Transcript Rail Renaissance: Returns, Capital & Capacity

Rail Renaissance: Returns,
Capital & Capacity
AB HATCH [email protected]
AREMA
September 21 2009::
Railroads at historic tipping point
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The Railroad Renaissance is here – will it last?
Capacity issues across all modes – or so we thought?
Volume increasing – right?
Share, rates, service levels (yes) – and returns increasing
But pushback (shipper/regulator/union) also increasing!
A secular, not a cyclical story – right?
Capacity and infrastructure – and competitor - issues remain
Fully reflected in the market? Or is this just another cyclical
slowdown?
NET/NETThe industry is poised to go up – or down –
based on decisions made here & now
Railroad Performance
Class I Railroads
Index 1981 = 100
300
250
Productivity
200
Volume
150
Revenue
100
50
Price
0
64
68
72
76
80
Source: Railroad Facts, AAR
84
88
92
96
(Based on a design by R. Gallamore)
00
04 08p
Street influence on RRs – and Why
that affects ALL stakeholders
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Battle for cash
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Management’s reactions to pressures
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Investors, competitors, regulators, politicians,
labor – oh, yes, and customers
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Short term decisions/long term consequences
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Remember 2004! (?)
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Which “bucket” will they place their chips?
Simple Math
Rates
 Returns
 Capital Expenditures
 Capacity
 Service
ARE ALL CONNECTED!
Virtuous Circle (’03-07) or Disinvestment?
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Key Class1 Issues in Recession ‘09
Re-regulation Bigger Threat than Ever
 Rates (versus Volumes)
 The Economy
 Service
 Green Ramifications
 Stimulus, MAP21, ATRK, “High” Speed
Rail (ONERail)
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New Sources of Capital – Threat or
Opportunity?
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Fortress-RailAmerica/FEC (etc)
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Infrastructure Funds (Toll Roads)
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Hedge Funds & “Activists” (TCI)
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PPPs – Heartland, Nat’l Gateway, CREATE
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Share repos
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C-1 Buyouts (DM&E)
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JVs – Meridian, Patriot corridors
Threats to the Renaissance
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Cyclical vs. secular argument
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New Congress –impacting labor & shippers
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Mandated Reviews – STB, Canada
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Rereg – the MAD answer
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Execution: service
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Execution: merger
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Hedge funds?
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Liquidity?
Cyclicality – Rails & Suppliers
What happened to the “end of the
cycle”?
 Thinking strategically vs. tactically?
 Panic Mode?
 Passenger the new lead dog?
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North – or South – of the Border
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Canada as the new model for rail regulation?
NAFTA review?
The “J” (& The MidAmerican, etc)
Auto Restructuring
Customs/Border issues
Detroit tunnel?
Rebirth of passenger rail?
RR Days on the Hills
S&P 500 and Railroads
Monthly Data January 1980 – April 2007
Index Jan. 1980 = 100
1400
1200
S&P500
Railroads
1000
800
600
400
200
0
Jan-80
Jan-85
Jan-90
Sources: MSN and CSI, Inc.
Jan-95
Jan-00
Jan-05
Change in U.S. Railroad
Non-Intermodal Carloads
2%
07Q4
08Q1
0%
-2%
07Q3
-4%
-6%
08Q2
08Q3
07Q2
07Q1
-8%
-10%
08Q4
-12%
-14%
-16%
-18%
Source: AAR Weekly Railroad Traffic
09Q1
Change in Canadian Railroad
Non-Intermodal Carloads
10%
07Q4
5%
07Q2
0%
-5%
07Q1
07Q3
08Q1
08Q2
08Q3
-10%
-15%
08Q4
-20%
09Q1
-25%
Source: AAR Weekly Railroad Traffic
Change in U.S Railroad
Intermodal Units
2%
07Q1
0%
-2%
-4%
07Q2
07Q3
08Q2
07Q4
-6%
-8%
-10%
08Q3
08Q1
08Q4
-12%
-14%
-16%
-18%
Source: AAR Weekly Railroad Traffic
09Q1
Change in Canadian Railroad
Intermodal Units
8%
07Q3
6%
4%
2%
07Q1
07Q4
08Q1
08Q2
08Q3
07Q2
0%
-2%
-4%
-6%
-8%
08Q4
-10%
-12%
-14%
Source: AAR Weekly Railroad Traffic
09Q1
Railroad Intermodal Revenue Growth
Over 5% - Long Live the New King!
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$14
$12
Billions
$10
$8
$6
$4
$2
$0
1990
1995
Coal
2000
.
