Federal Agency Confirms CN's Productivity-Sharing With Grain Shippers.

WINNIPEG, Manitoba--(BUSINESS WIRE)--July 20, 1999--

The Canadian Transportation Agency (CTA) has confirmed that Canadian National (ME:CNR.) (TSE:CNR.) (NYSE:CNI) is sharing its productivity gains with the grain industry.

Since 1995, CN has passed $190 million in benefits to grain farmers, shippers and the Canadian Wheat Board.

The federal regulatory agency, in a report released today by Arthur Kroeger, facilitator for the reform of Canada's grain handling and transportation system, states that Canadian railways have introduced efficiencies that have resulted in lower costs, and that the benefits have been shared with shippers.

The CTA estimates that 49 to 55 per cent of total productivity benefits achieved by the railways since 1992 have been passed back to shippers and farmers. In 1998 alone, those benefits totaled $121 million, of which nearly two-thirds went directly to farmers. This amount exceeds the benefit-sharing guidelines contained in the Canada Transportation Act.

The CTA report shows that the total benefits passed back to grain shippers have increased significantly since 1995, when the Western Grain Transportation Act was terminated. CN believes increased competition in the transportation marketplace since the end of the WGTA is resulting in a number of programs designed to pass financial benefits back to CN's grain customers.

"The CTA analysis conclusively proves that CN's statements on competition and productivity in the grain transportation industry were correct," said Sandi Mielitz, CN vice-president, grain and fertilizers. "The CTA confirms that we're getting more efficient, these efficiencies are producing benefits, we're sharing the benefits and the proportion we're sharing is increasing."

Mielitz said the CTA report proves that a recent study on railway productivity, commissioned by the Canadian Wheat Board and the Canadian Shipowners' Association, was distorted and misleading.

"The study's authors claimed that railways could have earned excess contributions of $224 million in 1998" said Mielitz.

"Their figure is based on inflated tonnages and an assumption that the railways shared only 20 per cent of their productivity gains. They were wrong. Their claims regarding railway earnings owing to productivity gains were off by more than 100 per cent from the Agency's actual findings."

At CN, benefit sharing includes a variety of rebates and rate reductions. CN offers rate discounts at nearly one-third of its delivery points, due to competition from nearby Canadian Pacific delivery points. CN also offers rate discounts to efficient, high-volume shipping facilities. And CN has offered rate rebates on wheat and barley shipments to the Port of Prince Rupert.

The CTA analysis also states that railways retained 45 to 51 per cent of their productivity savings since 1992. Companies use retained earnings to fund their capital expenditure programs. Since 1995, CN has invested $214 million in grain-related capital projects in Western Canada. These have included new locomotives, improved signaling systems and yard improvements.

CN's investments in grain-related capital projects since the elimination of the WGTA are $117 million higher than provided for in the federal government's maximum rate scale formula for the period since 1995.

"The CTA analysis confirms what we have been saying: CN has struck a fair and reasonable balance between sharing its productivity gains with shippers and retaining what it needs to fund its capital investments," said Mielitz. "Sharing productivity gains with customers helps CN succeed in a very competitive transportation marketplace, while capital investments in equipment and infrastructure benefit all shippers, including our grain customers."

Mielitz noted that the CTA analysis is based on overall railway productivity gains since 1992 - an unprecedented period of change in the Canadian railway industry. The CTA figures on overall productivity gains are likely higher than what was achieved in the grain transportation system, and higher than what is sustainable in future years.

"Many of CN's productivity improvements were made in the non-grain sectors of our business," said Mielitz. "The grain logistics system, with its hundreds of widely-scattered delivery points across Western Canada, has not been able to generate the same level of efficiency gains as other kinds of traffic."

Mielitz stated that the CTA analysis should put an end to the debate over productivity sharing, and act as a beginning for meaningful reform to the grain transportation industry.

"The Agency has provided an independent, authoritative report on how railways have generated productivity savings, and how they have shared them with shippers," she said. "This should tell the industry that competition between the railways is producing benefits, and could produce even more in the future. CN firmly believes the best way to do that is to develop a less regulated, more accountable and commercial grain transportation system. That remains the focus of our efforts in the grain reform process."

Canadian National Railway Company spans Canada and mid-America from the Atlantic and Pacific Oceans to the Gulf of Mexico, serving the ports of Vancouver, Montreal, Halifax, New Orleans, and Mobile, Ala., and key cities of Toronto, Buffalo, Chicago, Detroit, Memphis, St. Louis and Jackson, Miss., with connections to all points in North America.