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Transcript of 1 Princeton University December 15, 2010 RDC’s Long, Strange Trip to the Fringes of the Regional...
1
Princeton University December 15, 2010
RDC’s Long, Strange Trip to the Fringes of the Regional Railroad Movement
DARK TERRITORY
Henry Posner III, ChairmanRailroad Development Corp. (www.rrdc.com)
2
AGENDA RDC Today
General Businesses, Present & Past
History of RDC Plan A: Initial Years Plan B: P&LE Plan C: IAIS Plan D: International
The Future
3
RDC – General
Pittsburgh-based, privately held railway
investment and management company
Focus: Emerging Corridors in Emerging
Markets
Financial structure based on Joint Ventures
4
RDC – Businesses Overview
Country Entity LengthKm (Miles)
EmployeesTons Y. 2009(in millions)
CURRENT:
USA Iowa Interstate 954 (592) 206 11.7
Argentina ALL Central 5,690 (3,535) 1,200 2.3
Argentina ALL Mesopotamica 2,704 (1,680) 300 1.0
Guatemala Ferrovias Guatemala 322 (200) 13 N/A
Peru Ferrocarril Central Andino 535 (332) 431 1.8
PAST: Tons Last Yr of Investment
Malawi Central East African Railways 797 (495) 417 0.22 (2008)
Mozambique Nacala Corridor 873 (542)404 Rail209 Port
0.2 Rail (2008)0.9 Port (2008)
Estonia Eesti Raudtee 693 (431) 2,345 44.4 (2006)
FUTURE:
France Joint Venture with RFF for wagonload
Germany Hamburg – Köln Express for intercity passenger
6
RDC Businesses: Iowa Interstate RR (cont.)
1,000 km of former Rock Island trackage between
Chicago and Omaha
Rock Island liquidation in 1980 a major reason for
deregulation
Abandoned as through route from 1980 to 1984;
recapitalized 1991, 1997, 2005
Paralleled by BNSF, CN and UP
100% owned by RDC from January 2004
8
Safety
Gold Harriman Award 2004 and 2008 for Safety Performance in Years 2003 and 2007
RDC Businesses: Iowa Interstate RR (cont.)
9
RDC Businesses: Iowa Interstate RR (cont.)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
CARLOADS 53,310 52,874 47,986 52,367 62,401 65,394 63,593 64,508 59,213 57,961 57,203 65,307 64,221 65,115 73,436 74,078 75,890 78,339 94,345
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Traffic
10
RDC Businesses: Iowa Interstate RR (cont.)
New GE ES44ACs
Intermodal Facilities
Investment
Photo courtesy Tom McNair © 2010
11
RDC Businesses: Iowa Interstate RR (cont.)
Future Amtrak route Chicago-Iowa City… …using formerly-abandoned Rock Island main line
12
RDC Businesses: Iowa Interstate RR (cont.)
Photo courtesy Nathan Holmes © 2010
October 18, 2008
Double-headed, record setting steam freight haul: 66 cars, 6,252 tons, CBBI
HISTORY & CULTURE
15
RDC Businesses: ALL Central & ALL Meso
ALL CENTRAL 5,350 km between Buenos Aires and Mendoza
ALL MESOPOTÁMICA 2,740 km between Buenos Aires and Uruguay, Brazil and Paraguay
Argentina first country to “privatize” railways Privatized 1993; recapitalized 1999 JOINT VENTURE originally with IMPSA Conrail as Technical Advisor Publicly traded as part of ALL
CONTENTCONTENT
17
RDC Businesses: Ferrovias Guatemala (cont.)
1996: Abandoned by public sector… 1999: Restored to operation by private sector…
2007: Put out of operation by public sector
18
RDC Businesses: Ferrovias Guatemala (cont.)
ONLY example of a national railway abandoned by public sector & restored by private sector
100% equity financing (including funds diverted by govt.)
“Right of Way” development a major piece of business plan: Electricity distribution, Pipelines, Lease of Stations, etc.
No Personal Injuries for 1.5 years, 2/05 – 8/06
CONTENTCONTENT
19
All traffic was “intermodal” between Atlantic ports and Guatemala City.
Base traffic was steel, with spot intermodal as capacity permitted.
Traffic Base
RDC Businesses: Ferrovias Guatemala (cont.)
20
RDC Businesses: Ferrovias Guatemala (cont.)
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Annual Tons 63,000 113,392 100,670 129,152 157,000 125,466 92,566 39,604 0
2000 2001 2002 2003 2004 2005 2006 2007 2008
SERVICE SUSPENDED SEPTEMBER 2007
DECLARATION OF LESIVO, AUGUST 2006
Traffic Growth
22
0
1
2
3
4
5
6
Injuries 6 5 3 0 1 4
2002 2003 2004 2005 2006 2007
SAFETY
RDC Businesses: Ferrovias Guatemala (cont.)
23
RDC Businesses: Ferrovias Guatemala (cont.)
