JANUARY 22, 2016

Presentation By: Dr. Alexander Metcalf

Transportation Economics & Management Systems, Inc.

IMPACTOFTHE PANAMACANALANDMARKET

OPPORTUNITYFORTEXAS

PresentationTo:

12thAnnual

SouthwesternRailConference

HOSTEDBY

TEMS, Inc.. !2

TEMSKEYEXPERIENCE

TEMS, Inc.. !3

TEXASISGROWINGSTRONGLY

• TexasGDPhasbeengrowingby7percenteachyear

• Texasadded1.3millionpeoplefrom2010to2013

• Populationtogrowfrom26milliontodayto40millionby2050.

TexasTransportation

Systemneedsincrease

efficiencyandcapacityto

meetfutureneeds.

FEASIBILITY

TEMS, Inc.. !4

SUSTAINEDGROWTHISFORECASTEDFEASIBILITY

Historically,TexasGDPgrowthratehasbeensignificantlyhigherthanUSgrowthRate.“Forecasts

fromtheTexasComptrollerofPublicAccountspredictthattheU.S.andTexaseconomieswillrebound

fromthecurrentrecession(intermsofGSPandGDP),andgrowat2.6percentand3.37percent,

respectively,onaverage,peryearbetween2010and2035(Figure2-1).7Anefficientandwell-

maintainedtransportationsystemisvitaltothestate‘sabilitytoremaineconomicallycompetitiveat

homeandabroad.”

TheTexasComptroller

ForecastisinREALDOLLARS

Addinga2%annualinflation

getsusrightbackintothe5+%

range.

Averagegrowthratewillbe

5.4%(NOMINALDOLLARS)

fortheTexasmarketarea*Source:TexasStatewideLong-RangeTransportationPlan2035at:

http://ftp.dot.state.tx.us/pub/txdot-info/tpp/rural_2035/report/slrtp_final_ch2.pdf

TEMS, Inc.. !5

CONTAINERIMPORTSARECLOSELYLINKEDTO

NOMINALGDP

Growthratehasonlybeenmoderatedbyrecentrecession.

FEASIBILITY

TEMS, Inc.. !6

TEXASMARKETIS3RDLARGESTINTHEUSONLYAFTERCALIFORNIAANDNY/NJ(WHICHISDIVIDEDBETWEENTHETWOSTATES)

FEASIBILITY

NewYorkPortisdivided

betweentwostates

TEMS, Inc.. !7

HOWEVER,DFWANDMOSTOFTEXAS

ARECURRENTLYSERVEDOUTOFLA/LB

ThisisduetobigshipsontheWestCoastversussmallshipsinHouston;butHoustonfares

noworsethanEastCoastPortsinregardtoservingonlyitslocal(truck)porthinterland

area.MostofHouston’straffictodayisEuropeanandCaribbean-based.

USAsiaPortHinterlandsToday

FEASIBILITY

TEMS, Inc.. !8

CURRENTLYHOUSTON’SSHAREOFASIAN

CONTAINERSIS22%OFTEXASMARKET

Thisresultsfromtheeconomicsofsmallships,wheresmallvesselscurrentlyholdmore

than50%marketsharevs.theWestCoastinHouston.Houstoncurrentlyhasonlya

negligibleshareofDFWmarket,butTexasportssharewillincreasewithlargeships

providedtheyhaveeffectiveaccesstotheDFWmarket.

FEASIBILITY

HOUSTON DALLAS-FORTWORTH

TEMS, Inc.. !9

DFWASIANCONTAINERMARKETWILLGROWBYA

FACTOROFTHREE

FEASIBILITY

Thisgrowthwillputalotofstrainonexistingrailinfrastructureandcapacity

TEMS, Inc.. !10

CURRENTCOSTTRADEOFF:SMALLSHIPS

ChinaLA/LB$180

liftcost

DFW

Houston$180

liftcost

7,350x.02=

$147

11,994x.04=

$479

1,452x.12+

$125=$299

300x.12+

$125=$1611,601x.12+

$125=$317

DeliveredCostperTEUfromChina:

ToDFW:

ViaLA/LB:$147+$180+$299= $626

ViaHouston:$479+$180+$161= $820

ToHouston

ViaLA/LB:$147+$180+$317= $644

ViaHoustonDirect:$479+$180= $659

AboutEqual

Clear

Advantage

toLA/LB

FEASIBILITY

TEMS, Inc.. !11

PANAMACANALWILLCHANGETHESITUATION

CapacityofNewPanamaxshipwillincrease2-3times,butrequires48-51feetdraft.

