First Union Rail Corporation Robert J. Blankemeyer VP - Acquisitions 2593 Wexford-Bayne Road...

First Union Rail CorporationRobert J. Blankemeyer

VP - Acquisitions2593 Wexford-Bayne Road

Sewickley, PA 15143724-935-5523

[email protected]

May 12, 2011 [email protected]

IntroductionRailroad OverviewShipper OverviewGovernment RegulationEquipmentThe Future


▪ A Wells Fargo Company- Top 4 U.S. Bank Holding Co.- $1.3 trillion assets at bank

- Top 3 Bank Leasing Company - Top 4 general service rail lessor

- 90,000+ rail assets

Opinions are mine alone


The Beginning of the End Lower volumes + lower rates = Lower returns = Lower Capital Expenditures = Decreased Capacity & Service =

▪ Deferred Maintenance Lower volumes + lower rates =


40% of industry in bankruptcy CR, CRIP, MILW, etc.

Specter of nationalizationDeclining market shareCumbersome pricing structureDifficult abandonment processHeavy government regulation


Staggers Rail Act Eased abandonment process Gave Railroads pricing parameters

Industry Consolidation Mergers rationalized cost structure Dramatic reduction in employees;

productivity Boom in short lines and regional railroads

New tenor of government regulation Let the market decide


Railroads can envision a virtuous cycle: Higher volumes + higher rates = Higher returns = Higher Capital Expenditures = Increased Capacity & Service = Higher volumes + higher rates =

Intermodal is a key driverMay 12, 2011 [email protected]

Volume growth means more customers

Service Improvement means happier customers

Volume + Service = Productivity (“incremental margins”) means happier shareholders

Return Growth means happier shareholders and high levels of Capex (happier suppliers) – no “battle for cash”


The Great Recession of 2008 and 2009 was the 3rd worst rail recession in last 100 years 15+% loss of traffic – loads and revenues

Railroad’s Response Flexed market pricing power Increased network fluidity Trimmed work force Continued major expansion projects



$0$1$2$3$4$5$6$7$8$9

$10$11

1980 1984 1988 1992 1996 2000 2004 2008

Roadway and Structures

Equipment

90%+ of all expenditures maintain existing physical plant Little/no capex is used for expansion Public private partnerships are new

paradigm – Heartland , Gateway and Crescent Corridors

Leasing companies and shippers supply over 70% of railcars Railroads can avoid this Capex


Strengths: Strong Secular Growth – above GDP Favorable Market Structure – Mega-

carriers Supply Constraints – Infrastructure

issues of other modes Solid Barriers to Entry Limited Alternatives – truck, marine

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Challenges- Capital intensity – CAPEX intense (15%

to 19% of gross revenues)- Capacity bottlenecks – Low hanging fruit

is gone- Interdependent Supply Chain

- Can other modes keep up? Port congestion

- Reliability vs. trucks

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Threats - Economic malaise- Rising capital requirements- Regulation- Maritime trade flows

▪ Panama Canal is a game changer▪ Super Container Ships – 18,000 TEUs

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Grain – US is the world’s breadbasket Coal – Met Exports; PRB coal to China? MSW (garbage), perishables, shale,

others Hub and Spoke vs. direct T/L issues: Drivers, Oil, Carbon,

Infrastructure & Efficiency so…. Intermodal Intermodal – International and

Domestic Trucking companies becoming partners Domestic intermodal grew during recession

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“I want it there when I want it, on time, damage-free at a cost of next to nothing.”

Anonymous shipper

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Capacity! How can I move my product?Service! Will it get there when needed?Then….rates… How much will it cost?Trucker issues very much on shippers’

mindsAffecting political decisions – Shippers

easing away from re/reg fights to partnerships

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Infrastructure deficitTax policyCarbonOil independenceEfficiencyPassenger Rail – Help or hurt?

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2003 – 221 of Fortune 500 report on carbon; 409 in 2009

Green supply chains enforcement by Wal-Mart (from $2BN transport spend to $4BN+ by ’11); GE, P&G, etc…. As go large multi-nationals so go all

Anticipating future EPA regs and emissions law

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Railroads were the first regulated entity Interstate Commerce Commission - 1887

#1 Issue Today – Positive Train Control – PTC $10BN mandate; cost/benefit ratio of 22:1

Hazardous Material TIH/PIH protection wanted

Passenger Rail Supported but not at expense of freight

Trucking Hours of Service (HOS) regs

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Driving time recommended from 11 hours to 10 hours

Work day (driving and admin) can be extended to 14 hours/day; 16 hours 2x/wk But can only work 13 hours (break of 1-3 Hrs)

Required rest breaks (30 mins. 1st 7 hrs - 1 hr a day) Now, no limit on consecutive hours of driving/no required break

34 hour restart – Game Changer Drivers can’t drive after working more 60 hrs in any

