UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

 

 

Commission File Number 1-2328

 

GATX Corporation

(Exact name of registrant as specified in its charter)

 

500 West Monroe Street

Chicago, IL 60661-3676

(Address of principal executive offices, including zip code)

(312) 621-6200

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

 

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $2.4 billion as of June 30, 2007.

 

As of January 31, 2008, 47.9 million common shares were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

GATX CORPORATION

 

2007 FORM 10-K

 

INDEX

 

 

GATX Corporation (“GATX” or the “Company”) leases, operates and manages long-lived, widely used assets in the rail, marine and industrial equipment markets. GATX also invests in joint ventures that complement existing business activities. Headquartered in Chicago, Illinois, GATX has three financial reporting segments: Rail, Specialty and American Steamship Company (“ASC”).

 

At December 31, 2007, GATX had balance sheet assets of $4.7 billion, comprised largely of railcars, marine vessels and joint venture investments. GATX also utilized approximately $1.2 billion of assets, primarily railcars, which were leased-in under operating leases and therefore were not recorded on the balance sheet.

 

In 2006, GATX entered into an agreement to sell the majority of its aircraft leasing business to Macquarie Aircraft Leasing Limited (“MALL”). The sale was completed in two stages: the sale of wholly owned aircraft closed on November 30, 2006, and the sale of partnered aircraft closed on January 17, 2007. Separately in 2006, GATX sold 26 wholly owned and partnered aircraft and its interest in Pembroke Group, a 50% owned aircraft leasing affiliate. These events resulted in the complete sale and disposition of GATX’s aircraft leasing operation (formerly the “Air” segment). Accordingly, Air has been segregated and classified as discontinued operations for all periods presented.

 

See discussion in Note 24 to the consolidated financial statements for additional details regarding foreign operations and see Note 25 to the consolidated financial statements for details regarding each segment’s operating results.

 

Rail is principally engaged in leasing tank and freight railcars and locomotives in North America and Europe. At December 31, 2007, Rail had total assets of $5.0 billion, including $1.2 billion of off balance sheet assets. Rail’s railcar leasing customers are comprised primarily of shippers of chemical, petroleum and food products as well as railroads. Rail’s locomotive leasing customers are primarily Class I, regional and short-line railroads and industrial users. Worldwide, Rail provides more than 130 railcar types used to ship over 600 different commodities.

 

 

As of December 31, 2007, Rail’s worldwide fleet, comprised of wholly owned and leased-in railcars, totaled approximately 132,000 railcars. These cars have depreciable lives of 30 to 38 years and an average age of approximately 16 years in North America and 24 years in Europe. Rail also had an ownership interest in approximately 28,300 railcars worldwide through investments in affiliated companies, including 5,700 railcars in North America and 22,500 railcars in Europe. Affiliate fleets consist primarily of freight and intermodal railcars.

In addition, Rail manages approximately 4,500 railcars for third party owners. The following table sets forth Rail’s fleet data as of December 31, 2007:

 

 

In North America, Rail purchases new railcars from a number of manufacturers, including Trinity Industries, Union Tank Car Company, American Railcar Industries, Inc., FreightCar America, National Steel Car Ltd. and The Greenbrier Companies. In 2002, Rail entered into agreements with Trinity Industries and Union Tank Car Company for the purchase of 5,000 and 2,500 newly manufactured railcars, respectively, the deliveries of which were essentially complete at December 31, 2007. During 2006, Rail signed a purchase agreement with American Railcar Industries, Inc. to acquire up to 4,000 newly manufactured railcars to be delivered through 2011. In December 2007, Rail agreed to purchase up to 3,000 new railcars from Trinity Industries to be delivered through 2011. In Europe, Rail acquires new railcars primarily from the IRS Group. Rail Europe also assembles a few hundred pressure tank cars each year at its Ostroda, Poland service center.

 

 

North America

 

At the end of 2007, there were approximately 1.4 million freight cars and 309,000 tank cars operating in North America. Rail’s freight car fleet comprised approximately 4% of all North American freight cars and Rail’s tank car fleet comprised approximately 20% of all North American tank cars. Rail’s primary competitors in North America are Union Tank Car Company, General Electric Railcar Services Corporation and various other lessors. Rail competes on the basis of customer relationships, service, price and availability of railcars.

 

In North America, Rail leases new railcars for terms that generally range from five to ten years. Renewals on existing leases are typically for periods ranging from five to seven years. The weighted average remaining lease term of the North American fleet was 4.5 years as of December 31, 2007. Rail primarily provides railcars pursuant to full-service leases under which it maintains the railcars, pays ad valorem taxes and insurance and provides other ancillary services. Rail also offers net leases for railcars and most of its locomotives, in which case the lessee is responsible for maintenance, insurance and taxes. Rail had approximately 1,000 customers in 2007, with no single customer accounting for more than 4% of Rail’s lease income.

 

Rail operates an extensive network of service facilities across North America that performs significant repair, maintenance and regulatory compliance work on the fleet. This maintenance organization is dedicated to providing customers with timely, efficient and high quality repair services. Maintenance services include interior cleaning of railcars, general repairs to car body and safety appliances, regulatory compliance work, truck repairs, including replacement of worn parts, servicing and replacing wheels, side frames and bolsters, valve maintenance repair, exterior blast and paint, and car stenciling. In addition, to the extent possible, regulatory compliance work is conducted while cars are in the service centers for customer directed repairs, thereby minimizing the number of required service events. The Rail maintenance network consists of:

 

 

 

Rail’s repair network is supplemented by a number of approved third party service centers that adhere to GATX’s quality standards. In certain cases, third-party repair services are utilized via fixed-capacity contracts under which GATX has secured repair capacity in advance through term contracts. In 2007, these third party service centers accounted for approximately 41% of all North American service center maintenance costs (excluding the cost of repairs performed by railroads). Including both GATX owned and third party service centers, approximately 65,000 cars (which may include multiple independent service events for the same car) were serviced in 2007.

 

Rail’s North American operation also includes its locomotive leasing business, which consists of the purchasing, refurbishing and leasing of four- and six-axle locomotives. As of December 31, 2007, the fleet consisted of 615 units, 82% of which are four-axle and 18% are six-axle. Additionally, Rail manages 96 locomotives for an affiliate. Prior to 2007, Rail’s locomotive fleet consisted primarily of four-axle, medium horsepower locomotives. Four-axle locomotives have not been manufactured in any material quantity since the mid-1980’s but continue to be in demand by railroads and shippers. As a result, with periodic refurbishment, the four-axle fleet is expected to continue to be marketable and yield attractive returns. In 2007, Rail acquired 99 six-axle SD60 locomotives, expanding the locomotive operating lease business to include modern, high-horsepower locomotives. Rail will continue to look for opportunities to expand its presence in the six-axle market. Locomotive lease terms vary from month-to-month to 15 years, with a weighted average lease term of six years. The locomotives in Rail’s current portfolio have remaining depreciable lives ranging from 12 to 20 years. Major competitors in the North American locomotive leasing market are Helm Financial Corporation and National Railway Equipment Corporation. Competitive factors in the market include equipment condition, availability, customer service and pricing.

 

Europe

 

In Europe, Rail’s operations consist of its wholly owned subsidiaries in Germany, Austria and Poland. Rail operates in the home countries of each of its subsidiaries and leases railcars to customers in those countries as well as most other countries in Western, Central and Eastern Europe that utilize standard gauge rail. Rail’s customer base includes petroleum refining and marketing companies, chemical manufacturing companies, and transportation, forwarding and railway companies. The railcar fleet in Europe generally has lease terms ranging from one to five years, with a weighted remaining lease term of two years as of December 31, 2007. Rail also operates two repair facilities in Europe that perform significant repairs and regulatory compliance for owned railcars. The owned service centers are supplemented by a number of third party contract repair facilities, which in 2007 accounted for approximately 49% of fleet repair costs. In Europe, Rail principally competes on the basis of customer relationships, service, price and availability of railcars. Rail’s primary competitors in Europe are VTG Aktiengesellschaft, Ermewa, TransWaggon, and CTL Logistics Group.

 

Rail Affiliates

 

Rail has two notable investments in affiliated companies: a 50% interest in Southern Capital Corporation (“SCC”) and a 37.5% interest in AAE Cargo AG (“AAE”).

 

SCC is a joint venture with the Kansas City Southern Railroad (“KCSR”). The SCC joint venture was formed in 1996 and controls a mix of 4,198 freight cars and 96 locomotives, all of which are on lease to KCSR.

 

AAE is a Switzerland-based railcar lessor that as of December 31, 2007, owns approximately 22,500 freight cars with an average age of 9 years, comprised of 12,497 intermodal cars (55.5%), 4,834 covered cars (21.5%) and 5,192 other freight type cars (23.0%). AAE’s customer base consists of various railways throughout Europe as well as private operators. Utilization of AAE’s fleet has historically been very high and stood at 99.9% as of December 31, 2007.

 

Specialty is primarily focused on providing leasing and related remarketing and asset management services in the marine and industrial equipment markets. The Specialty portfolio consists primarily of operating and direct finance lease assets; joint venture investments; loans; and interests in residual values involving a variety of underlying asset types, including marine, rail, industrial and other equipment. The portfolio provides recurring lease and interest income and periodic remarketing income primarily related to the sale of assets. At December 31, 2007, the net book value of the investments in the Specialty portfolio, including off balance sheet assets, was $521.4 million, of which approximately 47% were marine assets and 24% were industrial equipment assets.

