PRESENTATION TO: CANADA GRAINS COUNCIL

1
PRESENTATION TOCANADA GRAINS COUNCIL
William RowatPresident and CEORailway
Association of Canada April 7, 2004Winnipeg
2
Who we are .
3

• We are the Canadian Rail industry
• 60 members virtually all of the industry
• Core representation from all sectors
• Class 1s CN and CPR
• Short lines Over 40 across Canada
• Passenger
• Commuter AMT, GO, WCE, Capital Railway
• Intercity VIA
• Tourist 8 across Canada
• RAC One Industry Voice

4
Where we are .
5
1992-NOW

• For freight a deregulation success story
• Class 1s
• Rates are down, lowest in the world
• CN, CPR now best operating ratios in NA
• Lowest level of accidents/incidents in North
  America
• Short lines
• Completely new customer-focused sector
• Vital to regional economies, 25 of originated
  carloads
• Growing the business, competing directly with
  trucks
• But short of capital funds
• For passenger more efficient, reducing
  congestion and improving sustainability in the
  corridor and in urban areas

6
NORTH AMERICAN RAIL INDUSTRY (2002)
7
2002 MARKET SHARE CANADIAN OPERATIONS
(Revenue tonne-kilometres)
SL
9
CN
CPR
53
38
The Canadian rail industry moved 321 billion
t-Kms of goods in 2002
8
ACTIVITY SHARES
1991
2001
Truck
Truck
22
35
Rail
Rail
65
78
Total freight activity (t-kms) 1991 to 2001 grew
by 55
Truck activity (t-
kms) 1991 to 2001 grew by 142
Rail activity (t-
kms) 1991 to 2001 grew by 30
REVENUE
1991
2001
Rail
7.2 bil
Rail
Truck
Truck
14.6 bil
6 bil
6.6 bil
Truck revenue (6.6 bil 1991 14.7 bil 2001)
grew by 122
Rail revenue (6 bil 1991 7.2 bil 2001) grew
by 20
Even though rail is growing intercity
truck traffic is exploding
9
CANADIAN FOR-HIRE TRUCK TRAFFIC
Billion t-kms
180
160
140
120
100
80
60
40
20
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source Statistics Canada, Trucking in Canada,
2002
For-hire trucking grew by over 140 in the 1990s
10
Rail deregulation has been key to successfully
competing in the North American transportation
market
11
Real rates are down 34 since 1990
REAL FREIGHT RATES
CANADIAN RAIL INDUSTRY

1990-2002
Cents/tonne-km
2.6
2.5
2.4
2.3
2.2
2.1
2.0
1.9
34
1.8
1.7
1.6
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source RAC
12
LOWEST RATES IN THE WORLD...

• Canadian rail rates have declined 40, now the
  lowest in the world

U.S. Cents per Tonne-Kilometre
Canadian rates are 60 lower than the
international average
Source RAC
Railroads passing on their efficiency gains as a
result of competition
13
EMPLOYMENT IN THE CANADIAN RAIL INDUSTRY
70,000
65,000
60,000
55,000
50,000
45,000
40,000
35,000
30,000
25,000
20,000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source RAC
Rail industry employment declined by 40 during
the 1990s
14
Up 169 since 1990
LABOUR PRODUCTIVITY
CANADIAN RAIL INDUSTRY
1990-2002
Revenue tonne-km/employee (000)
169
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source RAC
15
Federal freight subsidies have been virtually
eliminated
CANADIAN RAIL FREIGHT SUBSIDIES
Cdn Mil
696
683
248
28
27
25
26
25
1995
1998
1994
1997
1996
1999
2000
2001
16
Canadian railways are continental, with global
reach
17
CANADIAN RAIL FREIGHT DESTINATION MIX
CPR DESTINATION MIX 2002
CN DESTINATION MIX 2002
Originated or Destinated at Ports
Originated or Destinated at Ports
US Domestic Trans-border
US Domestic Trans-border
19
25
45
57

