Railroads and their money

It’s really easy to discover the financial choices made by the Class I railroads. They are laid out for all to see in the annual 10-K reports filed with the Securities and Exchange Commission (www.sec.gov). Make a beeline for the Consolidated Statements of Cash Flows, and see for yourself where the money comes from and where it goes. You’ll come upon some surprises. What follows are from the 10-K filings for 2014.

BNSF Railway. This Berkshire Hathaway subsidiary generated $6.6 billion from operating activities and poured almost all of it ($5.2 billion) into a massive capital investment program meant to open up its congested arteries. But BNSF also transfers billions every year to its parent company ($3.8 billion in 2012, $4 billion in 2013) and last year sent home $3.5 billion. To make the numbers work, the company borrowed (net of debt repayment) $2.4 billion. This follows a pattern set the two previous years. To be blunt, the cash sent home to Berkshire was obtained by borrowing the money. BNSF’s 2015 capital budget is $6 billion (26 percent of revenues), and if the pattern continues, expect it to borrow another $3 billion in 2015 to balance its books.

Canadian National Railway. Its operations provided $4.4 billion in cash (all figures are in Canadian dollars). CN divided it this way: $2.3 billion in capital investments, $818 million in dividends and $1.5 billion for repurchase of shares. New debt and repayment of debt just about netted out. It balanced things out by drawing down $161 million from its cash reserves, leaving it just $52 million of cash at the end of 2014 (relatively little for a company its size).

Canadian Pacific Railway. Operations provided $2.1 billion Canadian and capital investments soaked up $1.4 billion of that. Dividends took another $244 million and share buybacks amounted to $2.1 billion. In other words, the capital budget, dividends and share buybacks consumed twice the cash generated by operations. So how did CP fix this? Sale of part of the Dakota, Minnesota & Eastern brought in $236 million, and an accounting change $411 million more. CP netted $52 million from sale of assets, $62 million from stock it issued, and $771 million from short-term commercial paper (loans). Plus, it reduced it cash hoard by $250 million, leaving it with a bankroll of $226 million on December 31. The company plans a massive stock buyback this year, perhaps helping investor William Ackman cash in his investment. Unless CP’s new chief financial officer knows a hat trick I don’t, a lot of borrowing appears inevitable.

CSX. Operating activities (that means profits adjusted to add noncash items such as depreciation and deferred taxes and deduct such things as additional accounts receivable) gave CSX $3.3 billion in 2014. The capital budget took $2.4 billion of that, dividends $629 million and share repurchases $517 million. But CSX netted about $240 million from short-term investments and raised $70 million from new long term debt, net of debt repayments. It ended the year with a $669 million pile of cash, $77 million more than it began 2014 with.

Kansas City Southern. Operations provided $906 million. But capital spending and purchase or replacement of equipment under lease together consumed $970 million, dividends took $117 million and repayment of long-term debt another $508 million. It closed that gap of almost $700 million by taking out $175 million in new long-term debt and another $448 in short-term borrowing. The company had $430 million in cash beginning the year, and used $82 million of that to make its books balance. To my knowledge, KCS in its current form as a pure railroad has never bought back its shares.

Norfolk Southern. In round numbers, operations provided $2.9 billion. From that, subtract $2 billion for net capital investments, $687 million for dividends, $318 million for stock buybacks, and $645 for debt repayment. To make ends meet, it borrowed $200 million and drew down its cash hoard by $470 million. Still, cry not for Norfolk Southern; it ended 2014 with almost $1 billion of cash in the bank.

Union Pacific. UP took in $7.4 billion from operations. Net of asset sales, its capital budget consumed $4.2 billion of that. Then chalk up $1.6 billion in dividends and twice that amount ($3.2 billion) to buy back shares. Debt increased $1.9 billion, but UP ended 2014 with $154 million more cash in the bank ($1.6 billion in all).

This completes our little walk through railroad finances. I was struck at the amount of borrowing BNSF, CP, and UP did to assuage the appetites of their owners to take out money. On the other hand, BNSF and Union Pacific are arguably the two most financially sound railroads on this continent, and BNSF in particular is not letting its payments to Berkshire (they are a substitute for dividends) get in the way of a humongous capital program in both 2014 and 2015 (the budget this year, as I said, is $6 billion). I continue to wonder how much better off the whole industry would be long term if the share buybacks were redirected for a period to the crying physical needs of a business which says it wants to expand but by and large won’t invest sufficiently to make that possible.—Fred W. Frailey