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Rail Report - Spring 2007
Two major railroads set to improve Heartland service

BNSF and CN, two Class I railways serving large sections of the American Heartland, have announced major capital improvement programs for 2007.

BNSF plans to spend $2.75 billion on capital commitments for 2007. At least $750 million will go to new track and facilities to expand capacity – for customers in coal, agricultural products, industrial products and intermodal – to meet unprecedented demand for consistent freight rail service.

Matthew K. Rose, BNSF Chairman, President and Chief Executive Officer, pointed out that, “We are able to sustain increases in our capital commitment program to meet both the current demand for freight rail transportation as well as forecasted future volume growth because of continuous improvement in our returns. For 2006, BNSF’s Return on Invested Capital (ROIC) was a record 11.4 percent, a significant improvement from 10.1 percent in 2005 and 7.9 percent in 2004.”

Rose added that, “For 2007, BNSF currently expects to spend more than $1.6 billion to keep our infrastructure strong by refreshing track, signal systems, structures, rebuilding rolling stock, and implementing new technologies -- an increase of about $50 million over 2006. Total 2007 cash capital commitments are expected to be $2.4 billion. In addition, we plan to lease 200 locomotives with a cost of about $350 million.”

Some of the major capacity expansion programs include:

Coal Route – Adding about 60 miles of third and fourth main track on the Powder River Basin Joint Line and complete about 50 miles of double track in Nebraska and Wyoming

Southeast – Multiple sidings between Springfield, MO, and Birmingham, AL

Intermodal Facilities - Expansions at Alliance, Texas; Seattle; Los Angeles; Memphis; Chicago, and Stockton, Cal.

Other Infrastructure - Sidings in South Dakota and Oklahoma; fueling and mechanical facilities in North Dakota, Illinois and Texas.

BNSF currently operates one of the largest North American rail networks, with about 32,000 route miles in 28 states and two Canadian provinces.

CN announced plans to spend C$1.6 billion ($1.35 billion US) on capital programs in 2007, an increase of four per cent over the level of 2006.

E. Hunter Harrison, president and chief executive officer of CN, said: “In 2007 we will invest more than C$1 billion in track infrastructure to maintain a safe railway and to improve the productivity and fluidity of our network across Canada and mid-America. This reflects our key priorities - plant quality and safety, building capacity and speed, accelerating growth potential, and improving productivity across the board.”

CN will spend more than US$675 million in 2007 on basic capital, replacing rail, ties and other track materials and improving bridges. CN will also invest close to C$200 million in network and growth-related projects, including:

Extended sidings and double-stack clearances on the railway’s B.C. North Line to accommodate container traffic from the Prince Rupert Intermodal Terminal, which is scheduled to open in the second half of 2007

New siding capacity between Winnipeg and Chicago

Continued upgrading of its freight car classification yard in Memphis, Tenn.

In Western Canada alone, CN plans to invest nearly $295 million in track infrastructure and another $295 million to improve the quality of their equipment fleet. This will include about C$200 million for locomotives, covering the acquisition of 65 new units and continued spending on other improvements to the core fleet. Almost C$150 million will be spent on freight cars and intermodal equipment to meet customer requirements in the marketplace.

Harrison said: “CN’s 2007 capex program - equal to almost 20 per cent of our revenues - represents a major commitment to running a safe, efficient and productive railway for our customers and the communities in which we operate.”

Rail sector continues setting revenue records

Flush financial reports issued by several large railroads serving the ag industry were consistent with the growth in the rail sector as a whole.

• CSX reported earnings per share of $2.82 for 2006. Some of the earnings were from sources not directly related to the effectiveness of rail operations, such as “the resolution of certain tax matters,” a gain on the value of Conrail property and insurance recoveries from Hurricane Katrina. Nevertheless, when those incomes are eliminated from the equation, CSX’s full-year earnings were up 31% over 2005. According to CSX, “The increase was driven by strength in pricing, a growing agricultural market, export demand for coal and continued growth in imports that offset softness in the housing and automotive sectors.”

• Norfolk Southern reported that revenue from rail operations was up 21% to $2.6 billion. Their total net income was $1.5 billion, up 25% over 2005 after adjustments—in 2005 the company received a windfall of $96 million from changes in Ohio tax laws.

• BNSF touted all-time record operating income and earnings per share. Total earnings per share for 2006 were more than 25% higher than the previous year. Operating income was $942 million in the 4th quarter, up 18% over the same quarter in 2005.

• Union Pacific showed a growth in volume measured by carload (9.9 million, up 3%) and in operating income—up 61% to an all-time record of $2.9 billion. Revenue from the agriculture and energy sector was up 20%. The company noted that fuel prices were up 16% over 2005. What effect this may have had on revenue via fuel surcharges is not clear.

• CN issued reports of record earnings per share, operating ratio, free cash flow and annual revenues. 2006 net income was over $1.76 billion. The company also showed a 3% increase in volume as measured by “revenue ton-miles and credited the coal and ag sectors. These results were achieved, said CEO E. Hunter Harrison, despite losses to a strong Canadian dollar and “severe weather conditions during the fourth quarter of the year that disrupted our main lines.”

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