Container-‐On-‐Barge for Illinois Fueled by Biodiesel an Operating

Container-on-Barge for Illinois Fueled by Biodiesel An Operating Plan and Business Plan

August 27, 2011

Table of Contents

1.0 Introduction and Overview ------4

2.0 Research/Investigation/Reports ------6

3.0 Lessons to Consider ------8

4.0 Inland Rivers Operations ------9 4.1 Ownership ------9 4.2 Towboats/Barges ------9 4.3 River Operations Modes ------10 4.4 The “Power Split” ------12 4.5 River Freight Pricing ------13

5.0 Designing Illinois COB ------15 5.1 Design Alternatives ------15 5.1.1 Purchased ------15 5.1.2 Leased ------18 5.1.3 Unit Tow ------19

6.0 Gulf COB – Cargo Flexibility ------21

7.0 COB Program Synergy ------23

8.0 Demurrage Issues ------25

9.0 Calling Ports ------27 9.1 Shuttle COB ------27 9.1.1 North ------28 9.1.2 South ------31 9.2 Gulf COB ------34 9.2.1 North ------35 9.2.2 South ------37

10.0 COB Operating Plans ------43 10.1 COB Itineraries ------44

11.0 Component Specifications ------50 11.1 Shuttle COB ------50 11.2 Gulf COB ------54 11.3 Crew/Supplies ------55 11.3.1 Crew ------55 11.3.2 Insurance ------57 11.3.3 O&M ------57 11.3.4 OH Reserve ------57 11.3.5 Admin. O/H ------58 11.3.6 Fuel ------58

12.0 COB Expense Models ------59

13.0 COB Outside Revenue ------59 13.1 Gulf COB ------59 13.2 Shuttle COB ------62

14.0 Bringing It All Together ------63

15.0 Biodiesel ------70

16.0 Findings/Recommendations ------74

Appendix 1 – Business Plan and Financial Projections

Appendix 2 – Grants/Loans /DERA Application

Executive Summary

This report addresses the concept of Container-on-Barge (COB) from the perspective of inland river operations on behalf of, and funded by, the Illinois Soybean Association. A number of reports and studies have been completed in recent years regarding broad aspects of COB. In most cases, these earlier works on COB focus on the COB market potential within a specific geographic region of the US. Very little has been written (or at least published), however, where actual river operations of COB are revealed and/or applied in detail. As the river movement of container barges is the most costly and complex element of COB, this has been a curious oversight. We begin our work by reviewing the history and general progression (and, sometimes, regression) of inland river transportation is the US. We then move on to a review of COB work by others that has preceded our efforts, and in some cases provides pointers to where we should be going. This leads to a discussion of COB successes and failures to date (more of the latter and less of the former); and, lessons that should have been learned (but often were not) from those early attempts at COB. There are several such lessons that are recognized and incorporated in the proposed plans and programs presented. We then review the structure of the inland river transportation industry from river carrier ownership, to types of equipment, operating modes, and freight pricing practices. All of those subjects bear on the design of a successful COB program. COB Program design alternatives are presented for both Illinois Waterway Shuttle COB and a Illinois-to-Gulf COB programs, including strategies, ports of call, equipment, provisions and crewing specifications/costs, and itineraries. The sum of these components is then presented in spread sheet form to reveal the projected cost of COB - as designed - per Twenty Foot Equivalent Unit (TEU) of the several strategies; and, how that cost compares with respective competitive transportation modes. The program design then introduces use of biodiesel to power the COB strategies, including prior industry experience and mandatory required equipment modifications to successfully incorporate biodiesel at high ratios. Finally, we list a series of findings and recommendations, including:

• Both COB on the Illinois Waterway (shuttle), and Illinois-to-Gulf COB can be efficient and competitive with other inland container transportation modes with conventional river equipment – even at reduced container volumes that could be expected initially – if creative (but not radical) strategies are utilized in COB river operations. • Use of biodiesel in the COB program appears to be viable, particularly in the context of a COB dedicated unit tow. • Organization and management of COB may be best served from the platform of a non-profit shippers association to see the programs through formative years without the pressure of risk/return that has contributed to most of the historic COB failures.

• While the Shuttle COB on the Illinois River can function as a stand-alone, the Illinois-to-Gulf COB may require coordination with a Shuttle COB to function competitively. Our recommendation is that the two programs function in unison with common ownership and management.

1.0 Introduction and Overview

Water transportation, both blue water, ocean and river, has remained an important asset of nature to man throughout the history of civilization. Indeed, it is likely that man utilized the water for transportation even before the evolution of the wheel. Civilizations with access to water transportation prospered while those that did not, or failed to fully develop use of this natural asset, generally do not appear in our history books with stories of glory and grandeur. As one inventories the regions of the world in a 21st Century context, it can still be said that those regions that both have access to, and utilize, water transportation resources are those regions that also demonstrate robust economies.

While the Mediterranean Basin represents the earliest recorded example of economies and civilizations based on water transportation, Europe later became the finest example of utilizing rivers as a transportation artery. Over the centuries the Rhine River (and tributaries) as well as the Danube River (and its tributaries) have moved people, commerce and armies. Control of those transportation arteries became strategic focus of battles between tribes and nations. Much later in history Russia (hampered by north flowing rivers), and later still, China, have developed their river systems to move significant commerce internally and to ocean ports. The latest realization of the value of river transport has been South America. Over the last three decades it has been the development of river transportation in Brazil and Argentina that has contributed heavily to the ability of agricultural interests in those countries to bring commodities to export markets – bringing serious competition to US agricultural producers in the process.

European immigrants brought centuries of river transport experience to the New World. Early explorers of North America quickly recognized the ease of travel and exploration accorded by the natural North American river systems. Their Native American guides/vendors/customers also had, for centuries, utilized the North American river system. Much of the movement west from the New England States to the Central portions of the US was via the Ohio River and tributaries. Much of frontier lore of early settlement of North America focuses on travels on the Ohio and Mississippi River systems.

With the 19th Century came the steam powered riverboat – the steamboat. No longer was river travel with the current the only (or most feasible) direction. With steam power and paddlewheels river transportation became a two-way affair. Now not only could there be traffic in both directions, but any river with sufficient depth became a potential traffic artery – including the Upper Mississippi. Shallow draft steamboats brought most of the early settlers to Illinois, and virtually all of their supplies in and commodities back out.

The heyday of the steamboat era was short lived, and river transportation declined appreciably as the railroads extended service west utilizing gigantic federal land grants. The irregular service

provided by river transport due to seasonally fluctuating river levels as well as the limited shallow draft steamboat vessel capacity proved non-competitive with the rails. A series of congressional appropriations and massive public works projects in the 1930’s and thereafter brought river transportation in the US back to the forefront. Lock and dam projects on the Upper Mississippi, Ohio, Illinois, and Tennessee rivers resulted in assured 6/9/12 foot government maintained navigation channels on nearly 25,000 miles of rivers throughout the US. Today river transportation connects Minneapolis to not only New Orleans, but also Chicago, Pittsburgh, Cincinnati, Nashville, West Florida ports, Houston, and Brownsville, TX (7 miles from Mexico). In between those potential destinations are St. Louis, Memphis and many other US river port cities.

The US river system annually moves 800,000,000 tons of cargo. The majority of those movements have historically been bulk, such as agricultural products, coal, fertilizer, salt and ores. In addition, liquid cargo is moved by tank barge – usually as dedicated movements. Today the typical single river movement approaches 23,000 tons (15 barges) on the “locking” rivers (Illinois, Upper Mississippi, Ohio and Tennessee) and as much as 70,000 tons (45 barges) on the Lower Mississippi below Cairo, Illinois.

Since the mid 20th Century, the movement of freight – both internationally and domestically – has rapidly turned from break bulk strategies to shipping containers. The explosion of global commerce in the late 20th Century and early 21st Century has only added to the momentum to the containerized freight trend. Illinois has shared in the growth of both global trade and the utilization of containerized freight. Containers of goods manufactured in the far corners of the world arrive daily in Illinois; and, containers of products manufactured in Illinois depart daily for the far corners of the world. In very recent years Illinois-grown agricultural commodities have also begun moving by container to world buyers. That trend is destined for continued growth – particularly if Illinois shippers can develop the means to move containers to ocean ports at a cost competitive with – or even less than – those experienced by producers of the same commodities in areas located closer to the ocean ports.

Today containers move to/from Illinois primarily by Class I. rail to Chicago and points east; and, to the West Coast ports. Virtually all of the rail container movement in Illinois originates/arrives at the rail ramps located in Rochelle and the Joliet area. To date the transportation mode offering the least cost strategy for the movement of any type of freight to/from Illinois – the inland river system - carries little container freight of any type.

But it could. One element of this project is to address how that could happen, both as a shuttle service along the Illinois Waterway to/from Joliet area rail container ramps; and, as a container service from the Illinois Waterway to/from Gulf of Mexico ocean container ports.

A second and companion element of this project is to incorporate use biodiesel as fuel a COB program.

Initially, we will provide a snapshot of how the river transportation industry is organized and functioning today, and how that organization and function relates to the potential movement of containers on the river to/from Illinois river ports. Then, recognizing that no river ports in Illinois

5 are now specifically set up to handle containers, a strategy is suggested as to how Illinois river port location and infrastructure could be addressed to best support an Illinois COB program. With a Illinois COB river port structure assumed, we address three alternative operating COB models that could be the foundation for either or both of the two Illinois COB scenarios – and how the two scenarios could be coordinated to the benefit of Illinois shippers. Finally, we address issues of operating entity and finance for the recommended COB/Biodiesel strategy.

Since agricultural commodities, and Value Added derivatives of those commodities, will continue to be the largest arena of the Illinois export economy by cargo volume, this trade (both the inputs and outputs) seems to be the natural cornerstone for an Illinois COB program. But, the universe of container freight mode today addresses a wide range of cargo, of which agricultural commodities today remains a small proportion. While other container cargo opportunities for an Illinois COB program will be referred to here – including cargo that may be induced to convert from the bulk mode to the container mode by a reduced cost that results from COB - no attempt is made to address those other opportunities in depth.

2.0 Container-on-Barge Research/Investigation/Reports

Two centuries ago Edmund Burke said, “Those who don't know history are destined to repeat it.”. That observation has been repeated by others since then with slightly different wording, but the message remains the same – past success or failure with virtually an endeavor should be considered as one addresses a similar endeavor anew. Without question this admonition is applicable to Container-on-Barge.

COB has intrigued transportation professionals for decades as a measure to combine the logistical advantages of containers with the efficiency of water transport. This interest has been heightened in recent years with the focus on both the escalating cost of transportation fuel, and the governmental initiatives toward improved air quality. The contractor has reviewed the majority of the COB research work carried on over the past decade, including the following:

• Container-on-Barge Port Concept Paper (Southeastern Ohio Port Authority, 2008) • Container-on-Barge Pre-Feasibility Study (Port of Pittsburgh Commission, 2003) • Alabama Freight Mobility Study Phase I (The Coalition of Alabama Waterway Associations by Hanson Professional Services Inc., 2007) • Alabama Freight Mobility Study Phase II (The Coalition of Alabama Waterway Associations by Hanson Professional Services Inc., 2009) • A Modal Comparison of Domestic Freight Transportation Effects on the General Public (Texas Transportation Institute, 2007, 2009) • Feasibility of a Container-on-Barge Network Along the Texas Gulf Coast (Bomba and Harrison, Transportation Research Record, Paper No. 02-4007

• Container-on-Barge Service for Missouri Waterways (Missouri department of Transportation, 2006) • Marketing of Container-on-Barge (COB) Transportation to Promote Increased Utilization of Arkansas Waterways (Boardman and Malstrom, University of Arkansas, Undated) • Exporting of Local Grains via Container from an Illinois River Agricultural Hub (Vachal and Berwick, 2008) • COB for Minnesota, (Unpublished White paper by Dillerud for the Minnesota Department of Transportation, 2004) • Can Marine Highways Deliver?, (Fritelli, Congressional Research Service (January, 2010)

As the report titles suggest, most of this prior work has focused on specific geographic areas or river system segments; and most of the work has addressed COB in general as a potentially lost cost/more efficient alternative to trucking or rail of typical container cargo. Only the 2004 MnDOT work (by this contractor), and the 2008 work (Vachal/Berwick on behalf of the Illinois Soybean Association and the Illinois farm Bureau) seriously considered agricultural commodities as a primary COB cargo. Perhaps that is logical considering the significant agricultural economies of Minnesota and Illinois compared to the other geographic applications of COB represented. Even so, it is significant that agricultural container cargo has been essentially overlooked in so many COB research projects. Short of addressing each of the documents cited above, one can condense several common observations and conclusions from this earlier work:

• COB requires thinking well outside of the usual and historic barge transportation “box” to succeed. The bulk cargo mentality of the river carriers – even with bulk cargo in containers – is not a recipe for COB success. • The “miles” component of the freight transportation ton/mile performance measure is as - or more - critical than the “tons” component for COB – essentially the reverse of the customary perspective of river carriers. This reversal of the ton/mile measure relates to both “just-in-time” considerations of many container shippers, and the “box velocity” concerns of the container owners (primarily ocean container carriers). • COB must be viewed by ocean container carriers, river carriers, shippers and river terminals holistically, rather than “load it, and forget it”. The current tendency for these components of a container movement to think and operate in independent “silos” – as with bulk movements – is not consistent with container operations. Understanding, coordination and some measure of single-point control across all container movement components is paramount for COB success. • It should be assumed that competing transportation modes paralleling river corridors will not stand by idly as a COB program secures market share at their expense. There is at least one example of truckers reducing rates to less than the cost of providing service simply to undermine a COB program in its infancy – regardless of the efficiency and real cost savings COB provides shippers. In addition, it is well known that the rail industry

has for (now) centuries engaged in “water induced” rate structures where inherently more cost-efficient river transportation competes in parallel with rail corridors. • Shippers and container owners have long-standing relationships with their existing ground-based container carriers. Those relationships cannot be expected to be supplanted over night. A container shipper does not relish the thought of returning to his rail or truck container carrier on his knees should a COB program not succeed. Some shippers have already faced that issue, as will be seen below. • A significant key to successful COB is reliability. As long as the shipper can count on his cargo arriving on schedule – or the ocean carrier can rely on that box arriving to meet a vessel call – box velocity (and to some degree transit cost) remain concerns, but not as great as might be assumed. The shipper must be able to count on COB to arrive on time, and continue through good times and bad. • One –way container movement with no backhaul revenues to the river carriers’ equipment– particularly over long transit distances – can spell doom for the COB program. In addition, reliance on the business of a single or small group of common cargo shippers will undo a COB program should hard times visit those shippers – even briefly. • It is interesting (and telling) that the same colloquial comment was found in at least two of the reports cited above – independently arrived at, it appears. In characterizing the difficulty for COB to catch on, both authors observed that the over-riding issue for COB is, “What comes first, the chicken or the egg?”. Shippers say that they will use COB when carriers offer the service on a continuous and reliable basis; and, river carriers say that they will provide the service (usually on their existing operating terms) once shippers commit to use it in volume. Neither party has been willing to undertake the perceived risk of becoming the pioneer – in part due to the long line of COB program failures discussed later.

3.0 The COB “On the Water” Experience – Lessons to Consider

Many of the observations and conclusions noted above have been witnessed by the several container-on-barge programs that have been initiated in recent years. Unfortunately, there have been more COB disappointments than successes – perhaps because (at least in some cases) insufficient heed was paid to those observations and conclusions, or some of those observations and conclusions actually have resulted from those disappointments. A short list of inland river COB disappointments include:

• Albany Express Service. Initiated in 2003, this COB program ran from New York/New Jersey to Albany, New York on the Hudson River. The service moved bulk commodities northbound and empty containers southbound over a one-way distance of approximately 150 miles. Even with significant Federal, State, and Local operating subsidies, the COB service was providing but 10% cost savings over trucking the same route. When

discontinued in 2006, the COB service was moving no more than 30 containers per voyage. It important to note that the “Can Marine Highways Deliver” report of the Congressional Research Service refers to an earlier COB study that suggests 20-30% savings over trucking is likely necessary for COB long term success. • Osprey Lines. Initiated in 2004 it was primarily repositioning empty containers to/from Houston and New Orleans to/from Memphis. Subsequent years found baled cotton, lumber and glucose moved by COB from Memphis to New Orleans. COB service was briefly extended to Louisville, but abandoned shortly thereafter. All COB service was discontinued in 2009. The “Can Marine Highways Deliver” report referenced above suggests that the failure of this COB service was, “apparently due to a lack of northbound cargo”. • CSG Company, LLC. This venture, announced in 2005, was to provide twice monthly COB service from Pittsburgh to New Orleans moving container cargos of minerals, chemicals and consumer goods for export. Little information has been located regarding this venture, but it appears it has been discontinued.

But, inland rivers COB has not been totally an exercise in failure and disappointment. A notable long-term success story has been the Columbia-Snake River COB venture, established in 1975, and still operating successfully today. Covering 465 miles from the Port of Portland into Oregon and Idaho, this COB service moves a variety of containerized cargo, with the primary focus on agricultural commodities – including frozen French Fries in refrigerated containers. The recent recession has reduced the annual volume from the high water mark of 10,000 TEU, but, with the recent re-opening of the Columbia-Snake Waterway after a months-long closure for lock rehabilitation, the first tow included a container barge.

4.0 Inland Rivers Operations Structure

While there will be no attempt here to fully describe the operating structure of the inland rivers transportation mode, a basic understanding of the established operating procedures, opportunities and constraints of the system are important as a foundation for the most effective application of COB – particularly COB to /from Illinois ports.

Inland river transportation operations can be (and are) segregated into several subsets that constitute operating constraints/opportunities. Each subset contributes to the overall cost of movement of any commodity by river – including containers.

4.1 River Carrier Ownership

Today the ownership of river transportation assets is concentrated with a few firms as never before. For example, during the 1980’s no fewer than 20 individually owned river carriers

9 provided service to the Illinois Waterway ports. Through business consolidations during a 20 year financial “shakeout” of the industry, the number of river carriers serving Illinois ports has reduced to fewer than 10, with 6 firms predominating.

The river industry has historically been a combination of shipper-owned carriers, independent “common carriers” (prior to industry deregulation, at least), and independent “exempt” (bulk) carriers. The industry consolidation over the past 20 + years has all but eliminated the small to mid-sized river carrier serving Illinois ports in favor of a few very large independent carriers and the shipper-owned carriers (grain marketing firms). Only two truly independent mid-size carriers serve Illinois ports today at any appreciable scale. A potential river shipper without carrier ownership has few options open to influence pricing and service through competition for its business.

4.2 Towboats/Barges

Just as the rail mode of transportation is physically composed of rail cars and locomotives, the river mode is composed of barges and towboats (“power”). The moving combination of barges and towboat is referred to as a “tow”, not a boat or a barge. For reasons that are not as apparent today as they were in the past, most river carriers address barges and towboats as separate cost centers – almost two companies within one. While there are several reasons for this that transcend the scope of this paper, one historic reason has been that there are owners of barges that operate no power (and not enough power to serve their barge fleet scale); and, there are owners of power that own/operate few or no barges (“tramp towers”). This was far more prevalent during the heady years of capital equipment construction resulting from Investment Tax Credits and Accelerated Depreciation than today, when “doctor/lawyer” investment barges swelled the barge fleet to a scale that contributed to the economic difficulties the industry has faced for the past two decades.

While there remain today barge owners that do not own (or at least technically operate) towboats, and there remain towboat owners that do not own barges, that has become the significant exception. Even where carriers may not actually own and/or operate towboats (as is the case with one large and at least two mid-size carriers serving Illinois ports today), those barge-owning carriers surely control their power through charter agreements. Very few barge owners today purchase their towing on the “open market”, which has resulted in very few “tramp” towboat operators remaining that serve the Illinois market. – or, even anywhere above St. Louis.

The message to the Container-on-Barge initiative from the above discussion should be that, if prompt and reliable movement of barges of containers is a critical element of an Illinois COB program, control of power will be an important program component. Counting on carriers now serving Illinois for “tramp rides” on a timely basis may not coincide with the reliability/timeliness required for COB.

4.3 River Operations Modes

The river transportation industry features two somewhat different operating modes: “Barge Lining”, and “Dedicated Unit Tow”. While there are examples of cross-over or iterations of the two modes, those have be rare exceptions in response to peculiar market conditions, such as historic high grain markets at the time of the unprecedented (before or since) Russian grain sales late in the 20th Century.

The barge line mode is primarily a dry cargo strategy, and is the most prevalent and accounts for the vast majority of tonnage moved to/from the Illinois Waterway. This mode involves barges and towboat circulating essentially independently. Carriers’ towboats run semi- regular routes (such as from St. Louis to Illinois Waterway locations, or from St. Louis to New Orleans), picking up or dropping barges owned by the carrier from ports along that specific route. Harbor service firms shuttle and care for the barges of several carriers in each river port.

The dedicated unit tow is, today, the domain of the liquid cargo market on the river. The unit tow unites the barges with the towboat on a semi-permanent basis, with the towboat standing by during the loading/discharge of the barges. Generally the routing of integrated unit tows is irregular, depending on liquid cargo markets. The dedicated unit tow usually features a towboat power-to-tow tonnage ratio somewhat higher than that of the barge line tow, resulting in somewhat greater tow speed – speed being a relative term on the river, where 1 mile per hour can represent 15% speed increase – and tow navigation safety. Added power-to- barge ratios also speak to operating safety. While no accident on the waterways is acceptable, an accident involving a liquid cargo barge can be a disaster. Towboats exclusively utilized for unit tows are often configured (as to power train) somewhat differently than towboats used for barge line towing as well – related to incremental tow speed increases.

Dedicated unit towing is preferred for liquid cargos from at least three perspectives:

1.) Tow Speed. Liquid cargo (at least various petroleum based liquids) ranges in cargo value between twice and three times that of the predominant dry cargos. The time-value of the cargo in transit becomes a factor that must be addressed by towing mode.

2.) Cargo integrity/safety. As noted previously, the consequences of cargo loss and/or compromised cargo integrity is higher with liquid cargo both due to its physical properties, and due to its higher cost. Specially trained/licensed crew members accompany liquid cargo tows as on-board custodians of the cargo.

3.) Related to #2, some liquid cargo requires either an external source of heat (as with liquid asphalt), or cold (as with anhydrous ammonia). In those cases those heat/cold sources (on barge hot oil boilers, or compressors) require constant attention by skilled operators while the tow is underway.

