Managing Growing Capacity ISRI

1. Managing & Growing Capacity ISRI/Paper Stock Industries Fall ConferenceNovember 10, 2005 W. Baird Spicuzza Director Marketing Paper, Clay & Forest Products Norfolk Southern Corporation Good morning! Thank you for the opportunity to be here and to share some information with you about Norfolk Southern and the role that we play in the movement of paper in North America Good morning! Thank you for the opportunity to be here and to share some information with you about Norfolk Southern and the role that we play in the movement of paper in North America

2. Agenda Corporate Overview PC&FP Market Overview Equipment Status Equipment Utilization Initiatives I’m going to start out by giving you a brief overview of Norfolk Southern and then dial down to our paper, clay & forest products business, including recovered paper. Then I want to share with you some of the challenges we’re facing, particularly with regard to out rail car fleet and finally conclude with how we’re addressing those challenges. I’m going to start out by giving you a brief overview of Norfolk Southern and then dial down to our paper, clay & forest products business, including recovered paper. Then I want to share with you some of the challenges we’re facing, particularly with regard to out rail car fleet and finally conclude with how we’re addressing those challenges.

3. Norfolk Southern Who Are We? 2004 Statistics $7.3 billion in revenue 21,300 miles of track in 22 states, D.C. & Canada 28,057 employees 3,755 locomotives (owned and leased) 100,229 freight cars (owned and leased) There are six major rail carriers in North America – 2 in the eastern US, two operating principally in the western US, and 2 based north of the border in Canada. Literally hundreds of smaller rail carriers feed the majors. As far as Norfolk Southern is concerned, here are some key stats: There are six major rail carriers in North America – 2 in the eastern US, two operating principally in the western US, and 2 based north of the border in Canada. Literally hundreds of smaller rail carriers feed the majors. As far as Norfolk Southern is concerned, here are some key stats:

4. Here is a Norfolk Southern system map that shows our service territory highlighted with selected paper mills. Here is a Norfolk Southern system map that shows our service territory highlighted with selected paper mills.

5. 2004 NS Revenue by Business Unit Here is a revenue breakdown showing the components that comprise our book of business. The Paper, Clay & Forest Products group comprises nearly 10% of our revenue mix.  Here is a revenue breakdown showing the components that comprise our book of business. The Paper, Clay & Forest Products group comprises nearly 10% of our revenue mix. 

6. NS Carload Growth As most of you may know, the rail industry has enjoyed a boom in demand over the last several years. The rate of growth is slowing, but as you can see, our Paper business is up by 3% 9 months year-over-year, while volume overall is up by 5% during the same period. As most of you may know, the rail industry has enjoyed a boom in demand over the last several years. The rate of growth is slowing, but as you can see, our Paper business is up by 3% 9 months year-over-year, while volume overall is up by 5% during the same period.

7. TOP II Initiative(Thoroughbred Operating Plan) Network integration Integrate Intermodal, Auto, Unit Train, and Merchandise train network Focus on high volume corridors Size the operating plan to meet volume demands New TOP II plan complete September 2005 – ready for Fall Peak To deal with the surge in business, and to provide a more reliable service offering, we have moved to a scheduled rail network. More recently, we have made adjustments to our Thoroughbred Operating Plan to integrate all train movements in our network planning activities, including handling our peak fall demand and, very importantly, provide capacity for growth. To deal with the surge in business, and to provide a more reliable service offering, we have moved to a scheduled rail network. More recently, we have made adjustments to our Thoroughbred Operating Plan to integrate all train movements in our network planning activities, including handling our peak fall demand and, very importantly, provide capacity for growth.

8. Interline Service 72% of NS Paper, Clay & Forest Products Business Moves Interline CN, CSX, UP, KCS, BNSF, CP are our largest partners (in volume order) Periodic meeting with all Class I’s on interchange performance Movement to Scheduled Railroading Helping One very significant aspect of our business is the fact that near three quarters of our paper shipments move in connection with another rail carrier, commonly referred to interline movements. We have a variety of service and marketing initiatives under way with our connections to make such movements more seamless to our mutual customers. One very significant aspect of our business is the fact that near three quarters of our paper shipments move in connection with another rail carrier, commonly referred to interline movements. We have a variety of service and marketing initiatives under way with our connections to make such movements more seamless to our mutual customers.

