United States

Burlington Northern Santa Fe

UNITED STATES

Riding the wave of trade

19 August 2008

Initiating with an Outperform rating and a US$115 target price Burlington Northern Santa Fe (BNI) is one of the largest railroads in North America. BNI has a strong franchise, particularly in container trade (intermodal). We think that intermodal can grow faster than average, but that it will also face more price competition. BNI has a good productivity record.

The lifeblood of nations

Inside Investment considerations

4

Share price and valuation

15

Financial outlook

20

Company description

25

Analysis and sensitivities

35

Financials

39

BNI has a strong franchise in intermodal and coal products. Intermodal historically grows above GDP, though it is also more volatile. A weak economy and a weak dollar are likely to result in flat or negative growth for international intermodal volumes in the short term. Domestic intermodal volumes are also likely to see no growth. We expect a recovery from 2010. In the case of coal, uncertainty over carbon legislation could limit growth for thermal coal intended for domestic power plants in the next 5 years. There will likely be some upside from export coal in the short term. BNI is also exposed to the construction market where substantial economic pain is still the order of the day. We expect volumes in the sectors exposed to construction to decrease in 2008. We do not expect a recovery before 2010. All in all, we expect BNI’s volume growth will be moderate in the short term, but stronger than average afterwards.

Coming of age BNI has a good if not stellar ROIC, in our view. The more-volatile container trade has translated into tougher times for BNI in the past 2 years. We expect margins to recover in 2009 and to improve from 2010, partly from continuing price increases and partly from better operating performance. BNI should be making its cost of capital within a couple of years. We expect top-line growth coupled with improving productivity to drive EPS growth at an annual rate of about 18% through 2012.

High oil prices are good BNI has achieved price increases of 1–3% above inflation for the past few years in line with its peers. It has also been able to pass through most of the increase in its cost of fuel. We expect that BNI will be able to increase its base prices 1–2% a year over CPI for the next 5 years. Revenues per carload in intermodal have grown less quickly than those of the overall freight business. This gap has moderated latterly as high fuel prices have forced truckers to raise prices in order to stay in business. Further fuel surcharges should be unnecessary as the price of oil stops increasing. Analyst Arturo Vernon 1 212 231 2566 Rohit Vanjani 1 212 231 2485

Valuation reflects BNI’s EPS growth potential [email protected] [email protected]

We value BNI using a discounted cashflow approach. Our valuation is consistent with a forward CY08E PER of 15.5x, above the average of 14.9x for BNI and 14.7x for the industry over the past 12 months.

Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com.au/research/disclosures.

Macquarie Research Equities - Report

BNI US

Burlington Northern Santa Fe

Outperform

Stock price as of 14 Aug 08 12-month target 12-month TSR Valuation

US$ US$ % US$

98.82 115.00 +18.5 105.00

US$m US$m m

transportation 34,715 380.4 344.9

- DCF (WACC 9.0%)

GICS sector Market cap 30-day avg turnover Number shares on issue

Investment fundamentals Year end 31 Dec

2007A

2008E

2009E

2010E

Sales revenue Reported profit

m 15,802 18,488 19,190 20,171 m 1,829 1,938 2,336 2,682

EPS adj EPS adj growth PE adj

¢ % x

510.3 -0.1 19.3

592.9 16.2 16.6

698.2 17.8 14.1

835.9 19.7 11.8

Total DPS ¢ Total DPS growth % Total div yield %

114.0 26.7 1.2

134.4 17.9 1.4

142.9 6.3 1.5

157.2 10.0 1.6

10.7 16.9 9.0 70.1

11.6 18.5 7.8 74.5

12.4 20.7 6.9 74.5

13.6 22.9 5.9 74.6

ROA ROE EV/EBITDA Net debt/equity

% % x %

BNI US vs S&P 500 - US, & rec history

Burlington Northern Santa Fe Corp Company profile Burlington Northern Santa Fe (BNI) is one of two railroads offering rail-freight transportation services over the two-thirds of the US west of the Mississippi River. It is the second-largest railroad in North America by market capitalization. BNI organizes its end markets into six major groups: agricultural products, automotive, chemicals, energy, industrial products and intermodal. Intermodal: Intermodal accounted for 34% of freight revenues and 48% of carloads in 2007. It is made up of two main segments, domestic and international. Both segments transport containers primarily from West Coast ports to the Midwest. About half of intermodal revenues come from international traffic and the other half from domestic traffic. Domestic intermodal includes the truckload/intermodal marketing-companies segment and the expedited truckload/less-than-truckload segment. Industrials: Industrial products accounted for 24% of freight revenues and 16% of carloads in 2007. The industrial group is further subdivided into five sub-categories. Construction products ships 33% of the group’s revenues and it includes steel products, iron ore and various minerals and aggregates, most of which are used in the infrastructure and general-construction industries. Building products contribute 29% of the group’s revenues; it includes mostly forest products linked to the residential construction and paper industries. Petroleum products accounted for 16% of the group’s revenues; shipments include LPG, diesel fuel, lubes and asphalt. Chemicals and plastic products contributed 14% of the group’s revenues, used mostly in the automotive, housing and packaging industries. Finally, food and beverages account for 8% of the group’s revenues; it includes items such as canned goods, perishables and beverages. Coal: Coal contributed 21% of freight revenues and 24% of carloads in 2007. More than 90% of the coal shipped by BNI comes from the Powder River Basin in Wyoming and Montana. This coal is used by utilities to fire power plants. BNI also transports coal from the Utah/Colorado and Illinois basins.

Source: Datastream, Macquarie Capital (USA), August 2008 (all figures in USD unless noted)

Agriculture: This group ships 17% of BNI’s freight revenues and 10% of its carloads. It includes commodities such as wheat, corn and soy beans. Corn-based derivatives including fertilizers, ethanol and sweeteners account for roughly 42% of the group’s revenues. Automotive: This segment accounted for 3% of freight revenues and less than 2% of carloads in 2007. Most of these cars are imports manufactured outside the US. BNI is led by Matthew K. Rose. Mr. Rose has been BNI’s CEO since 2000. He previously held a variety of marketing and operations positions. Before joining BNI, he was an executive in a number of rail and trucking concerns. Current priorities include improving fuel efficiency and expanding the network to capture identifiable opportunities.

19 August 2008

2

Macquarie Research Equities - Report

Fig 1

Burlington Northern Santa Fe

Valuation comparison to transport stocks (US$)

Company

Symbol

Rating

Current Price

Target Price

CY PER 2008E 2009E

CY EV/EBITDA 2008E 2009E

Mkt Cap US$

YTD Perf. Abs. Rel.

Union Pacific

UNP

Neutral

$77.63

$87

18.5x

15.5x

9.1x

7.8x

$40,585

+24%

+36%

Burlington North Santa Fe

BNI

Outperform

$98.82

$115

16.7x

14.2x

8.1x

7.2x

$34,715

+19%

+31%

CSX

CSX

Outperform

$61.18

$70

17.4x

14.4x

8.7x

7.6x

$25,401

+39%

+51%

Norfolk Southern

NSC

Neutral

$70.49

$80

16.7x

14.6x

8.8x

8.0x

$27,061

+40%

+52%

Canadian National Railway

CNI

Outperform

$51.58

$59

14.9x

12.9x

9.1x

8.1x

$24,862

+10%

+22%

Canadian Pacific

CP

Neutral

$60.79

$66

14.7x

12.8x

8.5x

7.4x

$9,429

-6%

+6%

KSU

N/R

$50.54

--

25.2x

19.3x

11.9x

10.2x

$4,927

+47%

+59%

16.7x

14.4x

8.8x

7.8x

+24%

+36%

Kansas City Southern Rails JB Hunt Transport Services

JBHT

N/R

$38.84

--

24.6x

20.1x

11.7x

10.1x

$4,968

+41%

+53%

Landstar

LSTR

N/R

$52.80

--

24.3x

21.0x

21.7x

19.7x

$2,799

+25%

+37%

Con-way

CNW

N/R

$53.01

--

16.2x

13.4x

8.6x

7.9x

$2,552

+28%

+40%

Knight Transportation

KNX

N/R

$19.48

--

30.8x

24.9x

22.5x

19.4x

$1,691

+32%

+43%

Heartland Express

HTLD

N/R

$18.38

--

27.1x

22.8x

27.0x

23.2x

$1,768

+30%

+42%

Werner Enterprises

WERN

N/R

$24.66

--

$1,760

+45%

+57%

+31%

+43%

Trucking

27.3x

21.0x

13.1x

11.4x

25.9x

21.0x

17.4x

15.4x

Federal Express

FDX

N/R

$86.96

--

19.4x

15.2x

6.0x

5.7x

$26,958

-2%

+9%

United Parcel Service

UPS

N/R

$65.59

--

18.4x

16.4x

8.9x

8.2x

$68,476

-7%

+5%

18.9x

15.8x

7.5x

7.0x

-5%

+7%

Logistics

Note: Based on consensus estimates (per FactSet) if not covered; priced as of August 14, 2008. Source: FactSet, Macquarie Capital (USA), August 2008

Fig 2 BNI’s EPS US$ / share

Fig 3 BNI share price has tended to follow EPS growth Index

6.0

1,600

5.0

1,400

4.0 3.0

1,200 1,000 800

2.0 1.0 -

600 400 200

Normalized EPS from FactSet; 2008 estimate is 1H08 annualized.

Index: Jan 4 1989 = 100

Source: Company data, Macquarie Capital (USA), August 2008

Source: Company data, Macquarie Capital (USA), August 2008

19 August 2008

1/4/2007

1/4/2005

1/4/2003

1/4/2001

1/4/1999

1/4/1997

1/4/1995

1/4/1993

1/4/1991

19 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 95 19 9 19 6 9 19 7 98 19 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 07 20 08

(2.0)

0 1/4/1989

(1.0)

3

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Investment considerations Initiating coverage of Burlington Northern Santa Fe with an Outperform rating and a US$115 target price BNI, along with its peers, has profited from a strong pricing environment stemming from an oligopolistic industry structure and emerging bottlenecks in the rail and road networks. The container trade accounts for 30% of BNI’s revenue and we expect it to grow above the average for the rest of the customer groups and above average for the industry. BNI also has very limited exposure to the automotive sector that has dampened growth for its peers. We believe BNI has one of the best ROICs in the US and it has attractive prospects for improving it on the strength of price and volume gains. BNI has also been able to achieve steady progress in improving its operating performance.

Fig 4

Intermodal and coal are the biggest segments for BNI 2%

3%

1%

10%

18%

18%

24% 21% 43%

16% 24%

18%

48% 34%

21% Revenues

Carloads Intermodal

Industrial

Coal

Ton-miles Agricultural

Automotive

Source: Company data, 2007, Macquarie Capital (USA), August 2008

The lifeblood of nations BNI along with its peers is feeling the effects of steep price increases and a softer economy in flat volume growth. BNI’s customers in the intermodal, construction, chemicals and automotive industries have been hit in the current economic slowdown. Intermodal is BNI’s strongest group. The intermodal group depends on international commerce for 60% of its volume. Container flow into the US has actually decreased as a result of the soft economy and the weak dollar. It is unlikely that we will see any significant appreciation of the currency in the absence of higher interest rates. The Fed is unlikely to raise rates while the economy wobbles along. We think that container traffic will not start to pick up before next year at the earliest. Domestic intermodal traffic has held up in spite of weak results from logistics firms, but overall growth in intermodal will likely be muted for the next couple of years. Longer term, we should see the resumption of above-average growth for the group as commerce typically grows substantially faster than GDP. The trend may not be as strong as in the past because shipping companies have diverted traffic from West Coast ports to their counterparts on the East Coast and more traffic diversion is expected with the completion of the expansion of the Panama Canal in 2014. Even so, the container trade should translate into volume growth of 4–5% for BNI’s intermodal sector.