7 day period; now 60 hrs/7 days or 70 hrs/8 days Driver must be off-duty 34 hours and must include 2

periods of midnight to 6am; now just 34 hrs

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Impact Additional truck and drivers needed. Shorter length of haul resulting from 10-hour

restriction Inability to serve rural markets Increased costs Less efficient dedicated operations Congestion at pick-up and delivery windows IT investment to reprogram distribution mgt.

systems Unofficially, net-net will be:

5% to 7% productivity decrease Loss of 100,000+ drivers; could be 300,000 Increased trucker pay and trucking costs

Registered Active

UMLER 1,509,795 1,384,996

Adjusted 1,637,746 1,497,455

Adjusted – P, Q and S car types counted by platform

Data Source: Railinc Umler™ System.


Registered Active

UMLER -46,850 -146,973Adjusted -46,339 -161,895

Adjusted – P, Q and S car types counted by platform


My opinion is that 100,000+ cars have been retired/scrapped.


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285+k cars parked – 4/15/11 Down from 490+k at peak in 8/09 My estimate: 100k to 150k will never see

service again Older, less efficient cars

▪ 263k GRL versus 286k GRL Costs to repair/maintain difficult to recover Cars installed prior to 7/1/74 have 40 year

life▪ Cost to rebuild and qualify for 50-year life is not

economically justified

A - Equipped Box CarsB - Unequipped Box CarsC - Covered HoppersE - Equipped GondolasF - Flat CarsG - Unequipped GondolasH - Unequipped Hopper J - Gondola Car - GT


K - Equipped HopperL - Special Type CarsP - Conventional Intermodal Q - Light weight, low profile

intermodalR - Refrigerator CarsS - Stack CarsT - Tank CarsV - Vehicular Flat Cars



High cube, grain/DDG covered hopper – 3,193 Small cube, cement covered hopper – 1,519 Depressed, High Side Coal Gondola – 1,294 GS, carbon tank car, 18.5k to 21.5k gal – 1,006 Equipped Gondola, less 48’ – 750 Grain covered hopper 4k to 5k cf – 641 GS, carbon tank car, 21.5k to 24.5k gal – 558 GS, carbon tank car, 27.5k to 31.5k gal – 472

March 7, 2011 [email protected]

High cube, grain/DDG covered hopper – 40,153 GS, carbon tank car, 27.5k to 31.5k gal – 30,654 Depressed, High Side Coal Gondola – 27,590 Small cube, cement covered hopper – 13,773 Rotary, rapid discharge coal hopper – 11,796 COFC, 5 unit, 40’ well Double Stack – 10,195 GS, carbon tank car, 24.5k to 27.5k gal – 9,014 SS, 340 psi pressure, 31.5k gal – 7,700


Next Tier of regs for road units are slated for 2015 OEMs need to develop new engines at cost of

$1+BN Costs of retro-fits and overhauls are unknown Still hundreds of road units stored New orders will be abysmal for 2 years Scheduled railroading is increasing

productivity

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GenSet locomotives appear to be wave of future 4 competing manufacturers –

consolidation? Jury still out on “best” technology Government subsidized move through

lower emissions ▪ Continued economic support is iffy

Higher fuel costs may keep interest High initial cost continues to be an issue

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Above GDP++ Intermodal Domestic – 53’ Double Stack Cars

and 53’ containers and chassis Above GDP

Intermodal International – 40’ Double Stack Cars and 40’ containers and chassis

Ag Products – Covered Hoppers Export Coal – Coal Gondolas and Hoppers Ethanol – Tank Cars and large Covered

Hoppers

GDP Growth Autos – Multi-Level Racks and Flat Cars Lumber – Boxcars and Flats Chemicals – Covered Hoppers and Tank Cars Aggregates – Small Covered Hoppers and

Gons Metals – Gondolas

Below GDP Paper Auto Parts

Uncertain Domestic Coal – Impact of Nuclear

▪ Traditionally 40% of tonnage and 20% of revenues

▪ Market Share shrinks to 40% over next 15 years from approximately 50%

▪ Domestic source of energy▪ Environmental Issues▪ Clean Coal Technologies

The “Story” used to be on either end of the pipeline, i.e., either producers or retailers. Now the “Story” is the pipeline and rails are well positioned.

2011 will be a fantastic year for carriers Pricing increases in 6% to 8% range Traffic gains of 3% to 5% Better but not great for leasing cos. and builders

Equipment winners will be traditional favorites – no surprises

Recovery is underway but is “choppy” Housing will remain a “vast wasteland”

Lease pricing is slowly improving Market is moving to shorter term operating leases

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Thank you for your attention.

Questions????


First Union Rail Corporation Robert J. Blankemeyer VP - Acquisitions 2593 Wexford-Bayne Road...

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