Update on the North American Rail Equipment Market

Barbara Wilson, President Surface Transportation Group, January 2018

© 2018 Wells Fargo Bank, N.A. All rights reserved. Wells Fargo Rail Corporation is not regulated in Canada as a financial institution. Agenda

Today’s discussion will focus on: . Wells Fargo Rail Overview Opinions expressed . Economic Overview & Railcar Impact and topics discussed – Impacts to Rail from 2017 Tax Reform are my personal . Railcar Market Overview opinions and not – Market Opportunities & Challenges those of Wells – Carloads – Orders, Deliveries, and Backlog Fargo Rail or Wells – N.A. Fleet Utilization Fargo. . Key Car Types Impacting the N.A. Railcar Market – Coal – Grain – Sand – Plastics . Market Conclusions & 2018 Forecast

Wells Fargo Rail owns 175,000 railcars and 1,700 locomotives

Rebranded from Rail in 2016 with purchase of GE Rail . 225 employees, based in Rosemont, IL

Products: . Customized Operating Leases . Full Service & Net Lease . Finance Leases: long term net leases (10+ years), lessee may have a purchase option at the end of the lease Equipment . Equipment Management: WFR by Type manages equipment owned by other companies

. All staff in-house including customer service, accounting and inspectors

. Largest private railcar fleet in North America

Economic Overview & Railcar Impact

Growth in U.S. economy continues, but effects of strong performance are having lackluster impact on North American rail carloads

. 2.8% GDP growth projected in 2018, up from 2.2% growth in 2017 U.S. Growth . Inflation and interest rates remain low, healthy corporate balance Outlook sheets, commodity price rebound Rail Impact: Slow increase in North American Carloads

Global & Industrial . Industrial Production up 4% q/q in 4Q17 after stagnating in 2016 . Stability & Growth in global trade strengthening Weaker U.S. $ Rail Impact: Boost in U.S. exports support box and intermodal traffic

. Housing: low existing home inventory spurring construction Domestic . Consumer spending supported by balance sheets & jobs Tailwinds Rail Impact: Increases in demand for aggregate and box cars

. Higher energy prices and global oil demand Low Domestic . Low cost producer of natural gas, plastic pellet expansion Natural Gas Prices Rail Impact: Increase in demand for small cube covered hoppers for frac sand and plastic pellet cars

Source: Wells Fargo Securities, Wells Fargo Rail

Impacts to Rail from the 2017 Tax Reform

2017 Tax Reform Impacting Railcar Finance Market

. Top corporate tax rate reduced from 35% to 21% effective January 1, 2018

. The corporate Alternative Minimum Tax is repealed

. For tax years 2018 through 2023, 100% tax expensing of qualifying rail assets replaces MACRS

. NOLs may no longer be carried back and deductions are limited to 80% of taxable income

What Could These Mean for the 2018 Rail Leasing Market?

. Lessors/Shippers evaluating the impact of lower tax rates and 100% tax recovery to returns on railcar investments

. Some Lessors/Shippers evaluating capacity to absorb 100% tax recovery in conjunction with NOL changes

. Changes may accelerate the sale of older fully tax depreciated assets that would be taxed at lower rates and reinvestment in newer assets that can be 100% expensed for tax in 2018 and forward Railcar Market Overview Market Challenges and Opportunities

. Rail freight demand N.A. carloads remain well below historical average but continue to improve from 2016 trough; up 2.9% in 2017 continues to . Fleet utilization improvement; averaging 77% in 2017 from 69% in recover 2016

Oversupplied new . Builders working through backlog, backlog at 64k cars at 9/17 equipment . New car deliveries trending towards equilibrium market . Estimated that 40k cars were delivered in 2017

. Strong sale prices for assets with leases attached Robust secondary . Multiple players bidding for assets as investors seek yield in low-rate market environment

Accelerated . New car surplus creates challenging market for older assets scrapping of older . Relatively healthy scrap prices projected for 2018 assets . Opportunities to scrap less desirable assets; 4,750s, coal cars

Improving . Petchem expansion driving demand for plastics conditions in 2nd . Construction markets driving demand for aggregate cars half of 2018 . Growth in frac sand usage driving demand for small cubes

Carload data: AAR January 2018, utilization data: FTR January 2018

State of the Industry Today

North American Carloads Changes in North American Carloads 2017 vs. 2016 (2016 vs. 2017) Stone, Sand 21.5% Winners & Gravel . Stone, Sand & Gravel: + 21.5% Iron & Steel Scrap 8.3% . One of the few bright spots in 2017 with record carloads Coal 7.7% . Iron & Steel Scrap: +8.3% . Coal: +7.7% Stone, Clay & Glass 2.1% . Weak 2016 comps and robust export demand triggered short term coal Chemicals 0.8% demand, propping up carloads Petroleum 0.8% . Stone Clay & Glass: +2.1% Waste & Scrap 0.7% Losers . Automotive: -6.2% Pulp & Paper -0.4% . Forest Products: -1.7% Grain -1.0% . Grain: -1.o% . Decrease in grain carloads largely Forest Products -1.7% due to increased global supply creating low crop pricing Automotive -6.2%

-15% -5% 5% 15% 25%

Source: AAR January 2018 - carloads data as of 12/30/17 Railcar Builds, Backlog, and Deliveries

