Short Lines Conferences and More RR Thoughts

2019 11 12 11 23 30

Greetings;

The MLB playoffs are in full swing (Go BLUE!) and so, in this unusual year, is the short-line conference, 2020-Virtual version; I speak twice.  And if that is not enough for you (hold your comments please), there is the Fresno State (UD-UCAL) event on today as well  (see attached), which I refer to the “rail geezer event”; myself included.

 

Some early thoughts:

  • Congratulations Ashley and Maeghan!  Progressive Railroading Magazine, my partners in RailTrends (www.railtrends.com ) released their annual “Rising Stars” list and, if you’re scoring at home, the score is KSU 3, 2 each for CSX, NSC, UNP & CP, and one each for BNSF and Watco.  I hope that I didn’t miscount or miss anyone, but special congrats to Maeghan Albiston, the IR at CP, and the CEO of the NRC, Ashley Wieland!  Both of whom you saw at RT19, and would have seen at RT20….
  • Books on my nightstand – there’s a new one by oil-guru Dan Yergin, “The New Map” (Penguin); you know that I’m reading “Outside the Box” by Levinson on trade (the box being, well, the intermodal box) – but a special THANKS to Scott Lothes and the Center for Photography & Art for “The Railroad Photography of Donald W. Furler” – it is a true gem, a work of art into itself ...

 

The STB releases its Railroad Revenue Adequacy list….for 2019.  Yes, the Surface Transportation Board released its list of those rails whose returns (ROIC) exceeded their Cost-of-Capital, and the total was five.  The very announcement points out the inadequacies of the list itself, with the greatest of respect (it is slow/late; it counts only the US as per the STB being, of course, and American government body even if the freight rail system is continental and it shows that ROIC/CoC is very much an art, maybe even a dark art, and not a science.  For example, is the CoC really 9.34%?  Isn’t that perhaps one-third too high?  Yes, it seems closer to the mark than 12.2% for last (2018) year.  Does this matter?  Well, maybe not today,. But with the very nature - and use - of “revenue adequacy” up for debate in the future, it does bear watching.  Note that the two Canadian lines system-wide would have ranked number 1 & #2….Anyway, those getting passing grades were:

  1. UNP 15.6%
  2. CSX 12.8%
  3. BNSF 12%
  4. NSC 11.6%
  5. Soo Line (AKA “CP-USA”)

Both the KSU (6.2% - assuming US only and yet still seeming unrealistic) and CN-USA (7.4%) fell below the….target.

 

Short Line Fever, Part One – Remember, the short line value proposition fits well, after some tensions, with PSR (first/last mile, “shock absorber” for pre-blocking) and is central to any carload recovery. 

The NEARS Conference (North East Rail Shippers) was very short-line oriented, even and including some Class 1 connections (as it were) – so served as a great “appetizer” for the ASLRRA short line main course.  Commtrex’  Martin Lew spoke, too – grab a listen, as did KSU’s Pat Ottensmeyer, and others (me too).  But short lines seemed to be the main course (event).  Or maybe, I should write the Maine course, see below.  I will start with OmniTRAX and then the presentations (supplemented) of Pan Am, CP/CMQ, and from their analyst day, Brookfield/GWR – all of whose stories are intertwined, it seems, at present.