While liquid cargo dedicated unit tows are made up of barges of a different design and dimensions than those of barge line tows, there are liquid cargos that do move in tanker barges of

11 dry cargo barge dimensions, and in barge line tows. These cargos are the less toxic and/or potentially hazardous liquids such as liquid fertilizers and vegetable oils.

4.4 The “Power Split”

All US inland rivers were not created equal with respect to the ease and efficiency of transportation. Cargos moving to/from Illinois river ports to/from Gulf of Mexico ports travel over least two, and even three, different rivers of varying operating draft and constrictions. Each of those river types are addressed by the river industry (at least by the dry cargo barge line operators) – in terms of equipment and operations – in a distinctive and separate manner.

The river reach from Chicago to St. Louis on the Illinois Waterway is a “locking river”, with 4 locks for a river tow to negotiate from St. Louis to Peoria; and, 7 additional locks to negotiate from Peoria to Chicago Harbor. From St. Louis to New Orleans the Mississippi is an “open” river, with no locks encountered. The Gulf Intracoastal Canal east/west of New Orleans (providing potential access to the container ports of Mobile and Houston) is again a “locking river” (but with a just a handful of locks), but with otherwise constrained operating conditions due to navigational channel width, and stretches of navigation subject to Gulf of Mexico winds and wave action.

Virtually all of the barge line river carriers serving Illinois have addressed the “two faces” of the Mississippi in a similar manner: “double loop towing”. The carrier operates several towboats capable of 15 barge tows (5,000 to 6,000 horsepower) above St. Louis; and, larger towboats (6,000 to 10,000 horsepower), with as many as 40 barge tows, below St. Louis. Gaining nearly three times the efficiency below St. Louis, with towboat operating costs significantly less than three times as high, the barge towing efficiency is greater below St. Louis than above. A similar power/towing cost split exists with carriers serving the Upper Mississippi, Arkansas, Missouri, Tennessee, TennTom, Cumberland and Ohio Rivers.

Generally, the dedicated unit tow operators have not adopted the power split approach. Their towboats must be capable of handling their dedicated tows on any reach of the river system – thereby losing some efficiency over their barge line cousins on the Mississippi below St. Louis.

The Ports of Houston and Mobile are attractive Gulf Coast locations to “pair” with a Illinois COB operation – to avoid a the congestion, lack of container handling capacity, and high costs of New Orleans. To reach those destinations, however, requires dealing with yet another “power split” at New Orleans (or Baton Rouge). The Gulf Intracoastal Canal running from New Orleans (or Baton Rouge) west to Houston and east to Mobile is both a “locking river”, and is physically constrained as to navigation channel width. River tow size is generally limited to 6 dry cargo hopper barges.

Many barge line carriers choose not operate internal power east of west of New Orleans on the Intracoastal Waterway, with required dry cargo barge movements contracted to local towboats ranging from 800 to 2,000 horsepower on a “tramp” basis – at a significantly higher cost per mile than on the Mississippi River. Dedicated unit tows, however, generally ignore the power split,

12 and travel the Intracoastal to the Houston petro-chemical complex, or to Mobile in the same towboat/barge configuration as used on the Mississippi, regardless of efficiency.

The “power split” strategy commonly utilized by barge line carriers results in both additional costs and delays, compared with the unit tows that are not encumbered by that strategy. With towboat scheduling historically imprecise, barges often wait at St. Louis or Cairo, and at New Orleans for the next available towboat of that carrier, or an available “ride” on a “tramp” towboat. While the length of the delay can be mitigated at times with ride-swapping between carriers (“I have space on my boat today that I will swap for space on your boat next week, when my barges are ready to move.”), the St. Louis or Cairo delay can often reach 3 days in each direction; and, another 3 days in Baton Rouge/New Orleans in each direction, awaiting a ride to either Mobile or Houston. The barge line carrier power split operating strategy will usually cost the dry cargo barge cost center 6 days per round trip Illinois Waterway/New Orleans; 12 days per round trip Illinois Waterway/ Houston or Mobile. A barge destined west to Houston or east to Mobile from Illinois (or any river port north of St. Louis) could aggregate over several thousand dollars of cost center expense per barge per round trip as the result of the power split operating strategy common among barge line carriers, but not normally associated with dedicated unit tows.

Another aspect of the power split dynamics is that of barges being held in barge fleets while awaiting rides at the split points (St. Louis/Cairo, Baton Rouge/New Orleans and Houston/Mobile). While those holding fleets are monitored periodically for navigational security 24/7 by the fleet operators, barge cargo integrity is beyond the scope of such monitoring. Shipping containers loaded into dry cargo barges will leave the cargo box of those barges open to the weather (as well as to potential theft). Accumulating rain water in the open cargo boxes could compromise the lower layer of containers and cargo, if not regularly monitored and pumped.

4.5 River Freight Pricing

Perhaps no single subject regarding Illinois COB will prove more critical to the success of a program than that of the price the program will place on the movement a container in a shuttle program along the Illinois Waterway or from Illinois to a given Gulf Coast port. That, and reliability of schedule, are likely the two most important considerations to the potential COB shipper. While time-in-transit is a factor as well, that can be costed by the shipper in his overall logistics equation. The potential glitch in product availability caused by imprecise river transit times can result in serious consequences to the shipper of many traditional container cargos. As such, “chasing” ocean carrier schedules at coastal ports has also been suggested to be a requirement for an inland container carrier. It is here suggested that this amounts to the tail chasing the dog. The Illinois COB program should be the “dog”.

If an Illinois COB program is to prove truly beneficial to Illinois shippers, it is important to address the expense of a container move from a “cost of providing the service” perspective as well as (or even rather than) a “price quoted by carrier perspective”. This is particularly the case with the Illinois Waterway to Gulf movement. As with Class I rail and ocean freight, the pricing of river freight is often a mysterious subject – even to the experienced transportation professional. Unfortunately, bulk cargo river transportation pricing often bears as little

13 relationship to the cost of providing the service to the shipper – somewhat similar to the Class I. railroads’ artificial “water induced rates”. The river transportation mode is totally unregulated as to rates, with no “Public Tariffs” provided by any carrier to/from any destination. Lacking rate regulation by governmental oversight, river carrier rates impacting Illinois barge shippers (particularly to Gulf ports) are generally governed by the following:

• The grain markets. The majority of present river transportation volume is grain. Therefore, high grain prices equate to high river freight rates. This becomes a supply and demand situation, where high grain prices normally mean more grain moving to market, resulting in a greater demand for the transportation capacity to move the grain to market, and a bid-up barge freight market that bears little or no relationship to any increased cost to the carriers to provide the river transportation in those high freight rate markets – except somewhat more congestion/delay at locks. • Seasonality. With the grain market the single most important component of the river transportation industry for Illinois, the grain harvest period during which quantities of grain must move to market again impacts the supply/demand equation for barge freight (and rail freight as well), resulting in river freight rate spikes during the grain harvest season. • “Tariff”. Southbound bulk grain freight rates on the river are usually quoted to shippers as “a percentage of tariff “. “Tariff”, in this case, is a freight rate per ton established (by the former ICC) in 1976 as the compensatory price (not necessarily cost) to move a ton a bulk grain from the several reaches on the inland river system to the Baton Rouge/New Orleans export (discharge) ports. Those rates covered geographical “reaches” of the river. For instance, 100% of 1976 tariff at St. Louis is $3.99/ton, while 100% of tariff at mid- Illinois Waterway locations is $4.64 per ton. As you might expect, no grain moves at 100% of 1976 tariff today. In fact, the average grain rates over the past few seasons have been in the 400% range ($18.00/ton from Mid-Illinois Waterway loading locations), with occasional dips to as little as 300%, and spikes to nearly 1000%, depending of the grain market.

Northbound bulk cargo carried by barge line operators has historically been but a fraction of the volume of southbound grain cargo. Typically, 50% or more of the dry cargo barges entering the Illinois Waterway northbound do so empty. Those that are carrying northbound cargo are doing so at rates not as volatile as the southbound grain. Pricing of northbound bulk cargo (such as salt, fertilizer, cement and coal) is more closely related to actual cost to provide the service than the grain freight market. As such, northbound freight rates are more stable, month-to-month, and year-to-year. There are barge line carriers (notably the grain trading firm-captive carriers) that, at times, will even avoid northbound cargo altogether in order to get their barges quickly repositioned for the southbound grain trade – particularly during 500% + grain freight markets.

Essentially, north bound bulk dry cargo is priced based on the incremental cost to the carrier too provide the service, since most northbound river movements are viewed as a way to recover at least a portion of the cost to reposition barges for the lucrative southbound grain trade. Generally, carriers price northbound movements at a level to cover such incremental costs such as extra barge days to accommodate the loading/discharge of northbound cargo; vendor charges

14 for switching/fleeting/cleaning of the barge related to the north bounding loading/discharge; and, (in varying degrees) the added power cost to move a loaded barge versus an empty barge.

The added power cost factor in pricing northbound moves is still reflected by the “tramp” towing rates quoted to barge (only) owners at approximately a 50% premium to northbound loads over northbound empties. But, carriers towing their own barges on their own towboats can certainly adjust that (internal, in that case) premium significantly to positively impact a northbound freight rate bid. The performance (measured in miles over a time period) of today’s high horsepower towboats is not as impacted by northbound loads as was the case in the past. In fact, many towboat operators would prefer to have some loads in a tow to counteract the “windage factor” that results from 1,000 feet of empty barges rising 20 feet above the water in a cross wind.

5.0 Designing Illinois COB Programs

The dynamics of river transportation operations and pricing today are somewhat complex, but clearly focused and based on the bulk grain market. Illinois COB programs (particularly the Illinois Water/Gulf COB) may not be successful if they are assumed to operate within the operating/pricing structure of barge line carriers for at least the following reasons:

• The Power Split utilized by the carriers will not only add days-in-transit, but cost and schedule uncertainty to the program. All three factors appear to run counter to a successful COB program. The Power Split factor applies only to the Illinois/Gulf COB, and becomes even more critical to a program that contemplates port pairing with Houston or Mobile. • The barge line operating practices and pricing structure today continue to reflect the bulk grain markets, and operator strategies to most efficiently move bulk grain. To expect a barge line carrier to embrace the scheduling, cargo care, and time-in-transit requirements of COB in return for the limited volumes that can initially be offered with COB would seem to be improbable. • Most barge line carriers have huge investments in the existing operating mode, and in many cases the parent grain trading firms have equally large investments in bulk handling facilities. Operating to insure the best efficiency on those investments will remain most barge line carriers’ focus. An Illinois COB program (be it Illinois Waterway COB shuttle of Illinois to Gulf COB) that proposes to utilize existing barge line carriers’ will likely have to live by the bulk-focused operating mode of those carriers – and may not provide acceptable/expected service to container freight customers as a result.

5.1 Illinois COB Program Design Alternatives

It would appear that at least three COB operating alternatives are available for both the Illinois Waterway COB Shuttle and the Illinois/Gulf COB program:

1.) Carrier Dependent “Purchased Freight”

2.) Partially Carrier Dependent “Leased Barge(s)”

3.) Independent “Dedicate Unit Tow”

5.1.1 Purchased Freight

One approach to COB operations could be for the COB operating entity to simply purchase freight from barge line carriers – either northbound to the rail ramps from Mid-Illinois Waterway load points or southbound to the Gulf, as a posted COB schedule calls for a barge departure at either end of the route. For example, the COB operating might establish one or more “cut-off” dates at the north and south terminus of the selected route. Any containers tendered for the COB trip during that period (be it every 30 days, 15 days, or even weekly), must have arrived at the host COB terminals. If containers (whether one or many) have been tendered, and have arrived by that date, the COB operating entity would purchase barge freight in the spot market at the respective port.

At Mid-Illinois Waterway ports the freight purchased would be that of grain southbound. That means, of course, that the freight rate can vary from about $30,000 per barge to as much as $60,000 per barge to New Orleans – and, an additional $8-10,000 to Mobile or Houston. The rate the COB operating entity would pay would vary significantly southbound from the Illinois Waterway depending on the grain freight market for those same barges.

The scenario of the Illinois Waterway Shuttle (Joliet rail ramps to/from the Mid-Illinois Waterway ports) using a purchased freight scenario is somewhat more complex. Since round trip service is required, freight would be required to be purchased separately in both directions. In addition, freight rates on a per mile basis would be excessive due to barge towing minimum (floors) charges for short distance moves.

A major advantage of this strategy to the COB operating entity would be the ability to “pass” on the purchase of freight should no containers be tendered, and arrive at the host terminals by the established “cut-off” date. But, there would be several disadvantages of a Purchased Freight, including the following:

• There may be times where no barge freight is available at any rate at the scheduled date of need by the COB operating entity – either based on actual market, or for some less obvious reason. One can not forget the primary focus of most of the barge line industry – moving grain. The barge line carrier will naturally take care of his volume grain customer (and/or parent company) as its top priority. • Once the COB barge is loaded, the COB operating entity loses control over schedules. No firm schedule can be provided COB shippers for arrival at the terminal at the other end of the route. The barge may not leave the loading port for days; and may await a ride in at the trip terminus for days in either direction. • Adding COB loading ports at either end of the route (beyond a single matched pair) will entail added drop/pickup charges, as well as barge fleeting charges and barge day rental - all beyond the initial freight charges. Added ports will also add scheduling uncertainty, since the barge will again be awaiting a “ride” after loading at the secondary port. • It is unlikely that the barge line carrier will entertain moving barge loaded 3-high with containers, due to the concern with the third tier extending well above the height of the barge cargo box.

• A barge loaded with more than 60 - 20 foot containers which are loaded to maximum road legal weight will likely result in a barge draft of over 9 feet. Many carriers will not accept a barge loaded over 9 feet on the Illinois Waterway.

The Port of Pittsburgh’s earlier publication regarding COB reported that 2 barges could be circulated in dedicated COB service – Pittsburgh to Brownsville, TX. – with an annual subsidy to the start-up venture of $360,000, The author has learned from Port officials that this was a quote from a carrier, with no other details known. It is a reasonable assumption that a strategy similar to “Purchased Freight” was the basis for the Pittsburgh COB program cost estimate, with the only departure related to the more constant freight rates (not grain market-related) on the Upper Ohio River. It is likely that a carrier was willing to quote Pittsburgh Port officials fixed contract rates over an entire contract year.

5.1.2 Leased Barges/Purchased Towing

This strategy would have the operating entity leasing one or more suitable barges that would be operated on a semi-scheduled basis, utilizing “tramp “ towing, purchased from established river carriers. In a single barge scenario the barge would be booked to be moved on a date specific. On that specified date the barge would depart with whatever containers that had been tendered for movement. In the Illinois/Gulf COB scenario, should no containers be tendered for movement by the scheduled date of departure, the barge could be sold into the spot bulk market for immediate bulk cargo loading – at the prevailing market freight rate, minus a discount for the short notice loading- either northbound or southbound.

If, however, one or more container is/are tendered by the scheduled date of departure (in either direction) the barge would depart with those containers on schedule – regardless of how many are tendered. The reliability of the COB program would depend on the barge actually moving the containers tendered on the schedule promised the shipper, even if the revenue to the movement is far short of the break-even costs for the movement.

The operating entity would be required to schedule a wide window for arrival at the opposite end of the route, since the barge movement pace is essentially out of the operating entity’s control. An operating window of as many as 15 days southbound to New Orleans, and 20 days northbound from New Orleans to Illinois Waterway ports may be necessary to assure the single barge is on station at the scheduled departure dates – and arrive at least by a scheduled arrival date. If the route extends to Houston or Mobile, another 10 days would be required, both southbound and northbound.

The scheduling window for the Illinois Waterway COB Shuttle would depend on which Illinois Waterway port(s) is/are selected for the south Shuttle terminus. In this scenario, the barge(s) would, of course, contain “program” containers in both directions – empties southbound, and loads northbound.

Although confirmed with only one carrier to date, it would also be prudent to assume that the leased barge would be moved by the tower at the load rate – regardless of how many containers are in the barge; and, regardless of whether the containers are empty or loaded. It is also prudent

18 to assume that the carrier will not accept barges with containers loaded three-high – 25.5 feet above the water line – or, loaded out of trim. A short load of containers will need to be carefully distributed in the barge to avoid an out-of-trim condition.

A program on this strategy could be scaled up in volume as required by adding leased barges. With basic program management in place to operate barge #1, there would be little added management cost to the program until several more barges added – and finding prompt “rides” for those barges becomes increasingly difficult and time consuming.

The leased barge(s) COB strategy provides a measure of certainty and independence to the COB program not realized with the Purchased Freight strategy; while adding a measure of required commitment and management skill. The opportunity is there to save costs to the program over the Purchased Freight strategy, but the barge must always move on schedule, and can not be simply cancelled if the schedule is to be maintained. The major problem with the leased barge strategy remains the loss of control over the timing of barge movement.

5.1.3 Dedicated Unit Tow

The preferred operating strategy for COB has been suggested by others to be the dedicated unit tow, along a defined route, and on a reasonably fixed schedule. The COB report prepared for the Port of Pittsburgh suggests that a successful COB program (for Pittsburgh) should possess at least two critical operating characteristics:

1. “Paired Ports” COB service. 2. Dedicated barges and towing.

The unit tow strategy is applicable to both the Illinois COB Shuttle, and Illinois/Gulf COB, with two significant differences:

• The Shuttle COB would likely entail use of two-four open hopper dry cargo barges (no barge covers), or one or two flat deck barges and a single towboat of 1,000 to 1,500 horsepower. The Illinois/Gulf COB strategy would use up a larger number of dry cargo barges, and a proportionately larger horsepower towboat. • The dry cargo barges used with the Gulf COB program would include stackable covers (preferably the fiberglass type).

The unit tow is a strategy that would respond to those operational characteristics while operating close to break-even while the COB market develops. At the same time, the freight rate for container shipments would be established at a level that reflects the unit tow operating in an all- container mode at a determined percentage of container capacity. The unit tow would be dedicated as to route and schedule, but remain flexible at to cargo type – container or bulk. The unit tow would also be the minimum scale operation feasible – at the risk of not being the most efficient on all segments of the route.

The “augmenting feature” of the COB unit tow would be use of industry-standard jumbo hopper barges – with covers carried. Barges not required for the volume of containers available at either end of the routing would instead be sold at a discount (to incent stand-by loading and discharge) in the bulk market upon arrival. The key policy of the augmented unit tow would be that if, even a single TEU is in place for movement at either end of the routing, the barge necessary to handle that single TEU is committed for that purpose alone. That barge may move at a 1% load factor at times while establishing the integrity of the unit tow for COB. As container volume increases, that single barge will reach container capacity (southbound or northbound, or both), and a second barge of the tow will be committed to move containers at less than capacity – and so on, until the entire unit tow becomes exclusively COB. In the meantime, the tow is truly dedicated (both barges and power) with the bulk loadings and minimal outside “tramp” towing opportunities providing revenue to partially underwrite the build up of COB.

As to the scale of the unit tow, it appears that a 6 barge unit, powered by 2,500 horsepower, may be the minimum practical. At this scale, the towing cost to each barge on the Illinois Waterway would be slightly under that of the “tramp” towing market, and not more than 5 barges would need to be marketed for bulk loading – increasing the probability that the loadings could be accommodated on a reasonable stand-by basis. Also, there may be circumstances under which the tow (with 5 or 6 barges under load) may not be able to navigate the Lower Mississippi northbound due to extreme currents. In those cases, this scale tow could run east to Mobile; and, transit the Tenn-Tom water way northbound for most of the distance to St. Louis – all but 175 miles.

Other unit tow operating considerations would include:

• Outside Towing Income – With the tow configuration/size suggested above, coupled with a the towboat with a range of operating power to fit navigational circumstances, the COB unit tow, when river conditions permit, should have an opportunity to add “tramp” barges to its tow as an additional source of revenue. This would seldom (if ever) be the case on the Intracoastal Waterway or southbound on the Upper Mississippi, it certainly could be a semi-regular occurrence on northbound from New Orleans/Baton Rouge, and an occasional opportunity southbound below St. Louis. Indeed, some barge owners would have interest in the speed of the COB tow, and the avoiding “power split” lost time and charges at Cairo or St. Louis. • Tanker Moves – Export of Illinois produced ethanol (and even biodiesel) to distant domestic markets is already in its infancy, but will surely grow in volume – particularly with a National Ethanol Motor Fuel Content Mandate. An Illinois COB unit tow could substitute a 195 by 35 tanker for one of the 6 core barges and regularly move ethanol and/or biodiesel to Gulf Coast markets at very competitive rates. Certain other liquid products (such as liquid fertilizer) could become return cargo for the tanker. Since tanker load/discharge is often on a stand-by basis, the unit tow regime could be maintained even with the inclusion of an Illinois Alternative Fuels tanker.

6.0 Gulf COB – Cargo Flexibility

Reoccurring observations emerging from the review of unsuccessful COB ventures to date - leading to recommendations for future COB venture include:

• Lack of sufficient container volume to sustain the COB venture during initial operating periods as potential COB shippers monitor the reliability and staying power of the mode prior to committing to movement away from ground-based container carriers. Most US inbound container cargo today is time sensitive. The “just-in-time” inventory strategies of both manufacturers and retailers appears inconsistent with the extended time frames of COB transit. Often COB ventures have been based on a single container cargo or customer (or a very limited group of each). Any volume interruptions or down-turns from that limited base dooms the COB venture to on-going operating losses if timely and reliable service is to be maintained as a inducement for other shippers to adopt the service.

• Lack of backhauls to a one-way container movement that was the foundation for the COB venture – particularly where long distant movements were involved.

The repositioning of empty containers can and has provided backhaul (and front haul) revenues for COB carriers, but has only proven successful over relatively short distances and time frames. The requirement of container owners (usually the ocean container vessel operators) for “box velocity” is not compatible with a 10+ day COB transit time from Gulf ports to Illinois Waterway ports.

The Illinois Waterway-to-Gulf COB program focusing (at least initially) on bulk agricultural commodity container cargo would likely not be as exposed to shipper hesitancy to mode change or issues of transit timing as would be the case with other potential COB cargo – given a competitive rate structure related to land-based alternatives. Container shipments of bulk agricultural commodities has become an established practice, with volumes approaching 200,000 TEU per year –primarily from the Upper Midwest. Most agricultural commodity logistics are far less time-in-transit sensitive than manufactured or retail products logistics. The agricultural cargoes are both of lower value (reducing the “time value” aspects of slower transit times), and agricultural shippers tend to be more interested in a “full pipeline” than individual time-in-transit components of the pipeline.