19 August 2008

4

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Fig 5

Maritime-container traffic has grown above GDP over the long term CAGR 95-05 = 6.9%

30.0

26.0

Million TEUs

25.0

17.9

20.0 15.0

4.0 1.2

3.0 0.5 3.4

10.0 5.0

7.7

3.2 0.7 5.0

13.3

13.1

9.0

6.5

0.0 1995

2000 West Coast

East Coast

2005 Gulf Coast

Other

Note: TEU = Twenty-foot equivalent container Source: US DOT/Bureau of Transportation & Statistics, America's Container Ports: Delivering the Goods, March 07, Macquarie Capital (USA), August 2008

Volume growth in other sectors is also likely to remain under pressure for the next couple of years. Many of the revenues in the group depend on infrastructure, commercial developments and residential construction. Spending on infrastructure is increasingly being pushed to the states, which in turn are being encouraged to tap into private capital to supplement strained state resources. Most states have not yet mustered the technical skills and political will that it will take to put these deals together, in our view. Commercial-property rents are decreasing as vacancy rates remain at elevated levels. Finally, housing starts continue to decrease year on year, inventories remain high and the financial industry is still finding further mortgage-related charges to absorb. Ken Zener, our housing analyst, thinks that the housing slump has yet to reach the bottom.

Fig 6

New housing starts in the US have continued to decline 2,000 1,800

1,716

Thousand units

1,600 1,499

1,400 1,200

1,611

1,465

1,359 1,273 1,046

1,000

934

800 600 400 200 0 2001

2002

2003

2004

2005

2006

2007

2008

Includes single-family and multi-unit housing; 2008 is forecast Source: US Census Bureau, New Residential Construction, Macquarie Capital (USA), August 2008

19 August 2008

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Macquarie Research Equities - Report

Burlington Northern Santa Fe

Fig 7

Index of industrial production 2002–08 120

Index (2002 = 100)

115 110 105 100 95 90 85

'0 8 1Q

'0 7 3Q

'0 7 1Q

'0 6 3Q

'0 6 1Q

'0 5 3Q

'0 5 1Q

'0 4 3Q

'0 4 1Q

'0 3 3Q

'0 3 1Q

'0 2 3Q

1Q

'0 2

80

Source: Federal Reserve Board, Macquarie Capital (USA), August 2008

Coal can be an attractive segment in the medium term. Over 90% of coal production in the US is used in power generation. The power sector is under-invested and it is now running out of capacity in many electric regions. Half of generated power in the country uses coal as its fuel and the Energy Information Agency projects that additional generation capacity will come preponderantly from coal plants. The difficulty is that many of these coal plants are not actually being built. There is substantial uncertainty around the form that carbon-related legislation will take and many utilities do not want to commit long-term dollars to solutions that could have regulatory downsides. State public utility commissions have to approve new coal plants and they have been reluctant to do so, even in traditionally pro-coal states such as Virginia. In the short term, many utilities will end up building gas-fired power plants in spite of historically high gas prices because they are the quickest to build and because they have much lower carbon footprints than coal plants. Since the power sector really is in need of low-cost additional capacity, the situation could yet change. Coal plants, however, take 2–4 years to build. In the short term, we think it is premature to count on a substantial incremental uptake of coal from the power sector. The mid term looks more encouraging since we do not think that gas, nuclear or alternative fuels will be able to provide the required power-generating capacity on their own. The last of BNI’s important product groups is agricultural. About 40% of the group’s revenues stem from corn or corn-related products. This improves growth prospects for the group because corn has been growing even as total agricultural output has held steady for a decade. We see continued growth of 5–6%.

19 August 2008

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Macquarie Research Equities - Report

Fig 8

Burlington Northern Santa Fe

BNI has wide exposure to corn and corn-related products, 2007

Other feeds & DDG's 4% Soybeans

Sw eeteners 4%

10%

Wheat 19%

Ethanol 6% Fertilizer 5%

Corn Export 11%

Bulk foods (noncorn) 5% Fertilizer (non-corn) 7% Other 17%

42% cornbased derivatives

Whole Corn domestic 12%

Source: Company data, Macquarie Capital (USA), August 2008

BNI has a very low direct exposure to the automotive sector. We believe this will help BNI as the car industry continues to have unattractive prospects.

19 August 2008

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Macquarie Research Equities - Report

Burlington Northern Santa Fe

Fig 9

We expect BNI to grow its volume at 3–4% pa Macquarie forecast CAGR 03-07 = 3.6% 12,000

Thousand carloads

10,000 8,646 157 8,000

9,536 158 2,216

10,024 177

12,303

CAGR 07-12 = 3.6%

10,637 174

10,318

10,283

166

158

2,458 2,238

2,472

2,521

10,631

11,182 158

156 2,602

2,765

11,718 162

166

3,029 2,905

2,048 6,000

4,000

2,000

0

4,012

4,612

5,038

5,346

4,983

4,861

5,068

5,355

5,659

6,024

834

900

916

973

1,033

1,091

1,118

1,163

1,199

1,244

1,428

1,650

1,655

1,686

1,664

1,652

1,688

1,741

1,793

1,840

167

0 2004

0 2005

0 2006

0 2007

0 2008

0 2009

0 2010

0 2011

0 2012

2003

Other consumer prodcuts

Industrial

Agricultural

Intermodal

Coal

Automotive

Source: Company data, Macquarie Capital (USA), August 2008

Volume will likely be flat in 2008 and grow at an annual rate of 3–4% in the medium term

In short, we suspect that there is a strong case to stick to BNI’s low volume-growth scenario in the short term. Longer term, we think that freight can grow above GDP as international trade revives with the fortunes of the US economy.

Coming of age All rails including BNI have enormously improved their efficiency since the passage of the Staggers Act in 1980. BNI has managed to generally improve its ROIC. BNI’s ROIC is amongst the best in the US, but it still lags Canadian National’s ROIC. BNI’s ROIC is now close to its cost of capital.

19 August 2008

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Macquarie Research Equities - Report

Burlington Northern Santa Fe

Fig 10 BNI has an average ROIC, 2007

Fig 11 BNI has been improving its ROIC

8.5%

7.8%

7.4%

11.2%

10.2%

7.8%

7.9%

6.9%

BNI

CNI

CP

CSX

ROIC

NSC

4.8%

4.7%

4.5%

2002

2003

2004

6.3%

UNP

2005

2006

2007

WACC

ROIC has been calculated as net operating income less adjusted taxes divided by invested capital (equity + debt + deferred income tax liabilities). From the point of view of assets at management's disposal, tax liabilities for all intents and purposes are an equity equivalent.

See adjacent chart

Source: Company data, Macquarie Capital (USA), August 2008

Source: Company data, Macquarie Capital (USA), August 2008

Fig 12 Operating costs / carload, 2002–07

Fig 13

1,600

30%

CAGR 02-07 = 5.9%

1,400 1,194

US$ / carload

1,200 1,000

895

896

971

1,004

Operating margin / revenues, 2002–07

1,078 20%

800

15%

600

24.3%

25%

24.5%

21.3% 18.4% 18.5%

17.7% 17.6%

17.2%

22.5%

23.5%

22.1%

15.4%

10%

400 5%

200 0

0% 2002

2003

2004

2005

2006

2007

2002

2003

2004 BNI

2005

2006

2007

Industry

Operating margin = 1- operating ratio. Industry includes BNI, CNI, CP, CSX, NSC and UNP. Source: Company data, Macquarie Capital (USA), August 2008

Source: Company data, Macquarie Capital (USA), August 2008

BNI’s commitment to bettering its operating performance can be seen in improving efficiency indicators such as gross-ton-miles (GTM) per employee and GTM per gallon of fuel consumed.

19 August 2008

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Macquarie Research Equities - Report

Burlington Northern Santa Fe

BNI’s workforce productivity has continued to improve

Employees, thousands

45 40

37.4

36.6

41.5

39.5

37.6

41.2

30 25

35 30

20

25

15

20 15

10

10

5

5 0 2002

2003

2004

BNI Employees

2005

BNI GTM/Employees

2006

GTM / employee, thousands

Fig 14

0 2007

Ind GTM/Ind Employees

GTM = Gross ton-miles (ton-miles traveled with both loaded and empty cars). Industry includes BNI, CNI, CP, CSX, NSC and UNP. Source: Company data, Macquarie Capital (USA), August 2008

Fig 15 Fuel efficiency

Fig 16

BNI has more back-hauls than average

RTM / GTM 850

65%

GTM / gallon

800

60%

750 55% 700 50%

650 600

45%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 BNI

Industry

2002

2003

2004 BNI

2005

2006

2007

Industry

Industry includes BNI, CNI, CP, CSX, NSC and UNP.

RTM = revenue ton-miles; GTM = gross ton –miles. Industry includes BNI, CNI, CP, CSX, NSC and UNP.

Source: Company data, Macquarie Capital (USA), August 2008

Source: Company data, Macquarie Capital (USA), August 2008

Looking ahead, we believe BNI will attain ROIC levels of about 11% in 2012, up from 8% in 2007 and operating margins of 26% in 2012, up from 22% in 2007. We think BNI can attain these metrics with likely increases in pricing and volumes, and only moderate improvements in its operating performance.

19 August 2008

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Macquarie Research Equities - Report

Burlington Northern Santa Fe

High oil prices are good BNI has been able to increase prices in real terms and to pass on fuel surcharges, along with the rest of its peers. This pricing power lies at the heart of the rapid appreciation of BNI’s share price over the past few years. Price increases have also been enabled to an extent by the difficulties of the trucking industry. Since fuel accounts for perhaps 35% of a trucker’s revenues, compared to the railroads’ 20%, truckers have been forced to raise prices just to stay in business. They have in effect provided a price umbrella for the rails. This effect is particularly important in intermodal because it is the segment that typically faces the most competition from trucking.

Fig 17 Industry revenue/GTM has grown in real terms since 2004 7 Macquarie forecast

6 US cents

5 4 3 2 1

19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 20 07 20 09 E 20 11 E

0

current $

constant 2006 $

Projection is on a somewhat different basis and it is meant only to be indicative; prices in constant US$ go down because we are projecting a decrease in the price of fuel that we expect to result in reductions to the fuel surcharge. Source: AAR, company data, Macquarie Capital (USA), August 2008

BNI’s revenues per carload excluding intermodal grew at an annual rate of 10.1% compared to growth in intermodal rates alone of 8.8% in the period 2004-2007. In 2Q 2008, growth compared to 2Q 2007 was 19.3% for all segments save intermodal and 18.3% for intermodal alone, indicating that BNI has somewhat increased its pricing capability as truckers adjust their pricing to a higher fuel cost environment. We think price increases will slow down in response to lower oil prices and heightened prudence to prevent regulatory action. We expect oil prices to ease from US$120–130/bbl to US$90–100/bbl in the next 5 years. This means that further increases in fuel surcharges would not be necessary. We expect the surcharges to come down from current levels. Price increases will likely continue at a lower level

19 August 2008

We also expect BNI to moderate its base price increases because, together with the rest of the industry, it faces a very vocal lobby of its own customers demanding lower rates and even the re-regulation of the rail industry. The industry likes to point out that rates have fallen in real terms since 1980 but the story will prove to be a more difficult sell as prices start to climb back up.

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Macquarie Research Equities - Report

Burlington Northern Santa Fe

Fig 18 Industry ROIC has been below WACC as determined by the STB 14.0%

*

12.0%

10.2%

10.0% 8.0%

7.6%

8.5% 7.0%

6.9%

1998

1999

6.5%

6.8%

7.0%

2000

2001

2002

6.3%

6.1%

2003

2004

6.0% 4.0% 2.0% 0.0% 1997

Industry ROIC

2005

2006

WACC

WACC for 2006 was unavailable in December 2007 (when AAR published its 10-year trend) STB = Surface Transport Board; the STB is the federal regulator for the rails Source: AAR, Macquarie Capital (USA), August 2008

It has also been the case that railroad companies including BNI have not been making their cost of capital. This too will likely change in the years ahead, giving more credence to the shippers’ argument that the rails are earning a monopoly profit. Taken together, these trends mean that raising rates in real terms beyond 2012 or so will become more difficult as they would expose BNI to more vigorous shipper and regulatory action. In summary, we think that rates will increase at 1–2% in real terms over the next 5 years.

