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					January 12, 2011

Equity Research

Rails: Raising Estimates And Valuation Ranges
Volume Visibility, Pricing Power And Capital Returns

Sector Rating: Railroads, Market Weight
                                                                  FY EPS                             Valuation Range
                      Chg. Price                                 Chg.                      Chg.
  Ticker       Rating Y/N 01/11/11                   2010E       Y/N     2011E             Y/N        Curr           Prior

 Railroads
     CSX          2V        N       $68.00           $4.01         Y          $4.79          Y       $75-77         $59-64
    GWR           1V        N        52.90             2.11        N           2.65          N       $56-58           NC
     KSU          1V        N         51.43           1.77         N           2.71          Y       $59-66         $51-53
     NSC          2         N        64.96            3.94         Y           4.54          Y       $74-77         $62-67
      RA          1V        N        13.05            0.54         N           0.79          N       $15-16           NC
     UNP          1         N        97.47            5.45         Y           6.41          Y      $107-115        $95-101

Source: Company data and Wells Fargo Securities, LLC estimates 1= Outperform, 2 = Market Perform, 3 = Underperform, V = Volatile
          = Company is on the Priority Stock List NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful




• SUMMARY: We are raising the Q4 2010 and 2011 EPS estimates for our Rail
  universe, and raising our Valuation Ranges for CSX, KSU, NSC and UNP as we
  roll to our 2011E EV/EBITDA and 2012E P/E basis multiples. We have no ratings
  changes at this time and look for modestly better entry points on CSX and NSC,
  all else being equal. That being said, we nonetheless find the group attractive. We
  note the group is trading at roughly the same 1-year forward P/E multiple as
  compared to the same year-ago period, yet we feel we currently have better
  Volume Visibility (autos, agriculture, coal, intermodal, etc.). Also appealing to us
  is the rails' proven ability to raise prices above cost inflation. We think Pricing
  Power may be a stand-out feature vs. other industrials that may face commodity
  cost pressures in 2H11. Lastly, we see record earnings levels supporting continued
  Capital Returns (dividends and share repurchases) despite rising Capex. We raise
  our Q4 2010 and 2011 EPS forecasts as follows: CSX (Q4E to $1.08 from $1.02
  and 2011E to $4.79 from $4.56); KSU (Q4E unchanged but 2011E to $2.71 from
  $2.67); NSC (Q4E to $1.01 from $0.97 and 2011E to $4.54 from $4.44); UNP
  (Q4E to $1.48 from $1.42 and 2011E to $6.41 from $6.31). On 12/21 we raised our
  Q4E and 2011E for KSU. On 12/23 we raised our Q4Eand 2011E for GWR and RA.
• VOLUME VISIBILITY: While domestic economic activity is not expected to be as
  strong as prior corresponding phases of a market recovery, it is nonetheless
  expected to be positive. We point to encouraging forecasts for auto production,
  agriculture harvests, personal consumption, and industrial production.
• PRICING POWER: Even while navigating the sharp downturn in 2009, the rails
  in our universe were able to increase core pricing by ~6%. Similar gains in 2010
  give us confidence that the rails will continue to price above rail-cost inflation into
  2012. With commodity inflation potentially creating cost headwinds for other
  Industrials in 2011, we feel the Rails’ relative insulation provides certain appeal.
• CAPITAL RETURNS: In 2011, due in part to growth initiatives and Positive Train
  Control spend, CAPEX should approach or breach the prior peak levels of 2008.
  However, operating earnings are expected to be 21% higher suggesting increased
  cash flow to support modest dividend increases and share repurchases.
• RISKS: In addition to potentially being wrong about the pace of the domestic
                                                                                                                                   Anthony P. Gallo, CFA, Senior Analyst
  recovery/expansion, we think the risks to our forecasts could stem from material                                                                       (4 10) 625- 631 9 /
  changes in fuel prices or increased regulatory actions. Lastly, emerging market                                                        ant hon y. ga llo @wa c ho vi a. co m
  tightening could curtail demand for certain export commodities in H2 2011.                                                          Michael Busche, Associate Analyst
                                                                                                                                                         (4 4 3) 2 6 3- 6 57 9 /
                                                                                                                                       mi chae l. bu sche@ wa c ho vi a. com
Please see page 16 for rating definitions, important disclosures and
required analyst certifications
Wells Fargo Securities, LLC does and seeks to do business with companies
covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of the
report and investors should consider this report as only a single factor in
making their investment decision.
                                                                                                                                                            WELLS FARGO SECURITIES, LLC
Transportation                                                                                                                                             EQUITY RESEARCH DEPARTMENT

Summary
We have held the view that productivity-inspired cost savings coupled with a modest recovery in volume would
lead to attractive, sustainable earnings growth for the Railroad sector. We continue to hold that view, and
believe 2009 and 2010 results confirm our thesis. For example, the Class 1 Rails in our universe should finish
2010 with ~50% Operating Income growth on ~13% average carload growth. Further, we note that through Q3
2010, our Rails generated 31% more Operating Income than the comparable pre-recession period of 2007 on
Carload volume that averaged 10% below that prior peak.

We think performance during the downturn was impressive and that the productivity inspired
costs savings are sustainable. Through Q3 2010, the Class 1 Railroads in our universe generated
over 31% more Operating Income than the same period in 2007 but on 10% fewer carloads.
                                                                               Rail Historical Quarterly Operating Ratios
                      95%                                                                                                                                                           $5.00


                      90%
                                                                                                                                                                                    $4.00




                                                                                                                                                                                                   Diesel Price $ USD
 Operating Ratio %




                      85%


                      80%                                                                                                                                                           $3.00


                      75%
                                                                                                                                                                                    $2.00
                      70%


                      65%                                                                                                                                                           $1.00
                                   Q106   Q206   Q306   Q406   Q107   Q207    Q307        Q407    Q108   Q208   Q308     Q408     Q109   Q209   Q309    Q409   Q110   Q210   Q310

                                                                      Diesel Fuel Price          CSX     KSU      NSC           UNP      GWR       RA
                Source: Company filings, EIA



                                                                                                 US Rail Carloads
                                600,000                                                                                                                                        30%


                                550,000                                                                                                                                        20%


                                500,000                                                                                                                                        10%




                                                                                                                                                                                      Y/Y change
                     Carloads




                                450,000                                                                                                                                        0%


                                400,000                                                                                                                                        -10%


                                350,000                                                                                                                                        -20%


                                300,000                                                                                                                                        -30%
                                      Jan-08 Mar-08 May-08 Jul-08     Oct-08 Dec-08 Feb-09 May-09 Jul-09 Sep-09 Dec-09 Feb-10 Apr-10 Jun-10 Sep-10 Nov-10


                                                                                                   Y/Y change          Carloads
                     Source: AAR


Looking ahead to 2011 and 2012, we see three primary factors further supporting our favorable view on the
group. First, we feel that we have much better VOLUME VISIBILITY beginning 2011 than we did in the year-
ago period. Looking back, the recovery seemed to be a bit more pinned on “hope” than on confidence.
Conversely, and in no way discounting the headwinds from high debt-to-GDP advanced economies, or
monetary tightening in emerging markets, today we find much more stability. Utilizing the work of our
Economics, Energy, and Automotive groups and in the case of agriculture, the USDA, we find modest yet
encouraging growth forecasts, particularly for auto production and industrial production. Our own research
suggests attractive Intermodal growth in the mid-to-upper-single-digit range. Despite this favorable backdrop
versus the year-ago period, the Rails are trading at only a modest premium based on 1-year forward multiples.

Secondly, we believe the PRICING POWER of the Rails may be particularly appealing in 2011 relative to other
Industrials that could face higher input/commodity costs. We note that while navigating the sharp downturn
in 2009, the rails in our universe were able to increase core pricing by ~6%. Moreover, due to our Rails (except
UNP) largely re-pricing below-market legacy contracts, we believe the outlook for pricing remains attractive.
Unlike peers, UNP still has approximately $2 billion of its 2010E $16.9 billion in revenue under legacy
contracts that can be revisited over the next few years.




