What Does the Future Hold

for Hector Rail? Scandinavian Rail Development Stockholm 16 April 2013

Agenda

• Short about Hector Rail

• Big picture: Effects of market opening

• Hector Rails loco strategy at a brief

• Financing Rolling Stock as a private company

• Rolling Stock Development

• Organisational Development

• The ERTMS challenge

2013-04-18 3

Clear business model

• Independent line-haul traction

between facilities/ terminals of

– industrial shippers

– freight forwarders

– intermodal operators

– passenger traffic operators

– other railway companies.

• Within traction concept, we also

offer:

– Wagons (rented during contract period)

– Shunting

Independent traction provider

• Hector Rail is an

independent traction

provider

– Not owned by any state

– Not connected to any

transport or forwarding

company

– Serves all customers on an

equal basis

4

Operation in four countries

• Customers

– SCA

• Timber

• Bio fuel

– Stora Enso

• Timber

– Scand Fibre Logistics

• Paper

– Samskip Van Dieren Multimodal

• Trailer, Container

– Veolia Transport

• Passenger traffic

– SCA Transforest

• Craft liner

– SCT Transport

• Containers

– DB Schenker Rail Deutschland

• Steel

• 14 000 train km/day

6

Before deregulation

• Geography defined the

organisation

• The organisation

covered the entire value

chain

• Competition didn’t exist

within a certain

geography

7

From now on

• We must define our business concept within the value chain

• Core competences (not geography) define our organisations

• The market/competition will set the value on our competences

Roles in freight transport

Truck feeder Feeder operator

Integrator

Loco owner

Logistic solution provider

Warehouse and

distribution

Operator

Terminal operator

Focused or full service

Focused

• Focus on core business

• No problems that partners

could see you as potential

competitor

• Can always be part of most

competitive solution

(together with partners

which cover other parts of

the value chain)

Full service

• Can have end customer

contact and provide total

solution (this role can,

however, also be held by a

co-ordinator)

• Can create bigger margins

with integrated offer (but

risks to lose as all in-house

parts may not be the most

competitive or optimal)

State ownership increases in the railway

sector

• Incumbents buy New entrants in foreign countries

– DB: PCC, EWS, ECR, (BLS), (Nordcargo) etc

– Trenitalia: TX Logistik

– SNCF: ITL, Veolia Cargo (ex R4C)

• Incumbents becomes “New entrants” outside their home

territory and starts competing with the domestic incumbent

• Consequently private rail operations have decreased in

volume

• State railways has a tendency to strive for “World

domination” with a full service concept

States – Are they the best owners?

• What could be the reason for a state to be an owner of a railway

company?

– A State can be the right owner for domestic monopolies

• State owned railways tends to strive for a full service concept with risk

for lack of (internal) competition

• States are not the right owners in a competitive market

– Risk for expecting to small returns in the business which makes the

business sector less attractive to professional investors

– Worst case: State subsidies

• Why should tax payers (risk to) subsidize an international freight company?

Example State Railway; history

Example State Railway; projection

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

-1000

-500

0

500

1000

1500

2000

2500

3000

3500

2001 2003 2005 2007 2009 2011 2013 2015

MS

EK

LT debt

Equity

Solidity

Required solidity

600 MSEK new share issue >600 MSEK capital gains from divestment

Previous structure in Sweden

• Full service concept with a big number of focused services

• Full service concept created through internal (no competition) purchase of focused services

– Reduces true competitiveness of the service

• Try to attract customers through networks and political means

– Reduces market for the focused services

Wagon load

4,0

NTR

0,9

Logistics*

0,8

Traction

4,5

Road

0,4

Waggons

0,4

Road

0,4

On the way to a more rational future

structure?