Domestic
24
Domestic
30
About half of Canadian rail activity is
transborder almost another ¼ is international
traffic
18
ORIGINATED CARLOADS BY COMMODITY GROUPING - 2002
Intermodal
18
Bulk35
Agriculture
Manufactured Miscellaneous
10
Coal
Intermodal
1
9
18
Food Products
1
Paper products.
Minerals
7
16
Fuel Chemicals
12
Forest Products
11
Metals
Machinery Auto
Merchandise47
8
7
Rail is just-in-time Intermodal is the largest
single business line
19
Safety Performance
20
FATALITIES 2003
TYPES OF FATALITIES
Five Year Average (1999-2003)
Trespasser
Incidents
58
Crossing
Collisions
39
All Others
3
Source Transportation Safety Board (TSB)
The largest portion about 97 of rail related
fatalities are at crossings or involve
trespassers
21
10-YEAR TRENDS CROSSING/TRESPASSING FATALITIES
TOTAL
PER UNIT OF WORK
0.25
140
Trespassing Incidents
Trespassing Incidents
Crossing Collisions
120
Crossing Collisions
0.20
100
0.15
80
Number
Number
60
0.10
40
0.05
20
0.00
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year
Year
gtkm (gross tonne-kilometres)
Source Transportation Safety Board (TSB)
Source Railway Trends, Transportation Safety
Board (TSB)
Operation Lifesaver and Direction 2006, a joint
Government/Industry/publicpartnership has helped
reduced crossing/trespassing fatalities by 34
since 1994
22
10-YEAR TRENDS ACCIDENTS
PER UNIT OF WORK
TOTAL
1,400
2.80
1,300
2.60
gtkm (gross tonne-kilometres)
2.40
1,200
2.20
1,100
2.00
1,000
Number
Per billion gtkm
1.80
900
1.60
800
1.40
700
1.20
600
1.00
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year
Year
gtkm (gross tonne-kilometres)Source Railway
Trends, Transportation Safety Board (TSB)
Source Transportation Safety Board (TSB)
Accidents per unit of work on Canadian railways
are down 29 since 1994
23
The Short Line Sector
24
NUMBER OF NEW SHORT LINE RAILWAYS IN CANADA
SINCE 1990
60
Originated Carloads
2002
50
Short lines
Class 1's
24.5
40
75.5
30
20
10
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source Transport Canada
The number of short lines in Canada is up 200
since 1996. They account for 25 of originated
traffic ...
25
CANADIAN SHORT LINES
TOTAL REVENUES
650
9.4
600
-5.3
-0.7
6.8
550
22.8
(millions)
500
450
400
1997
1998
1999
2000
2001
2002
Source RAC
Similarly, revenue has plateaued
26
PERCENTAGE OF CAPITAL SPENDING TO REVENUES
25
Railways (Average)
Integrated Oils
18
16
Cement
16
Oil and Gas Services
11
Transportation
10
Automotive
Chemicals
10
9
Industrial Products
9
Paper Products/Packaging
Steel
8
6
Forest Products
5
Metals
10
Weighted Group Average
0
5
10
15
20
25
30
Source Globe and Mail
Railways are the most capital intensive industry
27
CANADIAN OPERATING RATIOS 2002
Percent
100
Operating Margin
90
Operating Margin
Operating Margin
80
70
60
50
40
30
20
10
0
Short Lines
CN
CPR
Operating ratio is calculated by dividing
operating expenses by operating revenues
Source RAC
SL operating ratios are increasing, now at 90
leaves a 10 operating margin not enough to
cover major capital investments
28
CANADIAN SHORT LINE AVERAGE (RAC MEMBERS)
OPERATING RATIO
91.0
89.0
90.0
87.0
87.1
85.0
84.4
83.0
83.6
82.8
81.0
82.0
79.0
77.0
75.0
1997
1998
1999
2000
2001
2002
Source RAC
Operating ratios are creeping up
29
COMPOSITION OF RAC SL MEMBERSHIP ONLY (NON
INDUSTRIALS)
Some Short lines are consolidating
30
OVERALL SHORT LINE PERFORMANCE
Overall, how would you rate their customer
service? Are you very satisfied, somewhat
satisfied, somewhat dissatisfied, or not at all
satisfied?
2002
Total Satisfied 87
50
37
8
4
Very Satisfied
Somewhat satisfied
Somewhat dissatisfied
Very Dissatisfied
Base 376 Ratings of Short Lines
31
Grain
32
SHIPPER AND GOVERNMENT CONTRIBUTION TO GRAIN
FREIGHT RATE 1984-2001
per tonne
1984100
Shipper
Government
35
30
25
20
15
10
5
0
1984-
1985-
1986-
1987-
1988-
1989-
1990-
1991-
1992-
1993-
1994-
1995-
1996-
1997-
1998-
1999-
2000-
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
Shipper pre-198- 4.85
Source Canadian Transportation Agency
Subsidies for shipping grain were abolished in
1995/96 they were 696 mil in 1995
33
CHANGES IN FARM INPUT COSTS 1992-2001

• Freight rates continue downward while other
  costs are increasing

102
56
53
48
34
27
19
18
NitrogenFertilizers
Elevation Charges
DieselFuel
Tractors
Supplies Services
Total Farm Inputs(Average)
Seed
Includes electricity, telephone heating fuel
RailwayGrain Rates
Base year 1992
Sources Statistics Canada, Farm Input Price
Index for Western Canada (2002). Canadian Grain
Commission, Licensed Primary Elevator Tariffs
(2002).
34
RAILWAY GRAIN TRANSPORTATION COST

• Rail rate on cash ticket is the single car
  rate
• Comparison of 1992-2001 ( Per Ton)
• Year Farmer pays Government Pays Railway
  Revenue
• 1992 10.81 20.46 31.27
• 2001 25.67 0 25.67
• Government subsidies cancelled in 1996 (they
  were 696M in 1995)
• Bottom Line Railway revenue from grain has
  declined because of efficiency gains.