 

 

Specialty also provides equipment residual value guarantees, which enable it to share in any asset value in excess of the guaranteed amount. As of December 31, 2007, Specialty was party to 58 such residual value guarantees that expire between 2008 and 2012. Specialty further leverages its equipment knowledge by managing portfolios of assets for third parties. The majority of these managed assets are in markets where GATX has traditionally had a high level of expertise, such as Rail and Air. Specialty generates fee income through portfolio administration and remarketing of these managed assets. As of December 31, 2007, the approximate net book value equivalent of Specialty’s managed portfolio was $378.1 million.

 

The following table sets forth information on Specialty’s owned and managed portfolio assets as of December 31 (in millions):

 

 

The principal competitors of Specialty are captive leasing companies of equipment manufacturers, leasing subsidiaries of commercial banks and independent leasing companies. Factors that affect Specialty’s ability to compete are GATX’s relationships, equipment expertise, relative cost of funds, and the availability of other financing alternatives for our potential customers.

 

Specialty Affiliates

 

Specialty’s investments in affiliated companies primarily consist of an aircraft engine leasing joint venture and five marine joint ventures.

 

Rolls-Royce and Partners Finance Limited (“RRPF”) is a 50% owned joint venture with Rolls-Royce PLC, a leading manufacturer of commercial aircraft jet engines. RRPF provides short, medium and long-term spare engine leases and owns one of the largest spare engine portfolios in the industry, comprised of more than 290 aircraft

engines of Rolls-Royce and International Aero Engine types. RRPF brings high levels of technical, financial and leasing expertise to the market. Through RRPF, Rolls-Royce was one of the first Original Equipment Manufacturers to provide dedicated, long-term, spare engine leasing options.

 

Cardinal Marine Investments LLC (“Cardinal Marine”) is a 50% owned marine joint venture with IMC Holdings, a subsidiary of the IMC Pan Asia Alliance Group (“IMC”). IMC is a 50 year old Singapore-based owner-operator of over 80 vessels, including chemical tankers, dry bulk carriers, multipurpose cargo and offshore oil and gas carriers. Cardinal Marine owns six chemical parcel tankers (each with 45,000 dead weight tons (“dwt”) carrying capacity) that operate under a pooling arrangement with IMC’s other vessels in support of the movement of organic and inorganic chemicals, along with vegetable and other oils, and biofuels from the Middle East Gulf to Asia, the U.S. and Europe.

 

Somargas Limited and Singco are each 50% owned joint ventures with IM Skaugen ASA (“Skaugen”). Skaugen is a 90 year old Norwegian Company primarily engaged in the transport of petrochemical gases and the ship to ship transfer of crude oil. Somargas owns six liquid petroleum gas/ethylene vessels (each with 8,500 — 10,000 cubic meters (“cbm”) carrying capacity) and Singco is building four liquid petroleum gas/ethylene/liquefied natural gas vessels (each with 10,000 cbm carrying capacity). The Somargas vessels operate in a 44 vessel pooling arrangement controlled by Skaugen, primarily transporting ethylene between the Middle East Gulf and Asia.

 

Clipper Third Limited and Clipper Fourth Limited, respectively, are 50% and 45% owned joint ventures with Clipper Group Invest Ltd. (the “Clipper Group”). The Clipper Group is a leading international shipping consortium with over 35 years of experience in the shipping business. The Clipper Group controls a modern fleet of over 250 vessels, approximately 100 of which are wholly owned. Their fleet consists of handysize, handy max and panamax dry bulk carriers (15,000 — 80,000 dwt carrying capacity), multipurpose tonnage vessels (4,000 — 17,500 dwt carrying capacity), and chemical tankers (1,500 — 20,000 dwt carrying capacity), and are capable of handling a variety of cargo types. Clipper Third owns four handysize vessels (each with 27,000 dwt carrying capacity) that support the worldwide movement of dry bulk products such as grain, cement, coal and steel. Clipper Fourth owns 14 handysize chemical parcel tankers (each with 10,000-15,000 dwt carrying capacity). These 18 vessels operate under a pooling arrangement with the Clipper Group’s fleet in support of the worldwide movement of dry bulk commodities and organic, inorganic and specialty chemicals with a concentration in the Atlantic and Mediterranean trades.

 

ASC operates a fleet of self-unloading marine vessels on the Great Lakes and is exclusively engaged in the waterborne transportation of dry bulk commodities. ASC’s sailing season generally runs from April 1 through December 31; however, weather conditions permitting, certain vessels may operate through mid-January of the following year.

 

At December 31, 2007, ASC operated a fleet of 18 vessels and had total assets of $292.0 million. Fifteen of ASC’s vessels are diesel powered vessels constructed in the 1970’s and early 1980’s, having an average age of 31 years and an estimated useful life of 50 years. These vessels range in size from approximately 635 feet to 1,000 feet long and can carry from 23,800 to 80,900 gross tons per trip. The three remaining vessels are steam powered vessels built in the 1940’s and 1950’s and have an estimated remaining useful life of ten years. The steamer vessels range in size from 690 to 767 feet and can carry from 22,300 to 26,300 gross tons per trip. ASC’s vessels operate exclusively in the fresh water conditions of the Great Lakes and as a result, with proper care and maintenance, may achieve extended use well beyond the useful life estimates.

All of ASC’s vessels are equipped with self-unloading equipment, enabling them to discharge dry bulk cargo without assistance from shore-side equipment or personnel. This equipment enables the vessels to operate twenty four hours a day, seven days a week. ASC’s vessels are capable of transporting and unloading almost any free flowing, dry bulk commodity. ASC’s customers are primarily consumers of iron ore, western and eastern coal, metallurgical limestone and limestone aggregates. ASC served over 35 customers in 2007 with the top five customers comprising 68% of ASC’s total revenue.

 

 

ASC operates pursuant to contractual commitments with customers to carry a stipulated range of freight volume each year. Committed volume is supplemented with spot opportunities. In 2007, ASC carried 37.3 million net tons of cargo including both contracted volume and spot business. ASC’s customer portfolio has remained relatively stable over the past three years and includes a mix of companies in the steel production, power generation and construction industries. Seventeen of the vessels in ASC’s fleet are used to service these contracts and spot business. ASC’s remaining vessel operates under a long-term time charter agreement that is scheduled to expire in 2015.

 

In 2007, for the markets that ASC serves, there were approximately 99 million net tons of freight volume carried by United States-Flag vessels on the Great Lakes. This freight volume was distributed among approximately 50 vessels, of which ASC’s fleet carried approximately 38%. ASC’s primary competitors on the domestic Great Lakes are Grand River Navigation, Great Lakes Fleet, Inc., Interlake Steamship Company, K & K Integrated Logistics, VanEnkevort Tug and Barge, Upper Lakes Towing, and Wisconsin & Michigan Steamship Company. ASC principally competes on the basis of price, customer relationships and service capabilities.

 

Patents, trademarks, licenses and research and development activities are not material to GATX’s businesses taken as a whole.

 

Seasonality is not considered significant to the operations of GATX and its subsidiaries taken as a whole.

 

GATX, taken as a whole, is not dependent upon a single customer nor does it have any significant customer concentrations. Segment concentrations, if material, are described above.

 

As of December 31, 2007, GATX employed approximately 2,094 persons, of whom 51% were covered by union contracts.

 

GATX’s operations, as well as those of its competitors, are subject to extensive federal, state, local and foreign environmental regulations. These laws cover discharges to waters; air emissions; toxic substances; and the generation, handling, storage, transportation and disposal of waste and hazardous materials. These regulations have the effect of increasing the cost and liability associated with leasing and operating assets. Environmental risks are also inherent in rail operations, which frequently involve transporting chemicals and other hazardous materials.

 

Some of GATX’s current and previously owned properties have been used for industrial or transportation-related purposes that may have resulted in the discharge of contaminants. As a result, GATX is now subject to, and will from time to time continue to be subject to, environmental cleanup and enforcement actions. In particular, the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), also known as the Superfund law, generally imposes joint and several liability for cleanup and enforcement costs, without regard to fault or the legality of the original conduct, on current and former owners and operators of a site. Accordingly, GATX may be responsible under CERCLA and other federal and state statutes for all or a portion of the costs to clean up sites at which certain substances may have been released by GATX, its current lessees, former owners or lessees of properties, or other third parties. Environmental remediation and other environmental costs are accrued when considered probable and amounts can be reasonably estimated. As of December 31, 2007, environmental costs were not material to GATX’s results of operations, financial position or liquidity. For further discussion, see Note 18 to the consolidated financial statements.

 

GATX makes available free of charge at its website, www.gatx.com, its most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (“SEC”). Charters for the Audit Committee, Compensation Committee and Governance Committee of the Board of Directors, the Corporate Governance Guidelines, the Code of Business Conduct and Ethics and the Code of Ethics for Senior Officers are posted under Corporate Governance in the Investor Relations section of the GATX website, and are available in print upon request by any shareholder. Within the time period prescribed by SEC and New York Stock Exchange regulations, we will post on our website any amendment to the Code of Ethics for Senior Officers and the Code of Business Conduct and Ethics any waivers thereof. The information on GATX’s website is not incorporated by reference into this report.

