News Release

BNSF CEO Matt Rose Addresses WCTA Today

Westin Tabor Center-Denver, CO. September 10:

"Thank you Steve (Steve Holloway, WCTA President), and good morning ladies and gentlemen.

It’s a pleasure to have been invited again to address your Fall conference. When I spoke here two years ago, the business climate and the scrutiny of CEO’s and CFO’s actions was quite different than it is today.

I’d like to talk for a few moments about what’s been grabbing the headlines this year in terms of corporate America, and then bring you update on BNSF and the political landscape facing us.

The business issues under discussion run the gamut from Board of Director’s governance to accounting and auditing procedures related to revenues and earnings, compensation, stock options – just to cite a few of the concerns.

In late July, The Wall Street Journal ran an article by Jeremy Siegel, a professor of finance at the Wharton School that made two key points. Professor Siegel said earnings manipulation began the 1990-91 recession when firms realized huge write-offs connected with discontinued operations, which caused reported earnings to fall sharply. As a result, management created a new target, called operating earnings, which excluded all sorts of special one-time charges, however, there was no formal definition in accounting standards.

This led investors to send stock prices higher when earnings exceeded estimates and stock prices lower when earnings only “met” or fell short of management’s target. Now, a group of experts, including S&P, Warren Buffet and top accountants from major Wall Street firms have defined a new measure, called “core earnings,’ that indicates the ongoing profitability of a company’s core businesses. This group suggests that core earnings subtract option expenses, portfolio gains and most restructuring charges from reported earnings and also eliminate the write-down of asset values.

My point is that this is a time, more than ever in Corporate America, when leaders matter. With every company, there is a business culture – a set of values that will guide and direct the company officers and the board of directors as they deal with the multitude of decisions they are confronted with.

As investors lose billions and even trillions of dollars, the best remedy for this situation is to return to an era of value investing and to enforce judicially the existing laws concerning basic business values.

Investors are now looking more closely at asset-based companies, like utilities, mines and railroads. This is good for all of us. And this should cause the markets to change their expectations as to what an industry or a specific asset-based company can achieve quarter to quarter and year over year.

Hopefully, the markets will begin valuing companies based on year-in and year-out consistent results, and strong cash flow and solid balance sheets rather than the forecasts of double-digit growth without a sustainable business model.

From a BNSF perspective, I believe, and my Board concurs, in full disclosure and in transparency in all financial dealings and reporting. We are taking seriously all existing regulations as well as all of the recommendations to tighten reporting.

I believe the markets valuations will eventually correct, and those companies – like ours -- with real value will be rewarded in the long term.

Now, let me tell you a little about our business. In less than two weeks, on September 22, we will celebrate our seventh anniversary as BNSF. These seven years have been flying by at lightning speed. As you all know, combining the Burlington Northern with the Santa Fe triggered a round of mergers and consolidations.

And today, I’m pleased to report that the entire industry has worked out the majority of the merger operating issues.

Our merger led to a huge capital investment program. By the end of 2002, BNSF will have spent about $14 billion, or $5.5 million per day to:

improve our infrastructure – rails, ties, ballast, bridges, tunnels and yards;

expand our network by reopening the Stampede Pass route in Washington, by rebuilding Argentine yard in Kansas City, boosting intermodal lift capacity at hubs in Alliance, Texas, Los Angeles, San Bernardino, Chicago and by building a new Stockton, California, hub center, as well as constructing a multi-modal center in Joliet, Illinois, which will open next month;

in addition, we added 500 miles of double and triple track in different parts of our 33,000 route-mile network, and have acquired some 1,700 locomotives and thousands of freight cars.

We had to spend that money in order to provide better service levels to meet our customers’ expectations, which is a key element of the vision of our Company.

Everyone here knows how important coal is to the railroad industry and to BNSF. Our Coal business unit has been the benefactor of a large part of that capital -- over $1.75 billion in coal capacity expansion since 1995. We have invested in aluminum cars and nearly 1,000 AC locomotives to enhance the productivity of our unit train coal operations. BNSF has spent $80 million on the PRB joint line, $100 million on coal terminals, and about $350 million on various coal corridors, adding double and triple track, lengthening sidings and improving the fluidity of our network.

This has enabled us to increase our coal traffic to a record movement of 242 million tons in 2001 compared with 204 million tons in 1995, while maintaining excellent cycle times to meet the requirements of our utility customers. The potential for maintaining the rate of productivity enhancements as we go forward is a challenge. Each percentage point increase in productivity for our coal business is becoming increasingly difficult to attain.