35
EXPORTS OF WHEAT AND ALL MAJOR GRAINS - CANADA
Wheat
35,000
All Major
30,000
25,000
20,000
thousand T.
15,000
10,000
5,000
0
1990/91
1991/92
1992/93
1993/94
1994/95
1995/96
1996/97
1997/98
1998/99
1999/00
Exports of Major Crops Declining Annual wheat
exports have declined some 10 million tonnes
since the mid-eighties
36
VALUE OF CANADIAN AGRICULTURE EXPORTS BY TYPE ()
30,000,000
Bulk
Intermediate
Consumer-oriented
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0
1995
1996
1997
1998
1999
2000
2001
Year
Source Statistics Canada and Agriculture and
Agri-food Canada
Canadian Agriculture Exports are Shifting Away
from Bulk Commodities Value added/consumer
products are growing in absolute terms and as a
per cent of total exports
37
GRAIN SHIPMENTS(tonnes)
CROP YEAR2000/01
CROP YEAR2001/02
29 y/y
SLs
SLs
11
9
12 y/y
A Crop Year in Canada is August - July
Because of the drought in 2001/02 shipments were
down dramatically SLs are playing a larger
role
38
Where are we going
39
MERGERS AND ACQUISITIONS

• Pace of Class 1 merger activity has slowed
  considerably
• Synergies being attained by operating agreements
  and alliances
• CN has made three recent strategy acquisitions
• WC (1.2 Bil U.S. ) (2001)
• BCR (1 Bil) (2003)
• Great Lakes Transportation (500 Mil) (2004)

40
GOVERNMENT REFORMS AND THE REVENUE CAP

• May 2000, the government of Canada introduced
  major changes to the GHTS. Key change was
  introducing revenue cap on railway grain revenues
• Resulted in a 18 reduction in estimated
  revenues
• Railways chose a two-pronged approach to meet
  revenue cap obligations.
• Published rates for single car reduced by 3
• Introduced incentives for moving multiple-car
  blocks
• Between 1999/2000 and 2001/02 proportion of cars
  moving in blocks of 25 or more climbed from 50
  to 75 (value of up incentive discounts 57.2
  million in 2001/02)

41
PRODUCER CAR LOADING

• Number of producer car-loading sites has declined
  27 since 1999/00 crop year
• From 706 to 513 (increased efficiency)
• Results of a 40 reduction in number of sites
  local to the Class 1 carriers
• Number of sites local to non-Class 1 carriers
  doubled from 63 to 127
• Although the number of loading sites has fallen,
  the number of producer-cars shipped continues to
  climb, up almost 40 and represents about 2 of
  the overall volume of grain shipped.

42
CONTAINERIZATION OF GRAIN

• Becoming more relevant given trends in source
  identification
• Challenge is to reduce cost (bring closer to bulk
  transport)
• High value-added commodities key to increasing
  success
• Railways actively looking to partner with
  producers where containerization makes sense

43
GRAIN MOVEMENTS TO MEXICO

• Mexico is among the biggest export destination
  for U.S. grains
• Mexicos livestock industry consumes the vast
  majority of the grains imported from the U.S.
• Not possible for Canada to compete on feed grain
  (sourced closer to market)
• Canadian markets in Mexico
• Milling wheat to millers
• Canola to crushers
• Some special soybean movements
• Overall, the prospect for increasing Mexican
  demand for grain highly dependent on the health
  of Mexicos economy

44
FUTURE DIRECTIONS OUR FIVE CORE PRINCIPLES

• Service Improve and offer niche services (higher
  value)
• Cost Control Continue to improve bottom line
• Asset Utilization Use modern efficient equipment
  in the way possible
• Safety Continue to improve performance
• People Hire and retain the best people

45
INTERMODAL DIRECTIONS

• Balancing traffic flows
• Smoothing day of week
• Selling capacity
• Gate reservations
• Minimizing handling

Changing customer behavior
46
SL DIRECTIONS

• Integration with Class I new growth model
• But need some flexibility
• Need Class Is long-term commitment
• Capacity and Investment
• Network standard (286,000 lb loadings)
• More transloads/sidings
• Government/Class I partners
• Modal Neutrality with Trucks
• Tax, CCA, road pricing

47
CONCLUSION

• Continental network feeding globally connected
  ports
• Deregulation providing desired results for
  industry
• Critical to maintain important role of short
  lines
• Challenge is to grow the business in areas with
  significant future potential
• Considerable change and restructuring in
  agriculture sector
• Transportation regulatory framework providing
  positive results for agriculture sector