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First Union Rail Corporation Robert J. Blankemeyer VP - Acquisitions 2593 Wexford-Bayne Road Sewickley, PA 15143 724-935-5523

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Presentation on theme: "First Union Rail Corporation Robert J. Blankemeyer VP - Acquisitions 2593 Wexford-Bayne Road Sewickley, PA 15143 724-935-5523"— Presentation transcript:

1 First Union Rail Corporation Robert J. Blankemeyer VP - Acquisitions 2593 Wexford-Bayne Road Sewickley, PA May 12,

2  Introduction  Railroad Overview  Shipper Overview  Government Regulation  Equipment  The Future May 12,

3 ▪ 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 May 12,

4  The Beginning of the End  Lower volumes + lower rates =  Lower returns =  Lower Capital Expenditures =  Decreased Capacity & Service = ▪ Deferred Maintenance  Lower volumes + lower rates = May 12,

5  40% of industry in bankruptcy  CR, CRIP, MILW, etc.  Specter of nationalization  Declining market share  Cumbersome pricing structure  Difficult abandonment process  Heavy government regulation May 12,

6  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 May 12,

7  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 driver May 12, 2011

8  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” May 12, 2011

9  The Great Recession of 2008 and 2009 was the 3 rd 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 May 12, 2011

10 May 12,

11 May 12, 2011

12  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 May 12,

13  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 13

14  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 14

15 15  Threats - Economic malaise - Rising capital requirements - Regulation - Maritime trade flows ▪ Panama Canal is a game changer ▪ Super Container Ships – 18,000 TEUs

16 16  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

17 17 “I want it there when I want it, on time, damage-free at a cost of next to nothing.” Anonymous shipper

18 18  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’ minds  Affecting political decisions – Shippers easing away from re/reg fights to partnerships

19 19  Infrastructure deficit  Tax policy  Carbon  Oil independence  Efficiency  Passenger Rail – Help or hurt?

20 20  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

21 21  Railroads were the first regulated entity  Interstate Commerce Commission  #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

22 22  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. 1 st 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

23 23  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

24 Registered Active UMLER1,509,795 1,384,996 Adjusted1,637,746 1,497,455 Adjusted – P, Q and S car types counted by platform Data Source: Railinc Umler™ System. May 12,

25 Registered Active UMLER -46, ,973 Adjusted -46, ,895 Adjusted – P, Q and S car types counted by platform Data Source: Railinc Umler™ System. My opinion is that 100,000+ cars have been retired/scrapped. May 12,

26 26  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

27  A - Equipped Box Cars  B - Unequipped Box Cars  C - Covered Hoppers  E - Equipped Gondolas  F - Flat Cars  G - Unequipped Gondolas  H - Unequipped Hopper  J - Gondola Car - GT May 12,

28  K - Equipped Hopper  L - Special Type Cars  P - Conventional Intermodal  Q - Light weight, low profile intermodal  R - Refrigerator Cars  S - Stack Cars  T - Tank Cars  V - Vehicular Flat Cars May 12,

29 Data Source: Railinc Umler™ System.

30

31 31

32 Data Source: Railinc Umler™ System.  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

33 March 7, 2011  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 Data Source: Railinc Umler™ System.

34  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 34

35  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 35

36  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

37  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

38  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

39  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 39

40 Thank you for your attention. Questions???? May 12,


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