The reason I’m telling you about our capital expenditures program is that it is relevant to the overall financial picture of our company. Unfortunately, our returns on that capital have been lagging over the past several years. During the last half of the 90’s, U.S. railroad’s rates of return have averaged two to three points below the industry’s cost of capital. As with your business, we will continue to invest only if adequate returns are realized. The ROIC for the nation’s railroads is not keeping pace with each individual railroad’s cost of capital.

What does this mean? Our investments were not giving us the financial value we had hoped for.

Why? Because our revenue growth was not what it needed to be. In turn, we haven’t generated enough operating income to give us returns that actually match or exceed our cost of capital.

What effect has it had? It disappointed our investors. To improve the returns for BNSF and our industry, there are really only two levers available to us.

One is to reduce our capital expenditures. Over the past five years we have done exactly that by reducing our annual capital program from a high of $2.5 billion to $1.5 billion this year.

The other lever is to boost our top-line revenue growth.

We were successful in boosting our coal revenues in the 90’s because of the tremendous growth in PRB coal

demand as a result of the Clean Air Act Amendments of 1990. From 1990 to 2001, PRB coal demand increased from 200 million tons to 390 million tons, a compound annual growth rate of 6 ¼ percent.

Increasing volumes every year enabled us to operate successfully with a declining coal rate structure. Our coal rates declined by about 25 percent in nominal terms and about 40 percent in real terms over the past 11 years. We were able to deal with this situation because we increased our coal volumes, our length of haul, and benefited from labor efficiencies and productivity improvements through our capital investments. But now we face a new challenge with coal demand growth.

Why? For a number of reasons, we do not see a 6 percent volume growth rate continuing over the next decade. Among the reasons are:

1. Phase I and Phase II are behind us.

2. Current U.S. coal production this year is down 3.9 percent. For the first time in years, all three supply regions are down - Appalachia – 6 percent, Interior – 6 percent, and the West – 2 percent.

3. The forecast for coal in the next few years is in the 2 percent annual growth range.

4. 187,000 megawatts of proposed gas plants are on the drawing boards.

5. PRB plants are already among the lowest-cost coal plants in the country, operate at high capacity factors, and are market leaders for electricity generation. There is still some potential for increased coal deliveries, but not at the growth rates that have been experienced in the past.

6. Environmental proposals to reduce SOX and NOX will reduce the clean coal advantage that PRB coals now have in the marketplace.

7. One well-respected coal consulting firm (Hill & Associates) has done an analysis of proposed mercury standards impact on the coal industry and they have forecast a significant decline in production. This report has been met with mixed reactions, and while we feel the magnitude of their estimates is too severe, we are very much aware and concerned about the difficulty of mercury removal from PRB coals.

For all of these reasons, volume growth will be modest and we are going to have to grow the top line by providing value to electricity markets. At today’s rate levels, we believe railroad coal transportation is undervalued. There is value from consistent, reliable service resulting from the infrastructure and railroad capacity that we have created.

We believe a way to unlock this value is through public market-based pricing that enables competitively priced electricity in today’s power generation markets, and that is the direction we are headed.

In May of 2001, we went to the market with a coal transportation options program. It was a unique approach to offer customers an opportunity to lock in coal transportation capacity should they anticipate higher prices in the future. Initial success did not continue because of a number of changes in the market - including the downturn in the economy and resulting low electricity prices, lack of price volatility due to weak demand, an abundance of coal and major contraction of trading for coal and electricity.

Therefore, we have determined that the options program will be shut down and perhaps revived at a later date when market conditions are more conducive to this program.

Nonetheless, we still believe there is a need to move toward public market-based pricing. Over the coming months, we will selectively introduce public pricing authorities, or tariffs, as a mechanism to secure coal transportation on our railroad. We are in the process of designing a Web-based system for offering tariff rates to coal shippers.

BNSF and others in the transportation marketplace have recently gone to market-based pricing providing transparency for business segments in intermodal, industrial, and grain commodities.

As we all know, coal is the largest commodity hauled by the nation’s railroads, and BNSF’s coal business represents about 23 percent of our revenues. This move toward tariffs is in line with actions we have taken with 250 BNSF intermodal lanes, as well as 50 percent of our Industrial Products commodity pricing. And, of course, our agricultural commodities business has had public tariffs for more than a decade.

What does this mean to you. Tariffs have standard terms and conditions and will provide transparency for all shippers to the published rail rates. Standard terms and conditions create a level playing field and should promote efficiencies throughout the distribution chain – loading, rail transportation and unloading – and obviate endless contract disputes. This tariff will provide you our lowest rates to the published destinations, except for previously existing contracts. Electric generators and participants in power markets will now have public access to BNSF delivered transportation prices within their relevant geographic market. We see this action as an opportunity to better balance supply and demand at prices that reflect market conditions.

