Inside the Numbers

I’m a bit behind on my reading these days, but I finally got around to reviewing a recent report to Congress that projected dollars needed by short lines and regionals to address infrastructure needs.The small railroad sector is one that isn’t easy to get your arms around so it’s always helpful to see reports like this with facts and figures. The report prepared for the U.S. Department of Transportation by the Upper Great Plains Transportation Institute (UGPTI) suggests that short line and regional railroads have a current need of $1.6 billion for infrastructure improvement, with future needs of an additional $5.3 billion.In conjunction with the American Short Line and Regional Railroad Association and the Association of American Railroads, UGPTI surveyed 470 short line railroads and received responses from 115. Those responding reported that slightly more than $599 million would be required among them to meet current service levels and expected growth. When asked about their estimated needs over the next five years for infrastructure spending and equipment, they reported a collective need of over $1.2 billion with 80 percent of these investment needs going to infrastructure. While it is difficult to determine the spending needs for this entire segment of the industry, the Federal Railroad Administration estimates, based upon the survey results, a current overall need of about $1.6 billion while future needs are $5.3 billion, bringing total investment needs to about $6.9 billion. The railroads also reported that they anticipated funding most of their expenses out of cash flow, bank loans, and an array of programs offered by state and federal governments.FRA noted that the rise of holding companies followed by greater access and options to the private capital markets is not a panacea to short line railroads’ access to capital to meet their investment needs. The holding companies interviewed stated that a mix of multiple funding sources is required.There are 27 holding companies that control nearly 270 small railroads, according to the report. “This development has changed the relationship between the railroad and the banker and has also changed the lending calculus. Holding companies have railroads that encompass geographic and commodity diversity and have essentially reduced the banker’s risk of not being repaid. Holding companies have also taken a sophisticated approach to fund infrastructure projects and have relied on multiple combinations of funding from all programs available,” according to the report.As the holding companies explained, there are still significant investments to be made, particularly the upgrading of track to handle 286,000-pound railcars as well as the repair and replacement of bridges. The holding companies also noted that the funding that is available often must be thinly spread among all carriers under their control in order to meet current and ongoing needs.Small railroads owned by holding companies represent nearly 50 percent of the total number of short line carriers. Of these holding companies, Genesee and Wyoming controls the largest number of short lines. Following its acquisition of Rail America in late 2012, Genesee and Wyoming now controls over 100 railroads in the U.S. The Class I railroads control 11, state and local governments control 26, and shippers control 55.The report highlighted the trend toward holding company ownership, noting that from 1996 through 2012, the number of holding companies has grown from 14 to 27. At the same time, the number of small railroads under the control of holding companies increased from slightly over 100 in 1996 to nearly 270 in 2012.While control of small railroads is constantly in flux, FRA estimates that there are around 200 railroads that remain independently owned and come under no controlling ownership. Independent Class III railroads also face these same investment challenges and the need to access capital to upgrade track and bridges for heavier rail cars as well as maintain their systems.State and federal programs have been helpful to finance projects. In total, the RRIF program has executed 27 loan agreements of nearly $700 million to 20 Class II and III carriers. Several carriers such as the Dakota Minnesota & Eastern Railroad, Iowa Interstate Railroad, R.J. Corman, Nashville and Eastern Railroad, and the Wheeling and Lake Erie Railroad have made use of the program more than once. To date, overall executed loan agreements under the program (including to Class I carriers and Amtrak) total over $1.725 billion with 40 percent of that going to Class II and Class III railroads, the report said.FRA’s assessment of RRIF loans to short line railroads shows that slightly over 78 percent went to infrastructure (bridges and track) while 17.6 percent went to equipment.TIGER grants have also been useful. “From the Recovery Act forward, there has been a total of $4.2 billion in funding for TIGER, including the most recent 2014 fiscal year appropriation. Of the $4.2 billion in the six offerings, nearly $810 million has gone toward freight rail projects, including port projects that have a rail component. The short line segment of the rail industry has received over $270 million, principally for capacity enhancements, track improvements, and bridge repairs,” the study said.According to the ASLRRA, the Section 45G railroad maintenance tax credit has helped fund more than $300 million worth of short line infrastructure improvements annually. Since 2005, ASLRRA estimates that the tax credit has helped Class II and Class III railroads and their customers invest over $1.2 billion.In addition to state/federal programs, short lines are increasingly partnering with Class I railroads to make capital improvements. Most of the situations in which this happens are when short lines own a strategic asset and have the possibility to improve the competitive position of a Class I through the joint use of that strategic infrastructure.The report is entitled Summary of Class II and Class III Railroad Capital Needs and Funding Sources. Follow this link to access the full report: Kathy Keeney
Kathy Keeney is Publisher of the Rail Group. The granddaughter of a railroader, she has been writing about railroads for nearly 30 years. She is a past president of The League of Railway Industry Women and served on the board of directors for the American Short Line and Regional Railroad Association and for the Washington Chapter of WTS.