But, a properly designed Gulf COB program can also overcome both the issues of initial cargo volume and backhaul revenue in a far more significant measure by utilizing an equipment configuration unique to the river transportation mode. The majority of the dry cargo river barges in service today (some 16,000) are either 195 foot rake end or 200 foot box or rake end, with fiberglass covers.

These barges have a cargo capacity of 1,600 to 1,700 short tons at a loaded draft of 9 feet (the maximum draft guaranteed on the Illinois Waterway and the Mississippi River north of St. Louis). That cargo weight capacity will accommodate 55 twenty foot containers (the ideal container size for most agricultural commodities that run about 65 pounds per cubic foot) loaded to a 30 gross ton “plus” (non-road) capacity. The cargo box dimensions of a typical dry cargo barge are generally 160 feet (minimum) to 180 feet in length, 28 feet in width and 15 feet to 17.5 feet in depth to the bottom of the covers, as depicted below.

While it may appear from above that no more than 48 twenty foot containers would physically fit in a typical dry cargo barge (two tiers that are 3 wide and 8 long), another design feature of the dry cargo barge (unique to the mode) is the ability to stack the covers over a 21 foot section of either end of the barge cargo box, leaving a minimum of 118 feet of the barge available for triple stacking of containers – yielding a total 20 foot container capacity (based on barge cubic volume) of 63. That is sufficient to allow the 55 twenty foot containers of a gross container weight of 30 short tons.

Assuming that the initial Illinois-to-Gulf COB cargo will be one way containers of agricultural commodities, the unique capability of the typical covered dry cargo barge to be both a container carrier, and a bulk cargo carrier by carrying the barge covers stacked provides COB the opportunity to address both front haul and back haul revenue issues as the actual container volumes build – or to weather any downturn in container volumes without suspending or

22 reducing COB service. If insufficient container volume is tendered for either back haul (as is likely) or the front haul (possible early in the COB program) you simply spread the barge covers and book bulk cargo as a revenue source to maintain the COB schedule and reliability available to existing (and potential) COB shippers. For example, the likely minimum scale COB unit tow strategy from Illinois to the Gulf would be a dedicated towboat and a tow of six dry cargo barges (4 rakes and 2 boxes) – around 9,500 short tons of bulk cargo capacity, or up to 375 twenty foot containers at road-legal gross weight or, a combination of stacked cover barges with containers and spread cover barges with bulk cargo. Should only a single container be tendered for transit, one of those six barges must be committed to COB – but, the 5 remaining would load bulk cargo, and the COB tow would remain in service and on schedule. It should be clearly understood here (and will be fully explained in following sections on program modeling and finance) that the sole focus of the bulk/container strategy is to provide the foundation for COB success over time by addressing the historic problems of COB related to initial program volume/front haul revenue, and program back haul revenue. Without question the probable need to “buy” spot bulk freight rates coupled with the inefficiency of a 6 barge tow compared with the usual 30+ barge dry cargo tows will not make this strategy profitable in the bulk-only mode.

7.0 Program Synergy – Shuttle/Gulf

The operations and business plans presented later in this document will address the COB Shuttle and COB Gulf programs as “stand alone” ventures. There is no question that the COB Shuttle venture can function independent of the COB Gulf venture. It is not so certain that the COB Gulf can function without coordinating with the COB Shuttle venture, however. Due diligence requires that the potential need for, and operating outline of such a potential synergy be addressed.

If it is assumed – as it is here - that the initial success of the Shuttle and Gulf COB programs will be based on loading containers for export with agricultural commodities such as soybeans, corn and their co-products, it is logical and sensible to also assume that those container loadings are best accomplished as close to the high production agricultural areas in Illinois – 100 miles or so down the Illinois Waterway from the critical Chicago area source of empty containers. Indeed, today most of the container loads of agricultural commodities originating from Illinois are the result of trucking those commodities 100 miles or more from the prime production areas to container loading facilities around Joliet.

The COB Shuttle Program is intended to address the (relatively) high cost of that trucking (container dray) movement by repositioning containers from the rail ramps to down-river location(s) for loading and return to the rail ramps. The intent is to realize direct logistics cost

savings to shippers as well as indirect cost savings to the Pubic related to air quality, highway safety and preservation of highway infrastructure.

The HighQuest report for the Illinois Soybean Association recommends Peoria as the most logical location for a container loading facility based on both the availability of agricultural container cargo, and the existence of several potential Peoria area COB customers for both export and import cargo – Cat and Deere to name but two. HighQuest does not address the container balance equation at Peoria to any extent. From discussions this contractor has had with Peoria Port officials and others with knowledge of container supply/demand in Peoria, it is safe to assume that there would not be a sufficient supply of empty containers available in Peoria to serve the agricultural container shippers; and, (depending on the ratio of import to export volume) there may not be a sufficient empty container supply at Peoria for potential customers beyond those shipping agricultural cargo either.

The Missouri Department of Transportation (MoDOT) and the Heart of America Port District (Peoria Port) have contracted with the firm RNO Consulting to undertake a COB project similar to this ISA project. Work has been started by RNO as this is written. It appears from the RFP for this project (“Part 2”, 5th Bullet) that Peoria is the designated north terminus for an Illinois/Gulf COB program design in response to the RFP:

Identify potential port pairs best suited for the freight and flows identified in this part. This must, at a minimum, include the ports identified by Corridor and Initiative sponsors in their applications to the DOT. In the M-55 Corridor, this analysis shall extend from Peoria, Illinois to the Gulf Coast ports, including and between Houston, Texas and Mobile, Alabama and connector navigable water tributaries to the corridor. (emphasis added)

With this Gulf COB program extending only as far up the Illinois Waterway as Peoria, it will be “short” about 100 river miles from the major location of excess empty container availability – the Joliet area. How will the required empty containers for the agricultural container cargo - and likely even the other Peoria export cargo - be repositioned to Peoria? Also, at such time as northbound (import) COB container cargo is forthcoming, how will some of those import containers reach the large Chicago market?

The best answer to those questions may involve coordinating the Shuttle COB venture with the Gulf COB venture. If Peoria would become the north terminus of the Gulf COB, and Peoria would also become one of the river locations served by the Shuttle COB – or even the south terminus of the COB Shuttle - it is reasonable to assume that the Shuttle could reposition empty containers to Peoria to be loaded with Gulf COB cargo as well as the containers to be loaded with cargo destined for return to the Joliet area rail ramps. Of course, any loaded import containers (or bulk cargo barges) arriving Peoria for up-river destinations could also be handled by the Shuttle COB.

It is reasonable to assume that, at the basic assumed level of operation; the COB Shuttle would pass through or arrive at Peoria 2-8 times for each Gulf COB round trip thereby assuring expedient transit for containers through Peoria. The Shuttle trip immediately prior to the arrival of the Gulf COB tow at Peoria could be loaded primarily with empty containers for immediate loading at Peoria. The return Shuttle trip to Joliet would include any Gulf origin containers and/or bulk-loaded barges off

the Gulf COB tow destined for points above Peoria. In between Gulf COB trips the Shuttle would return to movement of containers to/from Peoria or below to/from the Joliet area.

The key to success of this strategy would be scheduling coordination and container handling and loading rates at Peoria. The controlling metric for that coordination would be the container free days available from the container owner. The most challenging task to meet that metric would likely be the container loading and interchange activity at Peoria.

8.0 COB and Container Demurrage While the subject may appear somewhat beyond the scope of this contract, it potentially remains critical to the COB concept – and, perhaps one reason COB has not become as successful as it could be.

The prevailing operating strategy in the international container trade is to minimize container turnaround time at port and inland locations. Applied to the US, that strategy goes to maximizing the number of eastbound loadings from the Far East to the US. The assumption (and reality) has been that most westbound container trips returning to the Far East are non-revenue repositioning of empty containers. As with any transportation business model (be it rail cars, barges or containers), minimizing of non-revenue miles and/or days is a prime component of financial success. To that end, ocean container owners/lessees (primarily the steamship lines) prescribe maximum time periods that a container may remain in the custody of a shipper – referred to as “free days”. When containers are not returned to the custody of the steamship line within the prescribed free days, the shipper incurs detention or demurrage charges payable to the container owner.

The number of free days accorded a container shipper varies by steamship company and locale, but generally ranges 3-7 business days (Saturday, Sunday and Holidays excluded). The demurrage charges payable by the shipper to the container owner is also variable by container owner, ranging $25-$85 per day per container. One can easily see how exceeding the allowable free days with a single barge load of containers (say, 55 TEU in 20’s) could result in demurrage charges from a crippling $1,400 to as much as a disastrous $4,700 per day. With what would likely be a minimum 6 barge Gulf COB unit tow and the impact is potentially immense.

The container owners’ strategy regarding free time and demurrage clearly differs from that of a barge owner. Consider that fact that the allowable free to the shipper for a barge is similar to that of a container – 5 days in most cases. Also consider the asset cost of a new barge to be $650,000 with the usual daily demurrage charge of $300, while the asset value of a full barge load (55) of new twenty foot containers is around $150,000 with an aggregate daily demurrage charge for the barge load of those containers as much as $4,700. Clearly, the pricing of container demurrage in comparison to barge demurrage relates to factor(s) beyond the asset rental value of the equipment. The term usually describing one such factor is “box velocity” – the aspect of the container business model that focuses on maximizing the container days at sea on the container owners’ ship versus grounded at ports, during repositioning to/from ports or at a shippers facility.

Regardless of the business logic container owners utilize in support of their container free time and demurrage terms, it is incumbent upon the COB operator to design around those terms if necessary and where possible, and/or recommend specific elements of those terms that shipper customers of

COB need to negotiate with the container owners to ensure issue of free time and demurrage do not arise. The “through Bill of Lading”, where the ocean container owner/carrier (not the shipper) is responsible for the box once loaded may be a solution.

The foregoing discussion appears to point to several considerations for the design of COB from Illinois:

• It is likely that 5 free days could be the metric applied by most (if not all) container owners for boxes originating and delivered back to the Joliet area rail container ramps if the shipper is responsible for that movement. With Saturdays and Sundays added, this could be extended to 7 free days in most instances without demurrage becoming payable. Periodically a Federal Holiday would also add an additional free day. The Shuttle COB should be designed with this assumption in mind. • The Gulf COB will be delivering containers picked up from the Joliet area rail ramps directly to one of more Gulf ocean ports served by the container owners’ vessels. No rail or truck repositioning to an ocean port from the Joliet area will be involved. The reported transit time goal (but not guaranteed, we assume) for the BNSF railroad from the Elwood container ramp to Houston or Los Angeles is 72 hours – 3 days. A shipper utilizing Gulf COB should expect a similar number of free days to be added by the container owner for boxes moved directly by Gulf COB to vessel container ports served by the container owners’ vessels if no through bill of lading is involved. • Containers arriving and departing Chicago rail container yards also experience ground delay within the rail terminal as rail sorting/loading/unloading operations interface with road drayage. Free time to the shipper does not begin until the container leaves the container yard gate, and is chargeable to the shipper only until the box again passes the container yard gate upon arrival. Boxes engaged in COB transit to the Gulf will not incur lost days within the rail container ramp upon arrival. Those days should be available to the shipper utilizing COB transit to ocean ports. • The free time and demurrage terms specified by container owners can be negotiated by the shipper, including a through Bill of Lading. There usually is, however, a cost to the shipper to gain additional free days. While some negotiated percentage of a $25 per day demurrage charge to gain additional free days may be acceptable, it is difficult to accept any but a huge discount from an $85 per day demurrage charge for additional free days.

While no specific information is available to this contractor to determine the component of rail ramp container dwell time attributable to yard handling from gate to train, we are assuming 48 hours – including awaiting the train as a suggested amount of additional free time available to containers moved to ocean ports served by the container owners’ vessels.

In the COB operating plans presented below the assumptions regarding free time will be the standard 5 days for the Shuttle, and 10 days (3 days rail transit replacement, and 2 days rail container yard inbound handling) for the Gulf COB – in both cases excluding Saturdays, Sundays and Holidays. In practice, this will provide the COB Shuttle 7 total free days (with an occasional additional day); and, provide the Gulf COB 14 days free time on the same weekend exclusion. In practice, the through Bill of Lading may mitigate much of this issue.

A final note regarding container free days and demurrage is in order. A universally accepted principle of transportation (regardless of mode) is delivery delays resulting from “acts of God” or

26 circumstances beyond the control of the carrier – referred to as force majeure. For COB, qualifying events would include river closure resulting from weather events such as floods and channel closure due to shoaling; and, other events beyond the control of the carrier, such as lock closures due to mechanical failure. Delays resulting from such force majeure circumstances should not be chargeable to free day allocations.

9.0 Calling Ports

9.1 – Shuttle COB

As the term implies, this COB strategy entails movement of empty containers from a point on the Illinois Waterway near the existing BNSF and UP rail container ramps (Elwood/Joliet/Channahon) to a downriver point on the Illinois Waterway where both agricultural cargo and non-agricultural cargo would be originated – both export (initially) and import. Containers move in this corridor today exclusively by dray trucking.

9.1.1 Shuttle COB – North

As the name implies, the COB Shuttle will cover a limited distance along the Illinois Waterway. The north terminus of the Shuttle should be located within easy and short dray access to the UP and BNSF intermodal ramps in the Joliet area (around Mile 280 Illinois Waterway).

There are at least three on-river locations where containers could be handled to/from barge to/from dray vehicle with good access to either rail intermodal facility:

• Will County Barge Terminal, Joliet, Illinois – This existing facility is located at Illinois Waterway Mile 284.5 LDB. One way dray trucking to/from the UP Intermodal Terminal is 1.0 mile; and to/from the BNSF Intermodal Terminal is 7.75 miles. The site is several acres in area with a dock face of 600 feet – with expansion room to extend to 1200 feet – along the main channel of the Illinois Waterway. The dock is currently used to handle bulk commodities – primarily aggregates mined on an adjacent site. No specific site improvements would be required to handle COB with the exception of a crane capable of handling 30 tons at 50 feet from the crane pin (100+ ton crane capacity).

• MIDI Terminal, Channahon, Illinois - This existing facility is a barge slip dredged at 90 degrees to the main channel of the Illinois Waterway at Mile 277 RDB. One way dray trucking to/from the site to/from the UP Intermodal facility is 9 miles; and, to/from the BNSF Intermodal facility is 5.5 miles. The barge slip is 675 feet in depth, and 100-250 feet in width. The site also has 675 feet of main channel frontage. The entire site is 20 acres in area, with the direct water frontage portions totaling 7 acres. The site has had only minimal use as a barge terminal in recent years, with truck trailer storage becoming the alternative use. Few site improvements would be necessary for use of the site as a COB transfer location except (again) the need for a 100+ ton crane.

MIDI Terminal

• There are two additional dredged barge slips located just upriver from the MIDI site in Channahon at about Mile 280 RDB of the Illinois Waterway that could be potentially developed into COB transfer facilities. Those sites appear to be underutilized presently and would require dredging and dock face improvements. The dray distance to/from the intermodal rail facilities would be approximately the same as the MIDI facility. No additional information has been developed regarding these potential sites.

Given the relatively equal locations of the three sites with respect to both river mileage, and dray distance to the two Rail Intermodal facilities, we have assumed the sites to be of equal value as a north terminus in the COB Shuttle operating plan(s). The south terminus for the COB Shuttle has not been as obvious. Considerations have included:

• Demonstrated prior (and current) interest and current container loading volume by parties at various locations on the Illinois Waterway.

• COB Shuttle timing considerations given the container free day and demurrage calculus discussed above. • Potentially available existing river dock space for container handling. • Potential container markets (both import and export to Illinois) at various Illinois Waterway locations. • The conclusions and recommendations of HighQuest Partners in its April, 2011 report to ISA, “Study of Containerized Shipping of Soybean Meal Exports”.

9.1.2 Shuttle COB – South

Three potential south terminus locations have been addressed:

• Peoria – The Peoria Barge Terminal, located near the downtown Peoria at Illinois Waterway Mile 160 RDB features nearly 1,000 feet of Illinois Waterway main channel frontage – much of it improved with dock wall. In addition it is reported that the terminal owns or controls over 100 acres of adjacent property. Also of importance to the COB concept, the Peoria area is a major rail hub, and the home of several current and potential non-agricultural COB shippers. While no specific inquiries have been made of the terminal owner, the Heart of Illinois Port District has advised that the terminal would have interest in the COB business (both COB Shuttle and COB Gulf). As noted previously, the north terminus for the MoDOT/MARAD COB study appears to be Peoria.

Peoria Barge Terminal

• Mapleton – Two adjacent sites at Illinois Waterway Mile 150 RDB offer potential as COB transfer terminal. Growmark has recently acquired the former CF fertilizer terminal at Mapleton, which includes an excellent barge slip and frontage that could be utilized for COB activity with minimal additional investment. Adjacent to the Growmark developed facility there is an additional dredged barge slip (owned by Growmark) that was formerly used as a coal receiving facility for the neighboring Caterpillar foundry. That slip has been unused for many years and would require dredging and shore side improvements to accommodate COB transfers. While these Mapleton sites are within 10 miles of the Peoria facility, those 10 miles include the Peoria Lock and Dam. From a towboat timing perspective, the lock presents a potential for delay for the COB Shuttle that could turn those 10 miles into many hours.

Mapleton Site(s)

• Beardstown – This site is located at Illinois Waterway Mile 88 LDB, and was the focus of the ISA-funded COB study completed in 2008, and referred to early in this work. The owner of the site - Clarkson Grain - is already engaged in container movement of bulk grain using long distance truck dray to move the containers to/from Chicago or St. Louis. While the distance/time to accomplish the COB Shuttle movement doubles to Beardstown versus Peoria – and, therefore container free time/demurrage issues arise – the Shuttle COB operating plan should and will include a Beardstown option.

Beardstown Site

There certainly are other potential terminal sites (developed and undeveloped) that could serve as container loading/transfer locations for both the north and south ends of the COB Shuttle. These here described, however, appear to be the locations best suited for COB operations today.

9.2 Calling Ports – Gulf COB

The selection criteria regarding calling ports for the Gulf COB program include those of the COB Shuttle, and others as well, including:

• On the Illinois end of the movement, particular emphasis must be accorded to minimizing the transit time to/from the Gulf port of call. While substitution of COB container 34

movement to the Gulf for rail movement should provide 4-5 additional free days (beyond the typical 5 free days plus weekends), as the Gulf tow turn point moves north on the Illinois Waterway, the ability to operate within the even- expanded free days becomes more challenging – to impossible – without additional free time negotiated with the container owner (likely at a premium). • Related to the foregoing, the primary source of empty containers for grain export loadings will remain the Joliet area. This assumes that the container owners will not tolerate the repositioning of empty containers from Gulf locations to Illinois by COB due to the lengthy transit time – and that (at least initially) loaded containers from the Gulf to downstate Illinois locations via COB (resulting in empties to reload) will be similarly unavailable in quantity. • Transit time will also be a factor in selection of the Gulf port destination for the COB tow. For instance, at least two additional transit days in each direction will be required if Houston is the selected destination versus New Orleans, while at least two total more days would be required (assuming a northbound trip on the TennTom Waterway rather than the Lower Mississippi) for a Mobile destination versus New Orleans. • Perhaps the most important consideration related to the Gulf calling port may be the volume and frequency of container steamship service to the selected port coupled with trade lane service to Asian markets – this on the assumption that the majority of the export container grain volume will be to Asia. • As noted earlier, the “paired ports” strategy has been repeatedly endorsed by earlier COB investigations as preferred. However, a properly orchestrated multiple-port strategy may be required for the Gulf COB program to provide the necessary volume and/or access to steamship calls/frequency/Asian trade lanes (all of which may be expanded with the opening of the enlarged Panama Canal after 2014).

9.2.1 Gulf COB - North

Three Illinois locations are here considered as possible Gulf COB origins – singularly, or as multiple origins, as follow:

• Any of the three Chicago area terminal sites (Joliet and Channahon) described earlier as north-end destinations for the COB Shuttle could be a destination. In this case, the Gulf COB tow would require at least six days to transit the 280 miles of the Illinois Waterway. In addition, the grain loaded (or the containers) will have likely already incurred the expense of traveling at least a portion of the 280 miles from the downstate origins to the Joliet/Channahon area. • Peoria/Mapleton has been (as noted earlier) nominated in ISA HighQuest study as a good candidate for container loading; and, the forthcoming MARAD/MoDOT/Peoria Port work on COB will likely use Peoria as the north terminus of COB as well (based on the RFP specifications). Peoria/Mapleton is two plus total transit days closer to the Gulf

ports than Joliet/Channahon, and well within the major grain production area of Illinois (as well as the home of several potential non-agricultural COB shippers). It is likely that some method will be required to bring empty containers to Peoria from Joliet in a timely and coordinated manner – perhaps utilizing the COB Shuttle. • Granite City, IL – The Tri-Cities Port on the Chain of Rocks Canal (Bulk Service, Mid- Coast Terminal Company) at Upper Mississippi Mile 185 LDB (10 miles above St. Louis) may not be an ideal Illinois final destination for a Gulf COB tow due to the probable lack of available empty containers in sufficient quantity to fill the tow, but certainly could act as an intermediate point for the COB tow to drop one or more barges to be picked up on the return trip south from the Illinois Waterway. There would be little or no time lost for the tow to accommodate this intermediate COB port, while providing shippers in this part of Western Illinois and Eastern Missouri access to COB shipping. The terminal operator has indicated an interest in container handling; and, the site is already well-equipped for that task. Finally, should extreme winter weather interrupt Illinois Waterway movements – as it does occasionally – Granite City usually remains ice-free even if the Illinois Waterway is impeded. • East St. Louis, IL – while this location has been mentioned by others as a potential Gulf COB north turn point, we are unaware of terminals located there that would be available to handle the container activity.

Granite City Site

9.2.2 Gulf COB – South

Three Gulf locations are here considered as possible Gulf COB destinations – singularly, or as multiple destinations as follow:

New Orleans – The most often mentioned (and obvious) Gulf terminus for the Gulf COB is New Orleans. While there are several terminals that can handle containers (but not all can handle large container ships), the primary public port facilities for container vessel calls are the Napoleon and Nashville terminals located at around Mile 100 LMR LDB. The 2010 New Orleans port container volume was 427,518 TEU, up from 175,957 in 2006. New Orleans offers the Gulf COB advantages, including:

• At least 4 days less round trip transit time than Houston and at least 2 days less round trip transit time than Mobile.