Now, I’d like to make a few comments about the political landscape we’re facing today and its potential impact on our industry.

Since the Eisenhower presidency, U. S transportation infrastructure spending has largely been focused on the highway. We probably have the best highway system and road quality of any developed nation.

The investment in the national highway network has contributed to the huge gap between tonnage and revenue carried by trucks and that moved by freight railroads. Today, the nation’s freight railroads annually move about 40 percent of the nation’s intercity freight and earn about $35 billion in revenues. That freight volume level has grown marginally over the past decade, while over the past twenty years we have seen real freight rates reduced significantly.

By contrast, the trucking industry has annual revenues in the $350 billion range. The railroads, as I indicated, pay for their entire infrastructure, while the trucking industry only makes a partial contribution to their infrastructure.

So, in a way, the Government and the taxpayers have been supporting the trucking industry to the detriment of the railroads. The issue of road congestion, traffic safety, fuel emissions and other environmental considerations are now causing more communities and legislators to question whether rail isn’t a better solution.

And quite frankly, our industry has worked hard at seeming to not want to take government funding, when in many ways we have been financial partners with the Department of Transportation in grade-crossing and grade-separation projects for years. And in April this year, we opened the Alameda Corridor, probably the largest public private

partnership ever undertaken. This 20-mile rail expressway eliminated a couple of hundred grade crossings through some of east Los Angeles’ more densely populated neighborhoods because the rail is located in a below-grade trench. In addition, noise and vibration are no longer environmental factors for the people living nearby.

This is a $2.8 billion project that was funded through bonds and will be paid off through user fees. An innovative solution that took twenty years to become a reality and has reduced transit time to about forty minutes from three hours in moving from the Ports of Long Beach and Los Angeles to our mainline to take these intermodal trains onto the Midwest.

We hope railroads and communities will benefit from TEA–3, a piece of legislation supporting infrastructure financing and development that will be discussed by Congress next year. It builds on TEA-21, which ends next year, and recognizes the need for more public/private partnership initiatives to improve the nation’s rail infrastructure and to be responsive to public concerns about traffic congestion, safety, transportation flexibility and economic development.

I believe the rail industry needs on-going help with its infrastructure investments to remain strong and competitive. This is a different tune from the one our industry has sung in the past. But again, this is today’s reality.

Finally, the rail, mining, and generating industries all need to pull together to keep coal a strong part of the nation’s future energy program. PRB coal use has been growing and the economics have been competitive since the original Clean Air Act of 1970. Emissions of SOX have been reduced by one third, while electric generation from coal has tripled.

However, there are legislative proposals that may make the coal generation option too expensive to continue to grow. As I mentioned earlier, we have serious reservations regarding the technology and cost for mercury controls, and CO2 controls could toll a death knell for coal and the U.S. economy.

The Energy bill recently passed by the House and Senate is an example of the coal coalition working together. The Coal-Based Generation Stakeholders group was actively involved as the Energy bill moved through the debate and approval process in Congress. There are a number of very positive elements in the bill that impact all of our industries, such as, coal technology incentives; energy research aimed at improving fuel efficiency and reducing emissions from locomotives, and a phase-out of the 4.3-cent railroad tax for deficit reduction.

BNSF has been very active in the pro-coal groups within the Beltway and throughout the country. I am currently serving as Chairman of CEED, and our coal and legislative people are actively involved in many organizations that are fighting the coal battle. Additionally, the AAR has taken a very active role in coal issues the past few years. This will continue to be a priority with AAR.

I urge all of you to participate in the on-going public debate over coal, the environment, and low-cost electric generation that is necessary for a sound economy.

In closing, let me say that there are no silver bullets out there to resolve any of the issues I’ve been discussing this morning. We need to continue to look at every aspect of our business. We need to listen to our customers, ask tough questions and make tough decisions.

As we change our “go-to-market” strategy with our various businesses, there will always be cause for concern. I hope that you will review why we are changing our model and participate in making the change a “win/win” for each of us.

As business partners, we need your support to ensure that the rail industry is financially healthy and can efficiently provide transportation services that respond to both the needs of mines and the needs of the electricity generators.

Together, we must convince the policy makers at the federal and state levels that coal is the best product for generating electricity in an economic and environmentally responsible manner.

Thank you. Now, I’d be happy to take some questions."

BNSF Headquarters
BNSF Railway Company
2650 Lou Menk Dr. 2nd Floor
P.O. Box 961057
Fort Worth, TX 76161-0057
Phone: (817) 352-1000