Steam Charter (Baldwin-
Philadelphia, 1948)
HISTORY & CULTURE
24
RDC Businesses: Ferrovias Guatemala (cont.)
“Prensa Libre”, Guatemala, Mar. 14, 2007
First-Ever Claim Under CAFTA Pending
The Arbitration Process:
Notice to Government March 2007
Claim filed with ICSID June 2007, accepted August 2007
Tribunal of 3 arbitrators constituted April 2008
Various government objections overruled and rebuffed
Tribunal hearing case throughout 2009-2011
Binding decision expected 2012
26
RDC Businesses: Ferrovias Guatemala (cont.)
Rail (and right of way!) “stolen” on the Santo Tomas branch
A License to Steal
27
Theft of track material, bridge structural cross members (ties burnt to facilitate removal)
Theft of entire main lineMP 138, South of El Rancho Station
RDC Businesses: Ferrovias Guatemala (cont.)
A License to Steal (cont.)
30
RDC Businesses: Central Andino (cont.)
600 km between Lima/Callao and Cerro de Pasco and Huancayo
World’s 2nd Highest Railway (15,807 ft / 4,818 m)
Privatized September 1999
JOINT VENTURE with Juan Olaechea & Company; Minas Buenaventura; Cemento Andino; and others
Passenger Service inaugurated 2002, re-equipped 2006
CONTENTCONTENT
31
Monthly tourist operation on former “World’s Highest Railway”
No subsidy
RDC Businesses: Central Andino (cont.)
34
RDC Businesses: Central Andino (cont.)
New look for steam!!!
HISTORY & CULTURE
NYW&B MU at Callao
36
RDC “Past” Investments: Africa (cont.)
800 km linking Lilongwe with Blantyre & Mozambique’s Nacala Railway
Privatized December 1999
First Private Sector rail investment in Africa
JOINT VENTURE with CFM (Mozambique); ERL (Bermuda); MANICA
(Mozambique); and Mozambican investors
• RDC, ERL interests sold to local investors September 2008
MALAWI:
37
RDC “Past” Investments: Africa (cont.)
Mozambique’s Nacala Railway, which includes 872 km to Lichinga & Malawi’s border, plus Nacala Port
Transfer of concession in Jan. 2005 & integrated with CEAR
First private sector integration of ports & railways
JOINT VENTURE with CFM (Mozambique); ERL (Bermuda); MANICA (Mozambique); and Mozambican investors
• RDC, ERL interests sold to local investors September 2008
MOZAMBIQUE:
39
Traffic Base: Highly diversified — carload freight, LCL freight, passengers Main imports — fuel, cooking oil, fertilizer, food Main exports — tobacco, food
RDC “Past” Investments: Africa (cont.)
42
693 km linking the Estonian ports with Russia and Latvia
Only vertically-integrated privatization of a national railway in Europe (Aug. 2001)
JOINT VENTURE with Rail World Inc. (USA); Mid Europa Partners (UK); & Ganiger Invest (Estonia)
Traffic increased from 38.7 million tons in 2001 to 44.4 million tons in 2006
Personal injuries reduced 75% between 2001 and 2006
EESTI RAUDTEE e s t o n i a n r a i l w a y s EESTI RAUDTEE e s t o n i a n r a i l w a y s
RDC “Past” Investments: Estonia (cont.)
43
Soviet-era road loco fleet completely replaced with regauged former CR GE C30-7s and former UP C36-7s.
Limited Open Access regime agreed to as condition of privatization.
New, highly punitive Open Access regime imposed in 2003 as result of corruption.
RDC “Past” Investments: Estonia (cont.) CONTENTCONTENT
44
Conflict with government over retroactive confiscation of value settled in 2007 with re-nationalization at mutually agreed price.
“A win for the politicians, a draw for the investors and a loss for the Estonian people.”
Subsequently, a loss for the politicians.
RDC “Past” Investments: Estonia (cont.)
47
RDC Caption Contest – Entry #1
“Are you sure that Posner’s ‘never coming back’? There was a guy with a bowtie in the cab of that locomotive back at the station.”
48
RDC Caption Contest – Entry #2
Preoccupied with putting flags on the locomotive, Edgar and his comrades forgot a basic safety rule: “leave the handbrake ON”.
49
RDC Caption Contest – Entry #3
Overconfident in their knowledge of railway safety rules, Edgar and his comrades confused the “Blue Flag” rule with the Estonian flag.
50
RDC Caption Contest – Entry #4
Tragically, Edgar and his comrades learned too late the reason why railway workers wear high-visibility clothing.
51
RDC “Past” Investments: Estonia (cont.)