2005
Intermodal
Source: Carload Waybill Statistics (includes non-Class I railroads)
Intermodal was the Top Source of U.S. Freight Rail
Revenue, but Coal will be Number 1 in 2008
Intermodal and Coal as a % of Revenue*
26%
25%
24%
23%
22%
21%
20%
19%
18%
17%
Coal
Intermodal
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
*Data for BNSF, CSX, KCS, NS, and UP
Source: Railroad financial reports
U.S. Railroad Intermodal Traffic
(millions)
14
12
10
8
6
4
2
0
81
82
83
84 85
86
87
88 89
90
91
92 93
94
95
96 97
98
U.S. Railroad TOFC/COFC Units
Source: Association of American Railroads’ Weekly Railroad Traffic
99
00 01
02
03
04 05
06
07
08
U.S. Railroad Intermodal Traffic
Trailers vs. Containers (millions)
10
9
8
7
6
5
4
3
2
1
0
88
89
90
91
92
93
94
95
96
97
98
U.S. Railroad TOFC Units
99
00
01
02
U.S. Railroad COFC Units
Source: Association of American Railroads’ Railroad Facts
03
04
05
06
07
08
Intermodal Growth Drivers
Domestic and International
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Globalization
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Trade
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Railroad Cost
Advantages
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Share Recovery
From Highway
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Truckload Issues
Railroad Return on Equity
Class I Railroads
14%
12%
10%
8%
6%
4%
2%
0%
n.m.
91
93
95
97
99
01
03
05
07
n.m. = not meaningful (negative value)
Source: Railroad Facts, AAR
RR CoC vs. ROIC – RR Stocks have done well
but… they still trade at a discount to all stocks
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
81 82
83 84 85
86 87 88
89 90 91
92 93 94
Cost of Capital
95 96 97
98 99 00
01 02 03
Return on Investment
Source: Surface Transportation Board
Note: Cost of equity estimation method changed by Board effective 2006 and 2008.
04 05 06
07 08p
Railroad Capital Expenditures
Class I Railroads
Billions
$12
$10
$8
$6
$4
$2
$0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: Railroad Facts, AAR
Class I Railroad Capital Spending
vs. Net Income
$12
(Current Dollars)
$10
$8
Capital Spending
$6
$4
$2
Net Income
$0
-$2
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08
Source: Association of American Railroads
RRs and Investment
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Is growth affordable? Capex up 10% in ’07, up 12%
in ’08, so far only down 5-10% for 2009F
One rail cuts, most increase capex during ’07
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What will 2010 look like? (long term growth
v short term weakness)
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Is additional capacity necessary? Desirable?
Can the intermodal model extend to carload?
Wall Street’s constrictive role (“fighting the last
war”) – is it changing?
Is this disconnect between the Renaissance and
the Street the opportunity of a lifetime?
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Future Demand for Freight
Transportation Will Continue to Grow
Billions of Tons of Freight Transported in the U.S.
2002
2035p
0
10
p – U.S. DOT projection
20
30
40
Future Corridor Volumes Compared to
Current Corridor Capacity
2035 without improvements
Below
capacity
Near capacity
At capacity
Above
capacity
Railroad Rates- the old story
Class I Railroads, Revenue Per Ton-Mile – another (related) New Paradigm
Cents
7
6
5
4
3
2
1
0
Constant $: Down 49% since 1980
Current $: Up 17% since 1980
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07
Source: Railroad Facts, AAR
Rail Employment is Up
for the First Time in Decades
Total Class I Employment: Jan. 2001-Nov. 2008
170,000
168,000
166,000
164,000
162,000
160,000
158,000
156,000
154,000
152,000
150,000
2001
2002
2003
2004
Source: Surface Transportation Board
2005
2006
2007
2008
Railroad Employee Productivity
Class I Railroads, Ton-Miles Per Freight Service Employee
Millions
12
10
8
6
4
2
0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: Railroad Facts, AAR
Rail Service Cycles
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Is the recent improvement in the metrics
sustainable? Systemic?
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Is it a product of huge capex injection
and IT?
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Or, is it merely a product of lower
volumes/less stress on the network…
Rail Regulatory Risk
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Biggest Uncertainty Entering ’09
Safety Bill done
“Competition” Bill (“M-A-D”) vs Anti-Trust
STB makes it 3-straight shipper “wins”
Rocky & The Dark Star – new horror movie?
Cost of Capital Revision shock
Mandated STB, CTA “Reviews”
AAR/RAC/ASLRRA have great “D” but hard to
score on defense
Tax Incentives to Leverage
Capacity Expansion

25% tax credit for
projects that expand
rail capacity
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Expense other
infrastructure capital
expenditures
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Leverage private
investment
RR/Investor Issues Summary3Rs3Cs
Recovery?
 The Re-Set
 Re-Regulation
 Capital Needs
 Capital Cooperation
 Cash Flow
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ABH Consulting
Anthony B. Hatch
155 W. 68th Street
New York, NY 10023
(212) 595-0457
[email protected]