  • John Russel, CCO of OmniTRAX, is an industry vet, so when he points out some scary things, even weeks before Halloween, I  sat up and listened hard: while carload volumes have bounced hard off their lows (not as high as intermodal, of course), they are still double-digit down versus….2014.  some of the rail problems, in fact, are not pandemic-initiated (and this, beyond coal).  What Russell noted was that as rails went through PSR (in the US) they did get demonstrably better (metrics) – but at the cost of many “boots on the ground”.  Most alarming is his study of the last 5-year CAGR:  Rails are losing 6-8% of their connecting customers a year!  THAT is sobering….OmniTRAX’s plans to counter that are all about getting closer to the customer via car storage/transload/and real estate plays (a Broe specialty).
  • Switching to the Brookfield Analyst Day, Brookfield Infrastructure Partners (BIP) own rail assets in North America and the UK (GWR), Australia, and Brazil which comprise just about a fifth of their portfolio.  In BIP’s world-view the (1) Pandemic (etc) prove out the need for essential assets; H1/20 results were impacted only by ~5% (mostly coming from non-rail transport) and they expect to be up for the FY2020.  Rail was “underpinned” by long term contracts (averaging 9 years – not my RR nor SL experience).  And they see (2) a coming super-cycle for infrastructure (mostly deals coming from governments so perhaps less so in the SL industry?).  Despite rumors that they have been in talks and negotiations, they see transport dropping from a quarter to a fifth of their future (larger) portfolio.
  • Heading back to NEARS David Fink of the Pan Am Railway spoke and successfully ignored the heard of elephants rampaging through all of our virtual rooms (for those who somehow do not know they are for sale).  He did talk about how difficult things had been for Pan Am over the past year (do the math) with a major tunnel collapse and rebuild, and other beyond-their-control events all prior to the Pandemic.  But they handle those challenges and see in the traffic results during C19 (steady and positive results in home renovation materials, food, energy, and consumer waste were up-to-steady) the signs of a payoff of their growth strategy.  That is led by a whoda-thunk-it paper renaissance, as the Maine (see the theme coming into place) paper industry led by Sappi and 9 Dragons has pivoted from printing to packaging.  Other opportunities should come from MSW, biodiesel and enhanced opportunities in LNG and propane, perhaps connecting to a new C1 in Maine….Or might they become part of a Canadian Infrastructure firm’s already impressive North American short line (and regional) haul?

o   Meanwhile, 10 Mass legislators urged the Commonwealth to exercise its right of first refusal on the PAR  to purchase routes for passenger use.  I am not sure they have seen the multiples paid fir SL & rail assets these days….

  • CP proudly (re) plants their flag in the Maritimes and in Maine – are they looking for more?  From NEARS (and supplemental financial conference transcripts), Canadian Pacific can’t help their glee about the CMQ deal, given final (US) approval in the summer.  CMO John Brooks called the CMQ deal “even more compelling” than their opportunities from BC (the new Maersk deal included).  That is really saying something….What is interesting, perhaps subtly, is why?  My (and other’s) thoughts were to compete with CN in an eastern Canada port game, essentially St John (and….maybe….Searsport) versus Halifax.  This is becoming potentially important with the discussed if yet unverified supply chain movement away from China to the Suez.  But Colby Bullard, VP-Merchandise (ECP) says that the real reason is that “CP is committed to being a major player in the Northeast”  because of new market access, forest product originations, energy destinations (heating oil, propane), 10 new transload operations to add to the 100+ already on CP - and that the port access is just “icing on the cake”.  They are spending ~$90mm to upgrade the CMQ to “Class One standards” (Class III track – over 40mph) by YE21 to create a 24/48/72 hour St John IM service (Montreal/Toronto/Chicago).  Which, by the way, involves those icing ports (literally – it is far north.  And it should be pointed out that rival CN poo-poos the vaunted nautical mile difference since the speed, as in Rupert, is on the rail-mile side).  Brooks discussions with investors stressed the port opportunities, but maybe that’s what we wanted to hear?  It was newsworthy when CP took “advantage” of the strike at the Port of Montreal (which was spectacularly poorly-timed) to reroute a big box-ship to St John. 

o   One slide at NEARS was entitled “CP – Driver of growth in the NEUS”.  Oh really?  So….forest products….propane….where have I heard that before on the same day at the same (sadly – really sadly in this case) virtual place?  Oh – right – Pan Am!  It can be an all-Canadian duel in the sun….

o   Bullard had a slide on Searsport (ME)….I remain skeptical if big trains can get that from he-ah or anywhere; I have been there and….abh remembahs. (Click Here)

o   CP also has reported flat CAPEX at $1.6B  - flat not just with last year but with pre-Covid plans; they are having quite the year in 2020 despite and in stark relief of the C19 crisis – grain, potash, IM….

o   CP may be an under-rated Rail-tech play – but I may never know that.  I have tried without success to learn more (perhaps IR is too busy on the red carpet?) but CP and only one other Class One (you can guess) has not opened up on this always but never more so important aspect.  So….it was interesting to hear Nadeem Velani discuss this with a(nother!) analyst, starting by “technology is perhaps an area that we don’t get as much credit as maybe we deserve” – I have some ideas on that – and cited 5 areas:

