EFTA01371099

31 October 2017 Railroads Canadian Rails revenue over the last five years, however, driving weaker net income conversion during this time. The vast majority of free cash flow has been used to repurchase stock, with average share counts down about 15% since 2010 (3% CAGR). Figure 33: Cash Flow Metrics - U.S. Rails (CSX, NSC, Figure 34: Cash Flow Metrics Canadian Rails (CNI & CP cumulative) 2005-t8 UNP cumulative) 2005. 16 16,000 14.003 12,000 10,000 8,000 6,000 4,003 2,000 0 I 120% 100% 80% 60% 40% 20% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Operatng Cash flow WM V.S. Free Call Flow ...Wiwi FCC as • % el NI Swot OwarA• brit Co'w Mops 8.000 7.000 6.030 5.030 4,000 3/00 2100 1.000 0 2005 2004 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2=±±. Operating Cash Now MK Free Gosh Flow wowing %of NI Samoa Dainty Solt ConnNom 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Partly driving the significant capex investment cycle was heavy investment in new locomotives to handle growing energy-related volumes (prior to the decline in oil prices) and Tier 4 emissions requirements which came into effect in 2015. Significant investments have also been made on positive train control systems (PTC), which is a collision avoidance system that was mandated by the U.S. Congress in 2008 to be fully operational on locomotives operating in the U.S. by the end of 2020. We estimate the total cost of PTC at just under $7B for the Class I railroads under our coverage universe with a little over 56B at CSX, NSC, and UNP and 5900M at CP and CNI, though the vast majority (-90%) already outlayed. As such, capex appears to have peaked and is poised to decline as a % of sales for he majority of Class l's, with the exception of CNI and CP who are shifting their focus to revenue growth. I I Figure 35: U.S. rails are expected to see an improvement Figure 36: Canadian rails are investing for growth in free cash flow conversion 20.030 18.030 16.000 14.000 12.030 10000 8.030 6.000 4.000 2,000 120% 10.000 9,000 100% 8,000 7,000 80% COCO 60% 5,000 4,000 40% 3,000 20% 2.000 0% =...., US. Operating Cash Flow NM U.S freeCashRow ....0.46F as • % of NI 4, 44'1140tettelitoste Operating Cash Flow mai nee Cash Flow .%0( NI Sane DetneNIElank ONNOWNRINIIN Sose• Decele•• awfe Crow. Amp Page 20 90% 80% 70% 60% 50% 40% 30% 20% 10% Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0064290 SDNY_GM_00210474 EFTA01371099