News Release

June 23 - Response to STB Request on Peak Season

June 23, 2004:

The Honorable Roger P. Nober

Chairman

Surface Transportation Board

1925 K Street, N.W.

Washington, DC 20423-0001

Dear Chairman Nober:

In response to your June 9 letter requesting our view of 2004’s expected "Fall Peak" demands and how we expect those demands to affect BNSF and the industry, we offer the following observations, actions and goals to meet our customers’ expectations. A copy of this letter will be sent to the STB Director of the Office of Compliance and Enforcement, as well as the other gentlemen copied on your letter to me.

I would like to begin by discussing our view of how we attempt to balance existing BNSF capacity, as well as our annual "expansion capital" program, against the imperfect demand forecast process used by rail customers, especially given the unprecedented rail volumes BNSF has been moving since mid-2003.

For that portion of our business that is under contract or is tied to equipment guarantee programs, we are able to plan, with fairly decent accuracy, our capacity needs. Also, based on customer input regarding future volume growth, as well as where we see our rail network coming under stress, we can identify expansion capital investments. However, there are significant financial constraints that will not allow BNSF, or any other railroad, to invest just in order to be ready to handle unforeseen, large volumes of additional or new business.

The reason is directly related to the fact that BNSF and other Class I’s have had a steady erosion of their Return on Invested Capital ("ROIC") and a growing gap between this ratio and their cost of capital--a subject that has been well documented and has been a topic in some of your recent public comments. Further, revenue adequacy has been an elusive metric for several decades. For example, in the coal market, the value we receive for transporting coal has been in a steady state of decline for more than a decade. As a result, we have not been able to begin to adequately invest for the future. Based on a recent EIA forecast, there will be a 320 million ton increase in coal used for electricity in 2025, and most of it will come from the Powder River Basin ("PRB"). Thus, BNSF can expect to be asked to move another 150 million tons of coal on top of the 250 million tons we expect to haul this year. We estimate that for BNSF to handle the 2025 coal volume forecasts from the PRB will require 210 additional train sets, 700-to-800 new AC locomotives and $600-to-$900 million for additional track and terminal capacity, or between $3.2 and $3.8 billion total.

This is in addition to the $2.2 billion BNSF already has invested since 1994 to increasing its coal carrying capacity. Our compound annual revenue growth rate during that time was 1 percent, while our compound annual volume growth rate was 1.9 percent. We can not afford to invest for future demand when we have declining yields. This example reflects what has happened to our industry and why our industry is having difficulty dealing with the current sustained surges in demand and maintaining acceptable service metrics.

With these observations as a backdrop, let me cite actions we took late in 2003 through our capital investment program for this year to recognize the need for more capacity to deal with this unprecedented rail demand. These actions are captured in the attached letter we sent to BNSF customers on May 6, and to our short-line partners soon thereafter, to explain why our network has been fluid and should continue that way throughout the year. Please note that the 3,700 platforms being added to our stack car fleet will begin arriving July 1, and all are expected to be in service prior to Fall Peak. Further, we will have about 350 leased locomotives on property, in addition to the 350 acquired units, all in time for Fall Peak. In addition, our 2004 conductor-hiring program is progressing very well. Most of the nearly 1,800 new hires will be trained and ready to work effectively during Peak, as will most of our 17,000 other train crew personnel, as most of their vacation time will be behind them.

Other actions that we have taken include: extending train length by 10 to 15 percent, depending on type of train to create additional train slots; and managing east-bound in-gate activity at key intermodal facilities such as Hobart in Los Angeles. We also will have all of this year’s major track maintenance work behind us by October 1. In each instance, we have worked with our customers to explain what we are doing, why we are doing it and what impact this will have on them. These actions are designed to keep our network fluid and ensure that we are prepared to provide the service necessary during Fall Peak to meet our customers’ expectations.

We also have analyzed last year’s Fall Peak volumes and compared them with our customers’ demand forecasts for this year. We see about 6-to-9 percent volume growth at this time, and that equates to the volume growth rate we have been handling on our network during the second quarter of this year. We believe the key to our network’s fluidity is to keep our intermodal velocity close to our plan targets, while maintaining the current improved coal cycle times, coupled with meeting our daily targets for grain, which we have been doing for a couple of months.

Even with these additions to our infrastructure and adjustments to our operating approach, it is clear to us that we do not have all the assets we could use to manage these volumes. The result is less flexibility and a severe reduction in our recoverability leverage.

Some of the critical investments that have helped us through the past year’s historic volumes and will be vital to a successful Fall Peak are our Transportation Support System and our adherence to a Transportation Service Plan for every car on our railroad. Further, our steady efficiency improvements in the range of 6 percent compound annual growth rate in gross ton miles per employee has played an important role in our ability to operate our network. We need to be able to invest more vigorously in our infrastructure. We can’t because our ROIC is in the 6.6 percent range and some two to three points below our cost of capital.

For 2004, because of our strong revenue growth, fuel hedging, fuel surcharge initiative, improved pricing and cost savings programs, we should see a 500 basis points improvement in our ROIC. This would be the first improvement in seven years. Unless we continue to have similar annual improvements until we get into the 9 percent ROIC range, we can not invest the capital necessary to meet future forecasted demand.

As you can see, we have been working for some time to be prepared for Fall Peak this year and in the future. The key to whether we will be successful at providing the service performance required is directly related to the level of peak volumes. This will require closer cooperation than ever before between BNSF and its customers.

May 6 letter highlighted this point, and in all of our subsequent customer conversations, BNSF people have emphasized this issue. We look forward to participating September 9 in the customer forum sponsored by the Association of American Railroads to discuss further these issues.

There is no way to set specific performance metrics for this period, but BNSF is committed to delivering as high level of performance as is possible given the imprecision of demand forecasts and the resulting variability of equipment velocity. We will get through Peak season this year as we have every Peak. The broader question is: How can our industry, which is not revenue adequate, meet the longer-term demand of a growing U.S. economy? This is a critical question, considering current under-capacity on our highways, truck driver shortages and quality of life issues and community concerns over emissions.

Please let me know if you have any questions, as the success of our industry in serving its customers is based on ensuring that we have a common understanding about expectations.

Sincerely,

Matthew K. Rose

Attachment

cc: The Honorable W. Douglas Buttrey

The Honorable Francis Mulvey

The Honorable Allan Rutter

Mr. Edward R. Hamberger

Mr. Melvin F. Clemens

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