9. Paper, Clay & Forest Products Market OverviewJan - Sep 2005 Volume This graphic provides a further breakdown of our carload volume associated with the Paper, Clay & Forest Products group. Our single largest segment is pulpboard with nearly a fourth of our shipments. Recovered paper represents 4% of paper carloads, about the equivalent of two trainloads per week. This graphic provides a further breakdown of our carload volume associated with the Paper, Clay & Forest Products group. Our single largest segment is pulpboard with nearly a fourth of our shipments. Recovered paper represents 4% of paper carloads, about the equivalent of two trainloads per week.

10. NS Recovered Paper Trends Shown here is a 9 month year-over-year comparison of recovered paper carload volume revenue, which, as you can see, is down, although you will also note that total revenue in this segment is up for the period, reflecting increased yields on remaining business. Shown here is a 9 month year-over-year comparison of recovered paper carload volume revenue, which, as you can see, is down, although you will also note that total revenue in this segment is up for the period, reflecting increased yields on remaining business.

11. NS’ Recovered Paper Market Drivers Returns on Recovered Paper Historically Low Backhaul Strategy Execution Largely Ineffective Transactional Pricing – Migrating Toward Web-Based Scale Coverage Car Cycles Long Car Cleanliness for Next Load Unsatisfactory I’d like to talk for a moment on some of the challenges facing our participation in the recovered paper transportation market. These include: Low yields Ineffective execution of backhaul strategies. Large volume of small quotes. Excessive turn times on equipment. Dirty cars after unloading. I’d like to talk for a moment on some of the challenges facing our participation in the recovered paper transportation market. These include: Low yields Ineffective execution of backhaul strategies. Large volume of small quotes. Excessive turn times on equipment. Dirty cars after unloading.

12. Paper Boxcar Fleet by Marketing Car Type Speaking of rail cars, this pie chart shows the breakdown of the Norfolk Southern owned boxcar fleet. The workhorse continues to be the 50 foot, 70 ton rigid underframe car, which is primarily used in pulpboard moves and is very suitable for recovered paper shipments. Speaking of rail cars, this pie chart shows the breakdown of the Norfolk Southern owned boxcar fleet. The workhorse continues to be the 50 foot, 70 ton rigid underframe car, which is primarily used in pulpboard moves and is very suitable for recovered paper shipments.

13. Paper Boxcar FleetAging Profile The big fleet issue is the aging of our equipment. 3,500 of our 8,000 box cars will reach a 40-year life in the next five to 10 years representing huge fleet attrition and an ominous reinvestment requirement. The big fleet issue is the aging of our equipment. 3,500 of our 8,000 box cars will reach a 40-year life in the next five to 10 years representing huge fleet attrition and an ominous reinvestment requirement.

14. Paper Fleet Improvements Fleet Additions 75 recently-built 50-foot high roofs added December 2004 225 new 60-foot high roofs added March 2005 150 new 50-foot high roofs will be added February 2006 Fleet repairs and renovations (Jan – Jun 2005) Door program competed for 766 cars Medium program completed on 48 cars Medium program and life extension completed on 62 cars Norfolk Southern continues to invest in our box car fleet through additions and accelerated repair programs to facilitate a net increase in carrying capacity as shown by these statistics. Norfolk Southern continues to invest in our box car fleet through additions and accelerated repair programs to facilitate a net increase in carrying capacity as shown by these statistics.

15. New Car Capacity/Cost Issues Future Economic Challenge Escalating new car prices in excess of 35% will challenge industry additions. Increased internal competition for equipment capital Cost Issues High steel prices & component shortages are expected to keep new car prices up indefinitely. Builders no longer offer fixed prices, prices are tied to steel/component prices just prior to build. Delivery Issues New car deliveries have lengthy lead times as far out as 6 to 12 months tied to: Upswing in orders Component shortage (Fewer US based casting companies & replacement of defective Mexican units will drive more imports) Future additions to capacity, or even replacement capacity, will be much more difficult due to a number of challenges, including the rapidly increasing cost of new cars and internal competition for capital dollars as Norfolk Southern endeavors to responsibly manage its growth. In 2006, we expect Capex to be about $1.1 billion. Future additions to capacity, or even replacement capacity, will be much more difficult due to a number of challenges, including the rapidly increasing cost of new cars and internal competition for capital dollars as Norfolk Southern endeavors to responsibly manage its growth. In 2006, we expect Capex to be about $1.1 billion.