 

 

GATX is subject to a number of risks which investors should consider.

 

Competition could result in decreased profitability.

 

GATX operates in a highly competitive business environment. In many cases, competitors are larger entities that have greater financial resources, higher credit ratings and a lower cost of capital than GATX. These factors may enable competitors to offer leases and loans to customers at lower rates than GATX is able to provide, thus impacting GATX’s asset utilization or GATX’s ability to lease assets or make loans on a profitable basis.

 

GATX depends upon continued demand from customers for its assets.

 

GATX relies upon continued demand from its customers for its assets. This demand depends upon the stability and growth of customer operating requirements. A number of our customers operate in cyclical markets, such as the steel, chemical and construction industries, and demand for our assets is tied to cycles in those markets. Other factors influencing customer operating requirements include changes in production volumes, potential changes in supply chains, choices regarding type of transportation asset, availability of substitutes, and other operational needs.

 

In many cases, demand for GATX’s assets is also dependent on customers’ desire to lease, rather than purchase assets. There are a number of items that factor into the customer’s decision whether to lease or purchase assets, such as

tax considerations, interest rates, balance sheet considerations and operational flexibility. GATX has no control over these external considerations and changes in these factors could negatively impact demand for its assets held for lease.

 

GATX cannot predict whether inflation will continue to have a positive impact on its financial results.

 

Inflation in lease rates as well as inflation in residual values for rail, marine and other equipment has historically benefited GATX’s financial results. Effects of inflation are unpredictable as to timing and duration and depend on market conditions and economic factors.

 

GATX’s assets may become obsolete.

 

GATX’s assets are subject to functional, regulatory or economic obsolescence. Although GATX believes it is adept at managing obsolescence risk, there is no guarantee that changes in various market fundamentals or the adoption of new regulatory requirements will not unexpectedly cause asset obsolescence in the future.

 

GATX’s allowance for possible losses may be inadequate to protect against losses.

 

GATX’s allowance for possible losses on gross receivables may be inadequate if unexpected adverse changes in the economy differ from the expectations of management, or if discrete events adversely affect specific customers, industries or markets. If the allowance for possible losses is insufficient to cover losses related to gross receivables, then GATX’s financial position or results of operations could be negatively impacted.

 

The fair market value of GATX’s long-lived assets may differ from the value of those assets reflected in its financial statements.

 

GATX’s assets consist primarily of long-lived assets such as railcars, marine vessels and industrial equipment. The carrying value of these assets in the financial statements may at times differ from their fair market value. These valuation differences may be positive or negative and may be material based on market conditions and demand for certain assets. GATX regularly reviews its long-lived assets for impairment.

 

GATX may incur future asset impairment charges.

 

An asset impairment charge may result from the occurrence of unexpected adverse events or management decisions that impact GATX’s estimates of expected cash flows to be generated from its long-lived assets or joint venture investments. GATX regularly reviews long-lived assets and joint ventures for impairment, including when events or changes in circumstances indicate the carrying value of an asset or investment may not be recoverable. GATX may be required to recognize asset impairment charges in the future as a result of a weak economic environment, challenging market conditions, events related to particular customers or asset types, or as a result of asset or portfolio sale decisions by management.

 

GATX may not be able to secure financing to fund its operations or contractual commitments.

 

GATX is dependent, in part, upon the issuance of unsecured and secured debt to fund its operations and contractual commitments. A number of factors could cause GATX to incur increased borrowing costs and to have greater difficulty accessing public and private markets for both secured and unsecured debt. These factors include the global capital market environment and outlook, GATX’s financial performance and GATX’s credit ratings and outlook as determined primarily by rating agencies such as Standard & Poor’s (“S&P”) and Moody’s Investor Service (“Moody’s”). If GATX is unable to secure financing on acceptable terms, GATX’s other sources of funds, including available cash, bank facilities, cash flow from operations and portfolio proceeds may not provide adequate liquidity to fund its operations and contractual commitments.

 

GATX may not be able to procure insurance on a cost-effective basis.

 

The ability to insure its assets and their associated risks is an important aspect of GATX’s ability to manage risk. There is no guarantee that such insurance will be consistently available on a cost-effective basis in the future.

GATX is subject to extensive environmental regulations and the costs of remediation may be material.

 

GATX’s operations are subject to extensive federal, foreign, state and local environmental laws and regulations concerning, among other things, the discharge of hazardous materials and remediation of contaminated sites. In addition, some of GATX’s properties, including those previously owned or leased, have been used for industrial purposes whose activities may have resulted in discharges onto the property. Environmental liability can extend to previously owned or operated properties as well as properties currently owned and used by the Company. Environmental liabilities are routinely assessed, including obligations and commitments for remediation of contaminated sites and assessments of ranges and probabilities of recoveries from other responsible parties. Due to the regulatory complexities and risk of unidentified contaminants on its properties, the potential exists for environmental and remediation costs to be materially different from the costs GATX has estimated.

 

GATX has been, and may in the future be, involved in various types of litigation.

 

The nature of assets which GATX owns exposes the Company to the potential for various claims and litigation related to, among other things, personal injury and property damage, environmental claims and other matters. The transportation of certain commodities by GATX’s railcars and marine vessels, particularly those classified as hazardous materials, pose risks resulting in potential liabilities and losses that could have a significant effect on GATX’s consolidated financial condition or results of operations.

 

High energy prices could have a negative effect on the demand for GATX’s products and services.

 

Energy prices, including the price of natural gas and oil, are significant cost drivers for many of our customers, either directly in the form of raw material costs in industries such as the chemical and steel industries, or indirectly in the form of increased transportation cost. Sustained high energy prices could negatively impact these industries resulting in a corresponding adverse effect on the demand for GATX’s operating assets and assets held for lease, as well as related services.

 

New regulatory rulings could negatively affect GATX’s profitability.

 

GATX’s rail and marine operations are subject to the jurisdiction of a number of federal agencies, including the Department of Transportation. State agencies regulate some aspects of rail operations with respect to health and safety matters not otherwise preempted by federal law. GATX’s operations are also subject to the jurisdiction of regulatory agencies of foreign countries. New domestic or foreign regulatory rulings may negatively impact GATX’s financial results through higher costs or reduced economic value of its assets.

 

Events or conditions negatively affecting certain assets, customers or geographic regions in which GATX has a large investment could have a negative impact on its results of operations.

 

GATX’s revenues are generally derived from a number of different asset types, customers, industries and geographic locations. However, from time to time, GATX could have a large investment in a particular asset type, a large revenue stream associated with a particular customer, or a large number of customers located in a particular geographic region. Decreased demand from a discrete event impacting a particular asset type, discrete events with a specific customer or industry, or adverse regional economic conditions, particularly for those assets, customers or regions in which GATX has a concentrated exposure, could have a negative impact on GATX’s results of operations.

 

Fluctuations in foreign exchange rates could have a negative impact on GATX’s results of operations.

 

GATX’s results are exposed to foreign exchange rate fluctuations as the financial results of certain subsidiaries are translated from their local currency into U.S. dollars upon consolidation. As exchange rates vary, the operating results of foreign subsidiaries, when translated, may differ materially from period to period. GATX is also subject to gains and losses on foreign currency transactions, which could vary based on fluctuations in exchange rates and the timing of the transactions and their settlement. In addition, fluctuations in foreign exchange rates can have an effect on the demand and relative price for services provided by GATX domestically and internationally, and could have a negative impact on GATX’s results of operations.

GATX may be unable to maintain assets on lease or charter at satisfactory rates.

 

GATX’s profitability is largely dependent on its ability to maintain assets on lease (utilization) at satisfactory lease rates or charter rates. A number of factors can adversely affect utilization, lease and charter rates, including, but not limited to: an economic downturn causing reduced demand or oversupply in the markets in which GATX operates, changes in customer behavior, or any other change in supply or demand caused by factors discussed in this Risk section.

 

GATX is subject to the inherent risks of its joint venture investments.

 

GATX’s investments include noncontrolling interests in a number of joint ventures managed and operated by third parties. These entities are subject to many of the same risk factors outlined herein. GATX is indirectly exposed to these risks through its ownership interest in these entities and adverse developments at the entity level could potentially have a negative impact on GATX’s results of operations. Additionally, in those instances where the joint venture is managed and operated by third parties, including affiliates of partners, the Company may not have control over all operational decisions which may result in actions taken at the entity level that could potentially have an adverse economic impact on GATX.

 

Unfavorable conditions on the Great Lakes could disrupt normal business operations, which could result in increased costs and decreases in revenues.

 

The success of GATX’s ASC business segment is dependent upon its ability to operate efficiently on the Great Lakes. Severe weather conditions and unanticipated ice formation could cause significant business interruptions. Additionally, low water levels may restrict the volume that may be transported in ASC’s vessels on a per trip basis. As a result, these conditions could negatively impact results of operations due to increased operating costs or decreased revenues.

 

Many of GATX’s employees are represented by unions, and the failure to successfully negotiate collective bargaining agreements may result in strikes, work stoppages or substantially higher labor costs.

 

A significant portion of GATX’s employees are union-represented and work under collective bargaining agreements with various labor organizations that cover a range of worker matters, including wages, health and welfare benefits, work rules and other issues. Historically, the Company and the unions have been successful in negotiating acceptable agreements without the incidence of any extended work stoppages. However, if the Company is unable to negotiate acceptable new agreements, it could result in strikes by the affected workers, business disruptions and increased operating costs as a result of higher wages or benefits paid to union workers, any of which could have an adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.

