A Shippers Perspective on the Ever Changing Railroad Industry March 14th, 2007 Badger Mining Corporation

The Beginning of Railroading 1827 1st Railroad in North America The Baltimore & Ohio 1840 2,800 miles of track 5 of the 6 New England States, Kentucky & Indiana 1850 9,000 miles of track U.S. World Leader 1865 35,000 miles of track “The Golden Age” of Railroads 1916 254,000 miles of track In 1827 the first railroad in North America is chartered by Baltimore merchants – The Baltimore & Ohio By 1840 we had over 2,800 miles of track operating in 5 of the 6 New England states and the frontier states of Kentucky & Indiana By 1850 we had over 9,000 miles of track in the U.S., - as much as in the rest of the world combined. In 1865 the golden age begins as the rail network grows from 35,000 miles to a peak of 254,000 miles in 1916.

Interstate Commerce Act of 1887 Interstate Commerce Commission (ICC) Formed Subjected railroads to comprehensive federal economic regulation. Controlled railroad operations for the next 108 years and nearly destroy the industry. Government intervention started in 1887 when Congress passed the Interstate Commerce Act, creating the Interstate Commerce Commission. This made railroads the first U.S. industry to become subject to comprehensive federal economic regulation. The ICC would control wide areas of railroad operations for the next 108 years and nearly destroy the industry.

Elkins Act of 1903 Strengthened the Interstate Commerce Act of 1887 Imposed heavy fines on railroads offering rebates and shippers accepting them. The Elkins Act of 1903 strengthened the Interstate Commerce Act of 1887 by imposing heavy fines on railroads offering rebates, and on shippers accepting them. It prohibited unequal treatment of rail shippers, therefore the railroads could not effectively offer their services using their full range of marketing techniques, Nor could they promote special shipper relationships, without risking undue attention by the Commission's Bureau of Enforcement.

Surface Transportation Board (STB) Replaced the ICC in 1995 Shift in Control from Shippers to the Railroads The ICC was replaced by the STB, Surface Transportation Board in 1995. Back then, shippers had more clout with the ICC, but today, the railroads have the clout with the STB. The ICC had expertise concerning the tariff-based rate structure, and shippers had no hesitancy turning to the agency to invoke its power in this area. Railroads, on the other hand, did not have a comparable advantage.

The Peak Period of Railroads In 1916, there were over 1,500 railroads operating in the U.S. They operated on about 254,000 miles of rail Employed 1.8 million people. Largest U.S. Employer The peak period for railroads was in 1916, there were over 1,500 railroads operating in the U S, and they operated on about 254,000 miles of rail and employed 1.8 million people. At the time, this was the largest employer in the US

Shipper Advantages Mandatory Interchange Nonnegotiable Tariff Rates Interchange traffic w/out discrimination Contract-like preferences were illegal Nonnegotiable Tariff Rates ICC Enforcement The Advantages Shippers enjoyed during this peak period, were that the U.S. railroads had to interchange traffic without discrimination throughout the rail system. This Mandatory interchange, made the multi-carrier U.S. railroad system operate as a true network. Bolstering the shippers’ routing obligations was the assurance that they had remedies available at the ICC if there was any perceived discriminatory treatment. The agency spent an inordinate amount of enforcement effort, tracking down and disciplining carriers appearing to give preferred shippers special unwarranted treatment. Contract-like preferences were illegal per se. This had a profound impact on railroad management, effectively emasculating any real “marketing” initiatives prior to the Staggers Act. Another advantage was Tariff rates. Given the vast number of actual and potential interchanges in the 254,000 mile system, along with the non negotiable tariff rates, shippers had access to numerous route combinations with alternative carriers and carrier combinations for their traffic, and could also rely on the ICC to enforce service obligations by those carriers.

Government Intervention Federal Government seized control of railroads during World War I 1920s returned to private ownership Rundown condition By 1940s Unregulated Competitors Automobiles, buses, trucks, planes, pipelines, etc. The federal government seized control of the railroads for the duration of World War I. By the time they were returned to private ownership in 1920, they were in seriously run down condition and in need of substantial maintenance & improvement. By the 1940’s, automobiles, large buses, trucks, planes, and pipelines, supported by government subsidies, and less burdened by regulation than railroads, have become full fledged competitors to railroads.

Bankruptcy in the Future After World War II, railroad invest billions New locomotives, freight equipment, passenger trains, etc. Rail market share continues to decline Deferred Maintenance in the Billions Operate at Reduced Speeds Standing Derailment After WWII railroads invest billions of dollars in new locomotives, freight equipment, and passenger trains. In spite of the modernization, the decline in the rail market share that began before the war, continued to slide. By 1976, more than 47,000 rail miles had to be operated at reduced speed because of dangerous conditions. The amount of deferred maintenance was in the billions of dollars and the term "standing derailment" (in which stationary railcars simply fell off poorly maintained track) entered the railroad vocabulary.

Lead to Congressional Involvement! Bankruptcy Northeastern Railroads Midwestern Railroads Lead to Congressional Involvement! In 1976 the Penn Central and its various connecting Northeastern railroads, (the Pennsylvania Railroad, the New York Central, and the New York, New Haven, Hartford Railroad) filed for bankruptcy with the threat of further Midwestern railroad bankruptcies from (the Rock Island and the Milwaukee Road). Congress could no longer ignore the rail industry or depend upon the ICC to sort it out under unchanged regulatory statutes.