Post Script:
• Political conflict with Russia (“Bronze Soldier”)
decimated traffic 4 months after re-nationalization
• “Monopoly” handling 45 million tons in private hands
now handling 25 million tons in public hands
52
RDC “Past” Investments: Steel City Flyer
Express bus Pittsburgh/Harrisburg, “business class”
Initiated 11/08 to connect with Amtrak high speed Keystone Corridor at Harrisburg
No subsidy
Discontinued 7/09 due to:
Inability to access Harrisburg “intermodal” rail/bus terminal
Flawed assumption that Highmark was interested in saving $1 million per year/increased employee productivity
54
Plan A: Initial Years
Formation in 1987 in conjunction with former L.B. Foster principals (G&M, DM&E)
Strategy; continue formation of regional railroads at same pace (1 or 2 per year)
Results; high transaction costs, no results “Duck Creek North” (CNW North of Green Bay)
TranStar
W&LE
55
Conclusions Many buyers bidding for few lines
Every bidder is innovative, aggressive, market-driven, etc.
Successful bidders:– pay lowest wages
– renegotiate after award
– obtain public funding later
Plan A: Initial Years (cont.)
56
Local company in trouble
Opportunity for consensus with labor
Negotiated transaction (not a Class 1 auction)
Plan B: P&LE (1990)
57
RDC’s Plan for P&LE
Preserve Local Company Serve Local Customers, Monongahela Railway Coal Provide Trackage Rights to CSX for Through Trains Promote McKees Rocks Car Shop
Financial Package Completed Acquisition Financing 14 Labor Agreements (all unions)
58
Results
Sale Aborted June 20, 1990 Primary Cause – management believed it could use RDC labor
agreements and financing
Secondary Cause – DER hard line regarding McKees Rocks
(retroactive environmental liability)
Additional Cause – local counsel’s advice to lender that they
would be subject to joint and several environmental liability
59
SELECTED HEADLINES – Pittsburgh Post-Gazette
10-Feb-1990 Local Investors Agree to Buy P&LE
20-Mar-1990 Regulators Back Sale of P&LE Assets
16-May-1990 P&LE, Unions Reach Agreement on Severance
29-Jun-1990 Deal Off for Assets, P&LE Says
30-Jun-1990 Railroad President Denies P&LE Cheated Investment Group
25-Oct-1990 P&LE to Cut 500 Jobs, Trim Wages
2-Jul-1991 Regulators Approve P&LE-CSX Deal
31-Jul-1991 P&LE Agrees to Operate Meadville Shortline
11-Sep-1992 CSX Buys Out P&LE Railroad
60
SELECTED HEADLINES – Traffic World
19-Feb-1990 P&LE Hoping Third Time is Charm as Local InvestorsPlan Purchase
2-Jul-1990 P&LE, Unions in Holding Pattern as Would-Be BuyersCast Aside
5-Nov-1990 P&LE Breaks Deal with Organized Labor
8-Jul-1991 CSX Wins ICC Approval for Plan to Acquire & LeaseBack P&LE Track
21-Sep-1992 Pittsburgh & Lake Erie Railway Sold; Big EnvironmentalClean-Up Remains
61
P&LE Today
A Wide Spot on CSX Trackage Rights Traffic Strong Monongahela Railway Coal Strong On-Line Industry Weak
McKees Rocks: A Ghost Town Car Shop Demolished Environmental Problems Remain
62
Conclusions
RDC’s Plan Would Have Worked RDC’s Plan Was Undermined By:
Management’s belief that financing and labor agreements were transferable
Management’s economic incentive to see the company liquidated
DER’s inability to deal in good faith (“A job killing machine.” – Governor Tom Ridge)
63
Initially formed in 1984 to restore through service on Chicago-
Omaha main line of Rock Island
Unsuccessful restructuring initiated by CWP in 1990
Negotiated transaction completed by RDC
RDC ownership of 20%, with option to buy additional 80%
Plan C: IAIS (1991)
64
Conclusions
RDC finally in the railroad business
Part of a substantial company (Class 2, connecting
with all Class 1’s)
Entry price reasonable
Plan C: IAIS (1991) (cont.)
65
RDC contacted by Argentine company looking for partner
Argentine rail privatization unprecedented…and in Latin America
Very risky and difficult to analyze relative to U.S. transactions
RDC only company interested
Plan D: International (1991)
66
Conclusions RDC an early leader in overseas privatization
Not as risky or difficult to analyze as perceived to be
A very long-term investment horizon
Heavy emphasis on flexibility and cultural skills
Tried by many (RailTex, CSX, etc.), few left
Plan D: International (1991) (cont.)
68
RDC “Future” Passenger Service: Hamburg-Köln Express Service to begin late 2011, three
roundtrips/day
Used rolling stock purchased, to be refurbished
“Paths” confirmed on DB main line
No subsidy
69
Joint venture with Reseau Ferre de France (RFF) to streamline and save the wagonload business
Translate the U.S. short line model to France
Important opportunity to take trucks off highways
RDC “Future” Wagonload Business: France
70
“With great power comes great
responsibility.”Spider Man
for GE Transportation Systems
“There is no ‘I’ in Iowa Interstate.”
Henry Posner III
The Future