BNI has a consistent track record of giving cash back to investors We think BNI will continue to buy back shares to improve EPS and share price growth

BNI is an early believer in returning cash to shareholders. We applaud this stance as it looks unlikely that the company could profitably employ all of its free cashflow either through internal investments or M&A opportunities. BNI has already substantially increased its capital expenditures. M&A opportunities are probably limited to regional or local rail companies. The STB is likely to veto anything that looks large and the rest of the companies are sufficiently small that they can be accommodated through a moderate issue of additional debt as part of a rebalancing of the company’s capital structure. Short-haul companies are not ideal fits with BNI’s business, in our view, and, indeed, BNI along with its peers has spent much of the last decade spinning off track to these smaller companies.

Target price of US$115 is above the 12-month average We use a discounted cashflow methodology to arrive at target prices. Our target implies a 2008E forward PER of 15.5x, above BNI’s and the industry’s average over the last 12 months. BNI’s PER is based on a 2009E diluted EPS of US$6.97 compared to a consensus estimate of US$6.98.

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Macquarie Research Equities - Report

Burlington Northern Santa Fe

Fig 19

Forward PER for BNI has been at the past year’s industry average of 14.7x

20

P to forward E

16 12 8 4

Industry Composite

10/3/2007

10/3/2006

10/3/2005

10/3/2004

10/3/2003

10/3/2002

10/3/2001

10/3/2000

10/3/1999

10/3/1998

10/3/1997

10/3/1996

10/3/1995

0

BNI

We use 1-year forward earnings in our PER as a better predictor of market expectations at each point in time. Industry includes BNI, CNI, CP, CSX, NSC and UNP. Source: FactSet, Macquarie Capital (USA), August 2008

Fig 20 EV to forward EBITDA

9.0 EV to forwrad EBITDA

8.5 8.0 7.5 7.0 6.5 6.0 5.5

7/ 2

1/ 2

4/ 20 01 4/ 20 01 1/ 24 /2 00 7/ 2 24 /2 00 1/ 2 24 /2 00 7/ 3 24 /2 00 1/ 3 24 /2 00 7/ 4 24 /2 00 1/ 4 24 /2 00 7/ 5 24 /2 00 1/ 5 24 /2 00 7/ 6 24 /2 00 1/ 6 24 /2 00 7/ 7 24 /2 00 1/ 7 24 /2 00 7/ 8 24 /2 00 8

5.0

Industry Composite

BNI

We use forward rather than historical EBITDA as a better guide to market expectations at each point in time. Industry includes BNI, CNI, CP, CSX, NSC and UNP. Source: FactSet, Macquarie Capital (USA), August 2008

We think that this approach makes sense. We expect BNI to be able to sustain above-average growth in EPS, that coupled with robust ROIC levels, should result in a higher-than-average multiple. 19 August 2008

13

Macquarie Research Equities - Report

Burlington Northern Santa Fe

BNI is a solid firm with upside potential but it has been volatile An entry point below US$100/sh looks attractive but prices above US$105/sh could yield market returns

19 August 2008

BNI’s shares have traded in a US$25/sh band from US$90/sh to US$115/sh. We think the stock would outperform if purchased below $100/sh. We would be neutral on the stock if purchased above $105/sh. We would be most likely surprised on the downside if BNI were unable to re-price its business as anticipated, through either economic weakness or some form of re-regulation. On the upside, BNI could surprise by growing more quickly than we anticipate through enhanced container volume or additional coal/agricultural exports. Volume growth would also help improve efficiency metrics.

14

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Share price and valuation BNI’s share price has grown at a compound rate of roughly 29% during the last 5 years, compared to the S&P 500’s 5–6%. This performance is based on the great strides in earnings and enterprise free cashflow generation that BNI has taken over that period. BNI has generally been able to command a premium because its return on invested capital was improving at a faster rate than the average for the industry.

Fig 21

On a 5-year trend, BNI’s share price has been ahead of the industry average

Index 450 400 350 300 250 200 150 100

S&P 500

BNI

14 /2 00 8 8/

14 /2 00 8 2/

14 /2 00 7 8/

14 /2 00 7 2/

14 /2 00 6 8/

14 /2 00 6 2/

14 /2 00 5 8/

14 /2 00 5 2/

14 /2 00 4 8/

14 /2 00 4 2/

8/

14 /2 00 3

50

Industry

Industry includes BNI, CNI, CP, CSX, NSC and UNP. Source: FactSet, Macquarie Capital (USA), August 2008

19 August 2008

15

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Fig 22

BNI’s share price relative to the industry’s

Index 140 130 120 110 100 90 80 70 60

14 /2 00 8 8/

14 /2 00 8 2/

14 /2 00 7 8/

2/

14 /2 00 7

14 /2 00 6 8/

14 /2 00 6 2/

14 /2 00 5 8/

14 /2 00 5 2/

14 /2 00 4 8/

14 /2 00 4 2/

8/

14 /2 00 3

50

BNI

Source: FactSet, Macquarie Capital (USA), August 2008

Over the last year, BNI tracked the industry as its ROIC lost some of its luster. We think that in the mid term, we can expect share price appreciation of 9–10% pa.

Fig 23

BNI’s share price has tracked the industry index over the past year

Index 150 140 130 120 110 100 90 80

S&P 500

6/ 7

/2 00 8

/2 00 8 4/ 7

/2 00 8 2/ 7

00 7 12 /7 /2

00 7 10 /7 /2

8/ 7

/2 00 7

70

BNI

Industry

Composite includes BNI, CNI, CP, CSX, NSC and UNP. Source: FactSet, Macquarie Capital (USA), August 2008

19 August 2008

16

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Fig 24

BNI’s share price performance relative to the industry’s

Index 110

105

100

95

90

85

/2 00 8 7/ 7

/2 00 8 6/ 7

/2 00 8 5/ 7

/2 00 8 4/ 7

/2 00 8 3/ 7

/2 00 8 2/ 7

/2 00 8 1/ 7

00 7

00 7 12 /7 /2

11 /7 /2

00 7 10 /7 /2

/2 00 7 9/ 7

8/ 7

/2 00 7

80

BNI

Industry = composite of BNI, CNI, CP, CSX, NSC and UNP Source: FactSet, Macquarie Capital (USA), August 2008

DCF analysis yields a price in line with current market values We use a discounted cashflow (DCF) approach as a primary valuation tool and we test for reasonableness by comparing the resulting PER and EV/EBITDA multiples to peers and to the industry average. Valuation approach: We project financial statements for 20 years in our DCF model to ensure that margins, growth rates and capex are consistent with a long-term view of the company even if we choose to model mid-term improvements in efficiency or asset utilization. We model free cashflow to enterprise, take the present value of the cashflows, then add back cash and investments, and finally subtract debt to arrive at the value of equity. We divide the value of equity into our estimated number of diluted shares to arrive at our price target. Valuation parameters: We use a WACC of 9% based on a market beta of 1.1 that we un-lever and re-lever as appropriate to accommodate changes in capital structure. We use 3% as a terminal value growth rate. This number is also our estimate for long-term inflation. Thus, we assume no growth in real terms beyond 20 years to avoid the pitfall of working infinite growth in our terminal value formula. These WACC and terminal growth rates are consistent across our rail coverage. Finally, we check that our projections are consistent with a terminal ROIC somewhat above our WACC. We think rail companies may be able to sustain returns above their WACC because of their unique circumstances. Volume: Volume growth is driven by our assessment of likely economic performance for representative sectors such as international trade, construction, coal mining and agriculture modified as appropriate for the company’s special circumstances such as the recent floods in the Midwest, or the possibility of enhanced coal exports. These assumptions are consistent across our coverage of the railroad space.

19 August 2008

17

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Prices: Prices are driven by our expectations of inflation, the company’s ability to increase prices beyond CPI for each of its customer groupings and the company’s ability to pass on increases in the cost of fuel to its clients. We expect that base pricing will increase annually at a rate of 0–2% over CPI for the next 5 years. We tie fuel surcharges to the price of oil. Macquarie forecasts that oil will come down to US$90–100/bbl in 2010–12. We expect fuel surcharges to come down proportionately. Costs: Costs are driven primarily by our assumptions on labor productivity and fuel efficiency. We give credit for some improvement in fuel efficiency, and somewhat less in labor productivity. We increase average salaries slightly faster than inflation. Costs related to maintenance and equipment are driven off sales. Casualty costs are driven off salaries. Taxes: We project tax expenses with the statutory rate. We assume cash taxes to be consistent with a fiscal asset life of about 7 years compared with a financial asset life of 35–40 years. This yields a tax rate of about 32–33%. Capital structure: We model capital structure to a target ratio of equity to equity plus debt. This is consistent with the company’s management of its capital structure since it aims for a credit rating near the limit of investment grade. The company’s ratios have been fairly stable for the last few years. Cash / share buybacks: We assume that free cashflow after dividends will be used to buy back shares. This is consistent with the company’s stated philosophy. Our DCF model yields a price target of US$108 for 2008 and of US$118 for 2009. We interpolate to arrive at a 12-month target of US$115.

Fig 25 DCF model, estimates from 2008 (US$)

EBIT + Depreciation EBITDA + Cash income taxes on EBIT + Capex + Changes in Working Capital Enterprise FCF Growth YoY (%)

Valuation PV of operations (calculated)

2004

2005

2006

2007

2008

2009

2010

2011

2012

1,686 1,012 2,698 (211) (1,527) (23) 937

2,922 1,075 3,997 (651) (1,750) (59) 1,537

3,517 1,130 4,647 (916) (2,014) (23) 1,694

3,486 1,293 4,779 (802) (2,248) (98) 1,631

3,873 1,387 5,260 (1,239) (2,372) 338 1,987

4,439 1,483 5,922 (1,420) (2,666) (56) 1,780

5,015 1,584 6,599 (1,605) (2,874) 35 2,155

5,540 1,693 7,232 (1,773) (3,123) 115 2,451

6,134 1,808 7,943 (1,963) (3,453) 129 2,656

0.0%

64.0%

10.2%

-3.7%

21.8%

-10.4%

21.1%

13.8%

8.3%

37,898

39,734

Growth YoY (%)

6.3%

4.8%

Liquid assets + Investments + Cash

322 322

Debt + Short-term debt + Long-term debt Market capitalization (calculated) Market capitalization (actual) Growth YoY (%)

EPS ($/share)

USD

Growth in EPS YoY (%)

Price ($/share) (calculated)

USD

43,841

45,686

48,048

50,268

52,289

54,380

(0.7%)

11.1%

4.2%

5.2%

4.6%

4.0%

4.0%

75

375 375

330 330

377 377

388 388

410 410

443 443

480 480

6,516 465 6,051

7,154 456 6,698

7,385 473 6,912

8,146 411 7,735

8,619 512 8,107

8,955 519 8,436

9,293 520 8,773

9,625 556 9,069

10,012 573 9,439

31,704 17,785

32,655 26,446

32,439 26,513

36,025 29,183

37,444 35,690

39,482

41,385

43,106

44,848

9.4%

3.0%

(0.7%)

11.1%

3.9%

5.4%

4.8%

4.2%

4.0%

2.10

4.01

5.10

5.10

5.92

6.97

8.35

9.86

11.53

-4.2%

90.9%

27.3%

-0.1%

16.2%

17.7%

19.7%

18.2%

84.2

85.5

87.7

75 -

39,449

100.4

107.8

117.9

128.8

140.8

16.9%

154.5

Note: the model discounts cashflows to 2027; we use a terminal value formula with terminal growth rate of 3%. WACC is 9%. Source: Macquarie Capital (USA), August 2008

19 August 2008

18

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Our target price is consistent with valuation multiples in the middle of the trading range Our current valuation places BNI somewhat above its record closing price in June 2008. Our target price is 9% higher than our valuation price. We believe this is reasonable as BNI recovers from a slowing economy. The company’s fundamentals remain strong, in our view.