 

Changes in assumptions used to calculate post-retirement costs could adversely affect GATX’s results of operations.

 

GATX’s pension and other post-retirement costs are dependent on various assumptions used to calculate such amounts, including discount rates, long-term return on plan assets, salary increases, health care cost trend rates and other factors. Changes to any of these assumptions could adversely affect GATX’s results of operations and financial condition.

 

GATX’s effective tax rate could be adversely affected by changes in the mix of earnings in the U.S. and foreign countries.

 

GATX is subject to taxes in both the U.S. and various foreign jurisdictions. As a result, GATX’s effective tax rate could be adversely affected by changes in the mix of earnings in the U.S. and foreign countries with differing statutory tax rates, legislative changes impacting statutory tax rates, including the impact on recorded deferred tax assets and liabilities, changes in tax laws or by material audit assessments.

 

United States and world economic and political conditions, including acts or threats of terrorism or war, could adversely affect GATX.

 

National and international political developments, instability and uncertainties, including political unrest and threats of terrorist attacks, could result in global economic weakness in general and in the United States in

particular, and could have an adverse impact on GATX. The effects may include: legislation or regulatory action directed toward improving the security of railcars and marine vessels against acts of terrorism, which could affect the construction or operation of railcars and marine vessels, a decrease in demand for rail and marine services, lower utilization of new and existing rail and marine equipment, lower rail lease and marine charter rates; impairments of rail and marine assets or capital market disruption, which may raise GATX’s financing costs or limit its access to capital, and liability or losses resulting from acts of terrorism involving GATX’s assets. Depending upon the severity, scope and duration of these effects, the impact on GATX’s financial position, results of operations and cash flows could be material.

 

GATX’s internal control over financial accounting and reporting may not detect all errors or omissions in the financial statements.

 

If GATX fails to maintain the adequacy of internal control over financial accounting, the Company may not be able to ensure that GATX can conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act and related regulations. Although GATX’s management has concluded that adequate internal control procedures are in place, no system of internal control can provide absolute assurance that the financial statements are accurate and free of error. As a result, the risk exists that GATX’s internal control may not detect all errors or omissions in the financial statements.

 

 

None.

 

 

Information regarding the location and general character of certain properties of GATX is included in Item 1, Business, of this document.

 

At December 31, 2007, locations of operations were as follows:

 

GATX Headquarters

Chicago, Illinois

 

Rail

 

Business Offices

San Francisco, California

Alpharetta, Georgia

Chicago, Illinois

Sterling, Illinois

Paducah, Kentucky

Bozeman, Montana

Marlton, New Jersey

Holicong, Pennsylvania

Houston, Texas

Calgary, Alberta

Cambridge, Ontario

Ennismore, Ontario

Montreal, Quebec

Vienna, Austria

Hamburg, Germany

Mexico City, Mexico

Warsaw, Poland

 

Major Service Centers

Colton, California

Waycross, Georgia

Hearne, Texas

Red Deer, Alberta

Sarnia, Ontario

Coteau-du-Lac, Quebec

Montreal, Quebec

Moose Jaw, Saskatchewan

Hanover, Germany

Ostroda, Poland

 

Customer Site Locations

Donaldsonville, Louisiana

Geismar, Louisiana

Cincinnati, Ohio

Catoosa, Oklahoma

Freeport, Texas

Yazoo City, Missouri

Gdansk, Poland

Plock, Poland

 

Fast Track Service Centers

Macon, Georgia

East Chicago, Indiana

Terre Haute, Indiana

Shreveport, Louisiana

Kansas City, Missouri

La Porte, Texas

Plantersville, Texas

 

Mobile Service Units

Mobile, Alabama

Colton, California

Tampa, Florida

Gray, Georgia

East Chicago, Indiana

Sioux City, Iowa

Donaldsonville, Louisiana

Lake Charles, Louisiana

Albany, New York

Masury, Ohio

Cleveland, Tennessee

Galena Park, Texas

Olympia, Washington

Edmonton, Alberta

Red Deer, Alberta

Clarkson, Ontario

Sarnia, Ontario

Moose Jaw, Saskatchewan

Montreal, Quebec

Specialty

 

Business Offices

San Francisco, California

American Steamship Company

 

Business Offices

Williamsville, New York
Toledo, Ohio

 

 

Information concerning litigation and other contingencies is described under “Legal Proceedings and Other Contingencies” in Note 18 to the consolidated financial statements and is incorporated herein by reference.

 

 

None.

 

 

The following information regarding GATX’s executive officers is included in Part I in lieu of inclusion in the definitive GATX Proxy Statement:

 

 

 

 

 

GATX common stock is listed on the New York and Chicago Stock Exchanges under ticker symbol GMT. The approximate number of common stock holders of record as of January 31, 2008 was 2,898. The following table shows the reported high and low sales price of GATX common shares on the New York Stock Exchange, which is the principal market for GATX shares, and the dividends declared per share:

 

 

For information pertaining to issuable securities under equity compensation plans and the related weighted average exercise price, see Note 21 to the consolidated financial statements and Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”. For information regarding restricted net assets, see Note 13 to the consolidated financial statements.

GATX Common Stock Performance Graph

 

The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

 

The GATX Common Stock Performance Graph sets forth a comparison of the yearly percentage change in the cumulative total shareholder return on the Company’s Common Stock with the cumulative total shareholder return of the companies within the Standard & Poor’s 500 Composite Stock Price Index (“S&P 500”), the Standard & Poor’s MidCap 400 Index (“MidCap 400”) and the Russell 1000 Financial Services Index (“Russell 1000”). The Company is not aware of any peer companies whose businesses are directly comparable to that of GATX and, therefore, the graph below displays the returns of the Mid-Cap 400 and the Russell 1000, both of which are comprised of companies with market capitalizations similar to GATX. The performance graph assumes $100.00 was invested in GATX Common Stock and each of the indices on December 31, 2002, and all dividends were reinvested.

 

 

 

OVERVIEW

 

General information and characteristics of GATX Corporation (“GATX” or the “Company”), including reporting segments, is included in Item 1, Business, of this document.

 

The following discussion and analysis should be read in conjunction with the audited financial statements included herein. Certain statements within this document may constitute forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” or “project” and similar expressions. This information may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. In addition, certain factors, including Risk Factors identified in Part I of this document may affect GATX’s businesses. As a result, past financial results may not be a reliable indicator of future performance.

 

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on financial data derived from the financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) and certain other financial data that is prepared using non-GAAP components. For a reconciliation of these non-GAAP components to the most comparable GAAP components, see Non-GAAP Financial Measures at the end of this Item.

 

GATX Corporation leases, operates and manages long-lived, widely used assets in the rail, marine and industrial equipment markets. GATX also invests in joint ventures that complement existing business activities. Headquartered in Chicago, Illinois, GATX has three financial reporting segments: Rail, Specialty and American Steamship Company (“ASC”).

 

The Company’s former Air segment has been segregated and presented as discontinued operations for all periods presented, see “Discontinued Operations” for additional information.

 

The following table presents a financial summary of GATX’s operating segments:

 

 

Financial Performance Measures

 

The following table presents certain financial performance measures for the Company based on continuing operations for the years ended December 31.

 

2007 Highlights

 

 

Segment Operations

 

Segment profit is an internal performance measure used by the Chief Executive Officer to assess the performance of each segment in a given period. Segment profit includes all revenues, including affiliate earnings, attributable to the segments as well as ownership and operating costs that management believes are directly associated with the maintenance or operation of the revenue earning assets. Operating costs include maintenance costs, marine operating costs, asset impairment charges and other operating costs such as litigation, provisions for losses, environmental costs, and asset storage costs. Segment profit excludes selling, general and administrative expenses, income taxes and certain other amounts not allocated to the segments; these amounts are discussed below in Other.

 

GATX allocates debt balances and related interest expense to each segment based upon a pre-determined fixed recourse leverage level expressed as a ratio of recourse debt (including off balance sheet debt) to equity. The leverage levels for Rail, Specialty and ASC are set at 4:1, 3:1 and 1.5:1, respectively. Management believes that by utilizing this leverage and interest expense allocation methodology, each operating segment’s financial performance reflects an appropriate risk-adjusted cost of capital and is presented on a comparable basis.

 

Rail

 

Segment Summary

 

In 2007, Rail focused on renewing leases at higher rates, extending lease terms on renewals in an effort to reduce future earnings volatility, maintaining a disciplined investment strategy and taking advantage of high asset prices to selectively sell targeted assets. Rail entered the year with approximately 20,000 cars in North America whose contracts were scheduled to expire. Of this amount, approximately 14,600 were renewed, representing a renewal success rate of 72.9%, with the balance largely placed with different customers (“assignments”). The average lease term on renewals of a basket of common car types was 72 months in 2007, compared to 68 months for 2006 and 51 months for 2005. During 2007, Rail invested $494.0 million, acquiring approximately 6,000 cars in North America and 1,100 cars in Europe, compared to $533.6 million invested in 2006 for over 6,900 railcars. 2007 investments included 1,680 cars acquired pursuant to Rail’s committed purchase program. This program has enabled Rail to acquire new railcars at prices more favorable than current spot market prices. Rail also strategically sold, scrapped or otherwise disposed of approximately 4,200 railcars and locomotives in 2007 compared to over 5,000 in 2006.