OnlyafewGulfandEastCoastportscansupportthis,butinthelongtermFreeport

willbeabletoaccommodatetheselargerships.

33

41

43

50

51

WaterDepth(ft)

48

FEASIBILITY

TEMS, Inc.. !12

ECONOMIESOFSCALEFORBIGGERSHIPS

• 2015Shippingcostwilldecreasefrom$0.04/TEU·Mileto$0.02/TEU·Mile

(70%loadingfactorandinflationsince2001).

• Thiscutsshippingline-haulcostsinhalf.

• EastCoastPortsareexpandingtheircapabilities,soBigShipswillbeusedin

bothPacificandAtlantic(e.g.Suez)tradelanes.

Source:Reproduced

basedonFigure4.3

Impactsof

ContainershipSize,

ServiceRoutes,and

DemandOnTexasGulf

Ports,TXDOT,2001

FEASIBILITY

TEMS, Inc.. !13

BIGSHIPSCOMETOTHEGULFANDEASTCOAST

FROMASIA.THISTIPSTHECOMPETITIVEBALANCEAfterPanamaCanalExpansion

FEASIBILITY

TheCompetitiveBalancewiththeWestCoastPortswillchangedramaticallyifaSouth

Texasporthas50feetofwaterandaneffectiveinlanddistributionnetwork

TEMS, Inc.. !14

FUTURECOSTTRADEOFF:LARGESHIPS

ChinaLA/LB$180

liftcost

DFW

Houston$180

liftcost

7,350x.02=

$147

11,994x.02=

$240

1,452x.12+

$125=$299

300x.12+

$125=$1611,601x.12+

$125=$317

DeliveredCostperTEUfromChina:

ToDFW:

ViaLA/LB:$147+$180+$299= $626

ViaHouston:$240+$180+$161= $581

ToHouston

ViaLA/LB:$147+$180+$317= $644

ViaHoustonDirect:$240+$180= $420

Advantage

toHouston

Clear

Advantage

toHouston

FEASIBILITY

TEMS, Inc.. !15

CONTAINERMARKETSHAREATDFWFEASIBILITY

Notes:

1. Estimateapprox.750,000containerstotalIMXmarketinandoutofDFWtoday.

2. Freeportwillcomeonlinebetween2020and2025.By2025fullyoperational.

3. FreeportwouldaddrailEuropeanboxesthatarecurrentlytruckedwhichresultsinanimmediateboostinrailtraffic

WithLarge-Vessel

economicsandarail

connection,Freeport

cancompeteatDFW.

Aforecastedmore

thantriplingofrail

intermodaldemandby

2035willput

considerablepressure

onbothraillineand

terminalcapacityin

Texas

9trainsperday

(fromWestCoast)

16trainsperday,

6fromFPT

27trainsperday,

11fromFPT

SystemUnder

Construction

ExistingRailFEU

FreeportAsiaFEU

FreeportEuropeFEU

TEMS, Inc.. !16

OVERALLFREEPORTCONTAINERMARKETFORECASTFEASIBILITY

TEMS, Inc.. !17

RAILINTEGRATIONFORPORTFREEPORT

ConceptStudyenvisioned– PortFreeport

Improvements– RailLinktoInlandPorts

at:• Dallas

• FortWorth

• SanAntonio

– IntegratedHubat:• Rosenberg

FEASIBILITY

(FORTHOOD)

TEMS, Inc.. !18

PRELIMINARYFINANCIALANALYSIS

• ConceptualAnalysisundertakenfromthepointofviewoftheRailroadAuthority,innominalyearof

expenditure(YOE)dollars.FreeporttoCaldwellest.cost$880millionassumedinoperationby2025

• Thisanalysisisbasedon40¢percarmileand$28.41perLoadedTEU(assuming100%emptyreturn)

• Duetothelengthoftherouteandforecastedtonnage,operatingandcapitalmaintenanceisasignificant

componentofthecorridor’scoststructure,whichmustberecoveredthroughusagefees.

