Working with Shortlines

1
Working with Shortlines

• Remarks by Gary Kolbe - AVP Sales US Region

Minnesota Regional Railroad Association July 18,
2005
2
Outline

• CN Overview
• Key Principles
• Capacity - The Scheduled Railroad
• Investing for Growth
• Building Blocks for the Future
• Shortlines at CN
• What we can do for each other
• Conclusion

3
CNs Network

• Operates the largest rail network in Canada
• The only transcontinental network in North
  America
• Solid network of Short Line partners

• Eastern Canada
• 4,500 miles

• Western Canada
• 8,600 miles

• United States
• 6,000 miles

4
2004 Financial Results
(Cdn. Millions except EPS data) 2004 2003
Percent change Favorable/(Unfavorable) Revenu
es 6,548 5,884 11 Operating expenses 4,380 4,107 (
7) Operating income 2,168 1,777 22 Net
income 1,258 1,014 24 Operating
ratio 66.9 69.8 2.9 pts. EPS 4.34 3.49 24 Fr
ee cash flow 1,025 578 77
Driven by significant top line growth, and
immediate positive impact of GLT and BC Rail
5
Ultimate Challenge
In 2004, we continued to outperform
Operating Ratio ()

• Exceptional performance in 2004. Still well ahead
  of the industry
• To stay ahead, need to drive solid revenue growth
  based on quality service
• Also need to continue cost control, and
  breakthrough initiatives across all the
  Accountabilities

Peers
CN
1999 2004
1999 2004
Stay ahead of the pack
6
Transportation Growing at Low Incremental Cost

• Clearly demonstrated the power of operating
  leverage in 2004
• must do it again in 2005

• Continued improvement in train capacity
  utilization
• foremost in Merchandise and Intermodal
• Driving significant velocity increases
• focusing on centerbeams and other premium fleets
• Also working hard to absorb impact of growth in
  yards/shops
• reduce equipment idle time

We can do a lot more with the resources we
already have
7
Precision Railroading
8
CNs Five Guiding Principles
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CNs Five Guiding Principles

• Service
• Follow the plan
• Trip plan compliance and failure correction
• Connections with Short Lines provide key local
  service
• Continued transit performance improvements
• Capacity management
• Control Costs
• Labor expense (productivity, overtime)
• Injury and accident expenses
• Purchased services (taxi, lodging, utilities)
• Bureaucracy and discretionary spending
• Asset Utilization
• Equipment (locomotives, freight cars) and
  facilities (buildings, etc.)
• Adopt and enforce demurrage and other ancillary
  charges
• GCO program establishes a disciplined environment
• Train size (siding extensions)

10
CNs Five Guiding Principles

• Safety
• Behavioral focus
• Accountability
• Efficiency testing
• Labor/management safety teams
• People
• Comprehensive training and development
• Plan and program
• Comprehensive manpower plan and process
• Responsibility and accountability (ABCs)

11
CN The Scheduled Railroad

• The Service Plan
• All activities scheduled
• Always a work in progress
• Disciplined execution
• Five key areas are built in
• Service
• Cost Control
• Safety
• Asset utilization
• People

Scheduled railroad mindset identifies further
opportunities for improvement
12
Significant Capacity Available

• Prince Rupert
• Phase 1 early 2007
• Closest Port to Asia
• Significantly faster transit to key markets

Prince Rupert
Prince George

• Edmonton to Winnipeg
• Seven siding extensions
• Signal improvements

Edmonton

• Eastern Canada
• Nine siding extensions
• Four switch upgrades

Vancouver
Winnipeg

• Vancouver to Edmonton
• BC Rail transaction
• Four siding extensions
• CN/CP Co-Production

Halifax
Montreal

• Winnipeg to Chicago
• GLT transaction
• 25 siding extensions
• CTC additions
• Yard improvements

Toronto
Chicago
Memphis

• Chicago South
• Two siding extensions
• Directional operation

Jackson
New Orleans
Additional Capacity Gains From Operating
Improvements
13
CN-UP Routing Protocol Example
Fort Saskatchewan, AB to Houston, TX
Prince Rupert
CN UP Total Yard Gateway Miles Miles Miles Ha
ndlings Current Chicago 1,642 1,114 2,756 4 Propos
ed Superior 1,191 1,431 2,622 3 Difference
(451) 317 (134) (1)
Fort Saskatchewan
Edmonton
Saskatoon
Calgary
Vancouver
Regina
Hearst
Winnipeg
Kingsgate
Quebec
Thunder Bay
Halifax
Montreal
Portland
Sault Ste-Marie
Superior
Minneapolis- St-Paul
Toronto
Buffalo
Sioux City
Chicago
Detroit
Omaha
Chicago
Cincinnati
Kansas City
St. Louis
Memphis
Jackson
Mobile
Houston
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Routing Protocol - North-Eastern U.S.