 

Notwithstanding Rail’s success in 2007, signs of softness in the North American rail market developed during the year. North American fleet utilization decreased slightly from 98.5% to 97.9% as increases in idle cars were experienced over a wide group of car types. Notably, centerbeam cars (used in construction), gondolas and open hoppers (which carry coal) and tank and covered hopper cars (serving the ethanol markets) experienced significant pressure. These developments are creating challenges in the North American market. Rail is poised to take

advantage of potentially falling asset prices by adding railcars through fleet acquisitions at attractive prices, while also acquiring railcars under its committed purchase agreements.

 

Components of Rail’s operating results are outlined below (in millions):

 

 

Rail’s Lease Income

 

Components of Rail’s lease income as of December 31 are outlined below (in millions):

 

 

Rail’s Fleet Data

 

The following table summarizes fleet activity for Rail’s North American railcars as of December 31:

 

The following table summarizes fleet activity for Rail’s European railcars as of December 31:

 

 

Segment Profit

 

Rail’s 2007 segment profit rose $19.4 million or 7.8% over 2006. The increase was primarily the result of an average of 3,000 more railcars on lease and rate increases achieved in the last two years on lease renewals and assignments, a significant increase in asset remarketing income from the strategic sales of certain railcar types and locomotives and the impact of foreign exchange rates. The increase was partially offset by increased ownership and maintenance costs.

 

Gross Income

 

Rail’s North American average active fleet grew by approximately 1,800 cars over the prior year. Additionally, lease rate increases were realized on both renewals and assignments. In North America, average lease renewal rates on a basket of common car types increased 15.5% over the average prior expiring lease rates, compared to 14.3% in 2006. The combined effects of the active fleet growth and lease rate increases contributed $31.7 million in additional lease income. In Europe, an average of over 1,200 more cars on lease and lease rate increases contributed $9.7 million in additional lease income, while strengthening European foreign exchange rates added $13.7 million in lease income. Locomotives contributed $1.8 million in additional lease income, primarily due to higher lease rates on certain overhauled locomotives. Rail expects lease income in 2008 to be higher as the full year effects of the 2007 lease rate increases and active fleet growth are realized and anticipated acquisitions of railcars and locomotives are expected to be placed on lease.

 

Asset remarketing income was $12.5 million higher in 2007 as Rail took advantage of the strong market and strategically sold certain targeted railcar types and locomotives. Other income was comparable to the prior year as lower third party repair revenue was offset by higher gains from scrapped railcars. As Rail’s fleet of cars under full service leases has grown, service center activities have become increasingly focused on fleet repairs and regulatory compliance for its fleet, resulting in fewer opportunities to service third party railcars. Scrapping gains increased primarily due to higher steel prices as the number of cars scrapped in each year was comparable. In 2007, 1,497 cars were scrapped, resulting in a gain of $9.1 million, compared to 1,458 cars scrapped in 2006 for a gain of $8.4 million.

 

The decrease in affiliate earnings primarily reflects the absence of $4.9 million of mark-to-market gains on certain derivative hedging instruments at the AAE affiliate recognized in 2006. Excluding the effect of the derivatives, earnings increased primarily due to growth in the size of the active fleet.

 

Ownership Costs

 

Ownership costs increased $25.5 million primarily due to depreciation and interest associated with fleet growth, partially offset by lower interest rates. The comparative mix of ownership costs was affected by the purchase in 2006 of approximately 4,700 railcars that were previously leased in under operating leases.

 

Operating Costs

 

Maintenance expenses increased $16.7 million, $5.6 million of which was due to the effects of foreign exchange rates. Excluding these effects, maintenance expense increased $11.1 million, comprised primarily of $4.4 million due to unanticipated repair of certain railcar types, $3.3 million due to higher material prices and

increased railroad repairs, including the replacement of wheelsets, and $1.3 million primarily due to increased volume of compliance inspection and repairs. Maintenance expense is expected to be affected by higher inspection costs over the next few years as a significant number of tank cars in North America will be required to undergo scheduled compliance maintenance.

 

Asset impairment charges in 2006 primarily consisted of the loss on the sale of a European repair facility.

 

Other operating expenses increased $6.7 million, largely driven by higher freight and transportation costs related to higher assignment activity and foreign exchange remeasurement losses on U.S. dollar assets in Canada.

 

Comparison of Year Ended December 31, 2006, to Year Ended December 31, 2005

 

Segment Profit

 

Rail’s segment profit rose $46.4 million or 23% over 2005. The increase was primarily the result of an average of 2,800 more railcars on lease, rate increases versus expiring rates on both lease renewals and assignments of existing cars and strong affiliate earnings in Europe. This was partially offset by the costs of a larger fleet including ownership and maintenance costs.

 

Gross Income

 

Rail continued to benefit from improving conditions in its markets during 2006 and as a result, revenues increased $52.1 million, reflecting higher lease rates and an average of 2,800 more cars on lease.

 

In North America, Rail had an average of 2,300 more cars on lease. Additionally, strong demand contributed to high lease renewal success, increased lease rates and near full utilization of the fleet. In combination, these factors resulted in a $41.5 million increase in lease income. For the year ended December 31, 2006, the average North American renewal lease rate on a basket of common car types increased 14.3% over the expiring rate and fleet utilization for the entire year was 98.5%. Rail’s locomotive business also experienced growth during 2006 as higher lease rates and the placement of additional locomotives on lease contributed $3.1 million to the increase in lease income.

 

Rail’s European operations continued to improve; an average of over 500 more cars on lease and increased demand contributed to high lease renewal success and slightly higher lease rates, resulting in a $3.1 million increase in lease income. The effect of the foreign exchange rate changes on European sourced revenues also contributed $2.5 million favorably to results.

 

Asset remarketing income was $6.4 million higher as Rail took advantage of the strong market and sold certain railcar types. Other income decreased due to lower third-party repairs, partially offset by higher gains from scrapped railcars. As Rail’s fleet of cars under full service leases has grown, Rail’s service center activities have become increasingly focused on repairs and regulatory compliance for its fleet, resulting in fewer opportunities to service third party railcars. Scrapping gains increased due to higher scrap steel prices as 1,458 cars were scrapped in 2006, resulting in gains of $8.4 million, compared to 1,857 cars scrapped in 2005, resulting in gains of $6.4 million.

 

The increase in affiliate earnings reflects improved operating results at Rail’s affiliates as they also benefited from the strong market conditions. Additionally, mark to market gains of $4.9 million on certain derivative hedging instruments at the AAE affiliate also contributed to the increase. Prior year affiliates’ earnings were affected by the write down of an investment in a non-core foreign logistics business, partially offset by an asset remarketing gain recognized by a domestic affiliate.

 

Ownership Costs

 

Ownership costs increased $21.5 million primarily due to depreciation and interest associated with fleet growth, partially offset by lower interest rates. The comparative mix of ownership costs was affected by the purchase in 2006 of approximately 4,700 railcars that had been previously leased in under operating leases and the sale and leaseback in 2005 of approximately 2,900 railcars.

Operating Costs

 

Maintenance expenses increased $8.4 million, reflective of the increased costs associated with maintaining a larger fleet. Additionally, higher costs for increased repairs performed by railroads, component price increases for regular maintenance and conversion work, and the effect of foreign exchange rate changes also contributed to the higher costs.

 

Asset impairment charges were $1.9 million lower than 2005, which included the write down of a North American repair facility that was sold in 2006 and the write down of certain locomotives in Europe. In 2006, asset impairment charges consisted primarily of the loss on the sale of a European repair facility.

 

Other operating expenses decreased $13.3 million, driven by lower car and foreign franchise tax expenses, lower legal costs associated with claim defenses and favorable translation gains on U.S. dollar denominated liabilities at Rail’s European operations. Additionally, 2005 included $5.0 million of debt extinguishment costs related to the termination of a structured financing in Canada.

 

Railcar Regulatory Issues

 

Railroad derailments and similar incidents have led to calls for increased regulation to address safety and security issues associated with the transportation of hazardous materials.

 

In 2007, the Tank Car Committee of the Association of American Railroads (“AAR”) finalized new performance standards for rail tank cars that transport toxic–by–inhalation hazardous materials in order to reduce the probability of a release of these materials in the event of a rail accident. Pursuant to these new rules, all cars transporting these materials must comply with the new performance standards by December 31, 2018. Car owners are required to submit plans to the AAR for complying with the new standards by December 31, 2008. GATX owns or leases approximately 3,100 tank cars (3% of its North American fleet) that carry these materials and, based upon management’s review, GATX does not expect that the new rules will have a material impact on the Company’s financial position or results of operations

 

In January 2007, the Federal Railroad Administration (“FRA”) announced that it had signed a Memorandum of Cooperation with industry participants in connection with the Next Generation Rail Tank Car Project, a research program intended to improve the safety of rail shipments of commodities such as toxic–by–inhalation materials and high risk gases and liquids. It is anticipated that the FRA will issue new federal design standards for tank cars that transport these materials in 2008. At this time, GATX cannot reasonably determine what effect, if any, new design standards might have in the event such standards are adopted by the FRA.