• Opportunities exist to reload backhaul bulk freight, including both dry fertilizer from nearby manufacturers (at Donaldsonville and Uncle Sam, LA) and salt from mines to the west.

New Orleans also presents a challenge to the Gulf COB program. According to the 2011 New Orleans Port Directory, only 3 container steamship lines serving Asia call New Orleans on a weekly basis. The reasons for that relative lack of container steamship calls (relative to Houston) likely relates to both a minimal “local” market for imported container cargo; and, the relatively high port costs for steamships due (in part) to the lengthy (100 miles) voyage from the mouth of the Mississippi River to the New Orleans terminals resulting in high pilotage costs.

The State of Louisiana provided planning funds and revenue bond authority several years ago to build a COB port substantially farther down the Mississippi River to provide less costly service for container steamships calling New Orleans. That facility would have been served by barge, but not rail, and be of a scale to accommodate the 14,000+ TEU container vessels now being constructed by some ocean carriers. It appears that enthusiasm for that project has waned in recent years – or, at least the project has been scaled down – since the ocean carriers have indicated that the large container ships will not be used in Gulf of Mexico trade lanes. If, however, the Louisiana container port is constructed to some scale, New Orleans may be able to overcome the high cost issues.

A Gulf COB dedicated unit tow calling New Orleans would transit the Mississippi River the entire southbound voyage, once departing the Illinois Waterway. With but 2 locks below the mouth of the Illinois Waterway, no more than 5 days tow transit time (and sometimes even less – depending on river conditions) would be required after departing the Illinois Waterway. The northbound trip would have two options available, assuming the unit tow is no larger than 8 hopper barges:

• Returning northbound on the Lower Mississippi, or; • Traveling east on the Gulf Intracoastal Waterway to Mobile, and then north on the TennTom Waterway/Tennessee River /Ohio River, returning to the Mississippi River at Cairo, IL.

The mileage from New Orleans to Cairo is no longer (in fact a bit less) via the Mobile TennTom route than from New Orleans to Cairo via the Mississippi River, but the TennTom, Tennessee and Ohio are locking rivers with the resultant lost time; and, transit east to Mobile can be slowed/delayed by Gulf weather. However, when the Mississippi River is at a high water stage, the northbound speed lost against the swift Lower Mississippi current will be more than time lost to locking on the TennTom/Tennessee/Ohio. The decision as to which route to take northbound would be on a trip-to-trip basis.

Houston – The Houston area container terminals (primarily Barbours Cut and Bayport) handled 1,812,268 TEU in 2010, up from 1,606,786 TUE in 2006. Both of the major Houston Port Authority terminals are located adjacent to the Houston Ship Channel, approximately 3 hours steaming time from the Gulf of Mexico. Both the proximity of these terminals to the Gulf (and resulting lower costs to calling steamship lines versus New Orleans), and the large built-in markets of the Houston/South Texas area have contributed to the quadruple annual container volume of the Port of Houston versus the Port of New Orleans. The Baytown terminal was constructed to handle volume overflow from the space-constrained Barbours Cut site. Although the Port of Houston is not noted as a dry cargo river barge port due primarily to limited connecting waterway width and depth, river barges (primarily liquid cargo unit tows) do access the port via one of three routes from the Mississippi River:

• From the Mississippi River Mile 304 LMR via the Old River Lock and the Atchafalaya River to Morgan City, LA; then west along the Gulf Intracoastal Waterway to Galveston/Houston – 370 miles from the intersection of the Mississippi River. • From the Mississippi River Mile 228 LMR (Baton Rouge) via the Port Allen Lock to Morgan City; then west along the Gulf Intracoastal Waterway to Galveston/Houston – 450 miles from the intersection of the Mississippi River.

• From Mississippi River Mile 93 LMR (New Orleans) via the Harvey Lock; then west along the Gulf Intracoastal Waterway to Galveston/Houston – 530 miles from the intersection of the Mississippi River.

Each route from the Mississippi River to the Houston Port the river operator is constrained as to tow size to a maximum equivalent of 6 dry cargo barges. The constraints include lock dimensions, channel width and channel depth. The main channel Mississippi River operating model utilizes towboats up to 10,000 horsepower, handling as many as 45 dry cargo barges – far in excess of what can navigate the routes to the Port of Houston. While bulk dry cargo barges do call the Port of Houston and intermediate ports along the Intracoastal Waterway, they are moved from the Mississippi main channel in groups of not more than 6 by towboats of 1,500-2,000

41 horsepower. The interchange from a Mississippi main channel towboat to a towboat capable of transiting the Intracoastal Waterway takes place at Old River, Baton Rouge or New Orleans – depending on the connecting route selected.

Many liquid cargo unit tows, however, are specifically designed to navigate both river regimes. The Houston petrochemical complex is a major customer of the liquid river carriers. The relatively high value and (often) hazardous characteristics of liquid cargo precludes the lost time and risk of changing towing vessels at the any of the three interchange points from the Mississippi main channel to the Intracoastal Waterway. This same operating logic applies to the Gulf COB. Houston becomes a viable option. Houston, and the tow route to/from Houston from the Mississippi River also provides dry cargo backhaul potential for a Gulf COB tow utilizing covered dry cargo hopper barges. Not only are there bulk dry cargo backhaul opportunities from Houston to Illinois, but the tow would closely approach all three of the Gulf salt mines moving to/from the Mississippi River and the Intracoastal Waterway (by all three alternative routes). Illinois annually imports nearly 1 million tons of salt – much of which is moved from these three Louisiana salt mines to Illinois in dry cargo river barges.

Mobile – Phase 1 of the Mobile, AL container terminal was completed in 2008 to an annual capacity of 350,000 TEU. Planned expansions would bring the annual capacity to over 800,000 TEU. The total Port of Mobile 2010 container volume was 120,000 – 145,000 TEU (depending on the data source), up from a 2006 volume of 80,000 TEU. The container terminal is located 3 hours steaming time from the Gulf of Mexico, and 150 miles east of New Orleans. Access to the Port of Mobile from the river is either via the Intracoastal Canal from New Orleans; or, via the TennTom Waterway/Tennessee River/Ohio River to Cairo, IL, and then back on the Mississippi River. Due to channel width and lock dimensions, river equipment access to the Port of Mobile is limited to the equivalent of a 6 dry cargo barge tow.

As of this writing it appears the Mobile container ship calls serve only the Caribbean Basin, South America and Europe trade lanes. At one time in recent years Zim Lines offered Far East service, but it appears that has been discontinued. Mobile is never-the-less addressed here for two reasons:

• While Far East container service does not appear to be available at this time from the Port of Mobile, the completion of the Panama Canal improvements in 2014 will likely change that circumstance. • Assuming that a 6 barge unit tow would be utilized for Gulf COB, the alternative route from New Orleans (or even Houston, perhaps) to the Lower Mississippi River at Cairo, IL would take the Gulf COB tow through Mobile. Mobile could nicely fit into a multi- call venue for the Gulf COB tow in concert with a New Orleans (or even Houston + New Orleans) call.

Multi-Port Gulf COB – It has earlier been suggested that a multi-port strategy may have value at the Illinois end of the Gulf COB – for instance, dropping one or more barges at Granite City, Il or Beardstown, IL, and picking those barges up on the return S/B trip. This strategy would not

42 only provide COB service to a broader Illinois market, but also to markets of Eastern Missouri. Of course, this strategy would also present an opportunity to fill out the Gulf COB tow from a broader universe of shippers. Similar logic applies to the Gulf end of the COB voyage. As can be seem from the graphics, a COB tow could drop one or more barges in New Orleans, and continue to Houston or Mobile to pick up the barges on the return trip. The care, custody, movement, and bulk reloads of those intermediate drops would be entrusted to a New Orleans harbor service – carefully selected.

10.0 COB Operating Plans

The foregoing sections of this work have described the history, components, opportunities and controlling constraints of Container-on-Barge programs to serve Illinois. The purpose of this section is to sort through those factors, and present COB programs that best respond. This leads to a program design featuring the following characteristics:

• Configuring both the COB Shuttle and the COB Gulf programs as dedicated unit tows – barges and towboat moving as a unit, with COB as the primary mission. • Initial scale of the COB Shuttle should be as limited as feasible to assure consistently high load factors, but the towboat should be sized and designed to handle additional barges as the program volume increases – adding only barges as the program volume increases. • The COB Gulf unit tow should be sized and powered to transit the Atchafalaya River, Gulf Intracoastal Canal and the TennTom Waterway without reducing the tow size – six barges, with sufficient towboat power to insure tow speed and the ability to handle northbound loads on the Lower Mississippi. The Gulf COB program should be scalable by adding additional unit tows rather than adding additional barges to an existing configuration. • Minimizing the number of calling ports for both components to one or two, selected to minimize voyage duration (in both cases); maximize access to ocean container carriers with frequent calls and Far East trade lanes; and, maximize access to northbound cargo (in the case of the Gulf COB). • Utilize conventional river towboats an barges of conventional “barge line” dimensions to both avail the program of opportunities for alternative front haul, as well as backhaul cargo requiring weather protection; and, to assure the marketability of the equipment should either the COB program prove unsuccessful, or equipment requires replacement in the future. • Assume that both COB Shuttle and COB Gulf “turn” at or near Peoria to maximize the potential for non-agricultural container cargo while achieving best fit for voyage scheduling in relation to container free days.

• The primary fueling location for both unit tows should be Seneca, Ill (REG), with the Gulf tow requiring an additional fueling point with biodiesel availability at the Gulf Coast. The Gulf tow will run light boat from the Peoria area to/from Seneca during the standby time at Peoria for barge discharge/loading. The COB Shuttle should be capable of taking fuel dockside at Seneca as needed without dropping its barge(s).

10.1 COB Itineraries

Shuttle COB – The Shuttle COB is equipped with a dedicated towboat and three 195X35 deck barges. One barge will always stay with the towboat, with one barge loading/unloading containers at each end of the voyage. The Shuttle would begin a voyage at one of the Joliet area river terminals (approximately Illinois Waterway Mile 280). The shuttle would proceed southbound on the Illinois Waterway to Peoria or Mapleton (approximately Illinois Waterway Mile 160). The southbound trip should require 24 hours.

Upon arrival in Peoria the boat will drop the deck barge of empty containers and pick up the deck barge with loaded containers for the return trip to Joliet. One deck barge will always be loading/unloading containers at each end of the Shuttle voyage – allowing 24 hours to handle 55+ TEU. The Shuttle COB will be capable of 3.75 trips each week. Should, however, the Shuttle be integrated with the Gulf COB – with the Peoria area as a common “turn point” (as recommended, and further discussed below), some Shuttle trips will include repositioning barges to augment the Gulf COB. The Shuttle towboat will be sized sufficiently to handle these additional barges as the need arises.

It is also reasonable to assume that Gulf COB barges moved to/from Peoria/Joliet on the Shuttle COB may include loaded containers destined for the Gulf. Several firms now load agricultural commodities into containers in the Joliet area. Much of that container Ag cargo originates from locations in Northern Illinois, Northern Indiana, and Southern Wisconsin, and therefore would not be likely candidates for container loading in Peoria due to drayage costs, even though a Gulf destination is desired.

Based on the foregoing, the COB Shuttle (towboat and 3 deck barges) would have the initial capacity to handle 200 TEU per week. With proper initial towboat sizing, the Shuttle scale could triple by simply adding additional barges to the program, while not experiencing a significant increase in overall tow operating expense – beyond the cost of the additional barges.

Gulf COB – The Gulf COB venture consists of a towboat and 12 covered dry cargo hopper barges. Six of those barges are always with the boat, while the remaining 6 barges remain in the Peoria area during the trip to provide sufficient time to discharge northbound bulk cargo and reload southbound loaded containers.

Beginning at Peoria, the towboat will depart southbound with up to 6 barges (6 barges, less any barges dropped northbound at Granite City/St. Louis) that have been loaded with containers (or bulk cargo, if insufficient container volume is available) prior to its arrival. The tow will travel 180 miles to the Granite City/St. Louis area in 1.5 days. At Granite City/St. Louis the tow with

44 pick up any barges that it dropped northbound for discharge and reloading. It is assumed that no time of consequence will be lost loading. The tow will then proceed down the Upper/Lower Mississippi.

With the multiple Gulf port program, the tow will proceed to the New Orleans Napoleon/Nashville terminal area (Mile 105) – 1,025 miles over 4.5 days. The voyage time from Peoria to New Orleans appears to be 6 days. There the tow will drop one or more barges (container and/or bulk loads), and immediately proceed west on the Gulf Intracoastal Canal to Houston’s Bayport and/or Barbours Cut terminals. While the tow completes the Houston leg of the trip the barge(s) dropped at New Orleans will unload containers; have the covers spread; and reload northbound cargo. Local tug services will move the barges as required. The intent is to have the barges ready for immediate pickup by the COB tow when it returns from Houston. The voyage time from New Orleans to Houston (350 miles) will be 2.5 days. In sum, the total voyage time from Peoria to Houston using the multiple ports strategy appears to be 8.5 days.

If, however, no New Orleans containers are on the tow, or a Houston Only strategy is adopted, the voyage to Houston will depart the Mississippi River via the Old River Lock at Mile 305 – shortening the Lower Mississippi transit time to 4 days. It would then transit 135 miles down the Atchafalaya River to Morgan City, La (1 day), and then west along the Intracoastal Waterway 250 miles (1.5 days) to Houston.

If Houston becomes the final Gulf COB destination, - regardless of the waterway route - the COB tow would stand by in Houston while the containers are unloaded; barge covers spread; and, any bulk cargo reloads for Illinois destinations. The exact standby time will vary depending on the number of remaining southbound container barges that require unloading in Houston (after the New Orleans drops); and the number of bulk reloads from Houston.

The Port of Houston has advised that their facilities can unload 20 TEU/hour. For the purpose of fixing an operating plan we have assumed all six barges (350 TEU) would unload at Houston; and, such northbound reloads as would take place would occur while the container barges discharge. Should a Gulf COB alternative be selected that features only New Orleans as the Gulf destination, the transit time from Peoria to a Gulf container facility would be six days. While we

47 have not confirmed this, we assume that the container handling rate at the two major New Orleans container terminal approximates that of Houston – 20 TEU/hour, or 18 hours to unload the 350 TEU COB tow. The towboat would again stand by for its barges to unload, and reload northbound bulk cargo.

The northbound trip for the COB unit tow essentially replicates the southbound trip except the voyage duration is significantly longer since the tow will be running against rather than with the current – making less than 50% of the southbound speed on the Lower Mississippi even during reasonable river conditions. Transit time northbound to St. Louis will include 10-12 days (depending on from Houston and New Orleans or just from New Orleans), and 1.5 days from Granite City/St. Louis to Peoria. The tow may drop one or more barges at Granite City/St. Louis

48 for bulk cargo discharge and container reloading to be picked up southbound – with no appreciable loss of time.

The New Orleans Gulf destination (as well as multiport, and Houston alone, to a lesser extent) combined with a six barge tow offers an opportunity for the Gulf COB to overcome extreme river conditions on the Lower Mississippi by using the alternative voyage routing to Cairo, Il via the East Gulf Intracoastal Waterway to Mobile, and then the TennTom Waterway/Tennessee River/Ohio River route. During extended extreme high water events on the Lower Mississippi (such as which occurred in 2011), the northbound voyage of the Gulf COB tow could save a day or more by utilizing this alternative route where river flow is controlled by dams to some extent. The decision to utilize the alternative route to Cairo will be on a case-by-case basis based on river stages and Gulf weather.

Upon arrival in Peoria the Gulf COB would drop the northbound barges, and immediately depart southbound with the barges that would have been loaded with containers just prior to arrival. The Shuttle COB would handle distribution of the northbound Gulf barges from Peoria to any intended destinations for unloading of the bulk cargo above Mile 160, Illinois Waterway as a component of its twice weekly service. There would be 20-23 days available to reposition, discharge, and reload containers on those six barges prior to the return of the Gulf COB tow.

In summary, regarding COB itineraries:

• Peoria appears to be the most appropriate “turn point” for both the COB Shuttle and the Gulf COB. • The COB Shuttle would well serve in harmony with the Gulf COB to handle Gulf COB barges above Peoria. • Several Gulf port options are available, with a multiport strategy including New Orleans and Houston the most favorable opportunity to access multiple ocean container carriers/container owners and Far East trade lanes. This strategy will also provide several opportunities to reload northbound cargo. • The Shuttle COB will turn Joliet/Peoria twice weekly, yielding 200 TEU/week, but would be scalable using the same towboat (and additional barges) to 600 TEU/week. • The Gulf COB tow would complete each round trip voyage in a maximum 23 days using the multiport New Orleans/Houston strategy

11.0 COB Program Component Specifications

In order to provide a reasonable forecast of the COB program costs it is necessary to review the details of the program components. Addressed here are the equipment, crewing, fuel, and other assumptions that we have applied to the two COB programs. Every effort has been made to be creative, practical, and conservative with specifications and program costs. Both Shuttle COB and Gulf COB programs are structured as dedicated unit tows at the minimum scale considered feasible. Both programs are scalable by the addition of barges only (Shuttle COB), or multiple identical unit tows (Gulf COB).

11.1 Shuttle COB Floating Equipment

As described previously the Shuttle COB would be initially composed of a towboat and three 195X35 deck barges. The towboat should be of 1200 horsepower. Recognizing that horsepower of that scale would not normally be required for handling a tow of that scale, but also recognizing that more barges may be in the COB Shuttle tow at times to accommodate coordination with the Gulf COB at the same time maintaining the Shuttle COB scale, a somewhat creative towboat design will be of value.

We have settled on the concept of using a triple screw towboat (as opposed to the more common twin screw configuration) with the intent of essentially having three towboats of varying horsepower (and – importantly – varying fuel consumption) available to the Shuttle COB as tow size and/or tow speed warrant. For instance, the 1,200 horsepower towboat is powered by three 400 horsepower diesel engines. The towboat can operate as a 400 horsepower vessel; an 800 horsepower vessel; or, a 1,200 horsepower vessel, as tow size and other factors dictate. The towboat maintains balanced thrust regardless of which configuration is in use. The vessel length should be as generous as possible; and, the width sufficient to ensure efficient operation of the

50 three propellers without “stealing” water. The towboat will likely require a few relatively inexpensive special features – such as accommodations for oil pressure in the reduction gears when free-wheeling propellers. It appears that this approach is preferable to the current practice of running twin engines “cut back” to accomplish the same fuel savings.

The towboat will also require features to accommodate high ratio biodiesel. Those features will include special bunker coatings to address bacterial build-up, multiple fuel filter banks, and some method to blend and heat fuel. Incorporation of these features in a “new build” vessel will not result in significant additional cost. Retrofitting an existing vessel (particularly for fuel heating) may prove more costly.

The Shuttle towboat should be set up for a crew of five, with private rooms for each crew member. Both galley and engine room should be so equipped as to accommodate multi-tasking crew members. The towboat should be design and equipped with all features necessary to meet current and project Coast Guard “Inspected vessel” standards, and the industry standard for crew comfort.

The estimated new build cost for a vessel of this size and design – including special features is $2 million. A “seasoned” hull with upgrades, current engines, and biodiesel modifications could likely be had for $1.25 million. Finding a seasoned triple screw hull will prove challenging. A seasoned twin screw with no modifications except biodiesel accommodation could get the Shuttle COB program underway - but not as efficiently – for about $1 million.

Since the barges utilized for the COB Shuttle will be dedicated to that service alone, and will not be required to handle bulk cargo as well, some flexibility is available regarding the barge type that is used – hopper barge, or deck barge. Also, many of the age and design/function factors that apply to the towboat do not apply to the barges. The operating model for the Shuttle COB utilizes deck barges, for the following reasons:

• Deck barges are of varying dimensions – to as large as 100X300. A more common dimension is 54X250. The Shuttle COB model utilizes 195X35 deck barges (50+ TEU capacity). This dimension will enable trouble-free integration with Gulf COB hopper barges (of the same dimensions) for any repositioning of the Gulf COB barges above Peoria if coordinated COB programs develop. • With the deck of the barge at or near shore ground level at many terminal sites, the option exists to handle containers on/off the barge with a regular container yard tractor/stacker utilizing a ramp – or, the dock as seen below. Since this is a dedicated/standby program, the tractor/stacker could even travel with the tow (loaded on the barge(s)) and be utilized at both ends of the Shuttle, thereby precluding the need for a 100+ ton crane at each end.

Stacker/Loader

• A typical 195 foot by 35 foot deck barge can handle 54 TEU in two tiers; and can accommodate 81 TEU with 3 tiers. Three tier container loading is accomplished on deck barges transiting the Columbia River today. Since three tiers of containers would equate to no more than 1125 pounds per square foot deck loading (well within the capacity of most deck barges), a third tier of containers is feasible, but only if the total gross tonnage does not exceed 1600 tons. • New deck barges of the dimensions noted above are priced in the vicinity of $800,000. In the case of deck barges, however, there are usually sufficient lease opportunities in the market as well. The scale of the Shuttle COB can be scaled-up by the addition of additional deck barges. The towboat can easily handle double the initial tow size.

The photo below depicts COB utilizing a deck barge on the Columbia River. This barge is smaller in size and capacity than what is proposed for the Shuttle COB.

11.2 Gulf COB Floating Equipment

The Gulf COB will utilize a larger towboat and 12 dry cargo hopper barges (with covers). The larger boat is required due to the 6 barge tow size, the tonnage to be handled (9,000+ tons), and the more demanding river conditions of the Lower Mississippi River. The Gulf COB towboat is of 2,500 horsepower. Less horsepower might work some of the time, but tow speed and safety are both paramount with the Gulf COB, and the risk of under-powering the tow should be avoided. The same vessel design and special modifications described for the Shuttle COB towboat are required for the Gulf boat – primarily relating to biodiesel capability, and currency of safety and crew comfort features. Crew accommodations for at least 5-6 in private cabins should be provided, as well as galley and engine room facilities to accommodate multi-tasking crew members. Finally, the vessel must be equipped to meet current and forthcoming Coast Guard Inspected vessel standards.

Since the Gulf COB towboat will be operating at full safe capacity most of the time, the design feature of triple screw power will not be advantageous. In addition, propeller diameter for triple screw boats of this scale tends to be less than for twin screw boats of the same horsepower – due to vessel width constraints that result in problems with propeller efficiency (“stolen water”). Generally, slower turning propellers of large diameter are favored for Lower Mississippi River operations. A twin screw towboat is the choice for the Gulf COB towboat.