16. Freight Car Initiatives To Improve Effective Capacity In addition to focusing on better forecasting for long-term needs, NS is addressing increased capacity needs now & in future (Fall Peak Demand) through: Increased repairs – Overall 2005 plan 30% greater units than 2004. 1,200 car door program; 925 program boxcar repairs Life Extensions – Extending life of 150 boxcars Improved Technology – Improve productivity Continued improvements in utilization Expanded use of contractors to clean & prep cars Increased use of TTX equipment Acquisitions of high quality cars Lease Renewals What to do? We feel that there a number of ways to effectively increase capacity short of outright acquisition. I will discuss some of these shown here in greater detail. What to do? We feel that there a number of ways to effectively increase capacity short of outright acquisition. I will discuss some of these shown here in greater detail.

17. Equipment Utilization NS is developing tools to examine every segment of the equipment cycle with an eye towards reducing non-productive time. Car Days per Load Miles per Car Day Contribution per Car Day Our primary goal is effective yield management of our fleet, much in the same way that airlines use revenue per passenger mile, but with the hope that our balance sheet will continue to look a bit a better than the airline industry’s. Essentially, we are talking about a “best use” strategy for our rail cars where equipment is employed in the most productive lanes. Our primary goal is effective yield management of our fleet, much in the same way that airlines use revenue per passenger mile, but with the hope that our balance sheet will continue to look a bit a better than the airline industry’s. Essentially, we are talking about a “best use” strategy for our rail cars where equipment is employed in the most productive lanes.

18. Car Distribution Utilization Initiatives Key utilization improvement initiatives that have enhanced effective capacity include: Converted boxcar location pools into free-running commodity pools serving various locations. This impacted 7,500 paper cars. Participant in North American Boxcar Pool (1,900 cars or 22% of total contributed). Participant in TBOX (60-ft) industry free-running pool. Outside of acquisitions and repair programs, our main thrust has been to improve the efficiency of our existing fleet more effective car distribution. This includes the elimination of customer-specific pools to reduce empty miles and improve car cycle times. This also includes our participation in rail industry free-running pools to accomplish these same objectives. Outside of acquisitions and repair programs, our main thrust has been to improve the efficiency of our existing fleet more effective car distribution. This includes the elimination of customer-specific pools to reduce empty miles and improve car cycle times. This also includes our participation in rail industry free-running pools to accomplish these same objectives.

19. Pre-Free Running Pools(Inefficient Empty Repositioning) Typical distribution practice: This graphic shows what often happens with customer-assigned pools in combination with general service movements. These three loaded movements have significant empty miles associated with them. This graphic shows what often happens with customer-assigned pools in combination with general service movements. These three loaded movements have significant empty miles associated with them.

20. Free Running Fleets (NABP / TTX / NS) More Efficient Than Location Assignments Using free running cars, we can minimize empty miles and improve equipment velocity. Nothing new to the trucking industry, but it’s something that the rail industry has struggled with for years. Our box car fleet cycles a very sad once per month average. Using free running cars, we can minimize empty miles and improve equipment velocity. Nothing new to the trucking industry, but it’s something that the rail industry has struggled with for years. Our box car fleet cycles a very sad once per month average.

21. Impact of Utilization Initiatives This table shows the specific benefit of the migration toward free-running cars. The only disappointment in these metrics is that there hasn’t been more cycle time improvements, but this may be due to the mix of business more so than a systemic problem. This table shows the specific benefit of the migration toward free-running cars. The only disappointment in these metrics is that there hasn’t been more cycle time improvements, but this may be due to the mix of business more so than a systemic problem.