• AtacompetitivetollinglevelandexistingcarloadtrafficnorthofRosenbergtoCaldwell;4.4%interest

and1.4%inflationtheNPVis$567millionpositive:thissuggeststhataninfrastructureauthoritycould

fullyserviceitsBondsfromfeeswithoutneedingsubsidyorgrantassistance.

• Morestudyisneededtopositivelyconfirmcostsandrevenues,butsuggestspotentialforaRRIFloanor

useofRevenueBondsasalow-costfinancingvehiclefordevelopingneededinfrastructureimprovements

FEASIBILITY

TEMS, Inc.. !19

SH36ARAILCORRIDORJOBCREATION

PortofFreeport2035:

10,000-20,000jobs.

RosenbergHub2035:

5,000-10,000jobs

• Currentmodelingsuggestsrailtraffic

volumeswillcontinuetoincreaseand

UPandBNSFwillneedtodevelop

additionalrailyardcapacityinthe

Houstonarea.• Rosenbergiswellpositionedinthe

futuretobecomeamajorraillogistics

hub.Shiftingintermodalactivityfrom

UPEnglewoodandBNSFPearlandto

Rosenbergwouldreducerail

congestionindowntownHouston.• Overall,potentialis15,000-

30,000jobslikelyintheSH36A

corridor,mostlyconsistingof

distributionandindustrialjobs.

FEASIBILITY

TEMS, Inc.. !20

SH36ARAILINCOMEIMPACTS–

INCOMEANDSALESTAXREVENUESBY2035

TotalIncomeIncrease

(million$perYear)

TotalStateSalesTaxIncrease

(million$perYear)

IncomeIncrease(million$)

$-

$200

$400

$600

$800

JobsUnderExisgngPahernofDistribugon

768.022

424.6654

DirectJobs DirectJobsand

IndirectJobs

SalesTaxIncrease(m

illion$)

$-

$11

$22

$33

$44

JobsUnderExisgngPahernofDistribugon

43.5568

24.0841

DirectJobs DirectJobsand

IndirectJobs

FEASIBILITY

TEMS, Inc.. !21

• TheportsofSeattleandTacomajoinedforcesinAugust2015tounifymanagementofourmarinecargofacilitiesandbusinesstostrengthenthePugetSoundgatewayandattractmoremarinecargoandjobsfortheregion

• Theportstogetherhaveninecontainerterminals,butnoneofthemarecurrentlyabletoeffectivelyhandlebigships.

• “Weusedtothink,themorecompetitionthebetter,”saidJockO’Connell,aninternationaltradeeconomist.Buttheadventofultra-largeships,someofwhichcancarryupto20,000cargocontainers,hasthrownportoperationsforaloop,hesaid.

• BookoutsaysiftheseaportsinSeattleandTacomawanttoremainadestinationforcargoships,theymustinvest."Wedon'thaveachoice,"shesaid."Wecan'tchoosetojusthandlesmallships.Weneedtohavethefacilitiesthatwillhandletheshipsofthefuture."

PORTSALLIANCEFORTEXAS?

PortsofSeattle,TacomaAgreetoAllianceathttp://www.wsj.com/articles/ports-of-seattle-tacoma-agree-to-

alliance-1433542075;Seattle,TacomaPortsVotetoFormAlliancehttp://www.wsj.com/articles/seattle-tacoma-ports-

vote-to-form-alliance-1438714867;https://www.nwseaportalliance.com;https://www.linkedin.com/pulse/seattle-

tacoma-gateway-development-strategy-unfolds-shawn-goh?forceNoSplash=true;http://kuow.org/post/notice-fewer-

containers-puget-sound-ports-canada-grabbed-our-business

FEASIBILITY

TEMS, Inc.. !22

THANKYOU

FORMOREINFORMATIONCONTACT

ALEXANDERE.METCALF,PHD

PRESIDENT

301-846-0700

AMETCALF@TEMSINC.COM