Pumping up the 'actions' volume, wordlessly (Pat Foran, Context, February 2008)

When shareholders believe they've got ideas that management of a publicly traded railroad ought to hear, and they don’t believe management’s taking them or their ideas seriously, they can play by the rules of the public-company game to attempt to influence organizational direction, as reporter Desiree Hanford notes in this month’s cover story ("Who’s Buying Shares in North America’s Freight Railroads — Why It Matters"). And no activist shareholder’s playing harder these days than The Children’s Investment Fund Management L.L.P. (TCI), which in December launched what amounts to a proxy battle with CSX Corp.

Because investors have bought in — literally and figuratively — to the “Railroad Renaissance,” activist shareholders likely will hold stakes in the industry for some time, Hanford concludes. How will rail execs respond in this new ownership environment? They’d probably all like to respond the way CSX execs did (i.e., wordlessly) last month. CSX reported 2007 surface transportation revenue increased 5 percent to $10 billion — the first time the Class I’s revenue had reached that mark. The railroad reported $2.25 billion in surface transportation operating income, a 6 percent increase compared with 2006’s total. CSX’s operating ratio improved 0.2 points to 77.6 — the railroad’s best in 10 years.

“We don’t just want to participate in the Railroad Renaissance, we want to lead it,” CSX Chairman, President and CEO Michael Ward told earnings teleconference attendees.

It sure helps to walk the walk.

’07 financials: For Class Is, a year of record-setting
CSX and North America’s other five largest railroads didn’t just have good (if not great) fourth quarters (see page 7). The expense side of the ledger notwithstanding, they had pretty good (if not really good) years in 2007. A few highlights (in addition to CSX’s):

• Union Pacific Railroad set four records: Operating revenue reached $16.3 billion, up 5 percent compared with 2006’s total; operating net income totaled $3.4 billion, a 17 percent hike; net income grew to $1.86 billion, up 16 percent; and return on invested capital increased to 8.7 percent. The Class I’s operating ratio improved 2.2 points to 79.3.
• Norfolk Southern Corp. posted three records: Railway operating revenue reached $9.4 billion, up slightly compared with 2006’s total; income from railway operations increased to $2.6 billion, up 1 percent; and diluted earnings per share hit an all-time high of $3.68, a 3 percent increase. NS’s operating ratio also improved slightly from 2006’s level to 72.6 — NS’s lowest annual ratio since the 1999 Conrail integration.
• BNSF Railway Co.’s revenue rose 5 percent to an all-time-high $15.8 billion, the fifth-straight year the railroad has set a new record. Operating income rose 20 percent to $3.5 billion and net income jumped 23 percent to $1.9 billion compared with 2006 totals.
• Canadian Pacific Railway’s revenue increased 3 percent to $4.7 billion. Income rose 7 percent to $675 million and the railroad’s operating ratio improved 0.1 points to 75.3.

Canadian National Railway Co. was the only one of the Big Six not to post a revenue increase. Due in part to a labor strike and weather-related issues, CN’s revenue decreased 4 percent to $7.7 billion and operating revenue declined 5 percent to $2.8 billion.

Mexican rails reveal capex plans at RailtecMéxico
To what extent will the U.S. economic slowdown affect Mexico’s freight railroads? Have Mexico’s two biggest railroads gotten any closer to resolving decade-long trackage rights issues? How well are the railroads working with other links in the transport chain to boost rail’s share of the Mexican (not to mention global) freight marketplace? Those not-so-rhetorical questions framed many a conversation at last month’s RailtecMéxico 2008. Presented by Asociacion Mexicana de Empresas Ferrocarrileras A.C. and co-sponsored by Progressive Railroading, the event was held Jan. 27-29 at CINTERMEX, Monterrey, Mexico.

As per usual, the freight roads presented summaries of their 2008 capital spending plans. For the most part, the railroads are investing in infrastructure (as opposed to rail cars and locomotives) this year. Kansas City Southern de México S.A. de C.V. has set aside $251 million; Ferrocarril Mexicano S.A. de C.V., $182.2 million; Ferrosur S.A. de C.V., $42.6 million; and Ferrocarril y Terminal del Valle de Mexico, $18.1 million. Ferrocarril del Istmo de Tehuantepec S.A. de C.V. could spend up to $25 million, mostly to rebuild (per Mexican government dictates) the former Chiapas-Mayab S.A. de C.V., which was ravaged by Hurricane Stan in October 2005.

For more spending-plan detail and other RailtecMéxico undercurrents, check out our “Blogs”