2
                                                                                        WELLS FARGO SECURITIES, LLC
Rails: Raising Estimates And Valuation Ranges                                          EQUITY RESEARCH DEPARTMENT

Lastly, we believe the Rails will be in a favorable cash position promoting CAPITAL RETURNS to shareholders
via modest dividend increases and share repurchases even in the face of rising capital expenditures which
include increased Positive Train Control (PTC) spend. In 2011, we expect capital expenditures for the industry
to approach or breach the prior record levels of 2008. Nonetheless, operating earnings in 2011 are expected to
be roughly 21% higher than that same period suggesting available cash flow. We do not believe this cash flow
will be directed to debt repayment among the Class 1 Rails as we sense that managers are comfortable with the
current capital/leverage structure. The one Class 1 exception is KSU where additional debt retirement is
possible. Likewise, we feel the Regional Railroads GWR and RA have the ability to reduce their debt exposure
in 2012. Importantly, we think higher earnings can offset the PTC spend. PTC is expected to cost CSX, NSC,
and UNP a combined $3.3 billion through 2015 (compared to $27.5 billion in capital expenditures over the
previous five years), and provide little in the way of operational benefits, in our view.

Risks

In addition to potentially being wrong about the pace of the domestic recovery/expansion, we think the risks to
our forecasts could stem from material changes in fuel prices. We have assumed ~5% fuel cost headwinds in
2011. Our wage and benefit expense growth assumption (3.5% on average) could also prove to be too low.

We believe the November 2010 election results and specifically the change in the House Transportation and
Infrastructure Committee Chairmanship have greatly diminished the perceived legislative risk. However, there
remains a risk (we think quite small) that the STB could take actions to broaden its authority over additional
types of freight or modify certain cargo categories which are currently exempt from its rate regulations. Public
hearings, which were originally scheduled for early-December then rescheduled for January, are now in May.

Lastly, emerging market economies present a somewhat mixed bag for the Rails in 2011, in our view. While
Rail revenue is predominately domestic, there are export markets for coal, agriculture products, and certain
metals, among other things. Over the near term, severe flooding in Australia appears to be improving the
prospects for increased metallurgic and thermal coal exports for the eastern rails. Our sense is that NSC has
more available terminal capacity as compared to CSX if there was to be a sustained increase in export demand,
although we believe both are currently participating in serving the incremental demand. We think the
quarterly incremental volume run-rate, due to Australian coal disruption, lies between 1.2-1.9
million tons, which compares favorably to the 6-7 million tons per quarter of export coal that
CSX and NSX each typically handle. Export tonnage represents 17% and 14% of CSX and NSC total coal
tonnage, respectively. Near-term worldwide crop challenges could provide boosts for both the West coast and
East coast/Gulf coast agricultural exports. Conversely, credit tightening in emerging markets could ultimately
curtail demand if economic growth is hampered in H2 2011.

VOLUME VISIBILITY - Q4 2010 Estimate Revisions and 2011 Outlook

Carload volume finished the year modestly ahead of our expectations. While we think fuel created a modest
headwind in Q4 2010 (diesel prices up ~7% Q/Q) our belief is that core pricing trends remained on track while
cost escalators, fuel surcharge programs, and efficiency gains offset much of the increase. We believe labor
expense will be tame in light of productivity gains and modest employment reductions. During Q4, according
to STB reports, the Class 1s on average reduced track maintenance crews as well as train and engine workers.
We did observe modest employment growth at NSC and KSU. Our estimate revisions are as follows:

CSX: Q4E 2010 goes to $1.08 from $1.02 (Street at $1.08) and 2011E goes to $4.79 from $4.56 (Street at
$4.76). We are establishing our 2012E at $5.50 as compared to the Street at $5.44.

GWR: On 12/23 we raised our Q4E 2010 to $0.70 from $0.45 (Street at $0.45) and 2011E to $2.65 from $2.40
(Street at $2.61). We established our 2012E at $2.90 as compared to the Street at $2.95.

KSU: On 12/21 we raised our Q4E 2010 to $0.60 from $0.56 (Street at $0.56). We now raise our 2011E to
$2.71 from $2.67 (Street at $2.65). We are establishing our 2012E at $3.29 as compared to the Street at $3.28.

NSC: Q4E 2010 goes to $1.01 from $0.97 (Street at $1.05) and 2011E goes to $4.54 from $4.44 (Street at
$4.63). We are establishing our 2012E at $5.29 as compared to the Street at $5.33.

RA: On 12/23 we raised our Q4E 2010 to $0.28 from $0.10 (Street at $0.10) and our 2011E to $.079 from
$0.66 (Street at $0.64). We also established our 2012E at $0.86 as compared to the Street at $0.82.

UNP: Q4E 2010 goes to $1.48 from $1.42 (Street at $1.47) and 2011E goes to $6.41 from $6.31 (Street at
$6.40). We are establishing our 2012E at $7.64 as compared to the Street at $7.68.




                                                                                                                   3
                                                                                                                                                                                             WELLS FARGO SECURITIES, LLC
Transportation                                                                                                                                                                              EQUITY RESEARCH DEPARTMENT

                                                                                                                                                           Estimates

December 31, FYE                                                                                        Consensus Street Estimates                                            Wells Fargo Securities, LLC Estimates

                                                          Company                           FQ4 2010E        FY 2010 E       FY 2011 E            FY 2012 E            FQ4 2010 E           FY 2010 E     FY 2011 E     FY 2012 E


Railroads

CSX Corp.                                                                                       $1.08           $4.03              $4.76               $5.44                  $1.08            $4.01         $4.79                                          $5.50

Genesee & Wyoming Inc.                                                                          $0.45           $1.83              $2.61               $2.95                  $0.70            $2.11         $2.65                                          $2.90

Kansas City Southern                                                                            $0.56           $2.01              $2.65               $3.28                  $0.60            $1.77         $2.71                                          $3.29

Norfolk Southern Corp.                                                                          $1.05           $4.00              $4.63               $5.33                  $1.01            $3.94         $4.54                                          $5.29

RailAmerica, Inc.                                                                               $0.10           $0.36              $0.64               $0.82                  $0.28            $0.54         $0.79                                          $0.86

Union Pacific Corporation                                                                       $1.47           $5.46              $6.40               $7.68                  $1.48            $5.45         $6.41                                          $7.64

Canadian National Railway Company*                                                              $1.08           $4.19              $4.65               $5.25              NE                   NE            NE                                             NE
                            *Note: Estimate data is consensus median (source: Capital IQ); Wells Fargo Securities, LLC does not provide estimates

                            Source: Capital IQ, Company Filings, and Wells Fargo Securities, LLC Estimates
                            Note: RA Estimates Adjusted for Non-cash swap amortization expense



Behind our 2011 and 2012 estimates are the following assumptions;
    •   GDP growth of 2.6% in 2011 and 3.3% in 2012,
    •   Light Vehicles Sales of 12.6 million in 2011 and 13.5 million in 2012,
    •   Industrial Production growth of 2.2% in 2011 and 4.4% in 2012,
    •   Harvested acreage (8 major crops) of 225 million in 2011 (vs. 226 2010E) and 225 million in 2012,
    •   Housing Starts of 770,000 in 2011 and 900,000 in 2012,
    •   CSX, NSC and UNP carload growth of 3.9-5.3% in 2011 and 4.4-4.8% in 2012,
    •   CSX, NSC and UNP Revenue per Unit increases of 3.6-4.2% in 2011 and 3.1-5.0% in 2012.

We expect higher coal volumes in 2011 and 2012 on increased domestic usage and elevated
export volumes.

                                                                                                     US Electric Power Coal Stocks
                                                220,000


                                                200,000
                           Short Tons (000's)




                                                180,000


                                                160,000


                                                140,000


                                                120,000
                                                            Jan         Feb           Mar       Apr           May          Jun           Jul           Aug              Sep           Oct           Nov     Dec


              Source: EIA                                                                                       2007         2008              2009             2010



Extraordinarily high stockpiles created headwinds for CSX and NSC in H1 2010.
                                                                                                      Coal Carloads vs. Coal Stockpiles
                                     650                                                                                                                                                                      650,000

                                     600
                                                                                                                                                                                                                        Coal Stocks (Short tons in 000's)




                                                                                                                                                                                                              600,000
Coal Carloads (in 000's)




                                     550
                                                                                                                                                                                                              550,000
                                     500
                                                                                                                                                                                                              500,000
                                     450

                                                                                                                                                                                                              450,000
                                     400

                                     350                                                                                                                                                                      400,000


                                     300                                                                                                                                                                      350,000
                                                   Q107   Q207   Q307   Q407   Q108    Q208   Q308    Q408   Q109   Q209    Q309       Q409    Q110    Q210      Q310 Q410E Q111E Q211E Q311E Q411E

           Source: Company Reports and EIA                                                             CSX          NSC          UNP          Coal Stockpiles




4
                                                                                                                                                                             WELLS FARGO SECURITIES, LLC
Rails: Raising Estimates And Valuation Ranges                                                                                                                               EQUITY RESEARCH DEPARTMENT

Given our Valuation Range and estimate revisions, we continue to favor UNP among the large-cap rails.
Furthermore, CSX is our preference in the East but we look for a better entry point on the shares, all else equal.