      • 1. Train vision via high-speed infrared camera
      • 2. Expanding cold-wheel technology
      • 3. Locomotive-mounted track inspection
      • 4. Joined Blockchain in Transport Alliance (why, hullooo, Maersk!)
      • 5. PTC (in the 30%+ US network; studying how to expand it….)
  • The ASLRRA Convention is just about at the halfway point – great stuff still to go including my second presentation (this time with Louis Paul of Macquarie, Friday afternoon) – see www.aslrra.org. Today there was a great panel on investing in shortlines from a sell-side (BMO) and buy-side (infrastructure funds) perspective.  Some highlights:

o   John Ma of First Sentier (owners of Patriot Rail) and Ben Krause of #i (owner or Regional Rail) agreed with my and Brookfield’s earlier comments – 2020 with all of its headwinds actually “proves out” the infrastructure and the rail/short line rail investment thesis – and showed (relative) stability in this most of unstable worlds. 

 

Other new that is rail or rail-related:

  • Now that is the Ag I remember!  Grain has, almost perversely, been one of the stable commodities for NA rails in this uncertain world (Canadian grain transport records set by both carriers; Grain & Farm Products were the only 2 of 20 US carload commodities tracked by the AAR to be up in August – September RTI coming soon).  So after putting on a suit and sitting still for church, we learn that the Ag Dennis can still be a, well, if not Menace (google it) then at least unpredictable.  Or predictably unpredictable.  Soybean export sales seem to have lost some steam as a slightly higher $ and world events might be slowing Chinese purchases.  And then – for the THIRD year in a row – the USDA substantially revised down US stocks of corn and beans after less than a month!  And we accuse other trading nations of not producing trustworthy stats!  In addition, the Farm Journal Bureau re[orts that the RFA (ethanol’s trade association) says that C19, etc will cause huge losses in ethanol – and up to $10-12B for corn growers….of course, they would say that. 
  • Coal’s black days aren’t going away: The NYT on coal – a major, front-page 4 full-page report, not offering any good news for coal transportation: https://www.nytimes.com/2020/10/05/us/politics/trump-coal-industry.html coal also saw Foresight Energy (part of the Murray coal story) file Chapter 11; BHP announce that their spin/sale of coal assets will be accelerated, and Peabody and Arch call off their proposed JV in the PRB in the face of FTC and court opposition.  And most report that if the NextEra-Duke consolidation would happen, that would only accelerate transitioning away from coal in the south & Midwest.
  • Warehouse demand continues to strengthen through/despite the Pandemic.  The WSJ reports that demand is up 51% in H1/20 – precisely (and sort of coincidentally) the amount that Amazon wanted to add (overall e-commerce was up fully 45% YOY in Q2/20 and is now over 16% of the retail total.  I loved the WSJ article about the new development in NYC, the Bronx Logistics Center, with rail access (CSX).  Only some 2% of these warehouses use rail but 5% of the tenants/potential tenants request it, according to JLL – and that % is growing….
  • Truck tech hype of the week – Michigan says it will build an AV lane between Ann Arbor and Detroit (I assume its to reduce drunk tailgaters returning home after attending Wolverine losses to MSU or NU or IU – did I mention all of the Big10 schools of prominent railroaders?  Oh – PSU!).
  • Real truck tech news – Uber sold a stake in Uber Freight ($500mm worth valuing UF at $3.3B) to old friends Greenbrier Equity Group, previous owners of ELD, and current owners of Nordco.  Congrats guys!  Now, I had written that my interesting conversation with UF made me think they had the goods to help rail, and with an owner conversant in all modes and in tech, maybe something might come to pass….
  • Quick hits:

o   Quebec is seeing a tough C19 “second wave”

o   Auto sales were better than anticipated (and not just Tesla)

o   Truck tonnage (tonnage) was down 9% in August

o   There are still 300K stranded seafarers

o   The ASCE (American Society of Civil Engineers) has hinted that their new report card might come out later this fall – their last one gave the US a D-, the Highway system also a D- and Railways a B 9and that includes passenger).  This isn’t just nuthin’ – the ASCE says the direct costs of highway congestion will be $40B by the end of the next decade….

o   Talkin’ Yankee what the CP will need to talk-like in Searsport.

 

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18