 

Pursuant to legislative directives, the FRA is conducting an analysis to determine the impact resistance of pressurized tank cars built with non-normalized steel prior to 1989, and will initiate a rulemaking to develop and implement an appropriate design standard for pressurized tank cars. This analysis is ongoing and, to date, no rules have been issued curtailing use of these cars. The Company owns or leases approximately 3,200 pre-1989 built pressurized tank cars in North America (3% of its North American fleet).

 

The Company continues to work actively with trade associations and others to participate in the legislative and regulatory process affecting the safe and secure transportation of hazardous materials by rail. At this time, the effect on GATX of the legislative mandates made on the FRA described above, the probability of adoption of other legislation or rules and their resulting impact on GATX cannot be reasonably determined.

 

Specialty

 

Segment Summary

 

The Specialty portfolio grew in 2007 as new investments of $141.0 million, comprised primarily of $110 million of industrial equipment assets and $18 million of marine assets, exceeded asset dispositions and depreciation, portfolio run-off and affiliate distributions. Specialty’s total asset base including off balance sheet assets, was $521.4 million at December 31, 2007 compared to $499.9 million and $467.2 million at December 31,

2006 and 2005, respectively. The estimated net book value equivalent of managed assets was $378.1 million at December 31, 2007.

 

Segment profit at Specialty has benefited over the last several years from substantial asset remarketing income attributable to wholly owned and affiliate investments as well as from the managed portfolios. This level of remarketing income is not expected to continue in 2008.

 

Components of Specialty’s operating results are outlined below (in millions):

 

 

Comparison of Year Ended December 31, 2007, to Year Ended December 31, 2006

 

Segment Profit

 

Specialty’s segment profit of $117.5 million was $18.6 million or 18.8% higher than the prior year. The increase was primarily due to higher marine affiliate earnings and the contribution from new operating lease assets acquired over the last two years, partially offset by lower fees and other income. Asset remarketing income generated from both wholly owned and affiliate owned assets, as well as the managed portfolios was comparable to 2006.

 

Gross Income

 

Revenues of $87.7 million were $5.4 million higher than the prior year. Lease income increased primarily due to investments in operating lease assets made over the past two years and higher usage rents from pooled marine vessels. Asset remarketing for both 2007 and 2006 primarily reflects gains and fees received in each period from sales of assets and can be affected by discrete events. For example, in 2007, a lessee exercised its purchase option, resulting in an $18.3 million gain and in 2006, significant residual sharing fees of $14.0 million and $8.3 million were received from remarketing events in two of the managed portfolios. The timing of asset remarketing income is

dependent on transactional opportunities and market conditions and is expected to be uneven in nature. Other income decreased $3.6 million primarily due to lower securities gains recorded in the current year.

 

Affiliate earnings of $74.4 million increased $21.0 million primarily as a result of increased operating earnings from the marine joint ventures. Asset remarketing income at the affiliate level was comparable in 2007 and 2006 as approximately $20 million of remarketing income was recognized in each year. In 2007, remarketing gains were primarily realized from the partial liquidation of a mixed asset joint venture comprised of rail, air and marine assets and the sale of a vessel by a marine affiliate. In 2006, gains were primarily realized from a residual value guarantee, the sale of engines in the aircraft engine leasing affiliate and the sale of marine vessels.

 

Ownership Costs

 

Ownership costs of $31.5 million were $3.7 million higher primarily due to depreciation on new operating lease assets.

 

Operating Costs

 

Asset impairment charges in both years primarily reflect the write downs of certain cost method investments. Other operating expenses include net bad debt recoveries of $3.1 million in 2006 versus a loss provision of $1.0 million in 2007. Excluding the bad debt activity, other operating expenses increased primarily due to higher operating expenses associated with increased vessel activity and higher fuel costs and a net decrease in the fair value of derivatives.

 

Comparison of Year Ended December 31, 2006, to Year Ended December 31, 2005

 

Segment Profit

 

Specialty’s segment profit of $98.9 million was $7.2 million or 6.8% lower than the prior year. The decrease was primarily due to lower interest income, gains from the sale of securities and affiliate earnings, and higher ownership costs. This was partially offset by significantly higher lease income in the current year. Asset remarketing income was significant in 2006 and 2005; both years included a large residual sharing fee from one managed portfolio transaction.

 

Gross Income

 

Revenues of $82.3 million were $2.0 million higher than the prior year. Lease income increased primarily due to investments in new operating assets over the past two years and higher usage rents from marine vessels. Interest income decreased $4.1 million as a result of the repayment of certain loans in 2005. Asset remarketing for both 2006 and 2005 primarily reflects gains and fees received in each period from sales of assets. Significant residual sharing fees of $14.0 million and $12.8 million were received in 2006 and 2005, respectively, related to one transaction in the managed portfolio. The timing of asset remarketing income is dependent on transactional opportunities and market conditions and is expected to be uneven in nature. Other income decreased $4.2 million primarily due to a $3.7 million gain from the sale of securities recorded in the prior year.

 

Affiliate earnings of $53.4 million decreased $6.6 million primarily as a result of decreased operating earnings from the marine joint ventures, partially offset by increased remarketing gains, primarily in an aircraft engine leasing joint venture. The marine joint ventures continued to post strong earnings in 2006; however, not at the levels experienced in 2005.

 

Ownership Costs

 

Ownership costs of $27.8 million were $2.7 million higher primarily due to depreciation on new operating assets.

Operating Costs

 

Asset impairment charges in both years primarily reflect write downs of certain cost method investments. Other operating expenses include net bad debt recoveries of $3.1 million and $2.3 million in 2006 and 2005, respectively. Excluding the recoveries from both years, other operating expenses increased primarily due to higher operating expenses associated with increased vessel activity.

 

ASC

 

Segment Summary

 

ASC’s 2007 results reflect a full year of operation for the six vessels acquired from Oglebay Norton Marine Services in June of 2006. ASC’s operations in 2007 were hampered throughout the sailing season by difficult operating conditions on the Great Lakes. Specifically, difficult weather conditions, particularly at the beginning and end of the sailing season hindered vessel operations. Additionally, low water levels created problems for heavily loaded vessels, causing delays in the unloading of cargo and effectively reducing vessel carrying capacity. These operating conditions had a significant impact on ASC, creating operational inefficiencies and negatively impacting financial results. Rising fuel costs also negatively impacted results in 2007.

 

ASC’s fleet of 18 vessels was fully utilized throughout 2007 and the outlook in 2008 for freight demand on the Great Lakes remains positive, with the exception of potential softness in the limestone sector. Subsequent to year end, the hull of one of ASC’s 1,000 foot vessels, the M/V Walter J. McCarthy Jr. was breached as it attempted to lay up at dock for the winter. Repairs are expected be completed by June 30, 2008, resulting in the loss of use of this vessel for a portion of the 2008 sailing season. Neither the cost of the repair nor the temporary loss of use of the vessel are expected to have a material affect on GATX’s results of operations in 2008.

 

Components of ASC’s operating results are outlined below (in millions):

 

ASC’S Fleet Data

 

The following table summarizes fleet activity for ASC’s Great Lakes fleet as of December 31:

 

 

Comparison of Year Ended December 31, 2007, to Year Ended December 31, 2006

 

Segment Profit

 

ASC’s segment profit decreased $11.3 million or 35.3% compared to 2006. The variance was primarily attributable to significant weather delays at the beginning and end of the 2007 sailing season, lower water levels and escalating fuel costs. Additionally, the recognition in 2007 of winter maintenance expense for the vessels acquired in 2006 also contributed to the variance. Winter maintenance costs for these vessels were capitalized in 2006 in connection with the acquisition.

 

Gross Income

 

ASC’s gross income increased $23.2 million from the prior year. The increase was primarily due to freight rate increases and higher fuel surcharges. In accordance with certain contract provisions, ASC is able to recover a portion of fuel cost increases from its customers. The fuel surcharges were offset by higher fuel costs in marine operating expenses. While ASC benefited from a full year of operations from the vessels acquired in June of 2006, total net tons carried in 2007 increased only marginally due to the aforementioned weather delays and operating conditions. Net tons carried in 2007 were 37.3 million compared to 37.2 million in 2006.

 

Ownership Costs

 

ASC’s ownership costs were $4.2 million higher than the prior year. Depreciation and interest expense increased $2.4 million and $1.8 million, respectively, primarily reflecting a full year of expense recognition for the acquired vessels compared to six months in the prior year.

 

Operating Costs

 

ASC’s operating costs increased $30.3 million from the prior year. The variance was primarily due to a full year of operating costs for the acquired vessels compared to only six months in the prior year. Higher fuel expense as well as higher labor costs resulting from a new labor agreement executed in 2006 also contributed to the increase. Fuel prices increased approximately 10%; however, a portion of the increased fuel costs were recovered through fuel surcharges. Maintenance expense increased primarily as a result of winter maintenance costs for the acquired vessels. These costs were capitalized in 2006 in connection with the acquisition.

 

Comparison of Year Ended December 31, 2006, to Year Ended December 31, 2005

 

Segment Profit

 

ASC’s segment profit of $32.0 million increased $13.6 million or 73.9%, primarily as a result of the operating contribution generated by the six acquired vessels, a full year of income from the time charter vessel, which commenced operation in June 2005, and freight rate increases for ASC’s existing fleet, partially offset by higher vessel operating and ownership costs.