As it relates to CSX vs. NSC, we are particularly impressed with the Operating Income growth that CSX has
achieved even as carload recovery has lagged. In our opinion, as CSX volumes continue to recover, the
intermediate term earnings picture becomes much more interesting. Further, we believe that a number of NSC
margin initiatives will not be realized until 2H2011-2012 whereas we believe CSX will continue to achieve
margin gains over the near-term.

Among the smaller capitalization names, our favorite remains KSU where we see above-peer revenue growth
opportunities (cross-border trade, new intermodal markets, Port of Lázaro Cardenas), as well as an emerging
margin story.

Please see the end of this report for additional Valuation Range details and risks.

                                                                        Enterprise Value LTM Multiples                Q3 EPS Comparison                                               Valuation

USD $ in millions except per share data                                                                                                       Y/Y      FY '11E              Current    Basis      3-5 yr
December 31, FYE                                                    Share price @                     Enterprise     Q4'09       Q4'10        %         EV/      FY 2012E   FY '12E   FY '12E Est. EPS     P/E to    Valuation
                          Company                      Ticker         1/11/2011         Market Cap      Value        EPS A       EPS E      Change     EBITDA      EPS       P/E       P/E      Growth     Growth     Range

Railroads
CSX Corp.                                             CSX                      $68.00     $25,445        32,684       $0.77      $1.08        41%         7.6x     $5.50     12.4x     14.0x        13%      1.12   $75 - $77
Genesee & Wyoming Inc.                                GWR                      $52.90        2,194        2,438       $0.44      $0.70        59%        10.0x     $2.90     18.2x     20.0x        17%      1.18   $56 - $58
Kansas City Southern                                  KSU                      $51.43        5,277        7,131       $0.33      $0.60        80%         9.2x     $3.29     15.6x     20.0x        20%      1.00   $59 - $66
Norfolk Southern Corp.                                NSC                      $64.96       23,605       29,315       $0.82      $1.01        24%         7.4x     $5.29     12.3x     14.0x        13%      1.12   $74 - $77
RailAmerica, Inc.                                     RA                       $13.05         716         1,176      ($0.24)     $0.28            NM      7.2x     $0.86     15.2x     17.0x        17%      1.00   $15 - $16
Union Pacific Corporation                             UNP                      $97.47       48,067       56,428       $1.07      $1.48        38%         7.9x     $7.64     12.8x     15.0x        15%      1.00   $107 - $115

Rail Average                                                                              $17,551      $21,528        $0.53      $0.86        48%         8.2x     $4.25     14.4x     16.7x      15.7%      1.07   $64    $68

Rail Median                                                                               $14,441      $18,223        $0.61      $0.86        41%         7.7x     $4.29     14.0x     16.0x      16.0%      1.06   $67    $71
          Source: Company Filings, Capital IQ & Wells Fargo Securities LLC, Estimates
          *Note: Estimate data is consensus median estimates (source: Capital IQ); Wells Fargo Securities, LLC does not provide estimates
          Note: RA Estimates Adjusted for Non-cash swap amortization expense




PRICING POWER
In our view, the Rails will continue to price above rail-cost inflation, particularly as other
transportation modes are expected to remain capacity constrained over the intermediate term.
Likewise, we believe the pricing gains achieved during the 2009 downturn exemplify the
industry’s pricing discipline.

                                                                                                     Core Pricing Change
                      10.0%
 Y/Y pricing change




                      8.0%



                      6.0%


                      4.0%

                                                                                              UNP          CSX             NSC              BNI
                      2.0%
                              Q1 07       Q2 07          Q3 07         Q4 07        Q1 08     Q2 08      Q3 08      Q4 08        Q1 09       Q2 09      Q3 09      Q4 09     Q1 10      Q2 10      Q3 10


        Source: Company filings, Wells Fargo Securities, LLC estimates



CAPITAL RETURNS

Through our 2012 forecast, we believe the Rails will be in a favorable position to modestly increase dividends
and share repurchases notwithstanding an increased maintenance and growth capital expenditures spend.
More specifically, we think the higher sustainable earnings will be sufficient to offset the negative effects of the
PTC spending. PTC is expected to cost CSX, NSC and UNP a combined $3.3 billion through 2015 and provide
little in the way of operational benefits, in our view. As a reference point, these three Railroads incurred $27.5
billion in capital expenditures over the last five years and paid $5.5 billion in common dividends.




                                                                                                                                                                                                                                  5
                                                                                                                       WELLS FARGO SECURITIES, LLC
Transportation                                                                                                        EQUITY RESEARCH DEPARTMENT

In 2011, we expect capital expenditures for the industry to approach the prior record levels of 2008. However,
operating earnings in 2011 are on average expected to be 21% higher (CSX +21%, NSC +3% and UNP +39%)
over the same corresponding time period suggesting available cash flow.

We do not believe higher cash flow will be directed to debt repayment among the Class 1 Rails as we sense that
managers are comfortable with current capital structures. One Class 1 exception is KSU where additional debt
retirement is possible. Likewise, we think GWR and RA may have the ability to reduce their debt exposure.

Capex in 2011 is expected to reach or breach the previous peak level of 2008 although 25-35% of
these expenditures likely will be growth oriented. We believe earnings growth will be sufficient
to cover these expenditures. For UNP (the only Rail to share 2011E Capex plans at this point),
perhaps 30-35% of expenditures will be for growth with roughly another 5% towards PTC.

                                                                Capital Expenditures
                        $3,500

                        $3,000

                        $2,500
    USD in millions




                        $2,000

                        $1,500

                        $1,000

                         $500

                           $0
                                    FY 2006     FY 2007          FY 2008                   FY 2009         FY 2010E          FY 2011E
               Source: Capital IQ                                   CSX    KSU    NSC      UNP




                                                                 Share Repurchase
                        $2,500



                        $2,000
      USD in millions




                        $1,500



                        $1,000



                          $500



                            $0
                                      FY 2006         FY 2007               FY 2008                  FY 2009              FY 2010 YTD
               Source: Capital IQ                                    CSX   NSC    UNP




                                                                  Dividends Paid
                        $600


                        $500
    USD in millions




                        $400


                        $300


                        $200


                        $100


                          $0
                                    FY 2006          FY 2007               FY 2008                   FY 2009              FY 2010 YTD
               Source: Capital IQ                                    CSX    NSC      UNP




6
                                                                                                                                                                                         WELLS FARGO SECURITIES, LLC
Rails: Raising Estimates And Valuation Ranges                                                                                                                                           EQUITY RESEARCH DEPARTMENT

In Q3 2010, UNP generated 40% more Operating Income than the pre-recession Q3 2007
period but on 8% fewer carloads.
                                                                                                             UNP Carloads vs. EBIT
                                                              2,522
                                     2,600                                                                                                                                                                         $1,600

                                                                                             2,398
                                     2,400                                                                                                                                                                         $1,400
         Quarterly Carloads ('000)




                                                                                                                                                                                                  2,427




                                                                                                                                                                                                                                                     Quarterly EBIT 000's
                                                                                                                                                                2,316
                                     2,200                                                                                                                                                                         $1,200
                                                                                                                               2,035

                                     2,000                                                                                                                                                                         $1,000


                                     1,800                                                                                                                                                                         $800


                                     1,600                                                                                                                                                                         $600


                                     1,400                                                                                                                                                                         $400
                                              Q107    Q207    Q307    Q407    Q108   Q208    Q308    Q408   Q109     Q209       Q309      Q409   Q110   Q210    Q310    Q410E Q111E Q211E Q311E Q411E


 Source: Company Reports and Wells Fargo Securities, LLC Estimates                                     Cars/Units (thousands)           EBIT ($mm)



