Railroads An Economic Perspective October 2, 2018
John Elliott, Senior Vice President Established in 1995 in Philadelphia to advise short jelliott@strategicrail.com line railroads and companies in the rail industry, SRF has advised on projects in 42 US states and Canadian provinces Strategic Rail Finance • Public and private finance 1700 Sansom Street, Suite 500 • Business sales and acquisitions Philadelphia, PA 19103 • Transportation planning and policy (215) 564-3122 • Business development and site selection Created OnTrackNorthAmerica in 2007, a 501c3 strategicrail.com non-profit advancing sound transportation policy ontracknorthamerica.org and collaborative, holistic growth of the rail industry AAPA Conference Strategic Rail Finance October 2, 2018 – Page 2
Presentation Outline Railroad industry as context Railroad performance measures Basic Railroad Economics Build or Buy Back?? AAPA Conference Strategic Rail Finance October 2, 2018 – Page 3
7 Structure of the North Class I Railroads American Rail Industry 600+ Class II and III Railroads Industrial Rail Shippers 3000+ AAPA Conference Strategic Rail Finance October 2, 2018 – Page 4
Comparison of Railroad Types Class I and Regional Railroads Terminal (Class III) Railroads • Long-haul carriers • Last-mile carriers • The railroads are “public” like a • Typically operate a few miles of utility but without price controls track and switching yards • Railroads privately fund the • Many public, private and hybrid infrastructure and locomotives ownership / operation models • Railroads maintain exclusive • Perform the blocking and operational control over tens of interchange for Class Is and thousands of route miles switching for customers AAPA Conference Strategic Rail Finance October 2, 2018 – Page 5
Railroad Annual Revenues $25.0 Operating Revenue ($B) $20.0 7 $15.0 600+ $10.0 $5.0 3000+ $- UP BNSF CSX NS CN CP KCS G&W SPB Ports Seven Railroads ... and One Holding Company AAPA Conference Strategic Rail Finance October 2, 2018 - Page 6
19% 19% Agriculture Automotive 10% Chemicals Coal Revenue Sources 21% Industrial Intermodal 18% 13% Revenue Diversity • Balance by sector • Intermodal v. Carload v. Unit Trains Revenue per Car • Agriculture, Chemical, Industrial • Coal / Auto have smallest per-car revenue • Intermodal (per container … context) Long trains, Long hauls • … And the long story of short lining AAPA Conference Strategic Rail Finance October 2, 2018 page 7
Operational Performance Measures Safety. Safety. Safety. And… Increase train velocity • How fast is fast? Reduce train time in terminals • No one makes money sitting in terminals! Increase train weight and length • Size does matter! AAPA Conference Strategic Rail Finance October 2, 2018 page 8
The “Average” Class I - $13B Annual Revenue Sources of Cash Uses of Cash 1% 7% 9% 9% 9% 58% 15% 92% Operating revenue Misc. income Debt (net) Operating expense Capital investment Dividends and interest Taxes paid Shares repurchased AAPA Conference Strategic Rail Finance October 2, 2018 - Page 9
Highlighting the Highlights Operating Ratio • What does it mean? • Why does it matter so much? Capital RE-Investment! • Over half of net cash • These are not really “additions” Leverage • Debt is typically 40% +/- • NS: the undisputed long-bond champion! How are they using extra cash? • Paying for capital! • Paying down debt • And giving equity back! AAPA Conference Strategic Rail Finance October 2, 2018 - Page 10
The “Average” Class I - $13B Annual Revenue Sources of Cash Uses of Cash 1% 7% 9% 9% What is this?? 9% 58% 15% 92% Operating revenue Misc. income Debt (net) Operating expense Capital investment Dividends and interest Taxes paid Shares repurchased AAPA Conference Strategic Rail Finance October 2, 2018 - Page 11
Reinvestment vs. Returning Capital Q At what point is it worth building something new?! A When you can get a 10 or 12 month payback!! AAPA Conference Strategic Rail Finance October 2, 2018 – Page 12
Recap • Class Is, short lines, and • Keep perspective on the railroad switching operators have very size and economics different business models • The longer the railroad, the • All railroads focus on operating more they focus on long trains cost (OR) and capital expense and long hauls • Railroading is capital intensive, • The shorter the line, the more capital is expensive, and there they focus on short-haul service are high hurdle rates for new • Create advantage in your investment respective cost of capital AAPA Conference Strategic Rail Finance October 2, 2018 – Page 13
Thank You! John Elliott, Senior Vice President jelliott@strategicrail.com Strategic Rail Finance 1700 Sansom Street, Suite 500 Philadelphia, PA 19103 (215) 564-3122 strategicrail.com AAPA Conference Strategic Rail Finance October 2, 2018 page 14
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