The new build cost of a twin screw towboat of 2500 horsepower, with the required biodiesel upgrades will approach $3.0 million. There usually is a market for older, but solid, vessels of this size where a vessel could be found – after biodiesel modifications – in the $2 million area. New build may not be as important the Gulf COB towboat, but considering finance/lease factors, the actual cost to operate either vintage vessel may not be significantly different.

The barge configuration for the Gulf COB differs markedly from that of the Shuttle COB – both in number and type – primarily responsive to the bulk cargo strategy proposed to support COB operations. That, of course, requires dry cargo hopper barges – and covers. Dry cargo hopper river barges come in varying dimensions – except length and width, which are always 195 (rake end) or 200 feet (box or rake end), and 35 feet, respectively. The fleet would consist of 4 box barges and 8 rake barges, to make up a 2 wide by 3 long tow for best towing efficiency northbound on the Lower Mississippi. Barge depth and the height of barge coamings (vertical sides extending above the deck) vary to some degree. Due to the container stacking required in the barge the most suitable barge depth is 14 feet (with 13 feet and 12 feet the other iterations). The coaming height should be as high as possible (to ensure maximum lateral support for a third tier of containers). A six foot coaming would be a minimum – if available.

There are a very limited number of 14 foot side wall barges available in the used equipment market since building to that specification has been a very recent trend. New build barges of that specification are currently priced in the $650,000 range (each). Utilizing Federal loan guarantees for new build hopper barges over the maximum allowable amortization period yields P&I requirements not much different than leasing or buying existing barges at less favorable financing terms – even if a buyer can locate 14 foot barges in the used equipment market. It

54 should be understood, however, that 12 or 13 foot sidewall barges would also work for the Gulf COB program. While recent build examples of even those barges are not common on the used equipment market, they can be found, and should be considered as viable options.

11.3 Crew/Supplies/Maintenance/Incidentals

While the specifications of the two dedicated tow COB programs vary significantly in other respects, this series of expense line items will be virtually identical with both the Shuttle COB, and the Gulf COB. The differences will be too slight to be of any consequence in the total cost structure of either program. Therefore they are addressed as equally applicable to both programs/budgets.

11.2.1 Towboat Crew

The Shuttle and Gulf COB dedicated unit tows share operating/crewing characteristics with their oil unit tow “cousins”, including a relative small boat to maintain, the absence of multiple barge drops and pickups (“tow work”) , and to avoidance of multiple cut locking (and the resulting need to re-wire the tow repeatedly at each lock). As such, less crew is required than found on the typical dry cargo towboat. With crew expense the second largest towboat operating line item (fuel being the largest); a sharp focus on the crewing of the towboat is important. If, however, the

55 towboat operator is planning to “short crew/multi-task” a towboat, it is critical to towboat performance to employ experienced and capable crew members.

Towboat crews generally work a 30 days on the boat/30 days off the boat schedule – essentially working ½ of a year. This would be the schedule for the Gulf COB, but the Shuttle COB may adopt an alternative even-day schedule since travel to/from the boat will not be as great an issue/expense (the company usually pays all travel to/from the boat). While on the boat, the crew utilizes two routines: a basic 6 hour on/6 hour off routine (mandatory for wheelhouse crew); and/or a basic plus “call watch” routine that best fits the actual duties for non-wheelhouse crew. The call watch-plus-basic type of on-boat routine best fits a dedicated unit tow such as both COB’s will be.

With towboat crews working half of the year, two full crews will be required for each of the COB tows – a total of 20 crew members. The towing industry is experiencing a shortage of experienced crew – particularly wheelhouse crew. While a dry cargo dedicated tow, running a prescribed route, will be considered to be an attractive berth, the operating company(s) should be prepared to pay premium salaries to attract stable and reliable crew members.

Towboat Crew Components:

• Captain – This position not only stands a towboat pilot watch, but also manages the towboat’s affairs. Not only is the Captain an experienced river pilot, he/she is an accomplished business/personnel manager. We have budgeted $600 per day for this position, and would expect to attract top piloting and management talent at that pay scale. • Pilot – While this position is solely responsible for standing a pilot watch, multiple rivers experience and talent are required. We have budgeted $500 per day for this position. • Engineer/Deck – This is a multi-task position. The primary responsibility will be anything mechanical on the towboat – engines, generators, pumps, electrical, plumbing, hydraulics, etc. A secondary responsibility will be to assist the Mate with deck duties as required. These duties would include being the second man on deck for locking. This position would have responsibility for engine room cleanliness – with assistance from the Mate. The unique circumstance of high ratio biodiesel use on both of the COB towboats will require the Engineer/ Deck to understand and appreciate the importance of the alternative fuel program, as well as possess the ability and knowledge to maintain any special fuels system components related to biodiesel. The secondary responsibility of this crew member will be as “second called” to assist the Mate with tow work during barge drops/pick-ups. When working in this capacity the Engineer/Deck will take direction from the Mate. When functioning in the Engineer position he will report directly to the Captain. • Mate – This crew member is responsible for all towboat and barge matters beyond the wheelhouse, engine room and galley. Overall non-mechanical towboat and barge maintenance and appearance, as well as all locking, barge pick-up and drop activities are directed by the Mate, upon the specific orders of the Captain or policy of the company.

The Mate supervises the tasks of the Engineer/Deck and Cook/Deck when those positions are functioning on deck outside their primary respective responsibilities. We have budgeted $250 per day for the Mate position. • Cook/Deck – This crew member will have a primary responsibility for preparing all meals and maintaining the galley aboard the COB towboats. In addition, the position will plan menus (within established company policy), and order boat provisions. As with the other non-wheelhouse crew, this position will have a secondary responsibility to assist the mate with required tow work and vessel housekeeping.

In an industry where personnel are increasingly difficult to secure and retain it is important to offer “cover all” benefits as well as competitive salaries. As such, the operating models assume 30% of total payroll to cover mandatory government contributions and expected company-paid benefits such as medical insurance.

11.2.2 Insurance

In addition to personal crew insurance costs covered by the payroll overhead, the COB tows will require insurance for liability, equipment damage/loss, and cargo. The towboat operator and crew will not be covered by normal Workman’s’ Comp, but rather Jones Act seaman coverage. Most vessel loss/damage coverage also includes “Inch Marie” coverage for unwarranted main engine mechanical failure damage. River operations insurance differs significantly from other transportation modes – taking the form of ocean transportation insurance.

We have secured a 2011 quote for all required barge and towboat insurance (liability, vessel, crew, cargo, pollution, and excess) from AON, St. Louis – a major river industry insurance broker. The operating cost estimates in later sections of this work reflect those quotations – detailed with footnotes.

11.2.4 Barge/Towboat Incidental Operating and Maintenance Expense

This expense line item covers a range of supplies, stores, and related incidental expenses incurred in the normal course of towboat operations. Included are crew groceries, lube oils, lines, rigging, and housekeeping supplies. We have included $100/day to accommodate these expenses.

11.2.4 Repair/Overhaul Reserve

Daily COB tow operations will result in mechanical failures beyond the scope of whatever Inch Marie insurance coverage included above. Pumps fail, hoses break, hydraulic cylinders fail and numerous other wear/tear items result in expense to the towboat owner. In addition, main engines, generators, and underwater running gear require periodic overhauls or replacement. A daily amount of $200 per towboat has been expensed in the operating models to both address routine replacements; and, to accrue a reserve to at least partially cover major overhauls as they become necessary.

11.2.5 Administrative Overhead

The COB tows will require shore side personnel to handle administrative tasks related to COB operations. Since COB is being modeled by this work product as a stand-alone venture, we have allocated 5% of operating cost – net of fuel cost – to cover shore side administrative overhead. A model assumption is made that the shore side administrative sector would serve both the Shuttle COB and Gulf COB concurrently. Of course, were either or both COB ventures to be managed and shore-supported as division of an existing river towing firm, the cost of overhead could be reduced significantly – as the possible expense of total COB focus.

11.2.6 Towboat Fuel

This category of COB operating expense is the largest and most volatile. Not only are fuel prices as variable day-to-day as ever in history, but we are dealing with alternative fuel (biodiesel) that does not have an in-place retail distribution network serving the river.

With regard to biodiesel supply issues, an appendix to this work will be an application to EPA for a DERA grant to subsidize 100% of the incremental cost of biodiesel over #2 diesel. That grant application will address the added cost of biodiesel due to lack of easy access to supply – a problem for the Gulf COB, but perhaps not for the Shuttle COB due to biodiesel supply at the river at REG, Seneca, Illinois. The solution (and grant funding to cover the solution’s cost) may be for the Gulf COB to position a supply of biodiesel at the Gulf using a chartered tank barge of Seneca biodiesel added to the tow from time-to-time. For the purposes of COB expense modeling we have assumed towboat fuel consumption (main engines plus generators) to be 1 gallon per day per rated horsepower for the Gulf COB southbound, and 1.25 gallons per day northbound. Recognizing the proposed multiple horsepower configuration of the Shuttle COB towboat, we have assumed the vessel to be operating at 800 horsepower at the twin engine configuration, since we do not anticipate the need for all three engines except in extreme conditions (where safety is at issue) during the initial two years of Shuttle COB operations. In addition, we have assumed fuel consumption at 80 % of respective rated horsepower for the Shuttle COB, accounting for operating hours at reduced RPM during lockage and other delays encountered on the Upper Illinois Waterway.

As this is written #2 marine diesel is priced near $3.25/gallon. We are assuming (as has been the case in the past) that biodiesel (after blender’s tax credits) will be priced similarly. That assumption may not hold should no EPA grant assistance is forthcoming for biodiesel’s extra delivery expense – particularly at the Gulf end of the Gulf COB voyages. While neither #2 diesel nor biodiesel pay State or Federal Road Tax when used in river towboats, the towboat operator is required to keep record of, and pay, the Federal Inland Waterways User Tax of 20 cents/gallon for fuel actually consumed by the propulsion engines. Tax is not paid on fuel consumed by on- board generators. We have, however, not deducted generator fuel usage from the total since the amount is insignificant compared to the total fuel used.

Forecasting fuel consumption (and the resulting cost to the COB programs) is an inexact exercise. Even the piloting skill of wheelhouse personnel can have a noticeable impact. We have

58 utilized generally accepted “rules of thumb”, with the hope that these will prove accurate in practice.

12.0 COB Expense Models

In the models below, aggregating the foregoing COB expense line item categories, and applying those aggregates to voyage duration yields forecasted COB costs on a daily, voyage, weekly, monthly and annual basis. The key aggregated cost is that of voyage. The remaining aggregations do, however, provide an initial glimpse at COB business cash flow requirements.

Potentially important “expense” factors not address by this section (but will be addressed in the accompanying Business Plan) is that of Return on Investment, Net Operating Margin and/or Net Profit. This is being addressed separately on the premise that the COB program(s) may be (and possibly should be) operated (at least initially) by some form of “non-profit” service organization on behalf of Illinois agricultural growers/shippers. That premise is based on the concern that the private river businesses have essentially avoided COB - unless as an adjunct to normal barge line operations - due to the inherent risks of any dedicated COB “start-up”. Those perceived risks will likely (and properly) require a private business operator to demand a higher potential return.

As noted previously, the Gulf COB will incur switching and fleeting charges related to any bulk loadings – either southbound, or northbound. Those charges will be addressed as adjustments to Gulf COB “outside” revenue in the next section.

Four separate COB expense models are presented: Shuttle COB; Gulf COB New Orleans Only; Gulf COB Houston Only; and, Gulf COB New Orleans + Houston.

13.0 COB Outside Revenue

Revenue to COB operations as described here will accrue from sources beyond charges for movement of shipping containers. Indeed, those “secondary” revenue opportunities will become a key to the success of COB – at least initially. Those outside revenues will essentially subsidize COB as the COB volume grows.

13.1 Gulf COB

The Gulf COB program is specifically designed to provide cargo flexibility, leading OB to two non-COB revenue streams:

• Southbound – As designed, six of the Gulf COB barges will always remain in Illinois while the COB tow makes an 18-23 day round trip to the Gulf. During that period any barges that arrived from the Gulf as loads will be repositioned (by the Shuttle COB) to ports at or above Peoria for discharge, returned to Peoria as empties, and then await

loaded containers for the next Gulf COB voyage. At a predetermined point in time (“cut- off date”) prior to arrival of the Gulf COB tow northbound at Peoria a decision will be required of COB management regarding how many of the six COB barges then in Illinois will be required for COB purposes on the forthcoming southbound tow, and how many are to designated for southbound bulk loading. Those barges that will not be required for southbound COB as of the cut-off date will be available for bulk loading at or above Peoria, and would be positioned for bulk loading, and returned to Peoria by the Shuttle COB for inclusion in the next Gulf COB tow. Initially, this decision to load southbound bulk could entail several of the Gulf COB barges, but the goal will be to eventually phase out southbound bulk in favor of 100% COB. There will likely be occurrences of a single southbound barge only partially loaded with containers. Since mixing bulk cargo and containers in a single barge is not practical, the program must be prepared to accept one southbound barge with a less than full load of containers as the price for building COB reliability in the eyes of shippers. There are additional expenses chargeable to a southbound bulk cargo reload (including Illinois Waterway charges for barge repositioning that would accrue to the Shuttle COB as revenue).

The revenue stream to the Gulf COB from southbound bulk cargo will be variable both due to the exact number of barges for which bulk is substituted for containers; and, also due to the wide range of freight rates attainable over the typical shipping season. For the purposes of this work we are assuming that during the initial two years of Gulf COB operations the tow will average no more than 50% of container capacity per voyage. (three barge loads or 165 TEU – slightly over 3,000 TEU per year). We are also assuming that the gross revenue from bulk grain loading of the remaining three barges to be based on a bulk grains freight rate of 350% of the $4.64 ton base for Upper Illinois loadings - $16.24/st. That will yield about $26,800 per barge, or $80,400 per voyage.

The gross revenue from southbound bulk loading of bulk grain will be reduced by the following charges: o Switching/Fleeting Illinois Waterway - $1,500/barge o Repositioning towing Illinois Waterway- $5,000/barge (minimums) This will be revenue to the COB Shuttle tow. o Cargo Insurance - $500/barge ($.05/$100 of cargo value)

Therefore the NET revenue to the Gulf COB from southbound substitute bulk grain loading will be approximately $20,800 per barge, or $62,400 per voyage (which equates to $378/container substituted for).

• Northbound – The concept of using dry cargo barges with stacked covers for the Gulf COB program is partially driven by the southbound “replacement” bulk cargo described above, but primarily driven by a northbound bulk cargo strategy (primary dry fertilizer

Gulf COB - Houston Only

Day Voyage Annual Month Week Boat P&I (Note #1) $ 650 $ 13,650 $ 237,250 $ 19,771 $ 4,943 Insurance (Note #2) 200 4,200 73,000 6,083 1,521 Stores 100 2,100 36,500 3,042 760 Lube/Mech 50 1,050 18,250 1,521 380 OH Reserve 200 4,200 73,000 6,083 1,521 Fuel 8125 170,625 2,965,625 247,135 61,784 Fuel Tax 500 10,500 182,500 15,208 3,802 Capt 600 12,600 219,000 18,250 4,563 Pilot 500 10,500 182,500 15,208 3,802 Engineer/Deck 300 6,300 109,500 9,125 2,281 Cook/Deck 250 5,250 91,250 7,604 1,901 Mate 250 5,250 91,250 7,604 1,901 Payroll O/H 495 10,395 180,675 15,056 3,764 Total Crewed 12,220 256,620 4,460,300 371,692 92,923 Barge P&I - 12 (Note #1) 1,675 35,175 611,375 50,948 12,737 Barge Insurance (Note #2) 177 3,717 64,605 5,384 1,346 Cargo Insurance (Note #2) 295 6,195 107,675 8,973 2,243 Management 973 $20,426 $355,017 $29,585 $7,396 Operating Daily Total $15,340 2500 HP 3.25 Fuel Price Days Operating 21 $322,133 Days Stand By Ex Fuel 1.5 $10,072 Container Reposition (Note #3) $16,500 Total Voyage Cost $348,705

Note #1 - Assumes a MARAD Title XI loan guarantee of a new-build towboat ($3 million) and 12 new-build covered hopper barges ($7.8 million) amortized over 35 years at 6% interest. MARAD financing will require 25% equity contribution for the towboat and 12.5% equity for the barges. Note #2 - Assumes annual towboat and 12 barges. Towboat: Hull @$27,000; P&I @$7,500; Crew@$25,000; Excess @$10,000; Pollution @$2,500 - all $25K/$50K Deduct. Barges: Hull @$46,800; P&I @$6,000; Pollution @$1,800; Excess @$10,000; Cargo @$108,000 - all $25/$50 Deduct.

Note #3 - Assumes 75% of the containers will be repositioned from Joliet to Peoria by the Shuttle COB tow @$100/container - 165 TEU/trip Peoria COB Gulf Pro Forma

Day Voyage Annual Month Week Boat P&I 700 15400 255500 21,292 5323 Insurance 200 4400 73000 6,083 1521 Stores 100 2200 36500 3,042 760 Lube/Mech 50 1100 18250 1,521 380 OH Reserve 200 4400 73000 6,083 1521 Fuel 8125 178750 2965625 247,135 61784 Fuel Tax 500 11000 182500 15,208 3802 Capt 600 13200 219000 18,250 4563 Pilot 500 11000 182500 15,208 3802 Engineer/Deck 300 6600 109500 9,125 2281 Cook/Deck 250 5500 91250 7,604 1901 Mate 250 5500 91250 7,604 1901 Payroll O/H 495 10890 180675 15,056 3764 0 0 0 0 Total Crewed $12,270 269940 4478550 373,213 93303 Barge P&I - 12 $2,400 52800 876000 73,000 18250 Management $734 16137 0 Operating Daily Total $15,404 338877 5622278

2500 HP 3.25 Fuel Price Days Operating 22 $338,877 Days Standby

Total/Trip Cost $ 338,877 and salt) utilizing the same barges – with the covers spread. The assumption leading to this strategy is, of course, that little or no northbound container business will be (at least initially) available to the Gulf COB given the lengthy northbound transit time. But, what would be lengthy transit time for containers northbound on the Gulf COB tow would be considered “express” service for most dry cargo compared to typical barge line operations. That timing advantage to some northbound bulk shippers could become sufficient incentive at Gulf bulk terminals to agree to the required standby loading of Gulf COB bulk barges for Illinois destinations (Peoria and above). There are additional expenses chargeable to a northbound bulk cargo reload (including Illinois Waterway charges for barge repositioning that would accrue to the Shuttle COB as revenue).

Northbound cargo is assumed for all six barges on every voyage during the initial two years of Gulf COB operations. Northbound bulk cargo rates are more stable than southbound, averaging about $16/st for fertilizer from New Orleans to the Upper Illinois Waterway, and $20/st for salt from the South Louisiana mines to Illinois Waterway locations. This will yield an average gross northbound Gulf COB revenue of about $26,500 per barge for New Orleans-loaded fertilizer; or $33,000 per barge for salt from the mines near Morgan City, LA.

Loading of northbound salt will only be available to the Gulf COB tow from the three salt mines located a two day + round trip west of New Orleans on the Intracoastal Canal. If a New Orleans-only COB strategy is adopted the added cost to the COB tow to undertake trip to Morgan City for salt will essentially reduce the net revenue for salt loads to that realized from New Orleans fertilizer. Due to the location of the salt mines, a Houston-only or New Orleans + Houston operating strategy would bring the Gulf COB within very close proximity of the salt mines, thereby providing the full measure of the $33,000 per barge northbound salt revenue.

For the following revenue/cost projections we have assumed salt loadings at the higher revenue number only for the Houston Only voyage alternative even though at least some of the barges could realize at the revenue advantages of the salt loadings under the New Orleans+Houston alternative as well. The gross revenue from northbound bulk loading of bulk fertilizer or salt will be reduced by the following charges:

o Switching/Fleeting Illinois Waterway - $1,500/barge o Repositioning towing on Illinois Waterway- $5,000/barge (minimums) This will be revenue to the COB Shuttle tow. o Barge Cleaning - $1,000. o Cargo Insurance - $250/barge for fertilizer and $55/barge for salt ($.05/$100 of cargo value) o Cover Stacking - $500

Therefore the NET revenue to the Gulf COB from northbound bulk fertilizer loaded at New Orleans will be approximately $18,250 per barge ($26,500-$8,250), or $110,000 per voyage. The Houston Only alternative will enable 100% northbound salt loading at Morgan City. Revenues here will approximate $24,945 per barge ($33,000-$8055), or $150,000 per voyage.

• Outside Towing – depending on river conditions and other factors that will vary from voyage to voyage, the Gulf COB will, at times, be capable of adding outside barges (known as “tramp towing”) to its COB compliment of six. These opportunities will most often be available southbound - St. Louis to the Gulf. For instance, the six barge tow could at times be increased to 8-12 barges at St. Louis or Cairo with favorable river conditions. For the purposes of financial modeling we have assumed an average of two outside barges added to the Gulf COB tow between St. Louis and New Orleans. The rate charged is assumed to be 6 mills/ton mile, or $10,000 per barge - $20,000 per voyage. No northbound outside towing has been assumed, even though occasional opportunities may be present to bring empty grain barges or 195X35 liquid cargo barges north – particularly with either Houston alternative.

In summary, the Gulf COB program – if properly managed – would realize on the order of $130,000 (New Orleans or New Orleans+Houston) to $150,000 (Houston Only) per voyage of revenue as a supplement, or in addition, to actual COB revenues. This will both insure the continuity of the COB venture regardless of actual periodic COB volumes, and work to significantly reduce the tow expense attributable to any COB volume.

13.2 Shuttle COB

The Shuttle COB program can also realize outside revenue from several sources:

• Regular positioning of empty containers on the Shuttle COB deck barges from Joliet to Peoria for Gulf COB loading. This would be a continuous revenue stream, but may reduce available shuttle container capacity of the Shuttle COB to some degree. This revenue stream would also be highly variable, depending on both the ability (or lack thereof) to secure empty containers at Peoria from local sources; and, the volume of containers (as opposed to substitute bulk) carried by the Gulf COB program from time- to-time. Assuming the Gulf COB will average three barges of containers southbound per voyage (1.33 Gulf COB voyages per month); a need to source 75% of those 165 twenty foot containers at Joliet; and a flat rate of $100 per container to reposition southbound only from Joliet to Peoria (a fair rate to the Gulf COB, given a probable trucking charge of around $500 for the same repositioning at current fuel prices), a revenue stream of $12,400 per month or $825 per Shuttle COB voyage can be realized as revenue to the Shuttle COB for container repositioning to serve the Gulf COB program - if the two programs are operated as a coordinated strategy.