Consolidation from 1980 Avoid Bankruptcy or simply increase profits 1982 - WP & MP merge into UP 1985 – Milw Rds & Soo Line = CP 1986-87 – Seaboard System, B&O, C & O =CSXT 1988 – DRGW & SP 1988 – MKT = UP 1995 – CNW = UP 1995 – ATSF = BN 1996 – SP = UP

Deregulation was chose. Staggers Rail Act of 1980 Nationalization OR Deregulation Deregulation was chose. So along came the Staggers Act of 1980. The status quo was untenable, so Congress essentially had two options: nationalization, at a continuing cost of untold billions of dollars, or deregulation and reliance on the free market. Congress chose deregulation and passed the Staggers Rail Act of 1980

Post Staggers Rail Act 1980 1980s Over 40 Class I Railroads Today Only 7 Class I Railroads Of which 4 control over 95% of the U.S. railroad business. When Congress passed the Staggers Act in 1980 there were over 40 Class I railroads competing for business. Today, after over 50 mergers and consolidations, there are only 7 Class I railroads in North America and four of them control over 95 percent of the U.S. railroad business.

Staggers Act Worked For Class 1’s From the brink of bankruptcy in 1980 The free market place conditions allowed by Staggers produced 2006 4th quarter profits: BNSF $519 million Canadian National $499 million Canadian Pacific $145 million CSXT $347 million Kansas City Southern $88 million Norfolk Southern $385 million Union Pacific $485 million The bottom line!, the Staggers Act Worked! for the railroads. From the brink of bankruptcy in 1980, to this years second quarter profits of $519 million for the BNSF $499 million for the CN $145 million for the CP $347 million for the CSX $88.2 million for the KCS $385 million for the NS $485 million for the UP

Consequences Shippers captive to a single railroad. Lack of Competition This consolidation has led to whole states, regions, and entire industries becoming captive to a single railroad. This level of concentration and the lack of competition it has brought were never envisioned in the 1980 Act.

Railroad Classification Today 2006 Class 1 Railroads >$277M OR Class 11 Railroads > $20.5 M OR Class 111 Railroads < $20.5 OR There are approximately 150,000 miles (240,000 km) of railroad track in the United States, nearly all standard gauge. The following is a partial list of United States railroads which currently operate there. For former railroads, see List of defunct United States railroads.

Classifications Rarely Used Regional Railroads 350 miles $40 M Local Railroads Non-regional feeder railroads Switching & Terminal Railroads BRC 28 MILES Tomahawk Railroad Escanaba Lake Erie WGN Wis Great Northern Feeder line by Hayward The Belt Railway of Chicago (AAR reporting marks BRC), headquartered in Chicago, is the largest intermediate switching terminal railroad in the United States. It is co-owned by six Class I railroads — BNSF Railway, Canadian National Railway, Canadian Pacific Railway, CSX Transportation, Norfolk Southern Railway, and Union Pacific Railroad — each of which uses the switching and interchange facilities of the BRC. As Chicago is the largest central hub of the railroad industry, rail cars seldom travel cross-country without passing through Chicago. Owner lines and other railroads bring their trains to the Belt Railway to be separated, classified, and re-blocked into new trains for departure. The BRC also provides rail terminal services to approximately 100 local manufacturing industries. The company employs about 520 people,

Why short lines are needed In 1916 250,000 miles of track 1,500 + railroads 2006 – 500, regional & local rail roads (short line) railroads feeding the 7 class 1s 150,000 miles of track

The Role of The WSOR & Feeder R R WSOR is one of 34 Regional Railroads 700 miles of branch & mainline track 21 counties in Wisconsin Made up of defunct WI & C, M R, C&NW runs over UP & CP track Connects with 6 Class 1’s BNSF, CN, CP,UP,CSXT,NS The Wisconsin and Southern Railroad (AAR reporting marks WSOR) is a Class III shortline railroad operating in the southern portion of Wisconsin and the northeast corner of Illinois. WSOR runs over 700 miles of branch and mainline tracks which are jointly owned by the state of Wisconsin and the 21 counties that the railroad serves. The WSOR holds a 50 year operating agreement with the state of Wisconsin to operate on these tracks. Using existing rights of way, some of the bridges along the line date back as early as 1903. Much of the railroad's operating territory is formed from the defunct Wisconsin and Calumet Railroad, on tracks originally constructed by the Milwaukee Road and Chicago and North Western railroads. Within Wisconsin, WSOR connects with four western Class I railroads: BNSF Railway, Canadian National Railway, Canadian Pacific Railway and Union Pacific Railroad. With direct access to Chicago, WSOR connects with eastern Class I railroads CSX and Norfolk Southern Railroad. WSOR has access to harbor facilities in Prairie du Chien, and WSOR transload facilities are located in Milwaukee, Janesville, Madison, and Oshkosh. 22 grain elevators have located rail load-out facilities on the Wisconsin & Southern system

Operational costs 6 of the 7 class 1 railroads intend to spend over 1 B @ in 2007 on Maintenance of Way, Infrastructure, & Horsepower Without State & County help the WSOR’s could not compete or stay in business.

Operation Comparison TRACK ONLY Class 1 New Track 2m per mile Class 1 2m onlymi TRACK ONLY Class 1 New Track 2m per mile Rehab track $250,000.00 per mile WSOR $10,000.00 PER MILE

Private vs. Railroad Owned Equipment North America Rail Fleet Class I Railroad Private Short Line 1997 1.4 Million 37% 58% 5% 2004 1.6 Million 25% 69% 6% Data Source: AAR Umler File, Ownership Mark As for the change in equipment ownership. In 1997, the North American rail fleet consisted of just over 1.4 Million railcars 37% (518,000) were owned by the class 1 railroads; 58% were furnished by private owners, and 5% to the Short line Railroads. In 2004, the North American rail fleet consisted just under 1.6 Million railcars With only 25% (400,000) being owned by class 1 railroads, they reduced there exposure by 20% in 7 years. (518K to 400K) Leaving private car owners 69% of the fleet, and the last 6% filled in by short lines.