• The different focused service

parts becomes own companies

• Service co-ordinators create

customer solutions

• Wagon load system provider

will be a concept owner and

buying focused services in

competion from suppliers

– Similiar to forwarder –

trucker on the road

• Creates a dynamic market

with focused service

providers in competition

Wagon load

4,0 NTR

0,9

Logistics

0,8

Wagons

0,4

Truckers

Separated

Traction providers

Private

Wagon companies

Done Done

Remains

Remains

Integrated

A dynamic railway market in Europe

• State owned full service providers can limit the development to a dynamic railway business in Europe

• It would be more dynamic to convert to focused service in competition in combination with co-ordinators and concept owners

• The state ownership is in itself an obstacle for a more dynamic market, since it reduces the interest for private investors

– Accept to low returns on the investment

– Political agendas

Conclusion:

Focus on your part of the value chain

• To be successful in the future market you have to define

and focus on your part in the value chain

– For Hector Rail: Traction provider

• Reduced state ownership in the railway business would

improve vitality in the sector

Hector Rails fleet strategy in brief

• Hector Rail takes long term responsibility for its locos

– Try to acquire or create locos with unique capabilities

– Have a mix between old and new locos

– Use operational leases to a limited extent

– Find optimal financing solutions

– Purchase most competitive maintenance solution

Productivity in many ways

• Cost efficient traction can be realised through

– Effective purchasing

• Prices, fleet sizes

– Efficient financing

• Interest rates

• Leverage

• Amortisation

– Efficient maintenance

• Cost / km

• Low down time / High availability

– Careful design of operation

• High utilisation of tractive effort

• High mileage

Fleet development

Loco fleet (September 2011)

Class Hector Rail 141 Hector Rail 142 Hector Rail 161 Hector Rail 241 Hector Rail 242 Hector Rail 441 Hector Rail 941 Hector Rail 942

Axle config Bo'Bo' Bo'Bo' Co'Co' Bo'Bo' Bo'Bo' Bo'Bo' B'B' B'B'

Number 3 12 *)

6 **)

12 5 2 2 2

Weight ton 86 84 129 84 85 86 90 88

Axle load ton 21,5 20,9 21,5 21 21,2 21,5 22,5 22

Power kW 6400 4000 5400 5600 6400 (7000) 6400 2700 1180

Tractive Effort kN 275 225 420 300 300 300 300 295

Max speed km/h 160 (230) 150 120 140 230 140 120 100

Approval SE SE SE, NO SE, DK, DE, NO SE, DE, AT SE SE, NO (DK, DE) SE

Year of manufacturing 1996 1972-75 1967 2007-2011 2000-2002 2005 2005 1995

*) thereof 11 in operation

**) Thereof three in operation

Old versus new locos

New

• High investment costs

• High availability

• Cross border operations

Old

• Lower investment costs

• Lower availability

• Single country operation

Hector Rail invests in Passenger Coaches

• Hector Rail has purchased

42 previous DB Bm235

coaches

– Designed for 200 km/h

• Purpose: To provide full

high speed train sets for

passenger operators in

Sweden

Financing locos as a private company

• Hector Rail has all our locos on the

balance sheet

• Financing this kind of equipment is a

difficult challenge

• As a private company the financier

demands profitability

• Over time financing has been more and

more complex

– Especially for older locos

– Increased demands on banks

• Hector Rail uses a big palette for

financing

– Leases, loans etc

– Four different banks

Organisational challenge:

Grow quickly and perform well

ETCS – pure horror?

• ERTMS/ETCS might jeopardise a

huge share of railway operations

• ERTMS/ETCS might discriminate

smaller operators and thereby

jeopardise market opening

• To avoid horror: ERTMS/ETCS

implementation plan must reflect

interests of all involved parties

Background to financing challenge

• ERTMS decided when railways were integrated and publicly owned

– ERTMS creates no tangible customer benefits

– Infrastructure benefits may in some cases offset rolling stock conversion costs

– Governments, owning both the IM and RU could also apply political motives to ERTMS

investments

• Problems now for separated RUs

– RUs don’t get any benefits from ERTMS (i.e. requires equity financing)

– Governments are unwilling to support RUs

– Thus, many RUs cannot finance rolling stock conversion

• Most private RUs will go bankrupt

• Therefore, financing solutions needed for rolling stock conversions to ERTMS

Toll Bridge Financing structure

Gives

directive

Repayment

Loan

Administer payments

“Toll” payment

Special

Purpose

Body

National

government Concept • Railway operators pay for the on board equipment

o Not up front, but over time when using the equipment o Similar to how to finance a new bridge through tolls

Train owners

Infrastr. mgr.

Operators

Equity

contribution