In Q3 2010, KSU generated 18% more Operating Income than the pre-recession Q3 2007 period
but on 2% fewer carloads (39% higher excluding the cost of Hurricane Alex).
                                                                                                            KSU Carloads vs. EBIT
                                      600                                                                                                                                                                         $160




                                                                                                                                                                                                                               Quarterly EBIT 000's
                                      500                                                                                                                                                                         $120
                                                                                                                                                                                                502
              Carloads 000's




                                                                                             472

                                      400                      428                                                                                             423                                                $80

                                                                                                                               371

                                      300                                                                                                                                                                         $40



                                      200                                                                                                                                                                         $0
                                              Q107    Q207    Q307     Q407   Q108   Q208    Q308    Q408   Q109     Q209      Q309      Q409    Q110   Q210   Q310 Q410E Q111E Q211E Q311E Q411E

                                                                                                                    EBIT         Carloads
 Source: Company Reports and Wells Fargo Securities, LLC Estimates


In Q3 2010, CSX generated 48% more Operating Income than the pre-recession Q3 2007 period
but on 9% fewer carloads.
                                                                                                             CSX Carloads vs. EBIT

                                     2,000                                                                                                                                                                        1,000




                                     1,800                                                                                                                                                                        800


                                                                                                                                                                                                                          Quarterly EBIT 000's
                                                              1,773                                                                                                                             1,673
      Carloads 000's




                                                                                             1,732

                                     1,600                                                                                                                                                                        600
                                                                                                                                                               1,609
                                                                                                                               1,466


                                     1,400                                                                                                                                                                        400




                                     1,200                                                                                                                                                                        200
                                              Q107    Q207    Q307    Q407    Q108   Q208    Q308    Q408   Q109     Q209      Q309      Q409    Q110   Q210   Q310     Q410E   Q111E   Q211E   Q311E     Q411E


                                                                                                                   Carloads       EBIT
 Source: Company Reports and Wells Fargo Securities, LLC Estimates



In Q3 2010, NSC generated 10% more Operating Income than the pre-recession Q3 2007 period
but on 8% fewer carloads.

                                                                                                             NSC Carloads vs. EBIT
                           2,000                                                                                                                                                                                   $1,000
                                                             1,909                          1,895
                                                                                                                                                                                                1,851

                           1,800                                                                                                                               1,753                                               $800
                                                                                                                                                                                                                                                 Quarterly EBIT 000's
 Carloads 000's




                           1,600                                                                                                                                                                                   $600
                                                                                                                              1,522



                           1,400                                                                                                                                                                                   $400




                           1,200                                                                                                                                                                                   $200
                                             Q107    Q207    Q307     Q407    Q108   Q208   Q308     Q408   Q109    Q209       Q309      Q409    Q110   Q210   Q310     Q410E Q111E Q211E Q311E Q411E

                                                                                                                    Carloads           EBIT
 Source: Company Reports and Wells Fargo Securities, LLC Estimates




                                                                                                                                                                                                                                                                            7
                                                                                                                                                                                                WELLS FARGO SECURITIES, LLC
Transportation                                                                                                                                                                                 EQUITY RESEARCH DEPARTMENT

Supporting Charts

We think Rail valuations are generally attractive, particularly in the context of elevated
expectations for Industrial Production in 2011 and 2012.

                                      1-yr Median 15.5x                                          Rail Index vs. Industrial Production                                                                    2-yr Median 13.0x


                           16.8x                              16.9x
                   17.0x                      16.6x                                                                                       16.4x                                                        16.5x                   105.00
                                                                      16.0x                           16.0x     15.9x                                                                  15.7x
                                                                                                                                                   15.2x                                       15.2x                   15.3x
                                    14.8x             15.0x                                                                       14.8x                                                                        14.8x
                                                                              14.6x           14.4x
                   15.0x                                                                                                                                                                                                       100.00
                                                                                                                          13.9x




                                                                                                                                                                                                                                        Industrial Production
                                                              14.7x                   13.2x                                                                                    13.1x
                           13.9x                                                                                                          14.0x                                                        14.0x
                                                                      13.8x
    P/E Multiple




                   13.0x                      13.6x                                                   13.7x     13.7x                                                                                                          95.00
                                                                                                                                                                                       13.2x                           13.4x
                                                      13.0x                                                                                        13.0x                                       12.9x
                                                                              12.7x                                               12.7x                                                                        12.5x
                                    12.4x                                                     12.5x
                   11.0x                                                              11.6x                               11.8x                                                                                                90.00
                                                                                                                                                                     9.9x      11.4x
                                                                                                                                                            9.7x


                    9.0x                                                                                                                                                                                                       85.00
                                                                                                                                                                     8.7x
                                                                                                                                                            8.5x
                    7.0x                                                                                                                                                                                                       80.00
                            1Q        2Q       3Q      4Q      1Q      2Q      3Q      4Q       1Q     2Q        3Q        4Q      1Q      2Q       3Q       4Q       1Q        2Q      3Q      4Q      1Q      2Q      3Q
                           2005      2005     2005    2005    2006    2006    2006    2006     2007   2007      2007      2007    2008    2008     2008     2008     2009      2009    2009    2009    2010    2010    2010

    Source: Capital IQ
                                                                                              1yr Forward EPS           2yr Forward EPS      Industrial Production
    Note: Rail index includes: CSX, NSC, TSX:CNR, UNP




We believe revenue mix is important for the Rails. While we find less coal concentration at
UNP appealing versus peers, we note that CSX, in particular, has been able to generate record
profits despite coal revenue running below prior peaks. We are generally positive on coal over
our 6-12 month investment horizon but looking over the intermediate term, we hold concerns
about growth prospects (coal-fired utility plant retirements, environmental headwinds).

                                     CSX 2010E Revenue by Commodity                                                                                  NSC 2010E Revenue by Commodity

                                  Automotive                                             Coal                                                              Coal
                                      7%                                                 31%                                                               28%
                                      Other
                                       2%                                                                                                         Automotive
                               Food &                                                                                                                 8%
                                                                                              Intermodal
                              Consumer
                                                                                                 12%                                                                                                           Intermodal
                                 2%
                                                                                                                                                       Paper                                                      19%
                                   Phosphates
                                      4%                                                                                                                7%

                                            Metals
                                             5%
                                                                                        Chemicals
                                                                                                                                                           Chemicals                                    Ag/Consumer/
                                                                                          15%
                                            Agricultural                                                                                                     14%                                            Gov't
                                             Products Forest Products Emerging                                                                                                      Metals &                14%
                                               10%          6%         Markets                                                                                                    Construction
                                                                        6%                                                                                                           10%




                                     KSU 2010E Revenue by Commodity                                                                                  UNP 2010E Revenue by Commodity
                                                                                                                                                            Agricultural                       Automotive
                                      Chemical and                                                                                                                                                 8%
                                                                                                                                                               19%
                                       Petroleum
                                          21%

                                                                                         Industrial and                                                                                                   Chemicals
                                                                                           Consumer                                                                                                         15%
                                        Coal                                                 23%
                                        14%

                                                                                                                                             Intermodal
                                                                                                                                                20%
                                  Automotive
                                      6%

                                                                                                                                                                                                       Energy
                                        Intermodal                                                                                                                                                      22%
                                           11%                                Agricultural and                                                                    Industrial
                                                                                  Minerals                                                                         Products
                                                                                   25%                                                                               16%


Source : Company Reports & Wells Fargo Securities, LLC Estimates




8
                                                                                                                                                                                              WELLS FARGO SECURITIES, LLC
Rails: Raising Estimates And Valuation Ranges                                                                                                                                                EQUITY RESEARCH DEPARTMENT

We note that CSX’s Operating Ratio was ~500 basis points lower in Q2/Q3 2010 vs. the same
period in 2008 when coal revenue was at comparable levels. Being that coal comprises
approximately 31% of the revenue mix, we see this is an impressive achievement.

