1 princeton university december 15, 2010 rdc’s long, strange trip to the fringes of the regional...

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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)

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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

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RDC – General

Pittsburgh-based, privately held railway

investment and management company

Focus: Emerging Corridors in Emerging

Markets

Financial structure based on Joint Ventures

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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

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RDC Businesses: Iowa Interstate RR

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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

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Safety

Gold Harriman Award 2004 and 2008 for Safety Performance in Years 2003 and 2007


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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

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New GE ES44ACs

Intermodal Facilities

Investment

Photo courtesy Tom McNair © 2010

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Future Amtrak route Chicago-Iowa City… …using formerly-abandoned Rock Island main line

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Photo courtesy Nathan Holmes © 2010

October 18, 2008

Double-headed, record setting steam freight haul: 66 cars, 6,252 tons, CBBI

HISTORY & CULTURE

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RDC Businesses: ALL Central

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RDC Businesses: ALL Meso

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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

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RDC Businesses: Ferrovias Guatemala

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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

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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

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All traffic was “intermodal” between Atlantic ports and Guatemala City.

Base traffic was steel, with spot intermodal as capacity permitted.

Traffic Base


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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

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Squatters


Local Conditions

Garbage dump

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0

1

2

3

4

5

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Injuries 6 5 3 0 1 4

2002 2003 2004 2005 2006 2007

SAFETY


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Steam Charter (Baldwin-

Philadelphia, 1948)

HISTORY & CULTURE

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“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

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Rail service suspended September 2007


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Rail (and right of way!) “stolen” on the Santo Tomas branch

A License to Steal

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Theft of track material, bridge structural cross members (ties burnt to facilitate removal)

Theft of entire main lineMP 138, South of El Rancho Station


A License to Steal (cont.)

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RDC Businesses: Central Andino

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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

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Monthly tourist operation on former “World’s Highest Railway”

No subsidy


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FCCA Profile

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Huayco

Motor car ahead of train


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New look for steam!!!

HISTORY & CULTURE

NYW&B MU at Callao

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RDC “Past” Investments: Africa

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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:

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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:

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First private sector integration of Ports & Railways


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Traffic Base: Highly diversified — carload freight, LCL freight, passengers Main imports — fuel, cooking oil, fertilizer, food Main exports — tobacco, food


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The “new” look…

CONTENTCONTENT

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RDC “Past” Investments: Estonia

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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.)

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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

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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.


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The Center Party’s View of Re-nationalization

“We bought the Railway back!”

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The Press View of Re-nationalization

“We’ve brought the ESSR back!”

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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.”

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Preoccupied with putting flags on the locomotive, Edgar and his comrades forgot a basic safety rule: “leave the handbrake ON”.

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Overconfident in their knowledge of railway safety rules, Edgar and his comrades confused the “Blue Flag” rule with the Estonian flag.

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Tragically, Edgar and his comrades learned too late the reason why railway workers wear high-visibility clothing.

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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

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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

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History of RDC

Plan A: Initial YearsPlan B: P&LEPlan C: IAISPlan D: International

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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

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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.)

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Local company in trouble

Opportunity for consensus with labor

Negotiated transaction (not a Class 1 auction)

Plan B: P&LE (1990)

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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)

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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

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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

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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

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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

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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)

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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)

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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.)

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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)

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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.)

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The Future

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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

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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

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“With great power comes great

responsibility.”Spider Man

for GE Transportation Systems

“There is no ‘I’ in Iowa Interstate.”

Henry Posner III

The Future

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“Come with us to the New Lands!”

“A Luta Continua…”Samora Machel

1 princeton university december 15, 2010 rdc’s long, strange trip to the fringes of the regional...

Documents

central slide

future slide

meso slide

rdc general

traffic slide

content slide

iowa interstate rr slide

public sector slide