19 August 2008

19

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Financial outlook We forecast that BNI will grow its revenues at an annual rate of 8–9% over the next 5 years. We expect BNI’s operating ratio to decrease from 78% in 2007 to 74% in 2012. We expect most of this improvement as a result of higher prices and volumes and only modestly from better operating efficiency.

Fig 26 We expect BNI’s operating margin to expand as the economy improves USD billion 30%

25

25%

20

20% 15 15% 10 10% 5

5% 0%

2002

2003

2004

2005

2006

2007

Revenues

2008E

2009E

2010E

2011E

2012E

Op. Margin

Operating margin = 1 - operating ratio; the improvement in this margin is basically due to price increases in real terms Source: Company data, Macquarie Capital (USA), August 2008

Revenue: Our revenue forecasts result from volume growth rates staying flat to down in 2008, growing by 3.4% in 2009 and by around 5% through 2012 as the economy comes back to life. From 2013 we assume volume growth comparable to GDP growth of about 2.6%. Prices will increase at around 2–3% in nominal terms throughout the period. Since we factor in fuel surcharges into our revenue expectations, revenue growth is also affected by our forecast that oil prices will ease from their current levels in the years ahead and that eventually diesel prices will follow. We assume that fuel surcharges will come down with the price of diesel. Operating ratio: The operating ratio will decrease as a result of higher real prices and lower expected fuel prices. Salaries and benefits will stay roughly constant as a percent of revenues because we see salaries increasing slightly above CPI. As BNI’s finances become stronger, there is a chance that unions could pressure for increases in real terms. We have not factored this eventuality into our expectations. Depreciation will also stay roughly constant as a percent of revenues because of BNI’s improved capex spending.

EPS: We expect EPS to grow 16% in 2008 to US$5.92, up from US$5.10 in 2007, and a further 18% in 2009 to US$6.97. Our estimates compare to consensus of US$5.91 in 2008 and US$6.98 in 2009. EPS is driven by our revenue and operating margin assumptions, but also by our expectations that BNI will buy back US$1.7bn worth of its shares in 2008 and a further US$1.4bn in 2009. These buybacks would account for 3% and 4%, respectively, of shares outstanding in each of those years.

19 August 2008

20

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Fig 27 We think BNI can grow its EPS at close to 18% pa USD 14

100.0% 11.53

12

80.0%

9.86

10

60.0%

8.35 8

6.97

6

40.0%

5.92

5.10

5.10

4.01

20.0%

4

0.0%

2 0

-20.0% 2005

2006

2007

2008E EPS

2009E

2010E

2011E

2012E

EPS Growth (sec. axis)

Source: Company data, Macquarie Capital (USA), August 2008

Capex: We expect capex spending to average about US$2.9bn through 2012, or approximately 14% of revenues and 1.8x depreciation. BNI’s capex spending relative to its revenues is lower than the industry’s. The 2008 capacity expansion program is expected to be approximately US$350m lower than from 2007.

We expect BNI's capex spending to continue at its current levels 4.0

20% 18%

Capex , billion USD

3.5

16%

3.0

14%

2.5

12%

2.0

10% 8%

1.5

6%

1.0

4%

0.5 0.0 2003

Capex / revenues, %

Fig 28

2% 2004

2005

BNI Capex

2006

2007

2008

BNI Capex/BNI Revenue

2009

2010

2011

0% 2012

Ind Capex/Ind Rev

Industry includes BNI, CNI, CP, CSX, NSC and UNP. Source: Company data, Macquarie Capital (USA), August 2008

19 August 2008

21

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Free cashflow: Free cashflow to enterprise was about 10% of revenues and 89% of net income in 2007. We expect the revenue ratio to stay roughly at 10–11% through 2012, but the income ratio to decline somewhat to 79% through 2012. The current high cash conversion in relation to net income is due to improved margins and relatively low capex spending.

Fig 29 BNI's FCF to enterprise / Revenue 14% 12% 10% 8% 6% 4% 2% 0% 2004

2005

2006

2007

2008

2009

BNI

Industry

2010

2011

2012

FCF = Free cashflow. This is the number we use in our valuation; it is based on EBIT less adjusted taxes plus depreciation. Industry includes BNI, CNI, CP, CSX, NSC and UNP. Source: Company data, Macquarie Capital (USA), August 2008

Fig 30

BNI's FCF to enterprise / Net income

140% 120% 100% 80% 60% 40% 20% 0% 2004

2005

2006

2007

2008

2009

BNI

Industry

2010

2011

2012

FCF = Free cashflow. This is the number we use in our valuation; it is based on EBIT less adjusted taxes plus depreciation. Industry includes BNI, CNI, CP, CSX, NSC and UNP. Source: Company data, Macquarie Capital (USA), August 2008

Share repurchases: Our buyback estimates are based on the expectation that BNI will use the bulk of its free cashflow to re-purchase its shares. We expect BNI to buy back an average of US$1.9bn worth of shares every year through 2012, or about 4% of outstanding shares each year.

19 August 2008

22

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Fig 31

BNI's repurchases / Net Income

105% 90% 75% 60% 45% 30% 15% 0% 2004

2005

2006

2007

2008 BNI

2009

2010

2011

2012

Industry

Industry includes BNI, CNI, CP, CSX, NSC and UNP. Source: Company data, Macquarie Capital (USA), August 2008

We project cash taxes will be around 32–33%

Tax rate: BNI’s tax expenses have kept close to its statutory level of 37–38% over the last few years and we expect them to stay there. Taxes paid have stayed at a level of 22–26%. Our projection is based on cash taxes of around 32–33% in the future. The lower cash rate stems from the difference between fiscal asset lives of about 7 years compared to financial asset lives of 30–40 years. Leverage: BNI has a Baa rating on its debt. We expect BNI to conserve this rating since it is close to its optimal capital structure. BNI’s leverage has come down marginally from 44% of debt plus equity in 2003 to 42% in 2007. Its interest coverage, as measured by EBIT / Interest expense, has improved from 4.0x in 2003 to 6.2x in 2Q08. We forecast the ratio to increase to 8.7x by 2012. Measuring interest coverage as EBIT + rents / Interest expense + rents paints a more nuanced picture of BNI’s fixed payment obligations. This ratio stood at 3.4x in 2007. Our forecast assumes today’s leverage as we suspect that BNI will do what it can to keep its investment grade rating.

Fig 32 We expect BNI’s leverage to stay at its current levels 50% 40% 30% 20% 10% 0% 2003

2004

2005

2006

2007

2008E

BNI debt/(debt+equity)

2009E

2010E

2011E

2012E

Ind debt/(debt+equity)

Industry includes BNI, CNI, CP, CSX, NSC and UNP. Source: Company data, Macquarie Capital (USA), August 2008

19 August 2008

23

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Fig 34 BNI's (EBIT + rents) to (Interest + rents) coverage ratio

Fig 33 BNI's EBIT to interest coverage ratio 10.0

4.0

9.0

3.5

8.0

3.0

7.0 6.0

2.5

5.0

2.0

4.0

1.5

3.0

1.0

2.0

0.5

1.0 0.0 2003

2004

2005

2006

2007 2008E 2009E 2010E 2011E 2012E BNI

0.0 2003

2004

Industry

2005

2006

BNI

2007

Industry

Industry includes BNI, CNI, CP, CSX, NSC and UNP.

Rents represent a commitment to pay a stream of income much as would be the case with interest. Industry includes BNI, CNI, CP, CSX, NSC and UNP.

Source: Company data, Macquarie Capital (USA), August 2008

Source: FactSet, company data, Macquarie Capital (USA), August 2008

Fig 35 Key company metrics (US$) 2002 P&L Revenues Volume ('000s carloads) EPS EPS Growth

$

Efficiency ROIC Operating Margin GTM/Employees GTM/Gallon Investment Capex Capex/revenues Capex/depreciation Liquidity EBIT/Interest Debt/(Debt+Equity) FCF/Net income

$

8,979

2003 $

9,413 $ 8,646 $

2004

2005

2006

2007

10,946 $ 9,536 2.10 $

12,987 $ 10,024 4.01 $ 90.9%

14,985 $ 10,637 5.10 $ 27.3%

15,802 $ 10,318 5.10 $ -0.1%

2008E 18,488 $ 10,283 5.92 $ 16.2%

2009E 19,190 $ 10,631 6.97 $ 17.7%

2010E 20,171 $ 11,182 8.35 $ 19.7%

2011E 21,765 $ 11,718 9.86 $ 18.2%

2012E 23,546 12,303 11.53 16.9%

4.8% 18.5% 23.4 760

4.7% 19.7% 24.9 751

4.5% 17.1% 26.9 753

7.4% 21.3% 26.8 757

8.5% 24.4% 27.0 758

7.8% 24.4% 27.2 778

8.1% 24.0% 27.4 785

9.0% 26.6% 28.0 789

9.8% 28.5% 28.8 792

10.3% 29.1% 29.0 796

11.0% 29.8% 29.0 800

1,358 $ 15.1%

1,726 $ 18.3% 1.90x

1,527 $ 14.0% 1.51x

1,750 $ 13.5% 1.63x

2,014 $ 13.4% 1.78x

2,248 $ 14.2% 1.74x

2,372 $ 12.8% 1.71x

2,666 $ 13.9% 1.80x

2,874 $ 14.2% 1.81x

3,123 $ 14.3% 1.85x

3,453 14.7% 1.91x

7.3 41.2% 89.8%

6.8 42.2% 89.2%

6.8 43.8% 76.2%

7.5 43.8% 80.3%

8.6 44.0% 81.2%

8.7 44.1% 79.3%

4.0 44.0%

4.1 41.2% 118.5%

6.7 42.9% 100.4%

6.9 43.8% 102.5%

Note: The model discounts cashflows to 2027; we use a terminal value formula with terminal growth rate of 3%. WACC is 9%. Source: Company data, Macquarie Capital (USA), August 2008

19 August 2008

24

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Company description BNI is one of two railroads offering rail freight transportation services over the two-thirds of the United States west of the Mississippi. It is the second-largest railroad by market capitalization after Union Pacific (UNP), the other rail serving the western US.

Fig 36 BNI’s network lies west of the Mississippi

Source: Company data, Macquarie Capital (USA), August 2008

BNI organizes its end markets into six major groups: agricultural products, automotive, chemicals, energy, industrial products and intermodal.

Intermodal BNI has a large exposure to intermodal and we expect it to grow above GDP in the mid term

19 August 2008

Intermodal accounted for 34% of freight revenues and 48% of carloads in 2007. It is made up of two main segments, domestic and international. Both segments transport containers primarily from West Coast ports to the Midwest and on to the Eastern Seaboard. About half of intermodal revenues come from international traffic and the other half, from domestic traffic. Domestic intermodal includes the truckload/intermodal marketing-companies segment and the expedited truckload/less-than-truckload segment.

25

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Fig 37 Half of BNI’s intermodal revenues come from international trade, 2007

Domestic 49%

International 51%

Source: Company data, Macquarie Capital (USA), August 2008

Container traffic has been steady throughout the years and is expected to continue to grow at 7−8% into the future, notwithstanding a soft patch in 2007 and 2008. China, Japan, Hong Kong, Taiwan and South Korea originated approximately 60% of all maritime container traffic inbound to the US and received about 50% of all outbound traffic. These imports/exports pass mostly the ports of Los Angeles/Long Beach in the south and those of Seattle/Tacoma in the north.