                                                                                              Coal Revenue vs. Operating Ratio

                        $900                                                                                                                                                                                            82.0%

                                                                                                                                                                                                                        80.0%
                               80.0%
                                                                                                                                                                                                                        78.0%
                        $800
                                               77.7%
                                                                         76.9%                                              76.8%                                                                                       76.0%
    $ USD in Millions




                                                            76.5%




                                                                                                                                                                                                                                Operating Ratio
                                       75.8%
                                                                                      75.3%         75.2%                                                                                                               74.0%
                                                                                                                                                                  74.9%      74.5%
                                                                                                              74.1%                                    73.9%
                        $700                                                                                                              73.4%                                                                         72.0%

                                                                                                                                                                                       71.2%
                                                                                                                                                                                                              70.7%
                                                                                                                                                                                                                        70.0%

                                                                                                                                                                                                   69.1%                68.0%
                        $600
                                                                                                                                                                                                                        66.0%

                                                                                                                                                                                                                        64.0%
                               $633    $638    $649         $683         $762         $824          $850      $849          $744          $662         $680       $641       $736      $835        $835       $819
                        $500                                                                                                                                                                                            62.0%
                               Q107    Q207    Q307         Q407         Q108         Q208          Q308          Q408      Q109          Q209          Q309      Q409       Q110       Q210       Q310      Q410E

  Source: Company Filings & Wells Fargo Securities, LLC Estimates                                    Coal Revenue                Operating Ratio



CSX Corp.                                      Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010

Coal
  Revenue (USD in millions)                       $633         $638         $649         $683          $762              $824          $850          $849       $744       $662       $680       $641       $736        $835             $835
  Carloads (in 000's)                             462              466          465          469            463           477           468           471       431        375        382         365        373         401                      392
  Revenue per Unit (USD)                        $1,370       $1,369       $1,396        $1,456        $1,646        $1,727        $1,816        $1,803      $1,726     $1,765       $1,780      $1,756     $1,973     $2,082    $2,130

Coal Tonnage (Tons in 000's)
Domestic
  Utility                                         38.3         38.6         38.3             37.9          36.7          36.5          37.2          38.4       37.0       32.6       31.4        28.8       29.8       30.5                30.2
  Other                                               4.8          5.2          5.1           4.7           3.9           4.6           4.4           4.1        2.7        3.0        3.9         3.9        2.5        3.9                       4.2
Sub-total Domestic                                43.1         43.8         43.4             42.6          40.6          41.1          41.6          42.5       39.7       35.6       35.3        32.7       32.3       34.4                34.4
Export                                                4.7          4.2          4.7           6.3           7.6           8.4           6.9           7.1        6.1        4.8        5.5         6.1        7.4        8.0                       6.6
Coke & Iron Ore                                                                               1.9           1.9           2.3           2.3           1.9        1.2        1.3        1.6         1.7        1.7        2.1                       2.3
Total                                             47.8         48.0         48.1             50.8          50.1          51.8          50.8          51.5       47.0       41.7       42.4        40.5       41.4       44.5                43.3


Source: Company Filings                          -1.8%        1.1%         -0.6%         0.6%          4.8%          7.9%              5.6%          1.4%     -6.2%    -19.5%     -16.5%      -21.4%      -11.9%       6.7%            2.1%



In our view, NSC’s margins appear to remain somewhat dependent on coal revenue.

                                                                                        NSC - Coal Revenue vs. Operating Ratio
                        $900                                                                                                                                                                                             85.0%



                        $800                                                                                                                                                                                             80.0%
                                                                                                                                80.3%
   $ USD in Millions




                                                                                                                                                                                                                                     Operating Ratio

                                                                         76.9%
                        $700   76.5%                                                                                                                                                                                     75.0%
                                                                                                                                          74.8%                               75.2%
                                                                                                                                                                   73.9%
                                                                                                                                                        72.8%
                                                            72.0%
                        $600           71.0%   71.1%                                  71.1%                                                                                                                              70.0%
                                                                                                                                                                                                               70.8%
                                                                                                                                                                                        69.8%       69.6%
                                                                                                    69.1%
                                                                                                                  67.5%
                        $500                                                                                                                                                                                             65.0%


                               $557    $579    $578         $601         $662         $775          $876          $798          $602          $511      $571       $580       $629       $696       $709       $711
                        $400                                                                                                                                                                                             60.0%
                               Q107    Q207    Q307         Q407         Q108         Q208          Q308          Q408          Q109      Q209          Q309       Q409       Q110      Q210        Q310      Q410E


  Source: Company reports & Wells Fargo Securities, LLC estimates                                    Coal Revenue                Operating Ratio


Norfolk Southern Corp.                         Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010

Coal
  Revenue (USD in millions)                       $557         $579         $578         $601          $662              $775          $876          $798       $602       $511       $571       $580       $629        $696             $709
  Carloads (in 000's)                            420.2        434.6        427.3         417.3              427           448           451           440       381        332        351         355        364         394                      403
  Revenue per Unit (USD)                        $1,326       $1,332       $1,353        $1,440        $1,550        $1,730        $1,942        $1,814      $1,580     $1,539       $1,627      $1,634     $1,728     $1,765    $1,762

Coal Tonnage (Tons in 000's)
Domestic
  Utility                                         36.2         36.0         35.6             35.0          35.6          36.1          35.9          36.9       33.4       30.6       29.1        27.2       28.0       29.6                31.6
  Other                                               3.6          5.1          4.9           4.3           3.5           4.7           5.4           4.7        2.6        2.4        3.2         3.6        4.1        5.2                       5.5
Sub-total Domestic                                39.8         41.0         40.4             39.3          39.1          40.8          41.3          41.5       36.0       33.0       32.4        30.8       32.1       34.8                37.1
Export                                                3.5          3.8          4.1           4.2           5.8           6.2           6.3           4.8        4.4        2.4        4.8         6.3        6.0        6.4                       5.2
Industrial                                            2.4          2.7          2.4           2.4           1.9           2.3           2.3           2.1        1.8        1.8        1.9         1.9        1.8        2.0                       1.9
Total                                             45.8         47.5         46.8             45.9          46.8          49.3          49.9          48.5       42.2       37.2       39.1        39.1       39.9       43.2                44.2


Source: Company Filings                          -2.5%        -2.1%        -1.0%        -4.0%          2.3%          3.8%              6.4%          5.7%     -9.8%    -24.6%     -21.7%      -19.4%        -5.5%      16.3%    13.1%




                                                                                                                                                                                                                                                         9
                                                                                                                            WELLS FARGO SECURITIES, LLC
Transportation                                                                                                             EQUITY RESEARCH DEPARTMENT

Carload Charts

                                                                      CSX Total Carloads
                                                                                                        Q3 '08 EBIT
     160,000                                                                                                                                       160,000
                                                                                                         $733 mm



     140,000                                                                                            Q3 '10 EBIT                                140,000
                                                                                                         $825 mm


     120,000                                                                                                                                       120,000

                                                                                                        Q3 '09 EBIT
                                                                                                         $594 mm
     100,000                                                                                                                                       100,000


                                                                                                           YTD Carload                   9.3%
      80,000                                                                                                                                       80,000
                                                                                                           YTD Intermodal              17.7%
                                       2008        2009        2010
                                                                                                           YTD Other                     5.3%
      60,000                                                                                                                                       60,000
               Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week
                1    3    5    7    9    11   13   15   17   19   21   23   25   27   29   31   33   35   37   39   41   43   45   47   49   51

       Source: AAR




                                                                      NSC Total Carloads
     160,000                                                                                                                                        160,000
                                                                                                        Q3 '08 EBIT
                                                                                                         $894 mm


     140,000                                                                                                                                        140,000


                                                                                                        Q3 '10 EBIT
                                                                                                         $746 mm
     120,000                                                                                                                                        120,000
                                                                                                        Q3 '09 EBIT
                                                                                                         $562 mm

     100,000                                                                                               YTD Carload                 13.8%        100,000

                                                                                                           YTD Intermodal              15.8%
                                       2008        2009        2010
                                                                                                           YTD Other                   12.3%
      80,000                                                                                                                                        80,000
               Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week
                1    3    5    7    9    11   13   15   17   19   21   23   25   27   29   31   33   35   37   39   41   43   45   47   49   51

       Source: AAR




10
                                                                                                                                                          WELLS FARGO SECURITIES, LLC
Rails: Raising Estimates And Valuation Ranges                                                                                                            EQUITY RESEARCH DEPARTMENT

                  CSX 2010 Q4 Q/Q change in Carloading by Commodity                                           NSC 2010 Q4 Q/Q change in Carloading by Commodity


                           Intermodal     -3.0%
                                                                                                                                                   Intermodal -2.0%