Quebec
MMA
QGRY
QGRY
Montreal
Ottawa
SLQ
Former Route 683 miles
Rouses Point
CN
CP
CSXT
SLR
VTR
NECR
Toronto
CLP
Portland
Saratoga Springs
Syracuse
GMRC
Guilford
CSXT
Albany
Boston
Buffalo
CSXT
NS
NECR
CSXT
Binghamton
Owned Trackage Rights CPR CN NS CSX
NS
CSXT
NS
CSXT
Scranton
New Route 353 miles
NS
Sunbury
RBMN
New York
Newark
CSXT
NS
Harrisburg
NS
Pittsburgh
Philadelphia
CSXT
NS
CSXT
CSXT
AMTK
Baltimore
CSXT
Washington
Alexandria
New CN-CPR-NS route saves 330 miles
15
Quality of Revenue

• Car Cycle is Critical Expand/Contract Fleet
• Per Car Rates
• GCO
• Equipment Pools
• Clean Car Initiative
• Demurrage
• Price Increases/Cost Containment

16
Investing to Grow the Business
Capital Expenditures Planned (Cdn B)

• Capital Expenditures (Capex) growth based on
  solid cash flow performance
• Basic Capital investments reflects strong focus
  on plant quality and safety across the network
• Rolling stock capital investments includes major
  equipment upgrade
• Operations Special Capital investments includes
  Memphis gateway and siding extensions

Over 1.3
1.2
IT and Other
Ops Specials
Locos
Cars
Basic Capital
Reinvesting 20 of revenues
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Car Fleet Investments - 2005

• Capital Overview
• 55 M growth
• 19 M replacement
• 64 M programs
• 29 M lease buyouts
• 12 M IM containers
• 21 M IM terminal equipment
• Two Aluminium Coal Sets
• 200 Million (Cdn)

18
Car Fleet Shop Programs - 2005
Total workload 550,000 Hours
19
Building Blocks for the Future

• CN continues to explore numerous innovations to
  improve growth and efficiency

Acquisitions
Albertas Oil Sands
Memphis Super Terminal
Prince Rupert Container Terminal
Short Line Partnerships
Co-Production
Routing Protocols
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Short Line Partnerships
25 or 1.5B of CNs Traffic Originates or
Terminates on Short- Line Railroads

• CN Short Line Council
• Service integration
• 286,000 upgrades
• Joint growth plans
• Systems interface

1.5B
Total 2004 Revenues 6.25B
Short Line Partners are important to CN
21
How Important are Short Lines to CN?
CN 2004 Revenues (M)
of CNs Total
CN Overall
Short Line Orig / Term
Business Unit
Petroleum Chemicals 1,123 289 26 Metals
Minerals 713 251 35 Forest
Products 1,452 606 42 Coal 284 96 34 Grain
Fertilizers 1,053 240 23 Intermodal 1,117 12 1 A
utomotive 510 41 8 Total Revenues 6,252 1,535
25
They are an integral part of our product offering
22
CN Short-Line Carloads and Revenues
Carloads
Revenue
(000)
(millions) Eastern Region
308 778 Western Region
132
421 USA Region 336
381 Total
776
1,580
24.5 of CNs Revenue
23
United States Region Short Lines

• Short Line Impact in the U.S. Regions for 2004
• Represents 36 Short Lines

Business Unit Carloads Revenue (USM) Petr
oleum and Chemicals 45,211 62.8 Metals and
Minerals 46,778 57.3 Forest Products 53,331 73.8 C
oal 148,695 55.9 Grain and Fertilizers 27,944 37.7
Automotive 14,116 17.6 Total 336,000 305.2
24
Short Lines are Growing Our Business
Carload Growth by Quarter
Short Line traffic has grown at a faster pace
than CN
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Who are CNs Short-line Partners?

• 96 Short Lines connect to CN
• They range from public corporations to sole
  proprietorships
• They are evenly distributed across Canada and US

This diversity can make working together complex
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What CN needs from Shortlines

• 7 day per week service
• Keep assets moving!
• Policy Knowledge and Support
• CNs policies promote Safety, Service and Asset
  Utilization
• Seamless service plan for mutual customers
• Deliver to interchanges when expected
• Timely, accurate reporting
• Car and train movement
• No Bill / No pull

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Short-line Partnership

• We need your involvement
• Equipment inspection
• Proper loading of cars
• Identify customer car damage
• Closed car door policy -cleanliness
• Car movement with hand brake on keep round
  wheels

Customer interface
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What Short lines need from CN

• Improved car supply
• Service frequency
• Cycles / Velocity
• Demurrage
• Work with shortlines
• Keep a dialogue open
• Joint intelligence on opportunities
• Other..

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CN Short Line Interfaces

• Region
• Main interface level with Short Lines
• Sales and Operating Superintendent contacts
• Day to day issues handled at this level
• Network Operations
• Network Operations Center
• Network operations functions including Service
  Design, Mechanical and Engineering
• Corporate
• Network Strategies
• Marketing and Sales
• Accounting

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Initiatives

• Account Mangers Performance Reviews
• Short Lines are Assigned to Account Managers
• New for 2005
• Minimum of Two formal Business Reviews
• One with AVP or Director as a participant
• Develop a Formal Business Plan
• Develop/Maintain Correct Business Relationship

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Conclusion

• Short Lines are an integral part of our business
  plan
• Serving customers
• Growing our business
• Integration and coordination will be key to
  future successes
• Improve current service product
• Opens up new opportunities
• CN and Short Line strategies
• Continued fine tuning and enhancement of the
  service plan
• Continued focus on the customer
• Continue communication
• Control costs and seek price increases