Fig 38 Container traffic flow, Top 20 US ports, 2003–07

30

Million TEU

25

CAGR 03-07 = 7.6%

26.8

24.9 20.6

20

0.2 1.4

15

7.9

22.8

1.6

0.2 1.6

0.2 1.5

10.1

9.5

8.8

0.2

28.2 0.2 1.8

10.9

10 5

12.3

13.6

14.9

15.3

11.2

2003

2004

2005

2006

2007

0

West Coast

East Coast

Gulf

Other

The top 20 ports account for 94–96% of container traffic; statistics shown combine imports and exports. Source: IANA, Macquarie Capital (USA), August 2008

19 August 2008

26

Macquarie Research Equities - Report

Fig 39

Burlington Northern Santa Fe

Intermodal traffic totals by month, 2004–08

Source: IANA, Macquarie Capital (USA), August 2008

Container flow may change when the extension to the Panama Canal is completed in 2014. There are already instances of shippers carrying goods intended for the East Coast making an all-seaborne trip rather than freighting the containers across the continent. Eastern ports and rails are preparing for more traffic in the future. If this trend becomes pronounced, BNI may see either its intermodal prices or volumes affected. International intermodal traffic ultimately depends on trade flows. We believe that a strengthening dollar coupled to a reviving economy will drive renewed growth in container traffic.

Industrials About 60–70% of the industrial group’s products depend directly or indirectly on construction and auto

19 August 2008

Industrial products account for 24% of freight revenues and 16% of carloads in 2007. The industrial group is further subdivided into five sub-categories. Construction Products ships 33% of the group’s revenues and it includes steel products, iron ore and various minerals and aggregates, most of which are used in the infrastructure and general construction industries. Building Products contribute 29% of the group’s revenues; it includes mostly forest products linked to the residential construction and paper industries. Petroleum Products accounted for 16% of the group’s revenues; shipments include LPG, diesel fuel, lubes and asphalt. Chemicals and Plastic products contributed 14% of the groups revenues used mostly in the automotive, housing and packaging industries. Finally, food and beverages account for 8% of the group’s revenues; it includes items such as canned goods, perishables and beverages.

27

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Fig 40

Breakdown of the industrial group's revenues, 2007

Food and Beverages 8% Chemicals and Plastics 14%

Construction 33%

Petroleum 16%

Building 29% Source: Company data, Macquarie Capital (USA), August 2008

We think the industrials group will see flat volume in 2008 ahead because its two main endindustries are not likely to recover before 2009. We elaborate on automotive below. Residential construction remains a cloud on the US economy. Sales of new single-family homes fell 40.3% from a year ago in May 2008. At this pace of sales, inventories represent 10.9 months of supply compared to 7.8 months a year ago. Mortgage applications continue to decline. The share prices of home builders have continued to decline and are now in 6–8 year lows.

Fig 41

New residential construction housing starts have continued to decline

1,359

1,273

1,716

1,611

1,499

1,465 1,046

274

2001

293

2002

304

2003

345

2004 Annual

369

2005

382

2006

260

2007

161

2008

First quarter

Units are in thousands. A single or multi-family home is each counted as a unit. Source: US Census Bureau, Macquarie Capital (USA), August 2008

Commercial construction is also weak. Non-residential construction for the first 5 months of 2008 is down 6% in revenue terms on the same period last year. Although some observers believe that the worst is over, the market remains skittish. Commercial vacancy rates are not particularly alarming at 13% as of mid 2008, but there is enough nervousness among tenants that it has been hard to pass on price increases. Commercial construction is also unlikely to be a source of growth through next year.

19 August 2008

28

Macquarie Research Equities - Report

Burlington Northern Santa Fe

Finally, construction of infrastructure will be hampered by strained state budgets, the exhaustion of the Federal Highway Fund in 2009 and limited support for Private Public Partnerships aside from a few progressive states such as Virginia and Florida. It is difficult to see how spending can increase much above the pace of inflation in the current political impasse. Consumer spending is also muted as the economy takes a toll on consumer confidence.

Energy We think coal will grow at 4% through 2012

Coal contributed 21% of freight revenues and 24% of carloads in 2007. More than 90% of the coal shipped by BNI comes from the Powder River Basin in Wyoming and Montana. This coal is used by utilities to fire power plants. BNI also transports coal from the Utah/Colorado and Illinois basins. Over 90% of coal produced in the US is used primarily in power generation. Most of the balance is metallurgical coal used in the production of steel. Exports are starting to be important as worldwide demand is increasing beyond supplies. Prices of all types of coal in the US have seen steep increases over the last few months.

Fig 42 Most coal consumed in the US is used to fire power stations, 2007 Other Industrial 5%

Resid / Commer 0%

Coke Plants 2%

Total = 1,129 short tons

Electric Power 93%

Source: EIA, 2007, Macquarie Capital (USA), August 2008

Coal for power stations Traditionally the two key characteristics of coal for power stations were sulfur content and heat content. High sulfur content results in harmful pollutants. Most utilities have already installed or are installing scrubbers at their plants to remove sulfur oxides from their exhaust fumes. Increasingly, it is heat content that becomes the paramount variable to observe in coal.

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Burlington Northern Santa Fe

Fig 43 Coal prices by basin of origin, 2005–08

Source: EIA, Macquarie Capital (USA), August 2008

There are two main coal-producing regions in the US: the SPRB and the Appalachians. Coal from the SPRB has 30% less heat content than that found in the Appalachians, but is also a lot cheaper to mine. SPRB mines tend to be open pit, whereas the Appalachians require deep underground shafts. Production from the Appalachians is expected to go into long-term decline. This means that more production will be eventually required from the SPRB, and that 30% more coal will be needed to substitute for each ton of Appalachian coal. Coal is overwhelmingly shipped by rail and UNP is one of two big players in the SPRB.

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Burlington Northern Santa Fe

Fig 44

Coal production in the US has held fairly constant CAGR 02-07 = 1.7%

Million short tons 1,400 1,200 1,000 800

13.7%

13.2%

13.3%

13.1%

12.9%

35.1%

35.1%

35.1%

33.6%

32.9%

16.1%

16.1%

16.0%

14.9%

14.6%

35.1%

35.7%

35.7%

38.4%

39.6%

2003

2004

2005

2006

2007

600 400 200 -

Wyoming

Other Western

Appalachia

Interior

Source: EIA, Macquarie Capital (USA), August 2008

This positive longer-term trend is unlikely to come to fruition immediately. Power plants need to retrofit in order to burn coal with differing heat contents. Retrofits can cost US$100m per plant. As already noted, coal-fired plants are being held up due to legislative uncertainty over carbon emissions. Coal producers are being cautious about expanding capacity. In the end, however, we do not see another viable solution to the looming shortage of power capacity.

Metallurgical coal There is also surging worldwide demand for steel primarily driven by China. Iron ore producers have been able to charge steep price increases to steel makers. The price of metallurgical coal is in the range of US$90–100/short ton, up from US$64/short ton in 2004. Coal from the Colorado/Utah Basin is metallurgical (met) grade. BNI will see shipments increase rapidly from a low base, again subject in the short term to cautious upgrading of production capacity at the mines.

Agriculture We think BNI’s exposure to corn will translate into somewhat higher growth for the segment of 3–4% pa

19 August 2008

This group ships 17% of BNI’s freight revenues and 10% of its carloads. It includes commodities such as wheat, corn and soy beans. Corn-based derivatives including fertilizers ethanol and sweeteners, account for roughly 42% of the group’s revenues.

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Macquarie Research Equities - Report

Fig 45

Burlington Northern Santa Fe

Breakdown of the agricultural group's revenues, 2007

Corn 23%

Other 23%

Ethanol 6% Wheat 19%

Fertilizer 11% Bulk foods 9%

Soybeans 9%

Source: Company data, Macquarie Capital (USA), August 2008

Fig 46

Major uses of cropland in the US, 2002

62 Harvested

U.S. total = 442 million acres

Failed

40

Fallowed Idle

16

Cropland pasture

17 307

Fallowed: cultivated summer fallow; Idle: acreage diverted from crops under several federal programs; Cropland pasture: cropland in rotation temporarily devoted to pasture or marginal cropland usually devoted to pasture Source: Major uses of land in the United States, 2002, Economic Research Service, USDA, Macquarie Capital (USA), August 2008

The area devoted to the planting of major crops has not changed substantially over the last decade and it is unlikely to do so in the future. Incremental production will come mainly from improvements in agricultural yield. In the case of corn and soy beans, yield has improved 1–2% per year over the last 7 years. Other major crops have been flat.

19 August 2008

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Burlington Northern Santa Fe

Fig 47

Acreage harvested in the United States has held steady

350

308

304

299

307

305

304

295

304

72

69

69

71

74

75

71

87

2000

2001

2002

2003

2004

2005

2006

2007

300

Million acres

250 200 150 100 50 0

Corn

Soy beans

Hay

Wheat

Cotton

Other

Source: Crop Production Historical Track Records, April 2008, USDA/NASS, Macquarie Capital (USA), August 2008

Fig 48 Yields of major crops in the US have improved only slowly Right-hand scale

180

151.1

160 Bushels / acre

2.0

136.9

100

1.5

80

1.0

60 40 20

41.2

38.1

0 2000

2001

2002 Corn

2003 Soy beans

2004

2005 Wheat

2006

Tons / acre

2.5

140 120

3.0

0.5 0.0 2007

Hay

Source: USDA/NASS, Crop Production Historical Track Records, April 2008, Macquarie Capital (USA), August 2008

BNI benefits from greater agricultural exports because of longer hauls to the West Coast and from increased use of corn in the production of ethanol for the same reason. Petrol consumption is higher in the urban centers along the coast than in the Midwest. All in all, we would expect the agricultural products to grow its volume at an annual rate of 3–4%.

Automotive This segment accounted for 3% of freight revenues and less than 2% of carloads in 2007. Most of these cars are imports manufactured outside the US. Light vehicle sales in the US stayed fairly constant during 2000–07. 1H08 has been more difficult. Car sales have held up but light trucks have lost 19% YTD July 2008. We expect further losses as consumers scramble to re-adjust their driving habits around much higher prices for oil. We anticipate a slow recovery for the market as a whole.

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Burlington Northern Santa Fe

Fig 49

New light vehicle sales and leases have stayed flat for nearly a decade

20 18

CAGR 02-07 = -0.2%

17.4

17.1

Million vehicles

16 14 12

8.5

8.7

8.7

9.0

9.4

9.3

8.7

9.0

8.9

8.4

8.1

7.6

7.5

7.7

7.8

8.1

2000

2001

2002

2003

2004

2005

2006

2007

10 8 6 4 2 0

Passenger cars

Light trucks

Source: US Department of Commerce, Bureau of Economic Analysis, Underlying Detail for the National Income and Product Account Tables, Internet site www.bea.doc.gov/ as of 12 March 2008, table 7.2.5S, Macquarie Capital (USA), August 2008

To the extent that BNI has exposure to domestic car makers, freight carloads will be further affected. GM, Ford and Chrysler have lost ground to foreign producers and the latest round of planned plant closures points to deeper retrenching before they are able to recapture share. Although the weak dollar has revived export growth over the last 5 years, we believe incremental sales from this source are not a sufficient counterweight to an otherwise challenging scenario.