                    All Other Carloads    -9.5%
                                                                                                                                           All Other Carloads -11.5%

            Waste & Scrap Materials       -2.7%                                                                                                Waste & Scrap -11.3%
                                                                                                                                                Materials
        Motor Vehicles & Equipment            2.6%                                                                                           Motor Vehicles &
                                                                                                                                                              -1.8%
                                                                                                                                               Equipment
                    Metals & Products -5.7%
                                                                                                                                          Metals & Products      -6.0%

                                 Coke     -2.3%
                                                                                                                                                         Coke    -6.0%

       Stone, Clay & Glass Products        -9.6%                                                                                         Stone, Clay & Glass
                                                                                                                                                             -9.5%
                                                                                                                                              Products
                  Petroleum Products       0.7%
                                                                                                                                         Petroleum Products      -8.0%


                           Chemicals      -1.8%
                                                                                                                                                   Chemicals     -1.3%


       Pulp, Paper & Allied Products      -1.4%                                                                                          Pulp, Paper & Allied
                                                                                                                                                              -5.7%
                                                                                                                                              Products

            Lumber & Wood Products        -5.4%                                                                                               Lumber & Wood -12.1%
                                                                                                                                                 Products

               Primary Forest Products -5.1%                                                                                                   Primary Forest
                                                                                                                                                              -8.2%
                                                                                                                                                  Products

             Food & Kindred Products -5.9%                                                                                                    Food & Kindred -2.7%
                                                                                                                                                 Products

                   Grain Mill Products -1.1%                                                                                              Grain Mill Products            3.0%


                  Nonmetallic Minerals -25.7%                                                                                            Nonmetallic Minerals            3.4%


      Crushed Stone, Sand & Gravel -15.8%                                                                                              Crushed Stone, Sand
                                                                                                                                                           -24.8%
                                                                                                                                            & Gravel

                                  Coal -4.4%                                                                                                              Coal -1.4%

                         Metallic Ores -15.6%                                                                                                    Metallic Ores -18.5%

                        Farm Products                                               42.8%                                                       Farm Products                         10.0%


                                 Grain                      14.5%                                                                                        Grain                    8.5%


    -30%        -20%      -10%          0%           10%      20%      30%    40%      50%     -30%       -25%      -20%      -15%       -10%      -5%          0%        5%     10%          15%

 Source: AAR                                                                                 Source: AAR



             CSX 2010 YTD Y/Y change in Carloading by Commodity                                           NSC 2010 YTD Y/Y change in Carloading by Commodity

                         Intermodal                           17.7%
                                                                                                               Intermodal                15.8%

                  All Other Carloads         3.4%
                                                                                                        All Other Carloads    -15.8%

         Waste & Scrap Materials          1.7%                                                              Waste & Scrap
                                                                                                                                                   31.4%
                                                                                                             Materials
     Motor Vehicles & Equipment                                                     43.1%                Motor Vehicles &
                                                                                                           Equipment          -0.4%

                 Metals & Products                                    25.7%
                                                                                                        Metals & Products                                  44.5%

                              Coke         2.3%
                                                                                                                     Coke                                                       76.9%

     Stone, Clay & Glass Products                 6.3%                                                 Stone, Clay & Glass
                                                                                                                                  6.1%
                                                                                                            Products
                Petroleum Products                  8.4%
                                                                                                      Petroleum Products               15.2%

                         Chemicals                  8.3%                                                       Chemicals               13.4%

     Pulp, Paper & Allied Products     -0.6%                                                           Pulp, Paper & Allied
                                                                                                                                      11.2%
                                                                                                            Products

         Lumber & Wood Products                    8.2%                                                    Lumber & Wood
                                                                                                                                  7.6%
                                                                                                              Products

           Primary Forest Products -1.5%                                                                    Primary Forest
                                                                                                                              -5.8%
                                                                                                               Products

           Food & Kindred Products        0.6%                                                             Food & Kindred
                                                                                                                                     10.2%
                                                                                                              Products

                 Grain Mill Products -5.1%                                                             Grain Mill Products        7.6%

               Nonmetallic Minerals -1.5%                                                           Nonmetallic Minerals                                                         79.4%

    Crushed Stone, Sand & Gravel                   7.3%                                            Crushed Stone, Sand
                                                                                                                                       13.2%
                                                                                                        & Gravel

                               Coal     -1.5%                                                                         Coal        7.9%

                       Metallic Ores                                                43.6%                    Metallic Ores                                                        80.4%

                     Farm Products                        12.9%                                             Farm Products     0.3%

                              Grain          3.7%                                                                    Grain             13.6%

                       -10%          0%            10%       20%       30%    40%      50%      -40%         -20%            0%        20%          40%           60%           80%       100%

 Source: AAR                                                                                 Source: AAR




                                                                                                                                                                                                    11
                                                                                                                           WELLS FARGO SECURITIES, LLC
Transportation                                                                                                            EQUITY RESEARCH DEPARTMENT


                                                                     KSU Total Carloads                  Q3 '10 EBIT
     40,000                                                                                                                                        40,000
                                                                                                          $116 mm




     35,000                                                                                                                                        35,000


                                                                                                         Q3 '08 EBIT
                                                                                                          $111 mm
     30,000                                                                                              Q3 '09 EBIT                               30,000
                                                                                                          $84 mm



     25,000                                                                                               YTD Carload                 16.3%        25,000

                                                                                                          YTD Intermodal              32.9%
                                       2008        2009       2010
                                                                                                          YTD Other                    8.5%
     20,000                                                                                                                                        20,000
              Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week
               1    3    5    7    9    11   13   15   17   19   21   23   25   27   29   31   33   35   37   39   41   43   45   47   49   51
       Source: AAR


     200,000                                                         UNP Total Carloads                                                            200,000
                                                                                                         Q3 '08 EBIT
                                                                                                         $1215 mm

     180,000                                                                                                                                       180,000


                                                                                                         Q3 '10 EBIT
                                                                                                         $1401 mm
     160,000                                                                                                                                       160,000



                                                                                                         Q3 '09 EBIT
     140,000                                                                                              $967 mm                                  140,000


                                                                                                          YTD Carload                 13.5%
     120,000                                                                                              YTD Intermodal              21.1%        120,000
                                              2008        2009       2010
                                                                                                          YTD Other                    8.7%

     100,000                                                                                                                                       100,000
               Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week Week
                1    3    5    7    9    11   13   15   17   19   21   23   25   27   29   31   33   35   37   39   41   43   45   47   49   51
       Source: AAR




12
                                                                                                                                                                                              WELLS FARGO SECURITIES, LLC
Rails: Raising Estimates And Valuation Ranges                                                                                                                                                EQUITY RESEARCH DEPARTMENT


                   KSU 2010 Q4 Q/Q change in Carloading by Commodity                                                                         UNP 2010 Q4 Q/Q change in Carloading by Commodity


                  Intermodal                               6.8%                                                                                                               Intermodal -6.7%


           All Other Carloads                                                                    20.6%                                                                All Other Carloads -3.4%


    Waste & Scrap Materials                                                                                                                                  Waste & Scrap Materials         -8.0%
                                         2.0%

            Motor Vehicles &                                                                                                                                             Motor Vehicles &
                                                                            14.2%                                                                                                               0.9%
              Equipment                                                                                                                                                    Equipment

                                                                                                                                                                      Metals & Products      -9.2%
          Metals & Products                                                              17.8%


                                                                                                                                                                                    Coke     -3.2%
                         Coke                2.4%

        Stone, Clay & Glass                                                                                                                                         Stone, Clay & Glass
                                                                                   16.6%                                                                                                -4.9%
            Products                                                                                                                                                     Products

        Petroleum Products        -0.8%                                                                                                                             Petroleum Products           1.9%


                   Chemicals            1.5%                                                                                                                                  Chemicals      -2.6%


        Pulp, Paper & Allied                                                                                                                                        Pulp, Paper & Allied
                                                     5.6%                                                                                                                                    -2.2%
             Products                                                                                                                                                    Products

             Lumber & Wood                                                                                                                                               Lumber & Wood
                                  -5.4%                                                                                                                                                      -3.6%
                Products                                                                                                                                                    Products

    Primary Forest Products        0.3%                                                                                                                        Primary Forest Products       -7.2%


    Food & Kindred Products                     4.2%                                                                                                         Food & Kindred Products            1.0%