Railcar builds expected to have reached cycle bottom in 2017

North American Railcar Deliveries 90,000 Covered Hopper Tank Other Freight 80,000 Forecast 70,000

60,000

50,000

40,000

30,000

20,000

10,000

0 2011 2015 2013 2012 2014 2016 2010 2007 2005 2006 2009 2008 2017 E 2021 F 2021 2019 F 2018 F 2020 F 2020

2017 YTD: Deliveries: 32k cars, Orders: 32k cars

Source: FTR, RSI Railcar Builds, Backlog, and Deliveries

Car builders working through overhang of large backlogs of small cube covered hoppers and tank cars built up in the CBR and fracking boom; market moving towards equilibrium

Railcar Backlog 2005 to Present 160,000 140,000

120,000

100,000

80,000

60,000 64,253 40,000

20,000

0 1Q11 1Q17 1Q15 3Q11 1Q13 1Q12 1Q14 1Q16 1Q10 3Q17 3Q15 3Q13 3Q12 1Q07 3Q14 3Q16 1Q05 3Q10 1Q06 1Q09 1Q08 3Q07 3Q05 3Q06 3Q09 3Q08

Source: RSI

North American Railcars in Storage

~81% railcar utilization estimated at January 1, 2018 an increase from 77% at January 1, 2017

North American Fleet % of Stored and Empty Railcars % Stored % In Service 100% 90% 80% 70% 60% 74% 80% 74% 78% 84% 91% 85% 50% 40% 30% 20% 10% 26% 20% 26% 22% 16% 9% 15% 0% Covered Tanks Gondolas Open Top Flats Box All Hoppers Hoppers Other % Change +2% +2% +4% 0% +4% +2% +4% y/y Present estimate is 312k idle assets, year over year decrease of ~35k cars

Source: Railinc, AAR January 2018 Key Car Types Impacting the N.A. Railcar Market North American Carloads and Impact on Coal Equipment

2017 uptick in coal demand, but long-term outlook calls for further decline

Total Coal Carloads 2006 vs. 2018F Coal Share of Rail Carloads by Car Type (Originated carloads) 2006 vs. 2018F (Excludes Intermodal) 9,000,000 All Other Carloads Coal Gondolas Coal Hoppers 100% -51% 11% 8,000,000 90% 17% 7,000,000 80% 14% 18% 6,000,000 70% 5,000,000 60% 50% 4,000,000 40% 3,000,000 75% 30% 65% 2,000,000 20% 1,000,000 10% 0 0% 2006 2018 F 2006 2018 F

Total Rail carloads have fallen 26% (2006 vs. 2018); Coal has declined from 35% to 25% of total volume

Source: FTR Challenging Grain Market and Oversupply of New Cars

Increased global grain production threatening U.S. market share of exports; depressed crop prices & record crops causing farmers to delay shipments

Global Exports of Grain Grain Carloads by Car Type by Market Share 1995 vs. 2014 (Most recent data) N.A. South America Other 100% 14% 45% 42% 90% 40% 40%

40% 80% 35% 35% 33% 33% 70% 30% 27% 60% 25% 25% 4,750s 93% 25% 50% 5,150s 20% 40% 86% 15% 30% % of Grain Carloads Grain of % 10% 20%

5% 10% 7% 0% 0% 2015 2017 E 2026 F 1995 2014 Excess of grain cars in the market; retirements required in the 4,750 c/f fleet

Source: USDA, AAR Frac Sand Demand Accelerating Since Trough in 2Q16

2017 set a new record for proppant demand Increases in lease rates for small cubes leading to new car investment

North American Proppant Demand 7% CAGR projected 2017 to 2020 120 Forecast

100

80

60 MM Tons 40

20

0 2011 2017 2015 2013 2012 2014 2010 2016 2019 F 2018 F 2020 F

By 2021, demand is forecast to grow to more than double the previous peak in 2014

Source: U.S. State Filings (actual) Wells Fargo Securities (forecast) Confidential Capacity Expansions Driving Plastic Pellet Covered Hopper Demand

Capacity coming online through 2020 will generate demand for additional plastic pellet cars

N.A. Plastic Pellet New Car Deliveries

9,000 Forecast 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2015 2013 2012 2014 2016 2017 E 2017 2021 F 2019 F 2018 F 2020 F

Deliveries for plastic pellet cars have significantly increased; estimated current backlog at 12k cars

Source: UMLER, WFR Confidential Equipment Market Conclusions

Confidential 2018 Outlook

. Demand for cars to continue Sand . Surplus from 2016 has disappeared and lease rates rebounding accordingly, triggering new car investment

. Challenging year for domestic market due to increased global Grain competition and increased supply of new cars . Robust scrapping in 4,750 c/f fleet

. Some utilization improvement projected as cars are scrapped Coal . N.A. Fleet is years away from equilibrium . Hopper demand far exceeds demand for gondolas

. Production originally slated for 2016/17 is expected to come Plastics online in the second half of 2018 . Increase in plastic pellet car demand, with average of 5k new car deliveries projected each year through 2021

. 2018 forecast for modest improvement in carloads with 2.4% Carloads & growth and average fleet utilization of ~82% Utilization . N.A. fleet retirements projected at >60k cars, new car deliveries at 41k = slightly shrinking fleet . Surplus of cars will continue across many commodity sectors

Contact Information

Barbara W. Wilson

President Wells Fargo Rail

[email protected] Office: 847-384-5324

www.wellsfargorail.com