Crude By Rail
James Cairns
Vice President, Petroleum and Chemicals
FORWARD-LOOKING STATEMENTS
The financial results in this presentation were determined on the basis of U.S. GAAP.
Please refer to the website www.cn.ca/nonGAAP for the reconciliation of certain nonGAAP measures to comparable GAAP measures. To the extent we have provided
guidance which are non-GAAP financial measures, we may not be able to provide a
reconciliation to the GAAP measures, due to unknown variables and uncertainty
related to future results.
Certain information included in this presentation constitutes “forward-looking
statements” within the meaning of the United States Private Securities Litigation
Reform Act of 1995 and under Canadian securities laws. CN cautions that, by their
nature, these forward-looking statements involve risks, uncertainties and
assumptions. The Company cautions that its assumptions may not materialize and
that current economic conditions render such assumptions, although reasonable at
the time they were made, subject to greater uncertainty. Such forward-looking
statements are not guarantees of future performance and involve known and
unknown risks, uncertainties and other factors which may cause the actual results or
performance of the Company or the rail industry to be materially different from the
outlook or any future results or performance implied by such statements. Key
assumptions used in determining forward-looking information are set forth below.
Key assumptions
CN has made a number of economic and market assumptions in preparing its 2013
outlook. The Company is forecasting that North American industrial production for the
year will increase by about 2.0 per cent. CN also expects U.S. housing starts to be in
the range of 950,000 units and U.S. motor vehicles sales to be approximately 15
million units. In addition, CN is assuming that 2013/2014 grain crop production in both
Canada and the U.S. will be in-line with their respective five-year averages. With
respect to the 2012/2013 crop, production in Canada was slightly above the five-year
average while production in the U.S. was below the five-year average. With these
assumptions, CN assumes carload growth of three to four per cent, along with
continued pricing improvement above inflation. CN also assumes the CanadianU.S. exchange rate to be around parity for 2013 and that the price of crude oil
(West Texas Intermediate) for the year to be in the range of US$90-$100 per
barrel. In 2013, CN plans to invest approximately C$1.9 billion in capital
programs, of which more than C$1 billion will be targeted on track infrastructure
to maintain a safe and fluid railway network. In addition, the Company will invest
in projects to support a number of productivity and growth initiatives.
Important risk factors that could affect the forward-looking statements include,
but are not limited to, the effects of general economic and business conditions,
industry competition, inflation, currency and interest rate fluctuations, changes in
fuel prices, legislative and/or regulatory developments, compliance with
environmental laws and regulations, actions by regulators, various events which
could disrupt operations, including natural events such as severe weather,
droughts, floods and earthquakes, labor negotiations and disruptions,
environmental claims, uncertainties of investigations, proceedings or other types
of claims and litigation, risks and liabilities arising from derailments, and other
risks detailed from time to time in reports filed by CN with securities regulators in
Canada and the United States. Reference should be made to “Management’s
Discussion and Analysis” in CN’s annual and interim reports, Annual Information
Form and Form 40-F filed with Canadian and U.S. securities regulators, available
on CN’s website, for a summary of major risk factors.
CN assumes no obligation to update or revise forward-looking statements to
reflect future events, changes in circumstances, or changes in beliefs, unless
required by applicable Canadian securities laws. In the event CN does update
any forward-looking statement, no inference should be made that CN will make
additional updates with respect to that statement, related matters, or any other
forward-looking statement.
A Great
Franchise
Balanced Portfolio
Intermodal
20%
Petroleum and Chemicals
17%
Grain and Fertilizers
16%
Forest Products
13%
Metals and Minerals
11%
Other Revenues
10%
Coal
7%
Automotive
6%
Connecting Canadian crude production with desirable markets
3
Rail Does Not
Preclude Pipe
CN FRA Accident Ratio
