Transcript The VA RR - Blanchard Company

Some Shortline Railroad Finance Basics
AAR Annual Meeting of the
Railroad Treasury/Finance Division
Naples, Florida
11/6/2007
Roy Blanchard, The Railroad Week in Review
www.rblanchard.com
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“There is a need to work more closely with short lines in
the light of growing regulatory and legislative pressures
now facing the industry.”
-- Mark Schmidt, BNSF, 3Q07 Short Line Newsletter
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Short Lines and Class Is (FY 2006)
Class I
BNSF
SL Rev Units
Class I RU
Pct SL
1,417,000
10,637,000
13.3%
CN
640,600
4,824,000
13.3%
CP
277,000
2,618,000
10.6%
CSX
926,900
7,358,000
12.6%
KCS
171,100
1,921,000
8.9%
NS
1,018,000
7,901,000
12.9%
UP
1,400,000
9,852,000
14.2%
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The Shortline Railroad Universe:
• More than 500 shortline (regional and local) names, 43,000
route miles, 12 mm cars per year (cpy)*
• 32 S&Ts (BRC et al), steel roads (EJ&E) have 2600 route
miles, 5.2 mm cpy
• NS has most (253), CP fewest (61)
• Top 20 SL ops companies (ex steel, S&T) - 174 roads, 27,000
miles, > 4 mm cpy
• Top 5 Commodities 2007 thru Q3: 16% forest products
(lumber, panels, paper and related), 14% chemicals, 11%
grain, 12% coal, 9% metals and related
*More accurately, revenue units (I’ll explain)
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Leading North American Short Line Operators
Operator
RRS
Miles of Line
Cars per Year
Cars/yr/mile
RailAmerica
43
8000
1,140,000
143
Genesee & Wyoming
43
3027
1,021,000
337
Washington Group
2
723
285,000
394
DM&E
2
2,300
227,000
99
OmniTrax
17
2,600
200,800
77
Watco
16
3600
275,000e
76
Anacostia & Pacific
4
594
137,000
231
Quebec Railway
7
1643
83,000
51
Ohio Central
7
516
71,000e
138
Rio Grande Pacific
3
484
57,000
118
145
23,487
3,496,800
149
Totals
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How Short Lines Earn Their Money
• Revenue per carload, mostly from Class I divisions,
allowances or fees; some ancillary fees (demurrage et al),
property leases, short-haul intra-line moves.
• Class I pays short lines out of revenue per EITF99-19; can
discourage short line participation if market manager
performance is measured on total revenue.
• Common short line compensation schemes:
ISS, handling fee, Jct Settlement, switch fees; the folly of carhire reclaim.
• How fuel surcharge revenue is shared varies widely.
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Shortline Economics
• Class I average FY 2006 revenue per merchandise load was
US$1996.
• Shortline pro forma allowance still US$250-$300 per revenue
load, does not go up with Class I RPU increases
• Double-digit Class I volume YTD 2007 decreases in low-rated
commodities (forest products, aggregates, waste) hit
allowance-based short lines the hardest
• Proposed regulatory and legislative limits to rate increases
will hurt ISS short lines the most
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Short Line 3Q07 YTD Commodity Trends
Commodity
Class I delta
SL delta
PP spread
Grain
-2.6%
.09%
2.51
Coal
-0.8%
-1.4%
(0.63)
Lumber, Wood -19.4%
-17.3%
2.06
Pulp, Paper
-6.6%
-8.7%
(2.05)
Chemicals
4.5%
7.7%
3.25
Metals
-9.2%
-7.4%
1.78
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Class I vs. Short Line Expense Comparisons
BNSF
($millions)
Revenues
2005
RailAmerica (1)
Pct of Rev
$ 12,987
2005
$
424
Pct of Rev
Expenses
Comp & benefits
$
3,515
27.1%
$
131
30.9%
Purchased Services
$
1,714
13.2%
$
33
7.8%
Depreciation
$
1,075
8.3%
$
31
7.3%
Equipment Rents
$
886
6.8%
$
51
12.0%
Fuel
$
1,959
15.1%
$
47
11.1%
Materials, other
$
916
7.1%
$
80
18.9%
Total Ops Exp
$ 10,065
77.5%
$
373
88.0%
Ops Income
$
22.5%
$
51
12.0%
Operating Ratio
2,922
77.5
88.0
Note (1) FY 2005 was the last FY
10-K for RRA
GWR not used because it reports
consolidated results w Australia
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Measuring Short Line Results
• Rules of thumb: Rule of 100, $5,000 per mile per year for
track maintenance to meet FRA Class 2 specs, fuel burn 8-10
gallons per revenue unit per year
• Resources consumed per revenue unit (Watco): man-hours, car
hire, fuel burn, switching hours, etc.