Million vehicles

Fig 50 Light vehicle retail sales have continued to fall, YTD May 2008 10

9.2 8.2

9

2.4

8

2.3

7 6

2.2

5

2.1

4 3

4.7

2

3.8

1 0 2007 Detroit

2008 Foreign, U.S. built

Foreign, imported

Light vehicles include passenger cars and light trucks; new lease figures are not included Source: www.motorintelligence.com/m_frameset.html, public area, Macquarie Capital (USA), August 2008

All in all, we believe the car industry will continue to see challenging times ahead. BNI’s limited exposure to this sector will let it weather the storm better than its counterparts, in our view. 19 August 2008

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Burlington Northern Santa Fe

Analysis and sensitivities Overall, we think that BNI has solid prospects for the future even if these are fully priced. There are a number of issues that would modify our outlook on the company should they happen.

Strategic issues Regulatory action: There are two Bills in Congress that would curtail BNI’s ability to price its services, and ultimately to invest in its network. The Bill that has seen the most recent activity, the Railroad Antitrust Act, was sent for debate and voting to the floor of the House in April 2008. It now looks unlikely that any action would be taken on this or the other Bill, the Railroad Competition and Service Improvement Act, before the presidential elections in November.

Activist shareholders: Berkshire Hathaway held 18% of shares outstanding in BNI as of March 2008. This investor has doubled its position in the last year. Berkshire emphasizes shareholder value, but it is also well known for letting management steer the company on its own. We do not think Berkshire’s holdings will translate into a substantial impact on the way BNI does business. Deeper recession than currently anticipated: We have built a scenario assuming that GDP contracts by 1% for four quarters starting with 4Q08 as opposed to the modest expansion of about 1% that Macquarie has forecast for the same period. We assume that the main effect of a deeper recession would be on volumes rather than prices. Railroads, including BNI, have been able to raise prices in the face of lower volumes for most of 2007 and the first half of 2008. They remain in a structurally strong position and trucks continue to suffer disproportionately from higher oil prices. Under these circumstances, our 2009E EPS would fall 5% to US$6.65 from US$6.97 and our target share price would fall by about 3% to US$112 from US$115.

Fig 51 Scenario: anticipated results in case of a deeper recession Scenario

Scenario parameters Base Scenario

GDP growth, 4Q08–3Q09

1.4%

-1%

2009E EPS, US$/sh Base Scenario

6.97

6.65

Target share price, US$/sh Base Scenario

115

112

Source: Macquarie Capital (USA), August 2008

Key market sensitivities Intermodal: Intermodal accounts for 33% of BNI’s revenues. Intermodal depends on international container trade for half of its revenues. Although trade has historically grown at annual rates exceeding 7%, or double the growth in GDP, growth can quickly stop in the face of a weak economy or a weak currency, both of which reduce the demand for imports. We think we will continue to experience these conditions in 2009 with a slow recovery after that. We could be surprised on the upside by a quicker recovery.

Coal: Coal accounts for 21% of BNI’s revenues and 43% of its ton-miles. We think that demand for coal is not currently as strong as one would think by noticing the looming capacity shortfalls in power generation across the land because not all power plants are actually being built. This could change if federal legislators pass a Bill that removes uncertainty on how carbon emissions will be treated, and that allows solutions that are competitive when compared to gas. This is a plausible scenario given that gas supplies seem to keep falling short of demand and that the cost of building new nuclear power stations is not competitive with current costs of coal-fired power plants. Since coal plants take 2–4 years to build, surging demand will not ramp up all of a sudden.

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Burlington Northern Santa Fe

On the supply side, coal producers are having trouble finding the capital and the workers to expand production to meet increased demand for exports in spite of surging spot prices. Top coal producers such as Peabody hope to increase production by 10% next year. Smaller producers are likely to grow at a much lower rate. Part of miners’ reluctance to expand capacity comes from a history of boom and bust resulting from the expansion of capacity beyond what new demand can sustain. The most recent instance of this phenomenon happened only in 2006–07.

Agricultural products/ethanol: The total planted surface area devoted to principal crops in the US has stayed roughly constant at 300m acres over the last few years. In spite of high food prices, recent incentives to boost ethanol production have resulted in more corn being planted at the expense of other crops rather than in an increase in the total area planted. For the rails, there is an opportunity to transport ethanol that was not there before as they did not usually transport the processed products resulting from these crops. Congress passed the Energy Independence and Security Act in late 2007 with overwhelming bipartisan support. Among other things, the act mandates increased ethanol production targets. The Bill has been widely criticized for setting unrealistic targets and for prescribing the wrong solution to address carbon emissions and energy dependence. If this legislation were to be rendered ineffectual, BNI would be likely to see more moderate volume increases in this segment of its business. At this time, this development seems unlikely in spite of some efforts in this direction. Construction: Construction remains a weak spot in the economy and it could drag down growth for BNI’s industrial group if it stays in a depressed state for longer than we expect. We have assumed that the sector will start to grow in 2009. Oil price: Fuel now accounts for roughly 20% of BNI’s revenues. We think that this amount will come down as oil prices ease over the next few years to the mid US$90s in 2010–12. There are many different readings of what could happen to the price of oil. If it were to stay constant or increase, BNI’s ability to pass on the added fuel surcharges might be curtailed.

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Burlington Northern Santa Fe

Summary of risks for railroad companies in our coverage Fig 52

Summary of risks facing the railroad companies in our coverage

Ticker

Risks

BNI

•

Intermodal volumes recover more slowly than expected

•

A sizable portion of international intermodal traffic is diverted to the East Coast in all-water transport

•

The company cannot increase base rates as anticipated

•

BNI fails to improve productivity

•

Intermodal volumes grow more slowly than expected

•

The CND continues to appreciate against the USD

•

The downturns in the housing and auto industries turn out to be deeper than expected

•

CNI fails to improve productivity

•

Intermodal volumes grow more slowly than expected

•

The CND continues to appreciate against the USD

•

The company cannot increase base rates as anticipated

•

Exports of commodities from Canada grow more slowly than anticipated

•

CP fails to improve productivity

•

On the upside, share buybacks could increase stock prices (CP is the only company that has not announced a program)

•

Intermodal volumes recover more slowly than expected

•

Coal exports grow more slowly than expected

•

The company cannot increase base rates as anticipated

•

CSX fails to improve productivity

•

Intermodal volumes recover more slowly than expected

•

Coal exports grow more slowly than expected; there seems to be a particular expectation that NSC can profit from coal exports

•

The company cannot increase base rates as anticipated

•

NSC fails to improve productivity

•

Intermodal volumes recover more slowly than expected

•

Coal and grain exports fail to sufficiently boost volume growth; UNP seems to be expected to grow above GDP

•

The company cannot increase base rates as anticipated

•

UNP fails to improve productivity; UNP appears to face fairly aggressive expectations to improve its performance

CNI

CP

CSX

NSC

UNP

Source: Macquarie Capital (USA), August 2008

Positive potential news flow ƒ Earnings call showing improving operating performance: We see the most potential

upside to BNI from a steady improvement of operating metrics beyond the effects of rate increases and fuel prices, or from stronger volumes than expected. ƒ Sustained increases in weekly shipping volumes: The economy has proved more

resilient than expected even though there is no shortage of pessimistic forecasts. In the event of an early recovery, weekly shipping volumes should provide a good indication of better times ahead. ƒ Passage of a law on carbon emissions: Removing uncertainty on the future of carbon

emissions is likely to encourage State Public Utility Commissions to approve coal-fired power plants and utilities to actually build them. In this event, coal miners would feel more comfortable in expanding supply while managing to keep prices up. ƒ Sustained increases in container traffic at West Coast ports: Signs that imports are

picking up more quickly than expected would lead us to expect stronger volumes for BNI. 19 August 2008

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Burlington Northern Santa Fe

Negative potential news flow ƒ Further action on rail Bills in Congress: Incremental actions that make more likely the

passage of any of the two Bills in Congress proposing re-regulation of the rail industry. ƒ Reduction of tariffs on imported ethanol: Any legislation that allows states to escape

federally-mandated ethanol targets or that provides an alternative to domestic production in order to meet those targets. ƒ Increase in the price of oil: BNI shares and those of its peers have consistently lost ground

with increases in the price of oil.

Potential corporate activity ƒ Acquisitions: Consolidation of the rail industry is substantially accomplished. Acquisitions of

short-haul rail companies might make sense if they can provide rights-of-way or terminals in a coveted spot such as Chicago. Even then, community activism can make it tricky to complete the acquisition. We do not expect BNI to undertake acquisitions for the next several years.

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Burlington Northern Santa Fe

Financials Year Ending 31 December Valuation WACC k(Debt) k(Equity) 10 year bond Market Risk premium NPV (Price USD/share) Leverage Ratios Net Debt : EBIT EBIT : Interest Trading Multiples EV/EBITDA PER

Units

06 A

07 A

% % % % % $/shr

9.1% 4.9% 10.3% 4.7% 4.8% 87.7

9.1% 5.1% 10.2% 4.7% 4.8% 100.4

x x Units

2.2x 6.8x 07 A

8.5% 4.6% 9.4% 4.0% 4.8% 107.8 2.1x 6.9x 08 E

9.0% 5.1% 9.9% 4.5% 4.8% 117.9 1.9x 6.8x 09 E

10 E

11 E

12 E

13 E

9.1% 5.0% 10.0% 4.6% 4.8% 128.8

8.7% 4.6% 9.6% 4.3% 4.8% 140.8

9.0% 4.9% 9.9% 4.6% 4.8% 154.5

9.2% 5.0% 10.1% 4.8% 4.8% 169.7

1.8x 7.5x 10 E

1.7x 8.6x 11 E

1.6x 8.7x 12 E

1.5x 8.6x 13 E

Recommendation Share Price Valuation 12-mth Target Upside/Downside to PT

Outperform $ 98.8 $ 105.4

$ 114.5 15.9%

Shares on Issue (m sh) + Common Stock + Dilutive securities Total Equity Value (US$m) Net Debt (US$m)* Enterprise Value (US$m)

344.9 6.4 351.3 34,715 7,816 42,531

7.2x 14.5x

7.7x 16.3x

8.1x 16.7x

7.2x 14.2x

6.5x 11.8x

1Q07 A

2Q07 A

3Q07 A

4Q07 A

1Q08 A

2Q08 A

3Q08 E

4Q08 E

05 A

06 A

07 A

08 E

09 E

10 E

# % # # # # #

2,507 -0.6% 390 594 247 1,235 41

2,581 -3.7% 431 611 239 1,256 44

2,630 -4.7% 431 627 265 1,268 39

2,600 -2.9% 412 640 282 1,224 42

2,486 -0.8% 403 634 284 1,126 39

2,509 -2.8% 422 589 262 1,193 43

2,614 -0.6% 417 631 262 1,269 35

2,674 2.8% 410 668 283 1,273 41

10,024 5.1% 1,655 2,238 916 5,038 177

10,637 6.1% 1,686 2,458 973 5,346 174

10,318 -3.0% 1,664 2,472 1,033 4,983 166

10,283 -0.3% 1,652 2,521 1,091 4,861 158

10,631 3.4% 1,688 2,602 1,118 5,068 156

11,182 5.2% 1,741 2,765 1,163 5,355 158

Revenue / carload Growth YoY Industrial Energy/Coal Agricultural Intermodal Automotive