• Repositioning of Gulf COB barges to/from locations above Peoria to accommodate discharge of northbound bulk cargo, and accommodate loading of any southbound bulk cargo for the Gulf COB program. This too will be a continuous revenue stream to the Shuttle COB, charged against the Gulf COB bulk loadings. This will not, however, impact Shuttle COB capacity, or increase Shuttle COB costs appreciably if the flex- power towboat is utilized as recommended. If we assume that ½ (3 barges) of each Gulf COB northbound tow will be required to be repositioned for discharge above Peoria, and returned to Peoria as empties for container loading following discharge, we can assume the Shuttle COB will charge the Gulf COB program the common Illinois Waterway tramp towing minimum of $2,500 per barge minimum each way ($5,000 total) per barge. Using the 1.33 Gulf COB trips per month, the revenue stream to the Shuttle COB for repositioning Gulf COB northbound loads will average $20,000 per month, or $1,333 per COB Shuttle voyage on average. • The Shuttle COB towboat will also have the capacity to tramp tow outside barges between Joliet and Peoria when such outside towing does not interfere with the COB tow schedule – which must remain the primary focus. This too will be highly variable, and accommodated only when the Shuttle COB has available room and/or when such outside towing is available. We have assumed only a single outside barge moved each voyage at the Illinois Waterway minimum towing charge of $2,500 per Shuttle COB voyage.

In summary regarding outside (non-Shuttle COB) revenue to the Shuttle COB, we assume 15 COB shuttle voyages per month from Joliet to Peoria and return. Upon the above revenue assumptions, this will provide $57,400 per month.

COB - Bringing It All Together

The foregoing sections have detailed the expense and revenue details of both the Shuttle COB and the Gulf COB. The sum of those details leads to conclusions as to what the break even rate structure could be for moving containers by river in either scenario, or, as a coordinated program.

• Shuttle COB – We have seen that the projected cost to operate the river transportation component of the Shuttle COB (as designed) will approximate $14,299 per voyage. We have also seen a potential of outside revenue to the Shuttle COB program of $3,833 per voyage, including the Gulf COB repositioning. This yields a net cost per voyage to Shuttle containers of $10,466 or $175 per round trip per TEU assuming a single deck barge load of 60 TEU per voyage – 210 TEU per week, 840 TEU per month, and 11,000 TEU per year. As the average container volume per voyage decreases from 60 TEU (a combination of fewer 20’s or substituting some 40’s), the following round trip rate per TEU to attain break-even results:

With Gulf COB As Stand-Alone Operation o 60 TEU $175 $197 o 55 TEU $190 $215 o 50 TEU $209 $236 o 45 TEU - $233 $262 o 40 TEU - $261 $295 o 35 TEU - $299 $337 o 30 TEU - $349 $393 o 25 TEU - $419 $472 o 20 TEU - $523 $590 o 15 TEU - $740 $786 o 10 TEU - $1,047 $1,180

Removing the outside revenue from coordination with the Gulf COB (column 3 above) – essentially making the Shuttle COB independent – increases the Shuttle COB projected break-even rate by 8-9%. Coordination of the two COB programs clearly has advantages for both programs.

• Gulf COB – The voyage totals for the three alternative destination models and the outside revenue off-sets and expense additions related to container repositioning/bulk cargo barge repositioning by the Shuttle COB, and bulk cargo third party charges are as follows:

Expense Net Outside Revenue Net to COB TEU New Orleans Only $299,328 $129,000 $170,328 $516 Houston Only $348,705 $198,000 $150,705 $457 New Orleans+ Houston $379,384 $198,000 $181,384 $529

So, how is it that “Houston Only” - the longest distance from Peoria - can have the lowest per container cost of the three options? Two reasons - from above discussions:

o The saving of voyage distance and voyage days by use of the Old River/Atchafalaya “short cut”, thereby by-passing transit to/through New Orleans. o The ability to access the South Louisiana salt mines for the higher freight revenue (and lower cargo insurance premium) salt cargo.

It must be noted however, that to the extent southbound bulk grain must be substituted for an inadequate volume of loaded containers, the Houston Only alternative may not be practical since bulk southbound soybeans and corn almost exclusively are handled by New Orleans area terminal elevators. The Houston bulk grain terminal primarily handles

wheat, and does not now have facilities for rapid barge discharge. Further investigation of bulk grain to Houston is clearly warranted, but beyond the scope of this project.

The bottom line financial data calculated above becomes essentially a break-even analysis. The Business Plan attached as Appendix A, however, requires going beyond these simplistic answers – regardless how rigorously the answer has been researched, detailed, and modeled. The Business Plan in this case will concentrate on forecasting financial outcomes in a manner required of lenders and investors. The business strategies, markets and related non-financial matters are addressed in this master document and will not be repeated – except by reference in the Business Plan.

The costs of services (at break-even) listed above must be addressed in the context of at least three additional considerations – to establish a COB rate structure to shippers and/or ocean container carriers:

• The cost of container inland transport from North/Central Illinois (to any port of departure – West Coast or Gulf) that today provides similar service to the ocean carriers and shippers – competing service. • The pricing impact of “plus loading” of containers up to railroad maximum gross per container (if higher than “highway legal” gross) with the Shuttle COB; and, to maximum container gross with the Gulf COB, given that there would be little or no additional costs to the COB program for such plus loadings. • Required returns above all costs (profit). This includes whether the COB programs could be best operated as a limited profit service to Illinois Ag shippers – at least initially.

Applying those considerations to the two COB programs:

• Shuttle COB – The only current competition for COB between Peoria and the Joliet area container rail ramps is dray trucking. There may be an opportunity for a shipper to move bulk grain by barge to Joliet for container stuffing at some point and rate, but the relatively short distance (compared to customary bulk barge moves) may not prove attractive enough to bulk river carriers to enable competitive pricing.

We have secured a May, 2011 dray trucking rate of $527 (including fuel surcharge at that time) per container for a guaranteed volume movement of 50 containers between Joliet and Peoria. This was for a one way movement, returning with an empty chassis. It is doubtful that this rate would available to a single round trip container movement. A rate for a round trip single container dray movement would likely be in the $600 area.

While plus loading of containers is a very significant COB advantage for the “all water” Gulf COB program, the Shuttle COB would be able to accommodate the slightly higher

65 gross container weight allowable by the railroads (26.5 tons) than would be “highway legal” (25 tons). This could provide the COB shipper a 5.8% cargo capacity advantage against truck dray - $35 per container.

We have determined that the Shuttle COB program as a “stand alone” program (no Gulf COB revenues as assumed) will operate at break-even at $200/container round trip at 100% of loaded container capacity (60 TEU) per voyage, as here designed. Adding Gulf COB moves to the Shuttle COB program will reduce that rate to $185 at break-even. To compare that rate with the truck dray competition one must add the cost of container handling across the dock at each end of the voyage, and the dray charge from the Joliet area dock to the rail container yards.

Unfortunately, river docks in the Joliet area and the Peoria area have little or no experience with handling containers in the volumes contemplated by these COB programs; and, it is beyond the scope of this contract to address the details of that container handling to establish a rate basis. We can only assume that the loading/unloading of container by docks that are properly set up for the task will result in rates similar to those found in other regions - $25/lift, or $100 to accommodate all 4 lifts required on a container per voyage.

We have secured a dray rate to/from any of the Joliet area docks to/from either of the rail container ramps in the Joliet area of $260. While we expect that rate could end up being less with a long term commitment, and the volume that the Shuttle COB (and particularly when the Gulf COB volume is added, we are assuming that rate for the purposes of this work.

Therefore, we believe that the “all in” break-even Shuttle COB cost (including dock handling and dray) would be in the $550/container area with the COB Shuttle program as a “stand alone”, or $535/container with the Shuttle COB and the Gulf COB operating as coordinated programs. Pricing the Shuttle COB at 10% over break-even would yield $220, and $205 COB Shuttle rates per container, respectively.

As the reader considers the foregoing pricing discussion, it is important to also recall one specific design parameter of the Shuttle COB program – that being scalability. Recognizing that river transportation rewards volume (compared to dray trucking and even the rail mode), the Shuttle COB program has been specifically designed to overcome a burden of high cost during the formative stage of the COB market by a scale that is the absolute minimum sustainable. But, with a program design and equipment specification that includes a “flex-power” towboat and standard dimension deck barges,

66 the Shuttle COB can grow in volume - with rapidly decreasing unit cost - as the COB market matures.

For example, by adding 3 deck barges (including insurance) to the program, and utilizing additional horsepower (and a measure of additional fuel) from the same Shuttle COB towboat, the capacity of the Shuttle COB program doubles while the cost of service increases less than 20%. The container volume carried per voyage would increase to 120, and the round trip cost per container would fall from $200 to $115. It is reasonable to assume that pricing of the COB Shuttle service to shippers and/or container owners would likely reflect similar reductions, thereby widening the spread between the cost of dray trucking and COB. The Shuttle COB could even triple its container volume from that modeled here by adding 6 deck barges (to the initial 3 barges) – and still safely use the same towboat – thereby reducing the cost per container to around $80 round trip.

Overly optimistic volume/revenue assumptions have contributed to many of the COB failures of the past. The design of a start-up scale for the Shuttle COB that is easily scalable is intended to mitigate that issue.

Gulf COB – The primary competition for the Gulf COB program is rail. Not only must one look at competition to the designated Gulf COB ocean ports of New Orleans and/or Houston, but also the current routing of export containers – primarily westbound to Pacific coast ports.

Unlike dray trucking, most Class 1 railroads post public rates for container service. The posted public rates of a Class 1 railroad with a container rail ramp in the Joliet area during mid-summer, 2011 reveal a flat rate of $1,809 per container from Joliet to Houston and $2,200 per container from Joliet to Long Beach, CA. The railroad’s posting does not distinguish between 20 foot containers and 40 foot containers, nor does it clearly state whether fuel surcharges are included in the rate. The maximum gross 20 foot container weight for this rail carrier is 26.5 st.

Another Class 1 railroad posts public rates from Chicago to New Orleans for 20 foot containers to a maximum gross weight of 26.5 st at $1,041 plus an 18.06% fuel – for a total rate of $1,230 per container. This rate and fuel surcharge is again basis mid-summer, 2011.

We have heard unconfirmed rumors of past contract rates from Chicago to both Houston and the West Coast for high volume container shippers of as little as $650 per container. What that rate would equate to today – considering fuel surcharges during the past 24 months – is difficult to ascertain. It seems reasonable to assume that even those high

67 volume contract rates would today approach $800 per container with fuel surcharges considered.

The concept of plus loading of containers would be a major factor when considering container rail to ocean ports versus COB. Most rail carriers now limit gross tonnage of a 20 foot container to just short of 25 net tons. Yet, corn or soybeans (but not DDG or soy meal) are of sufficient weight per cubic foot (plus/minus 70 pounds/cubic foot) that a 20 foot container (1,150 cubic feet) will not be filled by volume at the container’s maximum gross weight of 33 + short tons gross. A 20 foot container will have a tare weight of 2.5 short tons, providing about 30 tons of cargo capacity – well within what is capable with corn or beans without exceeding cubic capacity of the container. The same container by rail from Chicago would be limited to 22.5 short tons of cargo capacity.

On the assumption that Gulf COB containers will be loaded dockside in Illinois, and delivered by the COB tow directly to the port container terminals at New Orleans or Houston, 30 short ton container loadings should not be a problem for Gulf COB – except to the extent that the ocean carriers may limit the number of plus loaded containers carried per ocean vessel. Proper hopper barge specifications (14 foot sidewalls, etc) should enable 1,650 short ton barge loading at 9 foot draft, providing barge capacity for 55 twenty foot containers loaded to 30 short tons gross. That strategy will permit shippers 20% more tonnage per container by Gulf COB versus rail, thereby pushing even the rumored contract high-volume rail container rates to nearly $800 per container vis-à-vis COB.

Another container strategy that will serve as competition for Gulf COB is bulk rail grains to the Gulf (or West Coast) with containers loaded at the ocean port. This strategy is already in practice on the West Coast, and to a limited extent in New Orleans as well. The USDA reports rail unit train rates for bulk grain from Illinois (Champaign) to New Orleans to be $28.50/short ton. At a 30 short ton net container loading at New Orleans, that would equate to $850 per container for rail transportation, with box loading/handling assumed to nearly equal in cost to COB. It is also reasonable to assume that the rate from Peoria (or, the nearest unit train loading facility to Peoria) would be slightly higher for the Gulf transload option.

Container transloading at the West Coast would see a $47+ rail rate for shuttle train grain from Minneapolis – higher from the Peoria area. That would equate to $1,410 for a 30 short ton twenty foot container loading . Container transloading at the Texas Gulf Coast from 110 car shuttle trains originating in Polo, IL. would have a posted rail rate of $33/short ton, or $990 per twenty foot container.

A final strategy that offer competition to the Gulf COB is that of bulk grain barge movement from Illinois to New Orleans (or, far less likely due to cost) Houston. Using the same average bulk grain barge rate as was used for the Gulf COB substitute loadings ($16.24/short ton. There would be charges of approximately $7.00/short ton to load/unload the bulk grain barge in addition to the container handling charges incurred by other strategies, bringing the total bull barge to New Orleans transportation rate to an average of $23.24 per short ton - $700 per twenty foot container. There has also been a concern raised regarding transloading at New Orleans regarding the availability of empty containers on a regular basis. In the past, empty containers have been required to be repositioned from Houston to meet loading demand at New Orleans.

The foregoing discussion of Gulf COB competitive factors can best be summarized in tabular form:

Equivalent Equivalent Equivalent 30 st 30 st 30 st Rate Rate Rate Strategy New Orleans Houston West Coast

Container Rail $1,538 $813 $813

Rail to Transload $850 $990 $1,410

Barge to Transload $700 $1,000 N/A

COB Break Even $516 $457-$550 N/A

COB Rate $625 $750 N/A

COB appears to be competitive with other export container strategies to similar destinations at break-even. New Orleans COB done at the scale and in the manner proposed becomes a “near thing” compared to bulk barge transloading. This is due to the efficiencies of bulk grain transport in a barge line mode. That conceded, the issue remains regarding the availability of empty containers for transloading without the added expense of repositioning containers from another location – such as Houston.

For pro forma purposes we are using a COB container rate of $625 per twenty foot container to New Orleans, and $750 per twenty foot container to Houston.

15.0 The Biodiesel Component

A component of this contract that transcends other prior work - or even any known pending work - regarding Container-on-Barge is the proposed utilization of biodiesel fuel on the towboats engaged in the COB movement(s) contemplated. Inclusion of this project component assumes that recommendations regarding in preceding chapters of this report regarding the use of a dedicated COB unit tow are adopted.

This contractor addressed the utilization of biodiesel in river towboats with a 2006 report to the Minnesota Soybean Growers Association, “FEASIBILITY OF USING BIODIESEL FUEL IN UPPER MISSISSIPPI RIVER TOWBOATS”, (Dillerud, Shapley, and the University of Minnesota Center for Diesel Research, October, 2006). Some of that information regarding biodiesel as it may relate to its use in river towboats is included in this chapter. The task of the 2006 report was to design a demonstration project running biodiesel side-by-side with #2 petroleum diesel in a twin screw towboat on the Upper Mississippi River. The actual on-the- water demonstration would be in the “Phase 2” project as designed by the 2006 work.

The Phase 2 demonstration project recommended by the 2006 report has not proceeded. Indeed, little has transpired since 2006 regarding biodiesel use on the river. The only truly pertinent publication located by the contractor , “COST EFFECTIVENESS OF FIVE EMISSION REDUCTION STRATEGIES FOR INLAND RIVER TUG AND TOWBOATS “ (Papson et al, November, 2009) addresses biodiesel as one option for reduction of diesel emissions from towboats. The report was commissioned by the US Environmental Protection Agency responsive to the Diesel Emissions Reduction program. The report states that a B100 fuel will result in a 47% reduction in both carbon monoxide and particulates emissions compared to 500 ppm petroleum diesel, with a slight increase in ozone emissions. Due to the reported (as of then) wide price disparity between B100 and 500 ppm diesel, the report concludes that use of biodiesel appears to present a high cost-to-emissions reduction solution compared to other methods modeled. The report did not detail the source(s) of the fuel pricing beyond the DOE pricing reports of 2008. We suspect that the pricing disparity would not be as substantial today, leading to a more favorable finding regarding the economic suitability of biodiesel for reducing diesel emissions.

While the reduction of diesel emissions by use of biodiesel is an important consideration, an even more important aspect of biodiesel use is the substitution of a renewable fuel source for one for which there is an ever-diminishing worldwide supply; and an increasing US dependence on imported petroleum – and the geopolitical issues that result. The impact of this supply/demand situation for petroleum fuels is becoming evident today with the ever-increasing cost of petroleum fuel. Biodiesel can be produced from various feed stocks, but soybeans are, and will remain, a major biodiesel feed stock. The price of biodiesel may vary in parallel with to the price of commodity soybeans over time due to weather and other growing factors, but no foreign sovereign party or country will ever control supply.

The concept of fueling COB unit tows with soybeans as the primary cargo with biodiesel is far more than a public relations gimmick. Use of biodiesel on the river system will benefit Illinois soybean producers while also responding to National policies regarding transportation efficiency,

70 alternative fuels/energy; and air quality. While the volume of biodiesel consumed by the towboat(s) engaged in the COB program(s) will not be significant in the “big picture”, a potentially significant market for biodiesel exists on the river. Unfortunately many of the same market place impediments that are faced by COB are shared by biodiesel – primarily the “chicken or the egg” syndrome. It will likely require a river equipment operator successfully using biodiesel blends for an extended time period – along with the availability of biodiesel fuel delivery infrastructure – to move the river industry toward its use. The COB program(s) fueled by biodiesel blends will send the “message” to the industry – regardless of scale.

In addition to the two above-referenced reports, there have been a handful of on-the-water trials involving various blends of biodiesel in a marine transportation setting. While most of those trials have involved ferries and other vessels with operating characteristics that differ from river towboats, at least two are directly related to river operations:

• Sometime prior to 2006 American River Transportation (owned by the ADM agribusiness firm) is reported to have run a side-by-side trial utilizing a B20 biodiesel blend on one of the two engines powering a 6,000 HP towboat on the Lower Mississippi River. There is no published information regarding this trial, but it is understood that the trial resulted in no problems of consequence except an apparent reduction of power from the biodiesel-fueled engine (compared to the other engine running straight #2 petroleum diesel). It is also understood, however, that the biodiesel-fueled engine was turning a damaged propeller. It is also understood that the lower btu content of biodiesel (compared to #2 petroleum diesel) would also account for some of the observed power reduction. • The St. Louis District of the Corps of Engineers has started using B100 to fuel its towboat m/v Pathfinder buoy boat (1,200 horsepower Cat diesels) in 2011. Due to extended high water on the Mississippi River, that towboat has seen limited service since the introduction of biodiesel with limited experience to report at the time of this writing. As of our last interview with St. Louis Corps staff, no major problems have been encountered other than rapid deterioration of all rubber components in the fuel system, which should have been predictable given the solvent properties of biodiesel. It is interesting to note that a Caterpillar representative advised the Corps that B100 biodiesel would cause their engines to fail. We were advised by the Corps that the biodiesel product used in the Pathfinder was purchased from a firm located south of St. Louis, but actually produced by the REG biodiesel plant in Seneca, IL. • The National Oceanic and Atmospheric Agency reports on its web site that several of its small Great Lakes vessels are fueled with biodiesel. They also report that efforts are going forward to address the NOX emissions issues of biodiesel with catalytic scrubbers. Despite repeated attempts we have unable to secure additional information from NOAA regarding its experience with biodiesel.

The 2006 Minnesota biodiesel report several factors that are important when considering biodiesel use in any ratio, but which grow more critical when blends include higher proportions of biodiesel. These factors include:

• Due to its solvent characteristics, biodiesel will dislodge fuel tank sludge deposits that have been built up in towboat fuel tanks over years (or even decades). Once those deposits are released into suspension in the fuel supply, they will travel through the fuel system, eventually clogging fuel filters, and possibly valves and fuel transfer pumps. Therefore, pre-existing tankage that will hold any blend ratio of biodiesel must be cleaned to bare metal prior to introduction of biodiesel. • Biodiesel can soften and degrade certain types of elastomers and rubber compounds over time. We assume that the higher the biodiesel blend ratio, the more rapid the rubber/materials degradation process will take place. This was discussed in 2006 with shipyard advisors at length, with the goal of identifying components of the towboat’s fuel system (from tanks to engines) where materials potentially incompatible with biodiesel may be required to be replaced. The most obvious points of potential incompatibility (given that all fuel piping is steel) would be at the valves and the multiple fuel transfer pumps (cross tank and lift to the day tank). The valve seals and transfer pump seals/vanes on towboats vary widely as to materials. Older vessels tend to have some rubber in both cases, but newer vessels (or replacement pumps/valves) trend toward ceramic variations in both instances. The engine manufacturer should be consulted with to determine which components, if any, need to be replaced with biodiesel compatible counterparts. For older engines, where specific information on biodiesel compatibility is not available, replacement of fuel system components with biodiesel compatible components is recommended. (NBB B100 Material Compatibility Guide). In particular, Teflon and Viton can be used for seals, but Buna, Nitrile, Polyurethane, Polypropylene and Polyvinyl are not acceptable materials. Any copper, brass, zinc, lead and tin parts should also be replaced since these metals may accelerate the oxidation process of biodiesel creating fuel insolubles or gels and salts. These metals must be replaced with aluminum or steel.

• Other items that will need to be addressed include; fuel filter water separation effectiveness, and oil dilution impact. It will be critical to make sure that the fuel is fresh, dry (no water contamination) and clean (no microbe contamination). The issues of water and microbe contamination may be even more relevant on the river. A sensible precautionary measure to address these issues will be to install backup fuel filter arrangements to enable a simple switchover to clean filters should fuel pressure begin to deteriorate, as well as the ability to install new filter elements while under way.

• Recognized and well-documented physical characteristics of biodiesel that distinguish biodiesel from other fuels include elevated (in terms of ambient temperature) cloud point and pour point. While even #2 diesel is impacted by those physical characteristics at cold

temperatures (and is routinely blended with higher grades of diesel during colder temperatures to mitigate those characteristics), neat biodiesel with pour/cloud points at 32 degrees Fahrenheit presents an elevated challenge - particularly to the transportation industry. A river towboat presents a platform unique to the inland transportation industry (including rail and truck), upon which to address cloud point/pour point issues of biodiesel.

