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Rail Report - Winter 2007

Landmark Study Puts Rail Infrastructure Needs at $148 Billion
WASHINGTON, DC—About $148 billion must be invested to expand the nation's freight rail infrastructure over the next three decades to make sure that adequate rail capacity exists to meet future demand, according to the results of a first-of-its-kind study to measure rail capacity needs. Released in September, the National Rail Freight Infrastructure Capacity and Investment Study explores the long-term capacity expansion needs of the continental U.S. freight railroads.

"These investments will help the freight rail industry ease highway congestion, reduce stress on highways and bridges, significantly lower transportation-related energy consumption and emissions, and maintain existing capacity for Amtrak and local commuter rail," said Association of American Railroads (AAR) President and CEO Edward R. Hamberger. "If these investments aren't made, everyone in the country will feel the impact."

Built in 1910, the Beaver Bridge spans the Ohio River near Beaver, PA and is part of the CSX rail system. Such bridges are likely to be part of the $148 billion in infrastructure improvements called for by Cambridge systematics and the American association of railroads.

The study, conducted by Cambridge Systematics, paints a dire picture if freight rail capacity isn't increased: "Without this investment, 30 percent of the rail miles in the primary corridors will be operating above capacity by 2035, causing severe congestion that will affect every region of the country and potentially shift freight to an already heavily congested highway system."

The study highlights needed investment in new tracks, signals, bridges, tunnels, terminals and service facilities that railroads need to keep pace with demand for rail freight transportation, which is expected to almost double over the next 30 years.

The study found that most of that investment $135 billion will be needed on the rail networks operated by the nation's major freight railroads. The study notes that under current conditions, the railroads anticipate that the marketplace will allow them to raise most of the needed investment $96 billion. However, it states that a gap would remain of about $1.4 billion per year, an amount to be funded through railroad infrastructure tax incentives, public-private partnerships and other sources.

Hamberger said the study underscores how important it is to ensure a stable regulatory environment which promotes rail investment.

"Since the railroad industry's partial deregulation in 1980, railroads have been able to invest over $400 billion back into their operations, creating a national freight rail system that is second to none," said Hamberger. "The primary message from this report is that railroads need to materially increase their investments to expand capacity. Railroad earnings and productivity are the key to making these investments."

"The study also shows how important it is for legislators to approve the bipartisan infrastructure tax credit currently pending in Congress," he said. "Its passage would significantly reduce the $1.4 billion gap that exists between what the railroad industry needs to spend each year to meet future demand and what it can raise on its own.

"This legislation would provide a 25 percent tax credit to any company not just railroads that invests in projects to increase the rail network's capacity,î Hamberger stated. ěPassage would be a strong move in the right direction.
Hamberger said, "The study's findings point clearly to the need for more investment in rail freight infrastructure and a national strategy that supports rail capacity expansion and investment."

The study has been submitted to the National Surface Transportation Policy and Revenue Study Commission, established by Congress to report on the nation's future transportation needs and how to finance them. The study was conducted by Cambridge Systematics and commissioned by the AAR. It is the first report to benchmark the existing national rail network freight capacity and size of needed investment to meet projected demand.

Canadian Pacific acquires DM&E
Canadian Pacific Railway Limited announced completion of a transaction to acquire Dakota, Minnesota & Eastern Railroad Corporation (DM&E) and its subsidiaries, including the Iowa, Chicago & Eastern Railroad.

The transaction is subject to review and approval by the U.S. Surface Transportation Board (STB), pending which the shares of DM&E have been placed into an independent voting trust. The voting trust is required by US law so that CP does not exercise control over DM&E prior to approval of the transaction by the STB.

The DM&E locomotive "City of Dodge Center" passes through Davis Junction, Illinois. Canadian Pacific has purchased the DM&E and the Iowa, Chicago and Eastern Railroad and may pursue DM&E's planned expansion in the Powder River Basin.

CP announced that Mr. Richard Hamlin has been appointed as the trustee during the review period. Mr. Hamlin is a private consultant with over 30 years of experience serving major transportation companies. He is a retired National Director for the Transportation Practice of KPMG LLP and has served as past Chairman of the American Institute of CPA's (AICPA) Transportation Committee and of its Railroad and Trucking Task Forces. He has also served on the executive committee of numerous councils of the American Trucking Associations (ATA).

A statement released by CP said that the company has developed a solid transition plan focusing on safety and customer service that it will, subject to any requirements imposed by the STB, implement upon receipt of STB approval of the acquisition. The DM&E will become part of CP's overall U.S. network upon receipt of STB approval. The STB review process is expected to take less than a year.

The DM&E locomotive "City of Balaton" passes through Byron, Minnesota. Canadian Pacific has purchased the DM&E and the Iowa, Chicago and Eastern Railroad and may pursue DM&E's planned expansion in the Powder River Basin.

Both the Mayo Clinic and BNSF Railway Co. have urged the STB to take extra time to carefully review the acquisition because of D&ME's plans to extend their lines to the Powder River Basin and greatly increase coal train traffic on the line. CP will pay $1.48 billion for the D&ME system and pay an additional $1 billion if the expansion plan goes forward and meets its traffic targets. However, CP officials have stated to the STB that they may not pursue expansion and request a speedy approval of the acquisition. The Mayo Clinic has extimated that an additional 43 trains per day would pass close to its facilities in Rochester, Minnesota, but CP claims there would be an average of only one more train per day.

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