USD/car % USD/car USD/car USD/car USD/car USD/car

1,414 5.8% 2,169 1,279 2,534 968 2,829

1,448 8.0% 2,204 1,270 2,552 1,014 2,886

1,501 8.6% 2,232 1,354 2,574 1,053 3,077

1,585 12.6% 2,248 1,397 2,851 1,114 3,167

1,667 17.9% 2,330 1,505 3,049 1,115 3,308

1,733 19.7% 2,479 1,531 3,160 1,199 3,326

1,825 21.6% 2,724 1,653 3,141 1,289 3,756

1,767 11.5% 2,524 1,569 3,202 1,251 3,556

1,258 11.6% 1,890 1,094 2,328 892 2,288

1,367 8.7% 2,129 1,186 2,494 961 2,718

1,488 8.8% 2,214 1,326 2,635 1,037 2,988

1,749 17.6% 2,516 1,565 3,138 1,217 3,476

1,756 0.4% 2,529 1,579 3,170 1,223 3,502

1,756 0.0% 2,530 1,587 3,186 1,229 3,502

Op expenses / carload Op margin / carload Average employees Price of fuel

USD/car % 000 $/gallon

1,177 16.7% 41.0 1.81

1,163 19.6% 41.5 2.17

1,167 22.3% 41.3 2.31

1,267 20.0% 41.0 2.57

1,362 18.3% 40.2 2.77

1,438 17.1% 41.4 3.51

1,460 20.0% 42.6 4.10

1,423 19.4% 44.3 3.40

1,004 20.2% 39.5 1.40

1,078 21.2% 41.5 1.84

1,194 19.8% 41.2 2.22

1,421 18.7% 42.1 3.44

1,388 21.0% 42.7 2.97

1,355 22.8% 43.6 2.66

EPS Growth YoY

USD/shr %

0.96 -11.8%

1.20 -5.3%

1.48 11.6%

1.46 2.7%

1.30 35.0%

1.34 11.9%

1.66 11.8%

1.63 11.8%

4.01 90.9%

5.10 27.3%

5.10 -0.1%

5.92* 16.2%

6.97 17.7%

8.35 19.7%

USD m % USD m USD m USD m USD m %

1,001 27.5% (168) (537) 57 353

1,163 30.3% (166) (615) (132) 250

1,325 32.6% (207) (623) (8) 487

1,290 30.4% (218) (473) (15) 584

1,216 28.5% (615) (468) 44 177

1,220 27.2% (279) (574) (190) 177

1,420 29.0% (345) (707) 101 469

1,404 28.9% (335) (624) 383 828

3,997 30.8% (651) (1,750) (59) 1,537 64.0%

4,647 31.0% (916) (2,014) (23) 1,694 10.2%

4,779 25.8% (802) (2,248) (98) 1,631 -3.7%

5,260 28.5% (1,239) (2,372) 338 1,987 21.8%

5,922 30.9% (1,420) (2,666) (56) 1,780 -10.4%

6,599 32.7% (1,605) (2,874) 35 2,155 21.1%

Profit and Loss

Units

1Q07 A

2Q07 A

3Q07 A

4Q07 A

1Q08 A

2Q08 A

3Q08 E

4Q08 E

05 A

06 A

07 A

08 E

09 E

10 E

Revenues Revenue growth YoY (%) Operating expenses Operating ratio (%) + Labor and fringe benefits + Fuel + Equipment rents + Depreciation and amortization + Purchased services and materials Operating Income Op income growth YoY (%) + Other income - Interest expense Income before income taxes - Income taxes Income from continuing operations + Income from discontinued operations + Cumulative effect of accounting change Net income Net income / Revenues + Preferred Dividends Net Income: common stock Closing Shares (basic) Closing Shares (diluted)

USD m % USD m % USD m USD m USD m USD m USD m USD m % USD m USD m USD m USD m USD m USD m USD m USD m % USD m USD m m sh m sh

3,645 5.3% 2,951 81.0% 932 652 232 307 326 694 -12.4% (5) (121) 568 (219) 349 349 9.6% 349 356.1 363.7

3,843 3.8% 3,002 78.1% 925 771 237 322 240 841 -2.5% (6) (132) 703 (270) 433 433 11.3% 433 354.9 360.8

4,069 3.3% 3,068 75.4% 937 814 235 324 257 1,001 8.8% (6) (132) 863 (333) 530 530 13.0% 530 351.0 357.1

4,245 9.4% 3,295 77.6% 979 960 238 340 265 950 0.8% (1) (126) 823 (306) 517 517 12.2% 517 349.3 354.3

4,261 16.9% 3,386 79.5% 983 1,009 230 341 298 875 26.1% (134) 741 (286) 455 455 10.7% 455 346.3 351.3

4,478 16.5% 3,607 80.5% 951 1,245 223 349 299 871 3.6% (162) (140) 569 (219) 350 350 7.8% 350 344.9 349.2

4,896 20.3% 3,818 78.0% 979 1,466 244 342 267 1,079 7.8% (145) 934 (358) 576 576 11.8% 576 341.3 347.4

4,853 14.3% 3,805 78.4% 1,017 1,330 258 356 288 1,048 10.3% (146) 902 (345) 556 556 11.5% 556 334.8 340.9

12,987 18.6% 10,065 77.5% 3,515 1,959 886 1,075 916 2,922 73.3% (37) (437) 2,448 (917) 1,531 1,531 11.8% 1,531 371.8 381.8

14,985 15.4% 11,468 76.5% 3,816 2,734 930 1,130 952 3,517 20.4% (40) (485) 2,992 (1,105) 1,887 1,887 12.6% 1,887 361.1 369.8

15,802 5.5% 12,316 77.9% 3,773 3,197 942 1,293 1,088 3,486 -0.9% (18) (511) 2,957 (1,128) 1,829 1,829 11.6% 1,829 352.8 358.9

18,488 17.0% 14,615 79.1% 3,929 5,050 955 1,387 1,151 3,873 11.1% (162) (565) 3,146 (1,208) 1,938 1,938 10.5% 1,938 341.8 347.2

19,190 3.8% 14,752 76.9% 4,153 4,497 1,038 1,483 1,251 4,439 14.6% (653) 3,785 (1,450) 2,336 2,336 12.2% 2,336 329.1 335.0

20,171 5.1% 15,156 75.1% 4,363 4,209 1,124 1,584 1,355 5,015 13.0% (668) 4,347 (1,665) 2,682 2,682 13.3% 2,682 315.5 321.4

Cashflow

Units

1Q07 A

2Q07 A

3Q07 A

4Q07 A

1Q08 A

2Q08 A

3Q08 E

4Q08 E

05 A

06 A

07 A

08 E

09 E

10 E

Net cash in Operating Activities Net cash in Investing Activities Net cash in Financing Activities Forex effects on cash Net cash movement

USD m USD m USD m USD m USD m

1,148 (831) (300) (17)

428 (503) 76 (1)

889 (777) (130) 18

1,027 (263) (809) 45

931 (759) 23 (195)

774 (699) (119) 44

1,388 (707) (711) 30

1,439 (624) (890) 74

2,609 (2,023) (833) 247

3,108 (2,086) (722) (300)

3,492 (2,374) (1,163) 45

4,533 (2,788) (1,697) (47)

4,242 (2,666) (1,565) (11)

4,830 (2,874) (1,934) (22)

Balance Sheet

Units

1Q07 A

2Q07 A

3Q07 A

4Q07 A

1Q08 A

2Q08 A

3Q08 E

4Q08 E

05 A

06 A

07 A

08 E

09 E

10 E

Cash Current assets Investments PP&E Other Total Assets Current liabilities Debt (long-term and current portion) Deferred income taxes Other liabilities Shareholder Funds Total Liabilities & Shareholder Funds Indebtedness + Bank & Securitized Debt, Capital leases + Operating leases + Preferred Stock Total Debt less Cash Net Debt

USD m USD m USD m USD m USD m USD m USD m USD m USD m USD m USD m USD m

392 1,541 28,166 2,009 32,108 2,996 7,450 8,235 872 10,530 32,108

393 1,949 28,632 1,880 32,854 2,968 7,968 8,316 853 10,669 32,854

375 2,106 29,048 2,006 33,535 3,048 8,223 8,433 842 10,879 33,535

330 1,851 29,567 1,835 33,583 2,824 8,146 8,484 843 11,144 33,583

525 2,147 29,783 2,097 34,552 3,108 8,644 8,618 850 11,200 34,552

481 2,310 30,131 2,220 35,142 3,051 8,819 8,698 1,014 11,333 35,142

451 2,422 30,496 2,006 35,376 3,229 8,716 9,037 908 11,301 35,376

377 2,065 30,764 1,835 35,041 3,324 8,619 9,047 901 11,064 35,041

75 1,805 26,551 1,873 30,304 2,773 7,154 7,916 878 9,508 30,304

375 1,806 27,921 1,695 31,797 2,853 7,385 8,298 830 10,528 31,797

330 1,851 29,567 1,835 33,583 2,824 8,146 8,484 843 11,144 33,583

377 2,065 30,764 1,835 35,041 3,324 8,619 9,047 901 11,064 35,041

388 2,108 31,946 1,835 36,278 3,301 8,955 9,395 943 11,499 36,278

410 2,197 33,237 1,835 37,679 3,417 9,293 9,775 991 11,909 37,679

$m

7,450 1,991 9,441 (392) 9,049

7,968 1,991 9,959 (393) 9,566

8,223 1,991 10,214 (375) 9,839

8,146 1,991 10,137 (330) 9,807

8,644 2,324 10,968 (525) 10,443

8,819 2,324 11,143 (481) 10,662

8,716 2,324 11,040 (451) 10,589

8,619 2,324 10,943 (377) 10,566

7,154 1,559 8,713 (75) 8,638

7,385 1,964 9,349 (375) 8,974

8,146 1,991 10,137 (330) 9,807

8,619 2,324 10,943 (377) 10,566

8,955 2,449 11,403 (388) 11,015

9,293 2,550 11,843 (410) 11,433

Operational Metrics (period-end) Volume ('000 carloads) Growth YoY Industrial Energy/Coal Agricultural Intermodal Automotive

EBITDA Margin Taxes on EBIT Capex Change in Working Capital FCF Enterprise Growth YoY

x x

2.0x 7.3x 06 A

Currency: USD 08 E 09 E

Units

$m $m $m $m

Note: Priced as of August 14, 2008; historical multiples are calculated as of year-end; *2008 EPS includes US$119 million of one-time environmental charges not reflected in Net Income. Source: Company data, Macquarie Capital (USA), August 2008

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Important disclosures: Recommendation definitions

Volatility index definition*

Financial definitions

Macquarie - Australia/New Zealand Outperform – return >5% in excess of benchmark return (>2.5% in excess for listed property trusts) Neutral – return within 5% of benchmark return (within 2.5% for listed property trusts) Underperform – return >5% below benchmark return (>2.5% below for listed property trusts)

This is calculated from the volatility of historic price movements.

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10% Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10% Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return Macquarie - USA Outperform (Buy) – return >5% in excess of benchmark return Neutral (Hold) – return within 5% of benchmark return Underperform (Sell)– return >5% below benchmark return

Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative.

Low–medium – stock should be expected to move up or down at least 25–30% in a year.

EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares

Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Australian/NZ stocks only

All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Medium – stock should be expected to move up or down at least 30–40% in a year.