 

Gross Income

 

ASC’s gross income of $209.8 million increased $71.5 million primarily due to the impact of the vessel acquisition, a full year of operating revenue and lease income from the time charter vessel, higher freight rates and increased fuel surcharges. The fuel surcharges were offset by higher fuel costs in marine operating expenses.

The additional capacity attributable to the six acquired vessels contributed $51.2 million of additional freight revenue. Time charter freight revenue and operating lease income increased a total of $6.4 million, reflecting a full year of operation compared to seven months of operation in 2005. Revenue generated from the balance of ASC’s fleet increased $13.9 million primarily due to freight rate increases and fuel surcharges.

 

Ownership Costs

 

ASC’s ownership costs of $18.3 million increased $6.7 million primarily due to the costs associated with the acquired vessels.

 

Operating Costs

 

ASC’s operating costs increased $51.2 million primarily due to higher marine operating costs as a result of the vessel acquisitions, a full year of operating expenses related to the time charter vessel and higher fuel costs. The six acquired vessels added $36.5 million of operating expenses. Time charter operating expenses increased a total of $5.1 million, reflecting a full year of operation, compared to seven months of operation in 2005. Fuel prices increased approximately 16%; however, a portion of the increased fuel costs were recovered through fuel surcharges. Higher vessel labor costs resulting from a new labor agreement, executed in September 2006, also contributed to the increase.

 

ASC Regulatory Issues

 

ASC’s vessels take on ballast water when not fully loaded in order to ensure proper vessel control and safe operation. The United States Coast Guard and various Great Lakes States have initiated rulemakings or otherwise have legislation pending to enact new federal regulations and laws on ballast water discharge standards. The rulemakings and pending legislation focus upon, among other issues, the use of various ballast water treatment technologies designed to prevent the introduction and spread of non-indigenous aquatic species into U.S. waters. To date, no federal or state regulations have been promulgated with respect to this issue. Further, no developed treatment systems have proven effective in eliminating the spread of this species into U.S. waters. Accordingly, ASC cannot determine the impact that any such legislation or regulations, if enacted, may have on its operations.

 

Other

 

Other is comprised of unallocated interest expense, selling, general and administrative expenses (“SG&A”), miscellaneous income and expense not directly associated with the reporting segments and eliminations.

 

Components of Other are outlined below (in millions):

 

 

SG&A, Unallocated Interest and Other

 

SG&A increased $12.0 million in 2007, primarily due to higher compensation expense, including severance costs related to corporate staff reductions following the sale of Air, the effect of changes in foreign exchange rates and, in the prior year, the combination of favorable adjustments of certain accruals and the receipt of benefit claims refunds. SG&A increased $5.7 million in 2006 primarily due to the effect of stock option and stock appreciation rights expensing and higher information technology spending offset by the aforementioned favorable adjustments.

Unallocated interest expense is the balance (excess or shortfall) of external interest expense remaining after allocation to the reporting segments (including discontinued operations). The unallocated amount is a function of the difference between GATX’s average actual debt balances and the average amount of debt allocated to the reporting segments based on assigned leverage targets. In 2006 and 2005, GATX consolidated leverage exceeded that of the combined segments, whereas, following the sale of Air and throughout 2007, consolidated leverage has been materially lower than that of the combined segments. As a result, unallocated interest expense was a credit in 2007, compared to an expense in 2006 and 2005.

 

Other items in 2005 primarily consisted of $11.9 million of debt extinguishment costs related to liability management activities, partially offset by the reversal of a $2.7 million corporate provision for losses. Eliminations were immaterial for all periods presented.

 

Income Taxes

 

GATX’s effective tax rate in both 2007 and 2006, benefited from favorable deferred tax adjustments resulting from enacted reductions in statutory tax rates in foreign jurisdictions. In 2007, reductions in the Canadian, United Kingdom and German statutory rates resulted in $20.1 million in benefits. In 2006, a reduction in the Canadian statutory rate resulted in a $5.9 million benefit. GATX’s effective tax rate in 2005 was impacted by $9.9 million of taxes related to the repatriation of foreign subsidiary earnings. To take advantage of the one-time dividends received deduction in the American Jobs Creation Act of 2004, GATX repatriated $94.5 million of foreign earnings. Partially offsetting the repatriation expense was a tax benefit of $6.6 million recognized in connection with costs related to the termination of a structured financing. Excluding the impacts of the items noted herein from all years, GATX’s effective tax rate was 35.9% in 2007, 36.0% in 2006 and 36.7% in 2005.

 

On January 1, 2007, GATX adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which is an interpretation of Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes (“SFAS 109”). SFAS 109 does not prescribe a recognition threshold or measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. FIN 48 clarifies the application of SFAS No. 109 by defining criteria that an individual tax position must meet for any tax benefit to be recognized in an enterprise’s financial statements. As a result of the implementation of FIN 48, GATX recorded a decrease in the liability for unrecognized tax benefits and a corresponding increase of $11.0 million to the 2007 opening balance of retained earnings.

 

See Note 15 to the consolidated financial statements for additional information on income taxes.

 

Discontinued Operations

 

In 2006, GATX agreed to sell the majority of its aircraft leasing business to Macquarie Aircraft Leasing Limited (“MALL”). The sale was completed in two stages: the sale of wholly owned aircraft closed on November 30, 2006, and the sale of partnered aircraft closed on January 17, 2007. Separately in 2006, GATX sold 26 wholly owned and partnered aircraft and its interest in Pembroke Group, a 50% owned aircraft leasing affiliate. These events resulted in the disposition of GATX’s aircraft leasing operation (formerly the “Air” segment). Accordingly, Air has been segregated and classified as discontinued operations for all periods presented.

 

GATX had been in the commercial aircraft leasing business since 1968, building a valuable operating lease platform and portfolio of aircraft. GATX believes that, relative to competitors in the industry, its lower scale and higher cost of capital resulted in a competitive disadvantage and that the sale of the Air business will enable it to realize greater value for its shareholders than could have been realized from continuing to own and operate the business. Gross proceeds from these sales in 2006 totaled $1.3 billion, of which approximately $800 million was used to retire debt and pay transaction costs. The remaining proceeds, including $229.9 million received in 2007, were primarily used to fund new investments in rail, marine and industrial assets and to repurchase GATX common stock.

The following table summarizes certain operating data for Discontinued Operations (in millions).

 

 

In 2007, gain on disposal of segment primarily consisted of a $20.9 million reversal of accrued income taxes resulting from an enacted change in federal income tax regulations and the finalization of the tax effects of the Air sale. In 2006, loss on disposal of segment was comprised primarily of $60.3 million ($70.9 including tax effects) of losses realized on dispositions and in 2005, was comprised primarily of impairment charges of $196.4 million ($119.4 million after tax).

 

Results of discontinued operations reflect directly attributable revenues, ownership, operating, interest and SG&A expenses and income taxes. Results also reflect intercompany allocations for interest and certain SG&A expenses. Interest expense allocated was zero, $16.4 million and $26.7 million for 2007, 2006 and 2005, respectively. Interest was allocated consistent with GATX’s risk adjusted approach for continuing operations. SG&A allocated was zero, $6.1 million and $6.9 million for 2007, 2006 and 2005, respectively. SG&A was allocated based on management’s best estimate and judgment of the direct cost of support services provided to discontinued operations and amounts allocated approximate the amounts expected to be eliminated from continuing operations.

 

See Note 22 to the consolidated financial statements for additional information on discontinued operations.

 

Assets

 

Assets of continuing operations were $4.7 billion at December 31, 2007, compared to $4.4 billion at December 31, 2006. Increases in operating assets were partially offset by decreases in cash, receivables and other assets.

 

In addition to assets recorded on its balance sheet, GATX utilizes approximately $1.2 billion of other assets, primarily railcars, which are financed with operating leases and therefore are not recorded on the balance sheet. The off balance sheet assets represent the estimated present value of GATX’s committed future operating lease payments.

 

The following table presents assets of continuing operations by segment as of December 31 (in millions):

 

Gross Receivables

 

Receivables of $434.5 million at December 31, 2007, including leveraged leases net of nonrecourse debt, decreased $106.6 million from December 31, 2006. The decrease reflected the early buyout of two finance leases for a total of $35.5 million and contractual finance lease payments and loan repayments at Specialty.

 

Allowance for Possible Losses

 

The purpose of the allowance is to provide an estimate of credit losses inherent in reservable assets. Reservable assets include rent and other receivables, loans and finance lease receivables. In addition to establishing loss estimates for known troubled accounts, this estimate involves consideration of historical loss experience, judgments about the impact of present economic conditions, collateral values, and the state of the markets in which GATX operates.

 

The following summarizes changes in GATX’s consolidated allowance for possible losses as of December 31 (in millions):

 

 

The allowance for possible losses of $11.0 million at December 31, 2007 increased $1.4 million from 2006 primarily due to the effect of changes in foreign exchange rates.

 

There were no material changes in estimation methods or assumptions for the allowance during 2007. GATX believes that the allowance is adequate to cover losses inherent in the gross receivables portfolio as of December 31, 2007. Since the allowance is based on judgments and estimates, it is possible that those judgments and estimates could change in the future, causing a corresponding change in the recorded allowance.

 

Operating Assets and Facilities

 

Net operating assets and facilities increased $480.2 million from 2006. The increase was primarily related to Rail investing $494.0 million in rail assets, Specialty investing $118.6 million, primarily in industrial equipment assets, and foreign exchange rate effects of $100.7 million. Partially offsetting the increase were Rail dispositions of $55.5 million, Specialty dispositions of $15.4 million and depreciation of $192.3 million.

