

AAR Data

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Despite fundamental shifts in the composition of rail traffic, Chicago’s role continues to grow

*Includes traffic which had more than one event in Chicago

Terminal Classification of Movement Originated Terminated Interchanged Other* Total

Loaded Freight Cars 493,274 546,983 1,475,239 395,848 2,911,344

Empty Freight Cars 105,033 61,385 1,137,423 362,060 1,665,901

Total Freight Cars 598,307 608,368 2,612,662 757,908 4,577,245

Loaded Intermodal Units 1,854,250 1,683,448 713,350 37,130 4,288,178

Empty Intermodal Units 107,387 387,139 57,197 41,039 592,762

Total Intermodal Units 1,961,637 2,070,587 770,547 78,169 4,880,940

CHICAGO

Source: AAR, NS Data

0.60

0.80

1.00

1.20

2006 2007 2008 2009 2010 2011 2012 2013

Total NS Volume and Volume through Illinois Indexed to 2006

Illinois Volume Total NS Volume

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So what are the railroads doing to address these changes?

Pic of Track work (does not need to be this size)

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Railroad Spending on Infrastructure and Equipment* ($ billions, current dollars)

$575 Billion Back Into the Network Since 1980

*AAR: Data in chart for Class I railroads only

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CREATE Program Partnership – $3.8 Billion to fix the Chicago rail network - $1.3 pledged so far

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What is NS Doing To Address These Changes?

• Crews

• Locomotives

• Strategic Capacity Additions

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Resource Update

Crews During the first half of 2015, NS increased the

number of qualified Train & Engine employees by over 460.

Locomotives The NS locomotive fleet is at record levels.

75 new SD70Ace locomotives were received in 2014

100 used SD90MACs to be received by end of 2015

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Chicago 47th Street Expansion Will reduce interference between NS Intermodal operations and other operations on NS’ Chicago line

Echo Wye & Connection

Englewood Flyover

• Prevents intermodal trains from backing in and backing out of one side of the 47th Street intermodal facility

• Allows multiple intermodal train movements to occur at the same time • Reduces impact to the mainline from intermodal trains entering and exiting

Chicago 47th Street • Complements the improvement in the mainline fluidity benefits gained from

the Englewood flyover.

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NS Chicago Line

(46 Daily Freight Trains)

(14 Daily Amtrak Trains)

Proposed Overhead Bridge

Metra Rock Island District

(78 Daily Commuter Trains)

NS Park Manor

Intermodal Yard

Englewood Interlocking

Milepost CD-515.7

(Controlled by Metra)

Englewood Flyover

• Metra flyover operation Now fully operational

• Total Project Cost $140 M

• Eliminates at grade train interference between at least 78 north-south Metra trains per day and at least 60 east-west NS/Amtrak trains.

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Bellevue Yard Expansion

Bellevue Yard

Bellevue Yard in Ohio is at the crossroads of NS’ key Northern route structure.

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Bellevue Expansion

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Bellevue Expansion

Additions: New Track - 38.5 Miles Class Tracks - 35 Turnouts - 149 Buildings (3) – 11,340 sq ft. Service Roads – 10.4 Miles Power Switches – 162 Hump Control System Processing Capacity increase from 1,800 to up to 3,500 cars daily.

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Norfolk Southern’s Corridor Strategy

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•Completed 2008

•Cost: $300M MERIDIAN

•Completed 2012

•Cost: $630M CRESCENT

•Completed 2010

•Cost: $191M HEARTLAND

•Completed 2010

•Cost: $165M PAN AM

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New Crescent Terminals

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Memphis

Greencastle

Birmingham

Charlotte

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Charlotte Intermodal Terminal

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South Carolina Inland Port One Model for Shorthaul Intermodal

• Joint project between South Carolina State Ports Authority and NS

• 236 rail miles from Port of Charleston

• Operational Date: September 2013

Greer,

SC

Charleston

236 Rail

Miles

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D&H Acquisition – Expanding our New England and New York Competitive position

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Other Things We, as a Shipping Community, Need to Think About

Other Issues

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Conveyance Shifts Although not quantifiable across US Railroads, there has been a shift to more unit trains

Source – NS Internal Data

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Regulation Could have meaningful service impact in the future

• PTC

• Tank Car and Hazardous Material Regulations

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60’ High Roof

50’ 100-ton low roof

Box Conveyances Moving towards standard equipment

53’ EMP container

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Closing Thoughts

• The strain that we have seen in the U.S. Rail Network in 2014 and 2015 is abating

• Structural changes in the commodity and geographic composition of rail freight have imposed additional stress on some parts of the rail network

• All the railroads have demonstrated their commitment to providing the tactical resources and strategic investments to address these shifts in freight

– The issue is more one of timing

• Regulatory threats are real and potentially immediate

• NS continues to make tactical and infrastructure investments to drive service improvements

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Thank You!