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Recommendation proportions – For quarter ending 30 June 2008 Outperform Neutral Underperform

AU/NZ 41.88% 42.96% 15.16%

Asia 66.96% 16.30% 16.74%

RSA 66.13% 22.58% 11.29%

USA 50.82% 44.26% 4.92%

CA 71.01% 24.64% 4.35%

EUR 43.00% (for US coverage by MCUSA, 0.0% of stocks followed are investment banking clients) 48.00% (for US coverage by MCUSA, 3.7% of stocks followed are investment banking clients) 9.00% (for US coverage by MCUSA, 0.0% of stocks followed are investment banking clients)

In the next 3 months, Macquarie Capital (USA) Inc. ("MCUSA") or an affiliate expects to receive or intends to seek compensation for investment banking services, as defined under FINRA Rule 2711(a)(3), to Burlington Northern Santa Fe, Canadian National Railway, Canadian Pacific, CSX Corporation, Norfolk Southern, and Union Pacific. Within the last 12 months, Macquarie Capital (USA) Inc. ("MCUSA") or an affiliate provided investment banking services, as defined under FINRA Rule 2711(a)(3), to Norfolk Southern. Analyst Certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd ABN 94 122 169 279 (AFSL No. 318062 )(MGL) and its related entities (the Macquarie Group) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. Disclaimers: Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North America Ltd; Macquarie Capital (USA) Inc; Macquarie Capital Securities Ltd; Macquarie Capital Securities (Singapore) Pte Ltd; Macquarie Securities (NZ) Ltd; and Macquarie First South Securities (Pty) Limited are not authorised deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL) or MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any of the above mentioned entities. MGL provides a guarantee to the Monetary Authority of Singapore in respect of the obligations and liabilities of Macquarie Capital Securities (Singapore) Pte Ltd for up to SGD 35 million. This research has been prepared for the general use of the wholesale clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient you must not use or disclose the information in this research in any way. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. This research is based on information obtained from sources believed to be reliable but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Other Disclaimers: In Canada, securities research is prepared, approved and distributed by Macquarie Capital Markets Canada Ltd, a participating organisation of the Toronto Stock Exchange, TSX Venture Exchange & Montréal Exchange. Macquarie Capital Markets North America Ltd., which is a registered broker-dealer and member of FINRA, accepts responsibility for the contents of reports issued by Macquarie Capital Markets Canada Ltd in the United States and to US persons and any person wishing to effect transactions in the securities described in the reports issued by Macquarie Capital Markets Canada Ltd should do so with Macquarie Capital Markets North America Ltd. Securities research is issued and distributed by Macquarie Securities (Australia) Ltd (AFSL No. 238947) in Australia, a participating organisation of the Australian Securities Exchange; Macquarie Securities (NZ) Ltd in New Zealand, a licensed sharebroker and New Zealand Exchange Firm; Macquarie Capital (Europe) Ltd in the United Kingdom, which is authorised and regulated by the Financial Services Authority (No. 193905); Macquarie Capital Securities Ltd in Hong Kong, which is licensed and regulated by the Securities and Futures Commission; Macquarie Capital Securities (Japan) Limited in Japan, a member of the Tokyo Stock Exchange, Inc., Osaka Securities Exchange

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Co. Ltd, and Jasdaq Securities Exchange, Inc. (Financial Instruments Firm, Kanto Financial Bureau(kin-sho) No. 231, a member of Japan securities Dealers Association and Financial Futures Association of Japan); Macquarie First South Securities (Pty) Limited in South Africa, a member of the JSE Limited and in Singapore, Macquarie Capital Securities (Singapore) Pte Ltd (Company Registration Number: 198702912C), a Capital Markets Services licence holder under the Securities and Futures Act to deal in securities and provide custodial services in Singapore. Pursuant to the Financial Advisers (Amendment) Regulations 2005, Macquarie Capital Securities (Singapore) Pte Ltd is exempt from complying with sections 25, 27 and 36 of the Financial Advisers Act. Clients should contact analysts at, and execute transactions through, a Macquarie Group entity in their home jurisdiction unless governing law permits otherwise. Macquarie Capital (USA) Inc., which is a registered broker-dealer and member of FINRA, accepts responsibility for the content of each research report prepared by one of its non-US affiliates when the research report is distributed in the United States by Macquarie Capital (USA) Inc. Macquarie Capital (USA) Inc. affiliate research reports and affiliate employees are not subject to the disclosure requirements of FINRA rules. Any persons receiving this report directly from Macquarie Capital (USA) Inc. and wishing to effect a transaction in any security described herein should do so with Macquarie Capital (USA) Inc. The information contained in this document is confidential. If you are not the intended recipient, you must not disclose or use the information in this document in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. MGL has established and implemented a conflicts policy at group level (which may be revised and updated from time to time) (the "Conflicts Policy") pursuant to regulatory requirements (including the FSA Rules) which sets out how we must seek to identify and manage all material conflicts of interest. Disclosures with respect to the issuers, if any, mentioned in this research are available at www.macquarie.com/research/disclosures. © Macquarie Group Auckland Tel: (649) 377 6433

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Available to clients on the world wide web at www.macquarie.com/research and through Thomson Financial, FactSet, Reuters and Bloomberg.

19 August 2008

43

Research Heads of Equity Research

Healthcare & Biotech

John O’Connell (Global Co – Head) (1 212) 231 2631 David Rickards (Global Co – Head) (612) 8232 4017 Graham Copley (US) (1 212) 231 2632 Stephen Harris (Canada) (1 416) 848 3655 Alan Watson (Europe) (44 20) 3037 4383 Julian Wentzel (South Africa) (2711) 343 2202

Stefan Quenneville (Montreal)

Consumer Staples

Steven Song (New York) Rowan Goeller (Johannesburg) Fabrice Ndjodo (Johannesburg)

Food & Beverages Julian Wentzel (Johannesburg)

(2711) 343 2202

Consumer Discretionary Gaming Joel Simkins (New York) Blake Hossack (Toronto) Martin Dullaart (Johannesburg)

(1 212) 231 2635 (1 416) 848 3512 (2711) 343 2322

Media Nik Kershaw (Johannesburg)

(2711) 343 2211

Retailing David Pupo (Toronto) Julian Wentzel (Johannesburg)

(1 416) 848 3505 (2711) 343 2202

Energy Jason Gammel (New York) Wilson Leong (New York) Mark Heim (Calgary) Patrick Tomalin (Toronto) Ian Macqueen (Calgary) Jenny Mikhareva (Calgary) Iain Reid (London) Brendan Warn (London)

(1 212) 231 2633 (1 212) 231 2560 (1 403) 218 6652 (1 416) 848 3551 (1 403) 218 6659 (1 403) 218 6655 (44 20) 3037 4085 (44 20) 3037 4559

Alternative Energy Kelly Dougherty (New York) Shai Hill (London) Ben Kluftinger (London)

(1 212) 231 2493 (44 20) 3037 4232 (44 20) 3037 4077

Banks Alan Hartdegen (Johannesburg)

(2711) 343 2200

Diversified Financials Blake Hossack (Toronto)

Industrials Rob Stallard (New York)

(1 212) 231 2486

Capital Goods (1 212) 231 2455 (2711) 343 2336 (2711) 343 2337

Transportation – Infrastructure Arturo Vernon (New York) Ben Stretch (New York) Scott Ryall (London)

(1 212) 231 2566 (1 212) 231 2574 (44 20) 3037 4271

Information Technology Dennis Fong (Toronto) Glenn Jamieson (Toronto)

Guy Peddy (London) Nik Kershaw (Johannesburg)

(416) 848 3696 (416) 848 3658

Angie Storozynski (New York) Matthew Akman (Toronto) Stephen Harris (Toronto)

Jim Lennon (London) Adam Rowley (London)

Gerald Brockman (New York) Antonio Antezano (New York) Cooley May (New York) Karl Oelschlaeger (New York) Sameer Rathod (New York)

Quantitative Yin Luo (Toronto) Hannes Uys (Johannesburg)

Global Metals & Mining Pierre Vaillancourt (Toronto) George Albino (Toronto) Duncan McKeen (Toronto) Sam Catalano (London) Justin Froneman (Johannesburg) David Hall (Johannesburg) Avishkar Nagaser (Johannesburg) David Pleming (Johannesburg)

(1 416) 848 3647 (1 416) 848 3594 (1 416) 848 3576 (44 20) 3037 4278 (2711) 343 2293 (2711) 343 2210 (2711) 343 2280 (2711) 343 2287

Real Estate Property Trusts & Developers (1 212) 231 2457 (1 212) 231 2479 (2711) 343 2209

Global Property Securities Analytics Alex Moss (London)

(44 20) 3 037 4086

(44 20) 3037 4271 (44 20) 3037 4272

Emerging Leaders

Chemicals/Containers, Packaging/Paper & Forest Products, Construction Materials (2711) 343 2204 (2711) 343 2202

(1 212) 231 2569 (1 416) 848 3510 (1 416) 848 3655

Commodities & Precious Metals

Materials

Caroline Learmonth (Johannesburg) Julian Wentzel (Johannesburg)

(44 20) 3037 4509 (2711) 343 2211

Utilities

Aerospace & Defense

Nicholas Pirsos (New York) Ken Zener (New York) Leon Allison (Johannesburg)

Financials

Telecommunications (514) 925 2856

(1 212) 231 2473 (1 212) 231 1154 (1 212) 231 2586 (1 212) 231 2456 (1 212) 231 2474

(1 416) 848 3569 (2711) 343 2281

Alternative Strategies Blake Hossack (Toronto) Samora Adams (Cape Town)

(1 416) 848 3512 (2721) 813 2612

Economics and Strategy Stephen Harris (Toronto) Nazmeera Moola (Cape Town) Gina Schoeman (SA Economics)

(1 416) 848 3655 (2721) 670 1213 (2711) 343 2305

Find our research at Macquarie: www.macquarie.com.au/research Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx Contact Gareth Warfield for access (612) 8232 3207

Email addresses [email protected] eg. [email protected]

(416) 848 3512

Sales US Sales Greg Coleman (New York) Brad Bullock (New York) Mark Little (New York) Richard Sears (New York) Renee Connolly (New York) Bill Cleary (New York) Jack Rose (San Francisco) Wes Dalton (San Francisco) Roni Gudell (Boston)

US Sales Trading (1 212) 231 2567 (1 212) 231 2573 (1 212) 231 2577 (1 212) 231 2489 (1 212) 2312480 (1 212) 231 2495 (1 415) 762 5002 (1 415) 762 5007 (1 617) 217 2087

EU Sales Doug Stone (New York)

(1 212) 2312606

Equities Stevan Vrcelj (Head of Global Sales) Luke Sullivan (New York) Alex Rothwell (Toronto) Rob Fabbro (Continental Europe) Charles Nelson (London)

(612) 8232 5999 (1 212) 231 2507 (1 416) 848 3677 (44 20) 7065 2031 (44 20) 7065 2032

Austin Graham (New York) Jon Patria (New York) Matt Lahey (New York) Robert Risman (New York) Samantha Molina (New York) André Conway (New York) John Redmond (New York) James Henry (New York) James Trounson (New York) Marc Rosa (New York)

(1 212) 231 2494 (1 212) 231 2488 (1 212) 231 2487 (1 212) 231 2555 (1 212) 231 2502 (1 212) 231 2503 (1 212) 231 2549 (1 212) 231 2555 (1 212) 231 2547 (1 212) 231 2514

Canada Sales Tim Sorensen (Toronto) Alex Ball (Toronto) Jason Beales (Toronto) Craig Brenner (Toronto) Jessica Butt (Toronto) Sasha Djurdjevic (Toronto) Chris Naprawa (Toronto) Tim Newington (Toronto) Harry Pokrandt (Toronto)

August 08

(416) 848 3623 (416) 848 3554 (416) 848 3635 (416) 848 3626 (416) 848 3620 (416) 848 3573 (416) 848 3634 (416) 848 3558 (416) 848 3546

Michael Zuk (Toronto) Michael Marcotte (Montréal) Roy McDowall (Montréal)

(416) 848 3688 (514) 925 2853 (514) 925 2864

Carly Dean (Vancouver) Ryan Males (Vancouver)

(604) 639 6349 (604) 639 6372

Canada Trading Perry Catellier (Agency Trading) Tony Oram (Liability Trading) Bob Bastianon (Toronto) John Bellchambers (Toronto) Ben Chiu (Toronto) Paul Dorland (Toronto) Jesse Janzen (Vancouver) Mike Nininger (Toronto) Cheryl Polan (Toronto) Stephen Rawn (Toronto) Robyn Scott (Toronto) John Szucs (Toronto) Aadam Al-Khabyyr (Montréal) Joanne Patterson (Montréal) Cindy Vaincourt (Montréal)

(416) 848 3619 (416) 848 3631 (416) 848 3562 (416) 848 3599 (416) 848 3513 (416) 848 3529 (604) 639 6379 (416) 848 3625 (416) 848 3633 (416) 848 3611 (416) 848 3513 (416) 848 3678 (514) 925 2857 (514) 925 2872 (514) 925 2867