EFTA01371097

31 October 2017 Railroads Canadian Rails Figure 30: Employee productivity. as measured by GTMs per employee (in M) 25 20.1 20 19.0 20.0 14.6 Ui "18 1,200 1,100 1,061 1,000 15 13.3 900 -110 I- us 800 700 5 600 0 500 Figure 31: Fuel efficiency, as measured by GTMs per gallon of diesel consumed CM CP UNP NSC CSX Sans Dead. Sint CoVenv 1,035 I 880 I 801 919 I CM CP UNP NSC CSX Sens Genes art &Man Map Compensation/labor related costs are the largest component of operating expenses for a railroad - accounting for over 35% of expenses on average. In our view, this highlights the importance of employee productivity as it provides the largest opportunity for margin improvement. When we compare different cost contributions across our coverage universe, this is where CP and CNI see the largest difference relative to the other rails. We believe a large driver behind this is the Precision Railroading model implemented by Hunter Harrison at both CP and CNI (we go into more details in company-specific sections). However, we note that Canadian rails benefit from pension differences which optically reduces comp/labor expenses by roughly 3-4% points. We note that this will change on January 1, 2018 as these gains will flow through other income. Figure 32: Employee productivity is the largest source of margin differential for the industry (2016) 50% 45% 40% t 35% c • CNI 30% 25% 0 4 dE 20% ri I us 15% 10% ffi HU 5% 0% ffin i f . PH 1111 Comp/Labor Purchased services, materials, other SOW* DatiON &IS, Cowin morn Page 18 e ca • CP • UNP irNSC CSX g III 42 III Fuel D&A Equipment & Other Rents Profit Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL SDNY_GM_00210472 DB-SDNY-0064288 EFTA01371097