22. Car Cleaning & PreppingUtilization/Car Quality NS’s investment in on-site car cleaners & prepping operators generate car day savings. NS currently operates 25 cleanout sites (17 are boxcar sites), and 3 mobile cleanout operations and we plan to add more sites as needs are identified. For boxcars alone, the industry has gained an equivalent supply of 1,200 boxcars from Norfolk Southern’s efforts NS cleaning/prepping facilities. July 15, 2005 Car Cleaning Charge Another initiative that we’ve undertaken to improve car utilization and increase availability is the use contracted cleanout sites to prep cars for loading. Cars and inspected and cleaned of leftover dunnage and residual lading, which makes them otherwise unsuitable for loading pulpboard, newsprint, cut sheet, etc. This interim step precludes cars from being rejected and the associated switching cost and lost car days. But the long-term plan is to after the offenders who leave our cars dirty. Accordingly, this summer, we’ve instituted a dirty car charge to be assessed against receivers who leave material in our equipment. Another initiative that we’ve undertaken to improve car utilization and increase availability is the use contracted cleanout sites to prep cars for loading. Cars and inspected and cleaned of leftover dunnage and residual lading, which makes them otherwise unsuitable for loading pulpboard, newsprint, cut sheet, etc. This interim step precludes cars from being rejected and the associated switching cost and lost car days. But the long-term plan is to after the offenders who leave our cars dirty. Accordingly, this summer, we’ve instituted a dirty car charge to be assessed against receivers who leave material in our equipment.

23. Customer Support How can Customers Enhance Capacity? Place accurate car orders at least a week in advance. Order cars through NS’s web-based e-Cars ordering system. Work with us to identify opportunities where specific pools can be converted to free-running pools. Properly clean and remove debris before releasing empties. This will reduce rejects and out-of-service car days. Ensure proper loading/unloading procedures are being followed to avoid damage that could put cars out-of-service. NS brochures, videos & other materials are available. Seek ways to improve origin/destination dwell time. Provide accurate long-term carload forecasts. Maximize car loading capacity without overloading. We’re continually working with our customers to help themselves by helping us to become more effective in meeting equipment capacity demands with steps such as these listed here. As is often the case, communication of critical information is the key, but so is the adoption of appropriate business practices and procedures that will be mutually-beneficial in the long term. We’re continually working with our customers to help themselves by helping us to become more effective in meeting equipment capacity demands with steps such as these listed here. As is often the case, communication of critical information is the key, but so is the adoption of appropriate business practices and procedures that will be mutually-beneficial in the long term.

24. 2006 Utilization Improvement Opportunities NS responsibilities: NS transit (TOP and LOPA) Car distribution ( Pool consolidation, Optimization model) Customer responsibilities: Load/Unload dwell: 6 – 8 days, 25% of total cycle Bad order and reject out-of-service time: 1 – 2 days, 8% of total days. Customers use of equipment is root cause: Use of fork trucks to open doors Product loaded against doors Abandoned dunnage and debris In turn, we are focusing on making sure that we do what we should be doing to provide consistent, reliable service through our Thoroughbred Operating Plan, which is how we run trains across our network, as well as LOPA, or Local Operating Plan Adherence, which is how we measure that industries are properly served. Improving our operations coupled with optimized car distribution will improve our efficiency and effectively add capacity. In turn, we’re asking our customers to take steps to help us by no longer using our cars as storage and not to damage our equipment, thereby taking it out of service. In turn, we are focusing on making sure that we do what we should be doing to provide consistent, reliable service through our Thoroughbred Operating Plan, which is how we run trains across our network, as well as LOPA, or Local Operating Plan Adherence, which is how we measure that industries are properly served. Improving our operations coupled with optimized car distribution will improve our efficiency and effectively add capacity. In turn, we’re asking our customers to take steps to help us by no longer using our cars as storage and not to damage our equipment, thereby taking it out of service.

25. In summary, we have undertaken significant measures to provide for responsible growth that provides fair returns. We remain very interested in growing our participation in the recovered paper market and we will be taking specific initiatives in 2006 to become a more effective presence in this market. Thank you for you time and attention. In summary, we have undertaken significant measures to provide for responsible growth that provides fair returns. We remain very interested in growing our participation in the recovered paper market and we will be taking specific initiatives in 2006 to become a more effective presence in this market. Thank you for you time and attention.