          Grain Mill Products                                                            18.0%                                                                      Grain Mill Products          3.0%


       Nonmetallic Minerals                                                                                      26.5%                                             Nonmetallic Minerals      -38.0%

     Crushed Stone, Sand &                                                                                                                                     Crushed Stone, Sand &
                                  -3.3%                                                                                                                                                      -9.3%
            Gravel                                                                                                                                                    Gravel

                          Coal    -4.0%                                                                                                                                              Coal -3.5%


                 Metallic Ores    -0.7%                                                                                                                                     Metallic Ores              5.9%


               Farm Products                                             12.6%                                                                                             Farm Products                                     26.8%


                         Grain                                    9.4%                                                                                                              Grain                     11.1%


   -10%          -5%             0%             5%            10%           15%           20%            25%         30%     -50%       -40%       -30%           -20%       -10%          0%           10%           20%    30%     40%
 Source: AAR                                                                                                               Source: AAR




              KSU 2010 YTD Y/Y change in Carloading by Commodity                                                                         UNP 2010 YTD Y/Y change in Carloading by Commodity
                                                                                                                                         Intermodal                                  21.1%
                        Intermodal                                               32.9%

                                                                                                                                 All Other Carloads          3.3%
                All Other Carloads                         12.9%


          Waste & Scrap Materials                                                                                          Waste & Scrap Materials           4.2%
                                                                    21.5%
                                                                                                                                    Motor Vehicles &
                 Motor Vehicles &                                                                                                                                                                              37.2%
                                                                                                 47.0%                                Equipment
                   Equipment
                                                                                                                                 Metals & Products                                                                                   56.9%
                Metals & Products                                                                          58.1%

                                                                                                                                               Coke         2.8%
                              Coke                   9.2%
                                                                                                                                Stone, Clay & Glass
               Stone, Clay & Glass                                                                                                                     -0.6%
                                             -2.0%                                                                                  Products
                    Products
                                                                                                                               Petroleum Products                          11.9%
              Petroleum Products                     8.7%

                                                                                                                                         Chemicals                        11.3%
                         Chemicals              5.0%

                                                                                                                                Pulp, Paper & Allied
               Pulp, Paper & Allied                                                                                                                            5.0%
                                                    6.7%                                                                             Products
                    Products
                                                                                                                                    Lumber & Wood
                  Lumber & Wood                                                                                                                                   6.4%
                                              3.2%                                                                                     Products
                     Products
                                                                                                                           Primary Forest Products                                                      32.9%
          Primary Forest Products                                                                      51.6%

                                                                                                                           Food & Kindred Products         1.3%
        Food & Kindred Products          -12.0%

                                                                                                                                Grain Mill Products                7.2%
               Grain Mill Products                                       26.4%

                                                                                                                               Nonmetallic Minerals            5.2%
             Nonmetallic Minerals                                            30.9%

                                                                                                                            Crushed Stone, Sand &
          Crushed Stone, Sand &                                                                                                                                                             24.0%
                                                           12.3%                                                                   Gravel
                 Gravel

                                                                                                                                                Coal       1.7%
                                 Coal    -7.9%

                                                                                                                                       Metallic Ores                                                 30.4%
                       Metallic Ores                6.6%


                                         -25.2%                                                                                       Farm Products                        12.6%
                     Farm Products

                                                                                                                                               Grain                7.7%
                                Grain               6.9%


   -30%       -20%       -10%           0%          10%       20%        30%        40%          50%       60%       70%              -10%            0%           10%             20%          30%            40%          50%      60%

 Source: AAR                                                                                                               Source: AAR




                                                                                                                                                                                                                                             13
                                                                                                                                  WELLS FARGO SECURITIES, LLC
Transportation                                                                                                                   EQUITY RESEARCH DEPARTMENT


                                                                            GWR Carloads
     85,000

     80,000

     75,000

     70,000

     65,000

     60,000

     55,000

     50,000
                  Jan         Feb             Mar           Apr           May       Jun     Jul          Aug         Sep         Oct           Nov        Dec

                                                                            2008    2009   2010
     Source: Company Reports




                  GWR Q4 QTD Y/Y change in Carloading                                                  GWR YTD Revenue Mix by Commodity
                            by Commodity
                                                                                                                 Autos & Auto
                     Other                     17.1%                                                                Parts              Other
                                                                                                                     1%                 9%
         Autos & Auto Parts                 12.1%                                                  Petroleum
                                                                                                    Products
                                                                                                                                                      Coal, Coke &
        Petroleum Products                    15.7%                                                   3%
                                                                                                                                                          Ores
                                                                                             Chemicals &                                                  24%
        Chemicals & Plastic                         20.7%
                                                                                               Plastic
                                                                                                7%
 Lumber & Forest Products -1.5%
                                                                                                  Lumber &
                    Metals       4.9%                                                               Forest
                                                                                                   Products
              Pulp & Paper                  12.7%                                                    7%
                                                                                                                                                     Minerals &
                                                                                                        Metals                                         Stone
      Farm & Food Products                                                         56.7%
                                                                                                         9%                                             16%

          Minerals & Stone -1.7%
                                                                                                               Pulp & Paper     Farm & Food
         Coal, Coke & Ores                      19.1%                                                              11%            Products
                                                                                                                                    13%
                -10.0%    0.0%      10.0%     20.0%    30.0%      40.0%    50.0%   60.0%
     Source: Company Reports                                                                      Source: Company Reports




14
                                                                                                                                       WELLS FARGO SECURITIES, LLC
Rails: Raising Estimates And Valuation Ranges                                                                                         EQUITY RESEARCH DEPARTMENT


                                                                              RA Carloads

  80,000


  75,000


  70,000


  65,000


  60,000


  55,000


  50,000
               Jan           Feb           Mar              Apr              May            Jun        Jul          Aug         Sep        Oct          Nov

                                                                                 2009         2010
  Source: Company Reports




               RA Q4 QTD Y/Y change in Carloading                                                            RA YTD Revenue Mix by Commodity
                         by Commodity

                               Motor Vehicles -58.9%                                                                        Other          Motor
                                                                                                               Petroleum                  Vehicles
                                                                                                                             3%
                                           Other                         20.5%                                    5%                        1%
                                                                                                         Forest
                                      Petroleum          0.9%
                                                                                                        Products                                       Coal
                               Forest Products -3.1%                                                      6%                                           21%

                                   Pulp & Paper          2.1%                                     Pulp & Paper
                                                                                                       7%
                               Waste & Scrap             1.8%

                              Food & Kindered                   9.0%                                 Waste &
                                                                                                      Scrap
                                   Metallic Ores                                   30.8%
                                                                                                       7%
                                                                                                                                                      Agricultural
                        Non-metallic Minerals                           18.7%
                                                                                                         Food &                                          15%
                                      Chemicals                         19.5%                           Kindered
                                                                                                           7%
                                     Agricultural    -6.5%
                                                                                                             Metallic Ores
                                                                                                                                          Chemicals
                                            Coal          3.5%                                                   8%        Non-metallic
                                                                                                                                            11%
                                                                                                                             Minerals
 -60%   -50%   -40%   -30%    -20%      -10%        0%      10%        20%   30%      40%                                      9%
 Source: Company Reports                                                                                Source: Company Reports




                                                                                                                                                                     15
                                                                                       WELLS FARGO SECURITIES, LLC
Transportation                                                                        EQUITY RESEARCH DEPARTMENT

Valuation Range Information:
CSX Basis and Risks: Our 6-12 month valuation range is $75-77. We arrive at $77 based on a 14x multiple to
our 2012 EPS estimate of $5.50. Alternatively, if we apply a 8.0x EV/EBITDA multiple to our 2011 EBITDA
estimate we arrive at $75. Risks to our estimates include pending rail legislation whereby methodologies used
to determine "rate reasonableness" may not fully capture rail costs. Our estimates for CSX are highly
dependent on continued cost reductions and productivity improvements. CSX is highly dependent on coal
shipments, and coal faces a number of secular challenges.

GWR Basis and Risks: Our 6-12 month valuation range is $56-58. We derive $56 by applying a 11.5x
EV/EBITDA multiple to our 2011 estimated EBITDA. Alternatively, we arrive at $58 by applying a 20x P/E on
our 2012 EPS estimate of $2.90. Our estimates are highly dependent on GWR maintaining favorable
relationships with the Class 1 railroads. Further, our forecasts are premised on a smooth integration of
FreightLink, and continued demand for Australia based commodities. GWR is acquisitive and acquisitions
present a myriad of integration and operational risks.