Assuming that those physical and chemical characteristics of biodiesel are addressed; and, assuming that the basic pricing of biodiesel in high ratios continues to be similar to #2 diesel (with or without a Blenders Credit), the COB vessel operator must overcome issues of supply – specifically the location of a supply of high ratio biodiesel accessible to the towboats. While B5 blends may be available to truckers at many truck stops (all truck stops in Minnesota – by Law), river towboat fuel is available only at very few locations – due partly to the substantial fuel capacity of the towboats.

The instance of the St. Louis Corps of Engineers indirectly purchasing B100 from Seneca, IL (via a distributor located south of St. Louis) tends to amplify this issue. The trucking expense to move the biodiesel from Seneca to a point south of St. Louis – or the Corps operating base at St. Louis must be substantial. While biodiesel from Seneca is locational issue for the Corps, the Shuttle COB will pass Seneca twice weekly. Even though the river front REG Seneca biodiesel plant has no river dock at this time (and that may change in coming years), delivery of biodiesel to the Shuttle COB towboat should be possible by truck a few hundred feet from the biodiesel plant at the Seneca general cargo dock.

While the Gulf COB towboat should have sufficient on-board fuel capacity to complete one leg of the voyage (be it New Orleans of Houston) access to high ratio biodiesel will still be required at each end (or midway through) each voyage. There appear to be biodiesel producers at or near New Madrid and Caruthersville, MO in close proximity to the river. The same firm that owns the Seneca biodiesel plant (REG) also owns/operates biodiesel facilities at St. Rose, LA (New Orleans area, but not as yet in operation), and in Houston. We are advised that Houston REG pricing of biodiesel is about the same as in Seneca.

A second option for the Gulf COB towboat may be to secure several tanktainers that could be positioned in groups along the voyage route as “portable” refueling points. Subject to Coast Guard concurrence (not as yet requested) the tanktainers (dimensioned exactly as 20 foot dry containers, and with about 6,000 gallons capacity) could be carried along with the Gulf COB tow for placement and replenishment as required.

High ratio biodiesel fueling the COB towboats will require special towboat design features; well- trained towboat engineers; and creative solutions to supply, but as with COB careful pre- planning and conscientious management can produce results for the soybean industry and the Nation’s energy and air quality policies that will be significant. To that end (National Policy, at least) the US Environmental Protection Agency and Department of Energy have grant programs available to support alternative and reduced emissions fuel use. Appendix B will address those opportunities and include a draft application for US EPA grant assistance responsive to the Diesel Emissions Reduction Act.

All towboat fuel expense projections previously presented in this work, and carried forward to the venture financial projections found in the Appendix A Business Plan assume purchase of biodiesel at a price roughly equal to that of #2 marine diesel as of the time of this work. As a projecting tool, that is a fair assumption, since biodiesel refiners price to the public with a sharp focus toward being competitive with #2 diesel or heating oil. An opportunity will exist, however, for the towboat operator using high ratio biodiesel in large volumes to substantially reduce fuel expense by utilizing the RIN market for renewable fuels.

The RIN credit for alternative fuels is somewhat similar to the better known “cap and trade” initiative, but RIN differs in that it is in place as of 2007, while cap and trade is still being debated in Congress. Essentially RIN is a marketable credit for the substitution of renewable fuels for fossil fuels. Those credits are transferrable from the alternative fuel buyer/consumer to other fuel buyers/consumers that are required to meet federal minimum renewable fuel content standards, but do not or cannot. There is a market place for RIN credits already, but brokers generally handle the transfers. The biodiesel producers will often retain the RIN credits with low volume purchasers, and reflect part of the value of the RIN credits in the selling price of the biodiesel – part.

The subject of RIN credits trading would be an important factor for the COB programs using B80 or higher biodiesel in the quantities required. Consider that the Shuttle COB (at its initial volume) plus the Gulf COB will consume nearly 1 million gallons of biodiesel at B80 ratio per year. As of the summer 2011, the RIN credits could reduce the cost of that biodiesel on the order of 75 cents per gallon compared to #2 marine diesel, or biodiesel with the RIN credits left with the refiner - over $700,000 to the bottom line of the combined COB programs, that could reduce container rates on the order of $40/TEU.

We have not assumed the use of RIN credits in the COB cost of operations projections, except to the extent that the refiners apply those credits to maintain biodiesel selling price at a level competitive with #2 diesel. The opportunity is clearly there for the COB programs, however, with biodiesel the fuel of choice.

16.0 Findings, Observations, and Recommendations

The foregoing work has provided an insight into Container-on-Barge from a perspective of the key component of the concept – the river transportation industry. While prior work by others has addressed COB markets, potentials, and previous attempts to establish service, little has been published regarding why those prior attempts at COB have (for the most part) proven unsuccessful – at least over long distances on the Inland River System. With a detailed review of the how the river industry functions, we have provided a close look at how COB could function – from a river industry perspective – in an efficient manner designed to meet COB needs and constraints rather river industry “business as usual”. From both the months of research leading to this document, and the actual preparation of the document we have arrived at several findings, 74 observations and recommendations (along with the COB operating plans for both the internal Illinois Waterway and Illinois-to-Gulf) shared here.

1. Overcoming the inertia of existing inland container logistics practice appears to be an even larger challenge than we first assumed. Our contacts with both inland and Gulf ports, ocean container owners and carriers, 3PL’s and NVOCC’s, resulted in a substantial lack of knowledge regarding a COB alternative (which this work – if widely disseminated may mitigate) – coupled with a general lack of interest in even considering an alternative to business-as-usual inland container logistics.

2. The river transportation industry has talked of COB ad nauseum as a potential source of new business, but has done little to actually embrace the concept – particularly on Inland Rivers (historically/legally referred to as “Western Rivers” where pilot licensing issues are involved). The extensive ownership/operation of industry assets by the multi-national grain traders (who are heavily invested in bulk rather than COB movements) plays a large part in the river industry’s lack of action to date. Again, it is hoped that dissemination of this work will encourage river industry operators to act-on as well as speak COB. Surely positive adjustments/modifications of the COB programs presented here, but at least we have here laid a framework from which the river industry can proceed.

3. The river industry (as with all transportation modes) is built and functions on ton/miles. The river, however, is more about tons than miles/transit time. The COB programs presented here tend to work contrary to that formula, in response to the needs and requirements of the container shipping industry. The result is a narrowing of the usual spread between both rail and trucking costs/efficiencies, and COB-related river transportation costs/efficiencies. A prime example we have seen here is the long distance Gulf COB move. To adequately address the container industry time-in-transit, cargo security, and ocean carrier call/trade lane preferences/ requirements, the Gulf COB dedicated tow essentially is “competing” below St. Louis with bulk grain tows carrying at least 5 times the tonnage at far less than 5 times the cost. The same outcomes can be seen with the Shuttle COB, where the increase in the number of barges alone will double the COB capacity with a mere 20% increase in operating costs – resulting in significant reductions in required per-container rates.

4. The selection of the Peoria area as the “turn point” for both the Shuttle COB and the Gulf COB presents opportunities for both programs in terms as direct access to both the foundation COB cargo – grains – and future non- agricultural COB cargo to/from the sizable Peoria economy (both export and import). From what we understand from other researchers, however, the availability of empty containers at Peoria to support the Gulf COB program (this or any other) will be limited. Even though the Shuttle COB is feasible as a free-standing program, we question whether the Gulf COB program her presented (or any other similar COB

program with Peoria as the North terminus) could be feasible without a low cost strategy to reposition empty container from the Joliet area container pools.

5. Based on finding #4 above, it is our recommendation that the Gulf COB be operated as a coordinated venture with the Shuttle COB – to ensure a low cost strategy for positioning an adequate supply of empty containers to support the Gulf COB. It should be understood, however, that the Shuttle COB can be operated – particularly at the enhanced scale that would result from use of 6 barges rather than the 3 barges of the basic program presented here. The financial projections presented in Appendix A address both a free-standing Shuttle COB program, and a coordinated program of both Shuttle and Gulf COB operations.

6. Specialized port facilities and container handling experience is limited-to-nonexistent at Joliet and Peoria (or at any other Illinois Waterway port). With timing and coordination of container handling critical at the ports (particularly Peoria), a detailed plan for required container handling equipment and other container-related infrastructure will be required to ensure both that port performance does not become an impediment to COB, and to reduce the cost of container handling to a level experienced at properly equipped and operated container ports. Surely this does not imply the need for Illinois Waterway river ports to invest in multi- million dollar gantry cranes – as some authors on the subject of COB have stated – but, it does imply that equipment upgrades and port operating policy must address COB as a primary function rather than a poor cousin to the existing bulk operations. At the risk of appearing to toss the potential for COB success into another industry’s lap, the efficiency and resulting cost per container of Illinois Waterway port operations will contribute significantly to the ultimate success of COB.

7. We have modeled three different scenarios for a Gulf COB south terminus: New Orleans Only, New Orleans+ Houston, and Houston Only. The model outputs suggest Houston Only as the best option for the Gulf COB as here designed – providing the highest margin between COB and alternative inland container logistics strategies. Both the scale and dedicated design of the Gulf COB tow, and the convenient access to higher revenue northbound bulk salt loadings contribute to that outcome. The current container vessel calls and trade lanes serving Houston versus New Orleans becomes another compelling reason for a Houston terminus.

8. Yet, another important component of the presented COB strategy is the ability to substitute southbound bulk grain loadings when container volume is insufficient to fill the Gulf COB tow as it departs the Peoria area maintaining a prescribed schedule – particularly during the early stages of Gulf COB operations. The financial projections of Appendix A are based on the Houston Only alternative. The option remains, however, to move to a New Orleans+Houston strategy with relative ease.

9. As we have implied elsewhere in this work, a key component to the ultimate success of any COB venture will be the manner in which it is managed/operated. We have suggested and here recommend that the COB venture(s) be organized and managed as free-standing entity(s) – not amalgamated into an existing bulk barge operation. This could take the form of a semi- independent division of an existing river firm, or a completely independent organization staffed by management personnel experienced in both river operations and container shipping. While the Gulf COB (and, to some related extent the Shuttle COB) include a bulk component, the primary focus of COB management must be on containers – with bulk in only a supporting role.

10. With little track record of COB success to date (and more than a little failure), it is questionable whether the for-profit private business sector will again embrace a dive into COB as a primary focus – even with the road map this work provides. Even if they would, one could anticipate returns for the perceived risk that would push the COB rate structures well beyond those suggested here – seriously undermining or even eliminating any competitive advantage COB can provide vis-à-vis the other transportation modes before COB could become well established enough to warrant a less aggressive risk premium.

To that end we are recommending that COB (be it Shuttle COB alone, or in concert with Gulf COB) be organized initially as a non-profit service organization to Illinois agricultural shippers. While ISA could perhaps become the umbrella organization for this approach, we also recognize that other agricultural commodities and co-products will be COB cargo candidates, along with assorted widgets in later years. Also, the Gulf COB (and the Shuttle COB to some extent) will be serving Illinois agriculture and the Public by moving road salt (almost all of which is used on public roadways which also serve Illinois agriculture) and fertilizer northbound.

An organizational approach created initially by the Minnesota Legislature, and subsequently extended to adjacent states is that of a shipper’s association – referred to today as the Midwest Shippers Association (MSA). While the functions of MSA have yet to extend into COB, it has served Upper Midwest ag container shippers for many years as an aggregator of container cargo volume from ag shippers too small individually to secure container carrier volume rates. There is no legal impediment to a shipper’s association broadening its sphere of operations to include enhancement of inland container pricing for its members by undertaking a COB program.

11. The details of establishing a shipper’s association fall beyond the scope of this work. It is recommended, however, that Illinois agricultural interests look carefully to such an organization to initially own/operate the COB programs. There is a significant probability that 77

a non-profit operating organization such as a shipper’s association will be better suited to be the recipient of public investments (outright grants and low-interest loans) from various Federal, State, and agricultural industry grantors that have policies to which COB and inland river use of biodiesel respond.

## Required Start-Up Funds for a New Business or Opening Balance Sheet for an Existing Business

Required Start-Up Funds Amount Totals Depreciation Notes Fixed Assets Real Estate-Land $ - Buildings - 20.00 years Leasehold Improvements - 7.00 years Equipment 5,000 7.00 years Radios, Computers etc. Furniture and Fixtures 5,000 5.00 years Office Furniture etc. Vehicles 50,000 5.00 years Crew cab truck for Shuttle Other Fixed Assets - 5.00 years Total Fixed Assets 60,000

Operating Capital Pre-Opening Salaries and Wages 50,000 Office set-up/secure equipment/hire crew etc Prepaid Insurance Premiums 412,000 All insurances prepaid for 1 year Inventory 300,000 75K gallons fuel + boat supplies Legal and Accounting Fees 10,000 Incorporation etc Rent Deposits 2,000 Utility Deposits 250 Supplies 2,000 Advertising and Promotions - Licenses - Other Initial Start-Up Costs - Working Capital (Cash On Hand) 200,000 30 days wages etc. Total Operating Capital 976,250

Total Required Funds $ 1,036,250

Sources of Funding Amount Totals Loan Rate Term in Months Monthly Payments Owner's Equity 0.00% - Seed Grant (Fed/State/Othe) 72.38% 750,000 Additional Loans or Debt USDA Guaranteed Loan 27.62% 286,250 5.00% 84.00 $4,045.83 Commercial Mortgage 0.00% - 8.00% 240.00 $0.00 Credit Card Debt 0.00% - 7.00% 60.00 $0.00 Vehicle Loans 0.00% - 6.00% 48.00 $0.00 Other Bank Debt 0.00% - 5.00% 36.00 $0.00 Total Sources of Funding 100.00% $ 1,036,250 $4,045.83 ## Balance Sheet - Year One

Base Period End of Year One

Assets Current Assets Cash 200,000 886,417 Accounts Receivable - - Inventory 300,000 300,000 Prepaid Expenses 476,250 317,500 Other Current - - Total Current Assets 976,250 1,503,917

Fixed Assets Real Estate-Land - - Buildings - - Leasehold Improvements - - Equipment 5,000 5,000 Furniture and Fixtures 5,000 5,000 Vehicles 50,000 50,000 Other Fixed Assets - - Total Fixed Assets 60,000 60,000

Less: Accumulated Depreciation - 11,714

Total Assets 1,036,250 1,552,202

Liabilities and Owner's Equity Liabilities Accounts Payable - - Loan Payable 286,250 251,217 Mortgage Payable - - Credit Card Debt - - Vehicle Loans - - Other Bank Debt - - Line of Credit Balance - - Total Liabilities 286,250 251,217

Owner's Equity Common Stock 750,000 750,000 Retained Earnings - 550,986 Dividends Dispersed - - Total Owner's Equity 750,000 1,300,986

Total Liabilities and Owner's Equity 1,036,250 1,552,202 ## Balance Sheet - Year One

Base Period End of Year One

Statement Balances Statement Balances ## Year End Summary

Year One % Year Two % Year Three

Income Shuttle COB 2,616,000 2,616,000 2,616,000 Gulf COB 6,732,000 6,732,000 6,732,000 ------Total Income 9,348,000 100.00% 9,348,000 100.00% 9,348,000

Cost of Sales Shuttle COB 854,952 854,952 854,952 Gulf COB 4,255,320 4,255,320 4,255,320 ------Total Cost of Sales 5,110,272 54.67% 5,110,272 54.67% 5,110,272

Gross Margin 4,237,728 45.33% 4,237,728 45.33% 4,237,728

Total Salary and Wages 2,007,261 21.47% 2,007,261 21.47% 2,007,261

Fixed Business Expenses Advertising - - - Car and Truck Expenses 36,000 36,000 36,000 Bank & Merchant Fees - - - Contract Labor - - - Conferences & Seminars - - - Customer Discounts and Refunds - - - Dues and Subscriptions - - - Miscellaneous - - - Insurance (Liability and Property) - - - Licenses/Fees/Permits - - - Legal and Professional Fees 12,000 12,000 12,000 Office Expenses & Supplies 6,000 6,000 6,000 Postage and Delivery - - - Rent (on business property) 18,000 18,000 18,000 Rent of Vehicles and Equipment 1,161,600 1,161,600 1,161,600 Sales & Marketing - - - Taxes-Other 240,900 240,900 240,900 Telephone and Communications 6,000 6,000 6,000 Travel 12,000 12,000 12,000 Utilities 3,000 3,000 3,000 Total Fixed Business Expenses 1,495,500 16.00% 1,495,500 16.00% 1,495,500

Operating Income (before Other Expenses) 734,967 7.86% 734,967 7.86% 734,967 [EBITDA] ## Year End Summary

Year One % Year Two % Year Three

Other Expenses Amortized Start-up Expenses 158,750 158,750 158,750 Depreciation 11,714 11,714 11,714 Interest Commercial Loan 13,517 11,725 9,840 Commercial Mortgage - - - Line of Credit - - - - Credit Card Debt - - - Vehicle Loans - - - Other Bank Debt - - - Taxes - - - Total Other Expenses 183,981 1.97% 182,189 1.95% 180,305

Net Income 550,986 5.89% 552,778 5.91% 554,662 %

100.00%

54.67%

45.33%

21.47%

16.00%

7.86% %

1.93%

5.93% ## Projected Income Statement - Year Two

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Income Shuttle COB 218,000 218,000 218,000 218,000 218,000 218,000 218,000 218,000 218,000 218,000 218,000 Gulf COB 561,000 561,000 561,000 561,000 561,000 561,000 561,000 561,000 561,000 561,000 561,000

Total Income 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000

Cost of Sales Shuttle COB 71,246 71,246 71,246 71,246 71,246 71,246 71,246 71,246 71,246 71,246 71,246 Gulf COB 354,610 354,610 354,610 354,610 354,610 354,610 354,610 354,610 354,610 354,610 354,610

Total Cost of Sales 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856

Gross Margin 353,144 353,144 353,144 353,144 353,144 353,144 353,144 353,144 353,144 353,144 353,144

Total Salary and Wages 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272

Fixed Business Expenses Advertising ------Car and Truck Expenses 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 Bank & Merchant Fees ------Contract Labor ------Conferences & Seminars ------Customer Discounts and Refunds ------Dues and Subscriptions ------Miscellaneous ------Insurance (Liability and Property) ------Licenses/Fees/Permits ------Legal and Professional Fees 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Office Expenses & Supplies 500 500 500 500 500 500 500 500 500 500 500 Postage and Delivery ------Rent (on business property) 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 Rent of Vehicles and Equipment 96,800 96,800 96,800 96,800 96,800 96,800 96,800 96,800 96,800 96,800 96,800 Sales & Marketing ------Taxes-Other 20,075 20,075 20,075 20,075 20,075 20,075 20,075 20,075 20,075 20,075 20,075 Telephone and Communications 500 500 500 500 500 500 500 500 500 500 500 Travel 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Utilities 250 250 250 250 250 250 250 250 250 250 250 Total Fixed Business Expenses 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625

Other Expenses Amortized Start-up Expenses 13,229 13,229 13,229 13,229 13,229 13,229 13,229 13,229 13,229 13,229 13,229 ## Projected Income Statement - Year Two

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Depreciation 976 976 976 976 976 976 976 976 976 976 976 Interest Commercial Loan 1,047 1,034 1,022 1,009 996 984 971 958 945 932 919 Commercial Mortgage ------Line of Credit ------Credit Card Debt ------Vehicle Loans ------Other Bank Debt ------Taxes ------Total Other Expenses 15,252 15,240 15,227 15,214 15,202 15,189 15,176 15,164 15,151 15,138 15,125

Net Income 45,995 46,008 46,020 46,033 46,045 46,058 46,071 46,084 46,097 46,110 46,122 Dec Totals

218,000 2,616,000 561,000 6,732,000 - - 779,000 9,348,000

71,246 854,952 354,610 4,255,320 - - 425,856 5,110,272

353,144 4,237,728

167,272 2,007,261

- - 3,000 36,000 ------1,000 12,000 500 6,000 - - 1,500 18,000 96,800 1,161,600 - - 20,075 240,900 500 6,000 1,000 12,000 250 3,000 124,625 1,495,500

13,229 158,750 Dec Totals 976 11,714

906 11,725 ------15,112 182,189

46,136 552,778 ## Projected Cash Flow Statement - Year Two

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Beginning Cash Balance 886,417 943,618 1,000,820 1,058,021 1,115,222 1,172,424 1,229,625 1,286,827 1,344,028 1,401,230 1,458,431

Cash Inflows Income from Sales 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 Accounts Receivable ------Total Cash Inflows 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000

Cash Outflows Investing Activities New Fixed Assets Purchases ------Inventory Addition to Bal. Sheet ------Cost of Sales 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 Operating Activities Salaries and Wages 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 Fixed Business Expenses 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 Taxes ------Financing Activities Loan Payments 4,046 4,046 4,046 4,046 4,046 4,046 4,046 4,046 4,046 4,046 4,046 Line of Credit Interest ------Line of Credit Repayments ------Dividends Paid ------Total Cash Outflows 721,799 721,799 721,799 721,799 721,799 721,799 721,799 721,799 721,799 721,799 721,799

Cash Flow 57,201 57,201 57,201 57,201 57,201 57,201 57,201 57,201 57,201 57,201 57,201

Operating Cash Balance 943,618 1,000,820 1,058,021 1,115,222 1,172,424 1,229,625 1,286,827 1,344,028 1,401,230 1,458,431 1,515,632

Line of Credit Drawdowns ------

Ending Cash Balance 943,618 1,000,820 1,058,021 1,115,222 1,172,424 1,229,625 1,286,827 1,344,028 1,401,230 1,458,431 1,515,632

Line of Credit Balance ------Dec Totals

1,515,632

779,000 9,348,000 - - 779,000 9,348,000

- - - - 425,856 5,110,272

167,272 2,007,261 124,625 1,495,500 - - - 4,046 48,550 ------721,799 8,661,583

57,201 686,417

1,572,834

- -

1,572,834

- ## Balance Sheet - Year Two

End of Year One End of Year Two

Assets Current Assets Cash 886,417 1,572,834 Accounts Receivable - - Inventory 300,000 300,000 Prepaid Expenses 317,500 158,750 Other Current - - Total Current Assets 1,503,917 2,031,584

