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First Union Rail CorporationRobert J. Blankemeyer
VP - Acquisitions2593 Wexford-Bayne Road
Sewickley, PA 15143724-935-5523
rob.blankemeyer@wellsfargo.com
May 12, 2011 rob.blankemeyer@wellsfargo.com
IntroductionRailroad OverviewShipper OverviewGovernment RegulationEquipmentThe Future
May 12, 2011 rob.blankemeyer@wellsfargo.com
▪ 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, 2011 rob.blankemeyer@wellsfargo.com
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, 2011 rob.blankemeyer@wellsfargo.com
40% of industry in bankruptcy CR, CRIP, MILW, etc.
Specter of nationalizationDeclining market shareCumbersome pricing structureDifficult abandonment processHeavy government regulation
May 12, 2011 rob.blankemeyer@wellsfargo.com
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, 2011 rob.blankemeyer@wellsfargo.com
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 rob.blankemeyer@wellsfargo.com
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 rob.blankemeyer@wellsfargo.com
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
May 12, 2011 rob.blankemeyer@wellsfargo.com
May 12, 2011 rob.blankemeyer@wellsfargo.com
May 12, 2011 rob.blankemeyer@wellsfargo.com
$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
May 12, 2011 rob.blankemeyer@wellsfargo.com
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.
May 12, 2011 rob.blankemeyer@wellsfargo.com
Registered Active
UMLER -46,850 -146,973Adjusted -46,339 -161,895
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, 2011 rob.blankemeyer@wellsfargo.com
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
A - Equipped Box CarsB - Unequipped Box CarsC - Covered HoppersE - Equipped GondolasF - Flat CarsG - Unequipped GondolasH - Unequipped Hopper J - Gondola Car - GT
May 12, 2011 rob.blankemeyer@wellsfargo.com
K - Equipped HopperL - Special Type CarsP - Conventional Intermodal Q - Light weight, low profile
intermodalR - Refrigerator CarsS - Stack CarsT - Tank CarsV - Vehicular Flat Cars
May 12, 2011 rob.blankemeyer@wellsfargo.com
Data Source: Railinc Umler™ System.
Data Source: Railinc Umler™ System.
31
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
March 7, 2011 rob.blankemeyer@wachovia.com
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.
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
35
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????
May 12, 2011 rob.blankemeyer@wellsfargo.com
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