• EBITDA vs. Operating ratio: No tax advantage to capitalizing
major expenditures, below-the-line items have little meaning
for core values; puts focus on cash-generating capabilities of
property.
• EBITDA margin 40% - 50% for well-run short line; CP
estimates DM&E will be at 40% for CY 2007
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Shortline Growth
• Most roads started as Class I branch lines
• Staggers Act encouraged spin-offs; effects of new STB ruling?
• Lines transferred at low cost on assumption that short line
would continue to feed Class I core exclusively
• Some short lines “bought their freedom” (A&M/BNI)
• Recent short line transactions have been leases (BNI), Joint
Ventures (NSC)
• Until recently SL pct volume growth > Class Is; Masking
Class I losses?
• A bright spot: BNI short line units up 8% through 3q07
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Short Line Realities
• Better than Class Is for gathering and distribution, smallcustomer service, local infrastructure funding
• Free up scarce Class I resources (locos esp) for core ops
• 60% of short lines may not meet minimum economic
thresholds; exceptions are single-purpose lines w hi vols
• The most successful understand and complement Class I
financial, commercial and operating goals
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Shortline Consolidation
• Bethlehem Steel roads to Lehigh Valley Rail Mgt., Georgia
Pacific to GWR, Alcoa to RailAmerica
• Consolidation among shortlines: RailNet to OmniTrax,
Savage; Rail Management Group, Maryland Midland to GWR
• Second-tier moves – Caney Fork & Western to Cundiff Group
• Class Is wary of buyers over-paying
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The Capacity Question
• AASHTO: Predicts 70% growth in freight volume by 2020.
• National Freight Infrastructure Capacity and Investment
Study: Rails need to invest $135 bn in capacity over the next
30 years to meet demand.
• The AAR: HR 2116, S 1125: the Rail Freight Infrastructure Act
of 2007, provides for 25% tax credit for new railroad capacity
in both infrastructure and locomotives. See also
www.aar.org/itc/itc.asp .
• Public-Private Partnerships
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Short Line Capacity
• ASLRRA: Current federal tax credit program offsets up to 50%
of the amount invested in new or rebuilt track.
• Railroad Rehabilitation and Improvement Financing (RRIF)
Loans – Administered by FRA. Direct loans or loan
guarantees for the acquisition, development, improvement or
rehabilitation of existing or new intermodal or rail equipment
facilities.
• State and local rail infrastructure funding varies by state,
some more generous than others.
• Save Our Service (SOS) rail customer coalition lobbying for
the tax credit extension
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Closing thoughts: Possible Implications for Short Lines
in a Re-regulated Railroad Environment
• Cost of Capital: Rate ceilings, low-rated commodities most,
shortline concentration.
• Small Rate Cases: Risks of customer filing to remove
commodity from exempt list.
• HR 2125: “Railroad competition and Improvement” Act does
none of the above; nobody calls it “re-regulation.”
• Paper Barriers: Class Is holding off; “buying your freedom.”
• Competitive Access: A bad deal all around. A fable.
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Thanks
For your kind attention. Now for the fun part…
It’s Q&A time!
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