KSU Basis and Risks: Our 6-12 month valuation range is $59-66. We arrive at $66 based on a 20x multiple
to our 2012 EPS estimate of $3.29. Alternatively, if we apply a 10.0x EV/EBITDA multiple to our 2011 EBITDA
estimate we arrive at $59. Risks to our estimates include pending rail legislation whereby methodologies used
to determine "rate reasonableness" may not fully capture rail costs. KSU's revenue is dependent on
cooperation with other Class 1 railroads that often originate the freight that ultimately moves on the KSU
network. KSU is highly dependent on the Mexican economy and Mexican regulations.

NSC Basis and Risks: Our 6-12 month valuation range is $74-77. We arrive at $74 based on a 14x multiple
to our 2012 EPS estimate of $5.29. Alternatively, if we apply a 8.0x EV/EBITDA multiple to our 2011 EBITDA
estimate we arrive at $77. Risks to our estimates include pending rail legislation whereby methodologies used
to determine "rate reasonableness" may not fully capture rail costs. If recent cost savings do not hold as
volumes recover our estimates would not likely be achieved. NSC's revenue base has proven to be modestly
more cyclical than its peers. NSC is highly dependent on coal shipments, and coal faces a number of secular
challenges.

RA Basis and Risks: Our 6-12 month valuation range is $15-16. We derive $15 by applying a 7.0x
EV/EBITDA multiple to our 2011 estimated EBITDA. Alternatively, we arrive at $16 by applying a 18.5x P/E on
our 2012 EPS estimate of $0.86. The multiple reflects our discount to the median multiple that the industry
leader has carried. High fixed interest and swap amortization expenses consumes a large portion of operating
income. This can create substantial risk to our estimates if our volume growth expectations are not met.
Further, our margin improvement forecast is premised on continued pricing gains and operational
improvements that may not materialize.

UNP Basis and Risks: Our 6-12 month valuation range is $107-115. We arrive at $115 based on a 15x
multiple to our 2012 EPS estimate of $7.64. Alternatively, if we apply a 8.0x EV/EBITDA multiple to our 2011
EBITDA estimate we arrive at $107. Risks to our estimates include pending rail legislation whereby
methodologies used to determine "rate reasonableness" may not fully capture rail costs. If recent cost savings
do not hold as volumes recover our estimate would not likely be achieved. UNP has above-peer exposure to
bulk commodity cycles. UNP may face increased price competition from its Western peer given the change in
ownership.


                                              Required Disclosures

                     To view price charts for all companies rated in this document, please go to
                                  https://www.wellsfargo.com/research or write to
                           7 Saint Paul Street, 1st Floor, R1230-011, Baltimore, MD 21202
                                            ATTN: Research Publications
                            Additional Information Available Upon Request




16
                                                                                        WELLS FARGO SECURITIES, LLC
Rails: Raising Estimates And Valuation Ranges                                          EQUITY RESEARCH DEPARTMENT

I certify that:
1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or
issuers discussed; and
2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed
by me in this research report.

  Wells Fargo Securities, LLC maintains a market in the common stock of CSX Corporation, Kansas City Southern, RailAmerica,
  Inc.
  Wells Fargo Securities, LLC or its affiliates managed or comanaged a public offering of securities for Union Pacific Corporation
  within the past 12 months.
  Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in
  the next three months from Norfolk Southern Corporation, RailAmerica, Inc., Union Pacific Corporation.
  Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from RailAmerica, Inc., Union
  Pacific Corporation in the past 12 months.
  Wells Fargo Securities, LLC and/or its affiliates, have beneficial ownership of 1% or more of any class of the common stock of
  Genesee & Wyoming, Inc., Kansas City Southern, RailAmerica, Inc., Union Pacific Corporation.
  RailAmerica, Inc., Union Pacific Corporation currently is, or during the 12-month period preceding the date of distribution of the
  research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided investment banking services to
  RailAmerica, Inc., Union Pacific Corporation.
  Norfolk Southern Corporation currently is, or during the 12-month period preceding the date of distribution of the research
  report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided noninvestment banking securities-
  related services to Norfolk Southern Corporation.
  Wells Fargo Securities, LLC received compensation for products or services other than investment banking services from Norfolk
  Southern Corporation in the past 12 months.
  Wells Fargo Securities, LLC or its affiliates may have a significant financial interest in CSX Corporation, Genesee & Wyoming,
  Inc., Kansas City Southern, Norfolk Southern Corporation, RailAmerica, Inc., Union Pacific Corporation.

CSX: Risks to our estimates include pending rail legislation whereby methodologies used to determine "rate reasonableness" may
not fully capture rail costs. Our estimates for CSX are highly dependent on continued cost reductions and productivity
improvements. CSX is highly dependent on coal shipments, and coal faces a number of secular challenges.
GWR: Our estimates are highly dependent on GWR maintaining favorable relationships with the Class 1 railroads. Further, our
forecasts are premised on a smooth integration of FreightLink, and continued demand for Australia based commodities. GWR is
acquisitive and acquisitions present a myriad of integration and operational risks.
KSU: Risks to our estimates include pending rail legislation whereby methodologies used to determine "rate reasonableness" may
not fully capture rail costs. KSU's revenue is dependent on cooperation with other Class 1 railroads that often originate the freight
that ultimately moves on the KSU network. KSU is highly dependent on the Mexican economy and Mexican regulations.
NSC: Risks to our estimates include pending rail legislation whereby methodologies used to determine "rate reasonableness" may
not fully capture rail costs. If recent cost savings do not hold as volumes recover our estimates would not likely be achieved. NSC's
revenue base has proven to be modestly more cyclical than its peers. NSC is highly dependent on coal shipments, and coal faces a
number of secular challenges.
RA: High fixed interest and swap amortization expenses consumes a large portion of operating income. This can create substantial
risk to our estimates if our volume growth expectations are not met. Further, our margin improvement forecast is premised on
continued pricing gains and operational improvements that may not materialize.
UNP: Risks to our estimates include pending rail legislation whereby methodologies used to determine "rate reasonableness" may
not fully capture rail costs. If recent cost savings do not hold as volumes recover our estimate would not likely be achieved. UNP
has above-peer exposure to bulk commodity cycles. UNP may face increased price competition from its Western peer given the
change in ownership.

Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions.
Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability
and revenue of the firm, which includes, but is not limited to investment banking revenue.

STOCK RATING
1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the
next 12 months. BUY
2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market
over the next 12 months. HOLD
3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12
months. SELL




                                                                                                                                   17
                                                                                         WELLS FARGO SECURITIES, LLC
Transportation                                                                          EQUITY RESEARCH DEPARTMENT

SECTOR RATING
O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months.
M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.
U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.
VOLATILITY RATING
V = A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the
analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading.

As of: January 12, 2011
44% of companies covered by Wells Fargo Securities, LLC         Wells Fargo Securities, LLC has provided investment banking
Equity Research are rated Outperform.                           services for 42% of its Equity Research Outperform-rated
                                                                companies.
53% of companies covered by Wells Fargo Securities, LLC         Wells Fargo Securities, LLC has provided investment banking
Equity Research are rated Market Perform.                       services for 46% of its Equity Research Market Perform-rated
                                                                companies.
3% of companies covered by Wells Fargo Securities, LLC          Wells Fargo Securities, LLC has provided investment banking
Equity Research are rated Underperform.                         services for 43% of its Equity Research Underperform-rated
                                                                companies.



Important Information for Non-U.S. Recipients
EEA – The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain
categories of investors. For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited
(“WFSIL”). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Services Authority. For the
purposes of Section 21 of the UK Financial Services and Markets Act 2000 (“the Act”), the content of this report has been approved
by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets in Financial
Instruments Directive 2007. The FSA rules made under the Financial Services and Markets Act 2000 for the protection of retail
clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for,
and should not be relied upon by, retail clients.




18
                                                                                          WELLS FARGO SECURITIES, LLC
Rails: Raising Estimates And Valuation Ranges                                            EQUITY RESEARCH DEPARTMENT

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About Wells Fargo Securities, LLC
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This report is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments
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Wells Fargo Securities, LLC.

                                                     SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE




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