Less: Accumulated Depreciation 11,714 23,429

Total Assets 1,552,202 2,068,155

Liabilities and Owner's Equity Liabilities Accounts Payable - - Notes Payable 251,217 214,391 Mortgage Payable - - Credit Card Debt - - Vehicle Loans - - Other Bank Debt - - Line of Credit Balance - - Total Liabilities 251,217 214,391

Owner's Equity Common Stock 750,000 750,000 Retained Earnings 550,986 1,103,764 Dividends Dispersed - - Total Owner's Equity 1,300,986 1,853,764

Total Liabilities and Owner's Equity 1,552,202 2,068,155 ## Balance Sheet - Year Two

End of Year One End of Year Two

Statement Balances Statement Balances ## Projected Income Statement - Year Three

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Total Income 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000

Cost of Sales Shuttle COB 71,246 71,246 71,246 71,246 71,246 71,246 71,246 71,246 71,246 71,246 71,246 Gulf COB 354,610 354,610 354,610 354,610 354,610 354,610 354,610 354,610 354,610 354,610 354,610

Total Cost of Sales 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856

Gross Margin 353,144 353,144 353,144 353,144 353,144 353,144 353,144 353,144 353,144 353,144 353,144

Total Salary and Wages 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272

Other Expenses Amortized Start-up Expenses 13,229 13,229 13,229 13,229 13,229 13,229 13,229 13,229 13,229 13,229 13,229 ## Projected Income Statement - Year Three

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Depreciation 976 976 976 976 976 976 976 976 976 976 976 Interest Commercial Loan 893 880 867 854 840 827 814 800 787 773 759 Commercial Mortgage ------Line of Credit ------Credit Card Debt ------Vehicle Loans ------Other Bank Debt ------Taxes ------Total Other Expenses 15,099 15,086 15,072 15,059 15,046 15,032 15,019 15,006 14,992 14,978 14,965

Net Income 46,149 46,162 46,175 46,188 46,201 46,215 46,228 46,242 46,255 46,269 46,282 Dec Totals

218,000 2,616,000 561,000 6,732,000 - - 779,000 9,348,000

71,246 854,952 354,610 4,255,320 - - 425,856 5,110,272

353,144 4,237,728

167,272 2,007,261

- - 3,000 36,000 ------1,000 12,000 500 6,000 - - 1,500 18,000 96,800 1,161,600 - - 20,075 240,900 500 6,000 1,000 12,000 250 3,000 124,625 1,495,500

13,229 158,750 Dec Totals 976 11,714

746 9,840 ------14,951 180,305

46,296 554,662 ## Projected Cash Flow Statement - Year Three

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Beginning Cash Balance 1,572,834 1,630,035 1,687,237 1,744,438 1,801,639 1,858,841 1,916,042 1,973,244 2,030,445 2,087,646 2,144,848

Cash Outflows Investing Activities New Fixed Assets Purchases ------Inventory Addition to Bal.Sheet ------Cost of Sales 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 Operating Activities Salaries and Wages 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 Fixed Business Expenses 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 Taxes ------Financing Activities Loan Payments 4,046 4,046 4,046 4,046 4,046 4,046 4,046 4,046 4,046 4,046 4,046 Line of Credit Interest ------Line of Credit Repayments ------Dividends Paid ------Total Cash Outflows 721,799 721,799 721,799 721,799 721,799 721,799 721,799 721,799 721,799 721,799 721,799

Cash Flow 57,201 57,201 57,201 57,201 57,201 57,201 57,201 57,201 57,201 57,201 57,201

Operating Cash Balance 1,630,035 1,687,237 1,744,438 1,801,639 1,858,841 1,916,042 1,973,244 2,030,445 2,087,646 2,144,848 2,202,049

Line of Credit Drawdowns ------

Ending Cash Balance 1,630,035 1,687,237 1,744,438 1,801,639 1,858,841 1,916,042 1,973,244 2,030,445 2,087,646 2,144,848 2,202,049

Line of Credit Balance ------Dec Totals

2,202,049

779,000 9,348,000 - - 779,000 9,348,000

- - - - 425,856 5,110,272

167,272 2,007,261 124,625 1,495,500 - - - 4,046 48,550 ------721,799 8,661,583

57,201 686,417

2,259,251

- -

2,259,251

- ## Balance Sheet - Year Three

End of Year Two End of Year Three

Assets Current Assets Cash 1,572,834 2,259,251 Accounts Receivable - - Inventory 300,000 300,000 Prepaid Expenses 158,750 - Other Current - - Total Current Assets 2,031,584 2,559,251

Less: Accumulated Depreciation 23,429 35,143

Total Assets 2,068,155 2,584,107

Liabilities and Owner's Equity Liabilities Accounts Payable - - Notes Payable 214,391 175,682 Mortgage Payable - - Credit Card Debt - - Vehicle Loans - - Other Bank Debt - - Line of Credit Balance - - Total Liabilities 214,391 175,682

Owner's Equity Common Stock 750,000 750,000 Retained Earnings 1,103,764 1,658,426 Dividends Dispersed - - Total Owner's Equity 1,853,764 2,408,426

Total Liabilities and Owner's Equity 2,068,155 2,584,107 ## Balance Sheet - Year Three

End of Year Two End of Year Three

Statement Balances Statement Balances ## Financial Ratios

Ratio Year One Year Two Year Three RMA Industry Norms Liquidity Current Ratio 6.0 9.5 14.6 Quick Ratio 3.5 7.3 12.9 Safety Debt to Equity Ratio 0.2 0.1 0.1 Debt to Coverage Ratio 2.2 2.6 3.2 Profitability Sales Growth 0.0% 0.0% 0.0% COGS to Sales 54.7% 54.7% 54.7% Gross Profit Margin 45.3% 45.3% 45.3% SG&A to Sales 37.5% 37.5% 37.5% Net Profit Margin 5.9% 5.9% 5.9% Return on Equity 42.4% 29.8% 23.0% Return on Assets 35.5% 26.7% 21.5% Owner's Compensation to Sales 0.3% 0.3% 0.3% Efficiency Days in Receivables 0.0 0.0 0.0 Accounts Receivable Turnover 0.0 0.0 0.0 Days in Inventory 21.1 21.1 21.1 Inventory Turnover 17.0 17.0 17.0 Sales to Total Assets 6.0 4.5 3.6 ## Breakeven Analysis

Breakeven Analysis Dollars Percent Annual Sales Revenue $ 9,348,000 100.00% Cost of Sales 5,110,272 54.67% Gross Margin 4,237,728 45.33%

Salaries and Wages 2,007,261 Fixed Operating Expenses 1,520,731 Total Fixed Business Expenses 3,527,992

Breakeven Sales Calculation 3,527,992 45.33%

Breakeven Sales in Dollars $ 7,782,395 ## Salaries and Wages

Salaries and Related Expenses # Assumptions Wage Base Monthly Year One Year Two Year Three

Percent Change 0.00% 0.00%

Salaries and Wages Board Compensation 5 $ 2,500 30,000 30,000 30,000 Salaries 6 32,000 384,000 384,000 384,000 Wages Full-Time Employees 20 107,744 1,292,928 1,292,928 1,292,928 Estimated Hours Per Week 84.00 Estimated Rate Per Hour $ 14.80 Part-Time Employees 0 - - - - Estimated Hours Per Week - Estimated Rate Per Hour $ - Independent Contractors - - - - Total Salaries and Wages 31 142,244 1,706,928 1,706,928 1,706,928

Payroll Taxes and Benefits Social Security 6.20% $ 102,000 8,819 105,830 105,830 105,830 Medicare 1.45% 2,063 24,750 24,750 24,750 Federal Unemployment Tax (FUTA) 0.80% $ 7,000 145 1,736 1,736 1,736 State Unemployment Tax (SUTA) 2.70% $ 7,000 488 5,859 5,859 5,859 Employee Pension Programs 5.00% 7,112 85,346 85,346 85,346 Worker's Compensation 0.00% - - - - Employee Health Insurance 0.00% - - - - Other Employee Benefit Programs 4.50% 6,401 76,812 76,812 76,812 Total Payroll Taxes and Benefits 25,028 300,333 300,333 300,333

Total Salaries and Related Expenses 167,272 2,007,261 2,007,261 2,007,261 ## Amortization Schedule

Loan Type Assumptions Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Commercial Loan Principal Amount $ 286,250 Interest Rate 5.00% Loan Term in Months 84.00 Monthly Payment Amount $4,045.83

Year One Interest 1,193 1,181 1,169 1,157 1,145 1,133 1,121 1,108 1,096 1,084 Principal 2,853 2,865 2,877 2,889 2,901 2,913 2,925 2,937 2,950 2,962 Loan Balance 283,397 280,532 277,655 274,766 271,865 268,952 266,027 263,089 260,140 257,178 Year Two Interest 1,047 1,034 1,022 1,009 996 984 971 958 945 932 Principal 2,999 3,012 3,024 3,037 3,049 3,062 3,075 3,088 3,101 3,113 Loan Balance 248,218 245,206 242,182 239,145 236,096 233,034 229,959 226,871 223,771 220,657 Year Three Interest 893 880 867 854 840 827 814 800 787 773 Principal 3,153 3,166 3,179 3,192 3,205 3,219 3,232 3,246 3,259 3,273 Loan Balance 211,239 208,073 204,894 201,702 198,497 195,278 192,046 188,800 185,541 182,268

Commercial Mortgage Principal Amount $ - Interest Rate 8.00% Loan Term in Months 240.00 Monthly Payment Amount $0.00

Year One Interest ------Principal ------Loan Balance ------Year Two Interest ------Principal ------Loan Balance ------Year Three Interest ------Principal ------Loan Balance ------

Credit Card Debt Principal Amount $ - Interest Rate 7.00% Loan Term in Months 60.00 Monthly Payment Amount $0.00

Year One Interest ------Principal ------Loan Balance ------Year Two Interest ------Principal ------Loan Balance ------Year Three Interest ------Principal ------Loan Balance ------

Vehicle Loans Principal Amount $ - Interest Rate 6.00% Loan Term in Months 48.00 Monthly Payment Amount $0.00

Year One Interest ------Principal ------Loan Balance ------Year Two Interest ------Principal ------Loan Balance ------Year Three Interest ------Principal ------Loan Balance ------

Other Bank Debt Principal Amount $ - Interest Rate 5.00% Loan Term in Months 36.00 Monthly Payment Amount $0.00

Year One Interest ------Principal ------Loan Balance ------Year Two Interest ------Principal ------Loan Balance ------Year Three Interest ------Principal ------Loan Balance ------Nov Dec Totals

1,072 1,059 13,517 2,974 2,987 35,033 254,204 251,217

919 906 11,725 3,126 3,139 36,825 217,531 214,391

759 746 9,840 3,286 3,300 38,710 178,982 175,682

------

------## Financial Diagnostics

This sheet performs a few tests on your numbers to see if they seem within certain reasonable ranges. Remember, no computer can tell whether your projections are truly well-constructed, only a human can do that. But these tests can at least look for values that are critically out of range.

Financial Diagnostics Value Findings General Financing Assumptions Owner's Cash Injection into the Business 0.0% Owner's injection might be too low in relation to the amount of money needed Cash Request as percent of Total Required Funds 19.3% Cash request seems reasonable with respect to total request

Loan Assumptions Commercial Loan Interest rate 5.0% Interest rate may be too low for the type of loan requested Commercial Loan Term in Months 84 Loan term seems within range for this type of loan

Commercial Mortgage Interest rate 8.0% Interest rate seems reasonable Commercial Mortgage Term in Months 240 Loan term seems within range for this type of loan

Loan Payments as a Percent of Projected Sales 0.0% Calculated loan payments as a percent of sales seem resonable

Income Statement Gross Margin as a Percent of Sales 45.3% Gross margin percentage seems reasonable Owner's Compensation Lower Limit Check $ 30,000 An owner's compensation amount has been established Owner's Compensation Upper Limit Check 5.4% Owner's compensation seems reasonable Advertising Expense Levels as a Percent of Sales 0.0% Advertising as a percent of sales may be too low Profitability Levels $ 550,986 The business is showing a profit Profitability as a Percent of Sales 5.9% The projection does not seem highly unreasonable

Cash Flow Statement Desired Operating cash Flow Levels $ - The financial projection provides the desired level of cash flow Line of Credit Drawdowns $ - The business doesn't seem to require a line of credit Accounts Receivable Ratio to Sales 0.0% Accounts receivable amount as a percent of sales seems reasonable

Balance Sheet Does the Base Period Balance Sheet Balance? - The balance sheet does balance Does the Final Balance Sheet Balance - The balance sheet does balance Debt to Equity Ratio 19.3% The debt to equity ratio seems reasonable

Breakeven Analysis Breakeven Levels $ 1,565,605 The sales projection exceeds the projected break-even sales level ## Fixed Operating Expenses

Fixed Operating Expenses Monthly Year One Year Two Year Three Notes

Percent Change 0.00% 0.00%

Expenses Advertising $ - - - - Car and Truck Expenses 3,000 36,000 36,000 36,000 Bank & Merchant Fees - - - - Contract Labor - - - - Conferences & Seminars - - - - Customer Discounts and Refunds - - - - Dues and Subscriptions - - - - Miscellaneous - - - - Insurance (Liability and Property) - - - Licenses/Fees/Permits - - - - Legal and Professional Fees 1,000 12,000 12,000 12,000 Office Expenses & Supplies 500 6,000 6,000 6,000 Postage and Delivery - - - - Rent (on business property) 1,500 18,000 18,000 18,000 Rent of Vehicles and Equipment 96,800 1,161,600 1,161,600 1,161,600 Sales & Marketing - - - - Taxes-Other 20,075 240,900 240,900 240,900 Telephone and Communications 500 6,000 6,000 6,000 Travel 1,000 12,000 12,000 12,000 Utilities 250 3,000 3,000 3,000 Total Expenses 124,625 1,495,500 1,495,500 1,495,500

Other Expenses Depreciation 976 11,714 11,714 11,714 Interest Commercial Loan 1,126 13,517 11,725 9,840 Commercial Mortgage - - - - Line of Credit - - - - Credit Card Debt - - - - Vehicle Loans - - - - Other Bank Debt - - - - Total Other Expenses 2,103 25,231 23,439 21,555

Total Fixed Operating Expenses 126,728 1,520,731 1,518,939 1,517,055 ## Projected Sales Forecast

Products and Services Assumptions % Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Shuttle COB Price Per Unit $ 218,000.00 100.00% Variable Cost Per Unit $ 71,246.00 32.68% Gross Margin Per Unit $ 146,754.00 67.32% Projected Unit Sales Seasonality Factor 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% Year One 1 1 1 1 1 1 1 1 1 1 Year Two Growth 0.00% 1 1 1 1 1 1 1 1 1 1 Year Three Growth 0.00% 1 1 1 1 1 1 1 1 1 1 Overhead Exp Allocation 45.00%

Projected Revenue $ 2,616,000 Variable Costs 854,952 Gross Margin 1,761,048 Overhead Expenses 1,587,597 Profit 173,451 6.63%

Breakeven Sales Revenue $ 2,358,341.49 Breakeven Sales Units 11

Gulf COB Price Per Unit $ 561,000.00 100.00% Variable Cost Per Unit $ 354,610.00 63.21% Gross Margin Per Unit $ 206,390.00 36.79% Projected Unit Sales Seasonality Factor 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% 8.33% Year One 1 1 1 1 1 1 1 1 1 1 Year Two Growth 0.00% 1 1 1 1 1 1 1 1 1 1 Year Three Growth 0.00% 1 1 1 1 1 1 1 1 1 1 Overhead Exp Allocation 55.00%

Projected Revenue $ 6,732,000 Variable Costs 4,255,320 Gross Margin 2,476,680 Overhead Expenses 1,940,396 Profit 536,284 7.97%

Breakeven Sales Revenue $ 5,274,296.40 Breakeven Sales Units 9 Nov Dec Totals

8.33% 8.33% 100.00% 1 1 12 1 1 12 1 1 12

8.33% 8.33% 100.00% 1 1 12 1 1 12 1 1 12 ## Projected Sales Forecast - Page 2

Products and Services Assumptions % Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Product/Service C Price Per Unit $ - 100.00% Variable Cost Per Unit $ - 0.00% Gross Margin Per Unit $ - 0.00% Projected Unit Sales Seasonality Factor 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Year One ------Year Two Growth 10.00% ------Year Three Growth 10.00% ------Overhead Exp Allocation 0.00%

Projected Revenue $ - Variable Costs - Gross Margin - Overhead Expenses - Profit - 0.00%

Breakeven Sales Revenue $ - Breakeven Sales Units -

Product/Service D Price Per Unit $ - 100.00% Variable Cost Per Unit $ - 0.00% Gross Margin Per Unit $ - 0.00% Projected Unit Sales Seasonality Factor 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Year One ------Year Two Growth 10.00% ------Year Three Growth 10.00% ------Overhead Exp Allocation 0.00%

Projected Revenue $ - Variable Costs - Gross Margin - Overhead Expenses - Profit - 0.00%

Breakeven Sales Revenue $ - Breakeven Sales Units - Nov Dec Totals

0.00% 0.00% 0.00% ------

0.00% 0.00% 0.00% ------## Cash Receipts and Disbursements

Accounts Receivable Collections Percent of Collections 0 to 30 days 100.00% 31 to 60 days 0.00% More than 60 days 0.00% Total Collections Percentage 100.00%

Accounts Payable Disbursements Number of Days to Pay Suppliers 0 to 30 days 100.00% 31 to 60 days 0.00% More than 60 days 0.00% Total Disbursements Percentage 100.00%

Line of Credit Assumptions Desired Minimum Cash Balance $ 100,000.00 Line of Credit Interest Rate 8.00%

Income Tax Assumptions Effective Income Tax Rate 0.00% 158,750 13,229 Amortization of Start-Up Expenses - - Amortization Period in Years 3.00 13,229 ## Projected Income Statement - Year One

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Total Income 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000 779,000

Cost of Sales Shuttle COB 71,246 71,246 71,246 71,246 71,246 71,246 71,246 71,246 71,246 71,246 71,246 Gulf COB 354,610 354,610 354,610 354,610 354,610 354,610 354,610 354,610 354,610 354,610 354,610

Total Cost of Sales 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856

Gross Margin 353,144 353,144 353,144 353,144 353,144 353,144 353,144 353,144 353,144 353,144 353,144

Total Salary and Wages 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272

Other Expenses Amortized Start-up Expenses 13,229 13,229 13,229 13,229 13,229 13,229 13,229 13,229 13,229 13,229 13,229 ## Projected Income Statement - Year One

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Depreciation 976 976 976 976 976 976 976 976 976 976 976 Interest Commercial Loan 1,193 1,181 1,169 1,157 1,145 1,133 1,121 1,108 1,096 1,084 1,072 Commercial Mortgage ------Line of Credit ------Credit Card Debt ------Vehicle Loans ------Other Bank Debt ------Taxes ------Total Other Expenses 15,398 15,386 15,374 15,362 15,350 15,338 15,326 15,314 15,302 15,289 15,277

Net Income 45,849 45,861 45,873 45,885 45,897 45,909 45,921 45,933 45,946 45,958 45,970 Dec Totals

218,000 2,616,000 561,000 6,732,000 - - 779,000 9,348,000

71,246 854,952 354,610 4,255,320 - - 425,856 5,110,272

353,144 4,237,728

167,272 2,007,261

- - 3,000 36,000 ------1,000 12,000 500 6,000 - - 1,500 18,000 96,800 1,161,600 - - 20,075 240,900 500 6,000 1,000 12,000 250 3,000 124,625 1,495,500

13,229 158,750 Dec Totals 976 11,714

1,059 13,517 ------15,265 183,981

45,983 550,986 ## Projected Cash Flow Statement - Year One

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Beginning Cash Balance 200,000 257,201 314,403 371,604 428,806 486,007 543,208 600,410 657,611 714,813 772,014

Cash Outflows Investing Activities New Fixed Assets Purchases ------Inventory Addition to Bal.Sheet ------Cost of Sales 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 425,856 Operating Activities Salaries and Wages 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 167,272 Fixed Business Expenses 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 124,625 Taxes ------Financing Activities Loan Payments 4,046 4,046 4,046 4,046 4,046 4,046 4,046 4,046 4,046 4,046 4,046 Line of Credit Interest ------Line of Credit Repayments ------Dividends Paid ------Total Cash Outflows 721,799 721,799 721,799 721,799 721,799 721,799 721,799 721,799 721,799 721,799 721,799

Cash Flow 57,201 57,201 57,201 57,201 57,201 57,201 57,201 57,201 57,201 57,201 57,201

Operating Cash Balance 257,201 314,403 371,604 428,806 486,007 543,208 600,410 657,611 714,813 772,014 829,215

Line of Credit Drawdowns ------

Ending Cash Balance 257,201 314,403 371,604 428,806 486,007 543,208 600,410 657,611 714,813 772,014 829,215

Line of Credit Balance ------Dec Totals

829,215

779,000 9,348,000 - - 779,000 9,348,000

- - - - 425,856 5,110,272

167,272 2,007,261 124,625 1,495,500 - - - 4,046 48,550 ------721,799 8,661,583

57,201 686,417

886,417

- -

886,417

- Financial Projecons for Shule COB + Gulf COB

This series of ﬁnancial projecons assumes combined Shule and Gulf COB operaons as recommended by the Operaons Plan. We have selected the New Orleans + Houston operang strategy for ﬁnancial forecasng purposes. We have used the "Net Outside Revenue" combined with an average TEU revenue rate on the capacity assumpons presented in the Operaons Plan. To this end, the revenue projecons assume 1/2 of the containers (2,640 TEU per year) will discharge New Orleans and 1/2 of the containers (2,640 TEU/year) will discharge Houston at a blended rate of $675/TEU (($625+$750)/2), with backhaul revenue evenly split between salt and ferlizer. The Shule COB component revenues are those that result from coordinaon with the Gulf COB venture with regard to reposioning of containers and barges above Peoria.

Other notes to these ﬁnancial projecons:

1. Administrave salaries assume the full component staff of 6 with a salary "pool" to cover all 6 posions, but with no individual assignment of salaries. Some flexibility is built in to the staffing with this strategy.

2. The assumpon of 6% effecve capital financing cost is maintained, even though the 30 Year Treasury rate used to benchmark MARAD Title XI marine equipment financing is today about half that rate - conservave assumpon.

3. Start up and inial working capital costs are amorzed over the 3 year forecasng period.

4. Start up funding and required operang capital is assumed to be secured from USDA and/or MARAD grants.