(accident rate per million train miles)
2.27
2.23
2.25
2.10
2009
2010
2011
2012
4
Rail is lower
cost, lower
risk
Better crude
netback
(the bottom
line)
Dispatchability
(not locked
into one
geographic
pocket)
Rail is speed
to market
Scalability
5
CN Crude by Rail Adoption Rate
Long haul crude traffic
Carloads - Thousands
(average length of haul – miles)
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
All traf f ic
Manuf acturing
Crude
2010
2011
2012
2013F
0
1,000
2,000
Crude by rail is now a meaningful component of the crude supply chain
6
2011:
Manifest - CN
Facilitated
Transload
2012:
Manifest truck to tank
to rail
2013:
Unit Train Pipe to tank to
unit train
Facility Development:
Shifting to Unit Train
Infrastructure
Now Open - Rail loading facility and tank farm for
crude in Fort McMurray, AB
4
Why Rail, Why Now
1.
First wave of crude by rail bourne out of necessity production exceeded pipeline takeaway capacity
2.
Second wave driven by differentials - rail connected WTI
crudes to Brent markets.
3.
Current wave driven by pure rail economics for heavy crudes
Brent Crude Oil Prices
vs WTI and Western Canada Select
(US dollars)
60.00
50.00
Differentials as of March 20th, 2013
WCS v Brent
WCS v WTI
Brent v WTI
$35.64
$20.03
$15.61
40.00
30.00
20.00
WTI
10.00
WCS
0.00
Jan-09
Jan-10
Jan-11
Jan-12
-10.00
8
30%
70%
Bitumen by rail
Pipelines ship
dilbit, refineries buy
bitumen
Dilbit by pipeline
9
Source: Bloomberg (based on average monthly prices, as at January 21 2013), CAPP and Cenovus. 1. Assumes blending ratio of 29%; assumes WCS:CLB differential from Bloomberg from
Jan. 2007 – Dec. 2008 and MEG AWB thereafter, assumes the last reported quarter. 2. Blending ratio assumed to be 0% (assumes the use of a DRU which eliminates need for diluent
blending at a cost of $2.00/bbl included in dilbit transportation). 3. Assumes blending ratio of 17%. Neat bitumen pricing at US$4.00/bbl discount to Maya / Resid at USGC. Diluent haul back
margin assumes Mt. Belvieu Natural Gasoline density of 664 kg/m3 (price calculated using CAPP’s EQ), and diluent is backhauled only when profitable to do so utilizing all available rail
capacity (~13% greater than bitumen/blend volume). Assumes transportation costs to Hardisty of $3.50/bbl and to USGC of ~$24/bbl
10
Rail Car Production – The Future is Heavy
Tank Car Deliveries*
30000
25000
20000
15000
10000
5000
0
New tank cars in service 2012 vs. 2015*
2012
Light
Heavy
Actual
2011
Actual
2012
Projected Projected
2013
2014
2015
In the third quarter of 2012
alone, ~4,500 tank cars
were delivered
Light
Heavy
*CN Estimate
11
 CN directly overlays
the major heavy
crude producing
regions (Peace River,
Athabasca, Cold
Lake)
 Evolving from simple
truck to rail manifest
service to pipeline
connected tank to rail
unit train service
Operating Distribution
Centers
Under Development
Future Development
PEACE
RIVER
High Level
ATHABASCA
Roma
Sexsmith
Mitsue
Whitecourt
Lynton
Cheecham
Bruderheim
East Edmonton
IslayCOLD LAKE
Mannville
Lloydminster
Wainwright
Lashburn
Unity
Kindersley
CN’s Unique
Franchise of Alberta
Heavy Crude
12
Direct Access to
Eastern Canada
Consumers and
Tidewater
Tracy
Montreal
Sarnia
Woodhaven
Toledo
Chicago
Wood River
Nanticoke
Detroit
Saint John
Limoilou
Saint-Romuald
Dartmouth
 Physical access to all Eastern
Canada refineries; Sarnia ON,
Nanticoke ON, Saint John NB,
Saint-Romuald PQ
 Physical access to seaway
distribution terminals; Tracy,
Quebec City
 Tidewater access to PADD I,
PADD III, Europe and India
CN served crude destination site
Offline crude destination site
13
Direct Access to Gulf
Coast PADD III
Consumers
Jackson
Genesis
(Natchez)
ARC
Genesis
(Mobile)
(Baton Rouge)
LBC Sunshine
Stone Oil
(St. Gabriel)
(Manchac)
Crosstex
(Geismar)
Valero
(Norco)
IMTT
(St.Rose)
 Single-line high-velocity turnaround
service from Alberta / SK oilfields to
PADD III refineries. Capacity available
right away.
 Access refineries directly from Baton
Rouge to New Orleans corridor
 Access refineries by barge / pipeline up
to Houston ship channel via CN-served
tidewater distribution terminals
Lynton, AB to Natchez, MS – 2,800 rail miles
14
Fort McMurray
(Cheecham)
Kitimat
Edmonton
CN condensate hubs
Condensate
Backhaul
Peak of 50,000 barrels per day
Currently 30,000 barrels per day
CN Rail is an element of the condensate supply strategy
15
In Summary – The Rail Advantage

Rail provides market optionality

Connectivity to Brent markets on 3 coasts

Rail economics for heavy crudes are not spread dependant

Rail car and facility constrains are being addressed.

Rapid expansion of unit train capacity
16