 

Investments in Affiliated Companies

 

Investments in affiliated companies increased $25.9 million in 2007, primarily due to investment contributions to a marine joint venture at Specialty. Distributions of earnings and capital from affiliates were $93.4 million in 2007, approximating GATX’s share of 2007 affiliate earnings.

 

The following table shows GATX’s investment in affiliated companies by segment as of December 31 (in millions):

 

 

See Note 8 to the consolidated financial statements for additional information about investments in affiliated companies.

Debt

 

Total debt increased $145.0 million from the prior year, primarily related to the issuance of $242.8 million of commercial paper, partially offset by principal payments related to maturities and conversions of convertibles notes of $142.5 million and the repayment of $40.9 million of European debt. Subsequent to year end, $200 million of senior notes were issued for net proceeds of $197.6 million, which were substantially used to pay down commercial paper balances.

 

The following table summarizes the debt of GATX and its subsidiaries by major component, including off balance sheet debt, as of December 31, 2007 (in millions):

 

 

 

 

GATX generates a significant amount of cash from its operating activities and proceeds from its investment portfolio, which is used to service debt, pay dividends, and fund portfolio investments and capital additions.

 

Net Cash Provided by Operating Activities of Continuing Operations

 

Net cash provided by continuing operations of $339.8 million increased $46.5 million compared to 2006. The increase was primarily due to higher lease income and joint venture dividends and lower operating lease payments, partially offset by higher maintenance, other operating and SG&A expenses.

 

Portfolio Investments and Capital Additions

 

Portfolio investments and capital additions primarily consist of purchases of operating lease assets, investments in joint ventures, loans and capitalized asset improvements. Portfolio investments and capital additions of $640.8 million decreased $122.3 million from 2006, primarily attributable to ASC’s acquisition in 2006 of six marine vessels from Oglebay Norton Marine Services for $126.3 million. Rail’s investment volume of $494.0 million was $39.6 million lower than the prior year, and included approximately 6,000 railcars for its North American fleet and 1,100 railcars for its European fleet. Specialty’s investment volume of $141.0 million increased $46.9 from 2006 and included $109.6 million of industrial equipment and $18.3 million of marine assets. Other investments primarily reflect information technology activity, including systems expenditures that support GATX’s operations.

 

The following table presents portfolio investments and capital additions by segment (in millions):

 

Future portfolio investments and capital additions (excluding contractual commitments) will depend on market conditions and opportunities to acquire desirable assets.

 

Portfolio Proceeds

 

Portfolio proceeds primarily consist of loan and finance lease receipts, proceeds from asset remarketing and sales of securities, and capital distributions from affiliates. Portfolio proceeds of $246.8 million in 2007 increased $124.1 million from 2006. The increase was primarily due to higher proceeds from asset remarketing at Specialty and Rail and the maturity of debt securities in Europe.

 

Portfolio proceeds were as follows for the years ended December 31 (in millions):

 

 

Other Investing Activity

 

In 2006, Rail exercised purchase options on two operating leases covering a total of 4,700 railcars for an aggregate cost of $260.9 million. In 2005, the Company completed a sale-leaseback transaction for approximately 2,900 of its railcars (net book value of $170.0 million) for net proceeds of $201.3 million. The transaction produced a gain of $31.3 million, which was deferred and is being amortized as a component of operating lease expense over the 21-year term of the resulting operating lease. Proceeds from other asset sales primarily consist of scrapping of railcars, sales of assets held for sale, and dispositions of other assets.

 

Net Cash used in Financing Activities of Continuing Operations

 

Net cash used in financing activities of continuing operations was $246.5 million in 2007, compared to net cash provided of $112.6 million in 2006. Repayments of debt of $204.7 million in 2007 were primarily attributable to the principal paid upon maturity of the 2002, 7.5% convertible notes. Proceeds from debt primarily consisted of $242.8 million of commercial paper issuances. The stock repurchase program was also fully executed in 2007, with 6.3 million shares of common stock reacquired for $300.2 million.

 

Cash Flows of Discontinued Operations

 

Net cash provided by discontinued operations of $181.8 million in 2007, consisted primarily of $227.1 million of proceeds received from the disposition of the Air segment, partially offset by $33.8 million of allocated federal income tax payments.

 

General

 

GATX funds its investments and meets its debt, lease and dividend obligations through available cash balances, cash generated from continuing operating activities, portfolio proceeds (including proceeds from asset sales), commercial paper issuances, committed revolving credit facilities and the issuance of secured and unsecured debt. GATX utilizes both domestic and international capital markets and banks for its debt financing needs.

Principal sources and uses of cash from continuing operations were as follows for the years ended December 31 (in millions):

 

 

Additionally, net cash from discontinued operations, including proceeds from the sale of Air assets in 2007 and 2006, was $181.8 million, $558.7 million and $97.3 million in 2007, 2006 and 2005, respectively.

 

Credit Facilities

 

In the second quarter of 2007, GATX’s senior unsecured revolving credit facility was amended and restated. The amendment and restatement of the facility extended the maturity from June of 2010 to May of 2012 and increased the facility amount from $525 million to $550 million. The net worth covenant was eliminated.

 

At December 31, 2007, availability under the credit facility was $290.9 million, with $242.8 million of commercial paper outstanding and $16.3 million of letters of credit issued, both backed by the facility. Commercial paper issuances are the primary sources of cash used to fund daily operations. This short-term debt is paid down using cash flow from operations, portfolio proceeds or proceeds from long-term debt issuances. GATX also has revolving lines of credit totaling $45.2 million in Europe. At December 31, 2007, availability under these lines of credit was $40.9 million.

 

Restrictive Covenants

 

The revolving credit facility contains various restrictive covenants, including requirements to maintain a fixed charge coverage ratio and an asset coverage test. GATX’s ratio of earnings to fixed charges, as defined in the credit facility, was 2.1x for the period ended December 31, 2007, in excess of the minimum covenant ratio of 1.2x. At December 31, 2007, GATX was in compliance with all covenants and conditions of the credit facility.

 

The indentures for GATX’s public debt also contain restrictive covenants, including limitations on loans, advances or investments in related parties and dividends it may distribute. Some of the indentures also contain limitation on lien provisions that limit the amount of secured indebtedness that GATX may incur, subject to several exceptions, including those permitting an unlimited amount of purchase money indebtedness and nonrecourse indebtedness. In addition to the other specified exceptions, GATX would be able to incur liens securing a maximum of $871.2 million of additional indebtedness as of December 31, 2007, based on the most restrictive limitation on liens provision. At December 31, 2007, GATX was in compliance with all covenants and conditions of the indentures.

The loan agreements for certain of GATX’s wholly owned European subsidiaries (collectively, “GRE”) also contain restrictive covenants, including leverage and cash flow covenants specific to those subsidiaries, restrictions on making loans and limitations on the ability of those subsidiaries to repay loans to certain related parties (including GATX) and to pay dividends to GATX. The covenants relating to loans and dividends effectively limit the ability of GRE to transfer funds to GATX. At December 31, 2007, the maximum amount that GRE could transfer to GATX without violating its covenants was $25.9 million, implying that $349.4 million of subsidiary net assets were restricted. Restricted net assets are defined as equity less 50% of free cash flow. At December 31, 2007, GRE was in compliance with all covenants and conditions of these loan agreements.

 

Another subsidiary’s financing, guaranteed by GATX, contains various restrictive covenants, including requirements for GATX to maintain a defined net worth and a fixed charge coverage ratio. This fixed charge coverage ratio covenant is less restrictive than that contained in the revolving credit facility.

 

GATX does not anticipate any covenant violations nor does it anticipate that any of these covenants will restrict its operations or its ability to procure additional financing.

 

Debt Financing

 

During the third quarter 2007, GATX filed a shelf registration statement to issue debt securities and pass-through certificates. The registration statement is effective for three years without limit on the amount of issuance. Subsequent to year end, during February 2008, GATX issued $200 million of senior unsecured debt with a 6.0% coupon and a maturity date of February 15, 2018.

 

See Note 13 to the consolidated financial statements for detailed information on GATX’s credit facilities, debt obligations and related restrictive covenants.

 

Credit Ratings

 

The availability of GATX’s funding options may be affected by certain factors, including the global capital market environment and outlook as well as GATX’s financial performance. GATX’s access to capital markets at competitive rates is dependent on its credit rating and rating outlook, as determined by rating agencies such as Standard & Poor’s (“S&P”) and Moody’s Investor Service (“Moody’s”). As of December 31, 2007, GATX’s long-term unsecured debt was rated BBB+ by S&P and Baa1 by Moody’s. GATX’s short-term unsecured debt was rated A-2 by S&P and P-2 by Moody’s. GATX’s rating outlook from both agencies was stable.

 

2008 Liquidity Position

 

GATX expects that it will be able to meet its contractual obligations for 2008 through a combination of projected cash from continuing operations, portfolio proceeds and its revolving credit facilities, as well as available cash.

Off Balance Sheet Arrangements and Other Contingencies

 

Contractual Commitments

 

At December 31, 2007, GATX’s contractual commitments, including debt maturities, lease payments, and unconditional purchase obligations were (in millions):