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Why so much long term debt on the balance sheet?

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Posted by SD70Dude on Wednesday, February 24, 2021 4:34 PM

Ulrich

The railroads are also in constant communication with their workers to hash out disagreements and changes brought about by a multitutude of factors.

I see you've never worked for a railroad. 

The Class I theory of workplace communication is like Michael Caine's description of teamwork in "The Italian Job". 

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Posted by Ulrich on Wednesday, February 24, 2021 4:50 PM

SD70Dude

 

 
Ulrich
SD70Dude
Ulrich

We need more shareholder participation, not less. Most shareholders don't even know what they own let alone vote.. that level of passivity is what's wrong today.

Yeah, no.

Most shareholders have no idea how the business actually operates. 

Those that do decide to actively participate tend to do things like hire Hunter Harrison to run their railroad. 

As for the original subject, I find that the combination of increased debt, dividends and stock repurchases create a giant sucking sound, as ever increasing amounts of money flow from the company directly into the bank accounts of shareholders and executives. 

I suppose many will say this is capitalism at its finest, but I find it hard to reconcile that with the mismanagement and underinvestment I 'enjoy' every day at work.

That giant sucking sound is a paltry dividend yield of less than 2% in most cases. Most shareholders, sadly, have no idea of what they even own let alone how it functions, and that's due to their money being indirectly invested in complex funds.. Maybe the fix to that is to have direct investment once again as it used to be years ago. 

People often confuse a complex imperfect world for a badly run business.. most of the time there are no easy solutions.. only difficult compromises.

 

 

CN plans to spend over $2 billion on share buybacks this year.  One could build a lot of double track and/or decongest yards for that amount of $$$.

Suck, suck, suck.......

 

 

Difficult compromises... they're investng in infrastructure.. they're buying back shares.. they're investing in electric trucks, and they're doing a bunch of other things too. All of them may not be in the ratios that we'd like to see..  Sure, 2 billion could buy alot of other things, but business is largely an exercise in compromise. JJ Ruest and his leadership team are paid well to figure out how to most intelligently apportion limited and scarce resources.. What may not make sense to you or me may indeed make sense to those who have to consider all the angles impartially. 

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Posted by SD70Dude on Wednesday, February 24, 2021 5:19 PM

Ulrich
SD70Dude
Ulrich
SD70Dude
Ulrich

We need more shareholder participation, not less. Most shareholders don't even know what they own let alone vote.. that level of passivity is what's wrong today.

Yeah, no.

Most shareholders have no idea how the business actually operates. 

Those that do decide to actively participate tend to do things like hire Hunter Harrison to run their railroad. 

As for the original subject, I find that the combination of increased debt, dividends and stock repurchases create a giant sucking sound, as ever increasing amounts of money flow from the company directly into the bank accounts of shareholders and executives. 

I suppose many will say this is capitalism at its finest, but I find it hard to reconcile that with the mismanagement and underinvestment I 'enjoy' every day at work.

That giant sucking sound is a paltry dividend yield of less than 2% in most cases. Most shareholders, sadly, have no idea of what they even own let alone how it functions, and that's due to their money being indirectly invested in complex funds.. Maybe the fix to that is to have direct investment once again as it used to be years ago. 

People often confuse a complex imperfect world for a badly run business.. most of the time there are no easy solutions.. only difficult compromises.

CN plans to spend over $2 billion on share buybacks this year.  One could build a lot of double track and/or decongest yards for that amount of $$$.

Suck, suck, suck.......

Difficult compromises... they're investng in infrastructure.. they're buying back shares.. they're investing in electric trucks, and they're doing a bunch of other things too. All of them may not be in the ratios that we'd like to see..  Sure, 2 billion could buy alot of other things, but business is largely an exercise in compromise. JJ Ruest and his leadership team are paid well to figure out how to most intelligently apportion limited and scarce resources.. What may not make sense to you or me may indeed make sense to those who have to consider all the angles impartially. 

What doesn't make sense to me is that upper management, by their actions, has decided that it is ok for freight trains to average less than 15 mph on our mainline.  And that it is ok for trains to be staged for days at a time, taking up what little track capacity we do have.

As with most companies, stock options etc form a significant part of the compensation package our upper management enjoys.  Share buybacks increase the real value of that compensation, and in my mind that constitutes a conflict of interest. 

Same old story.  Executives and shareholders benefit.  Customers, employees and society at large do not. 

Greetings from Alberta

-an Articulate Malcontent

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Posted by Ulrich on Wednesday, February 24, 2021 5:47 PM

I really can't speak to the efficacy of specific decisions made by senior management at CN.  All I can tell you is that based on my own experiences running various departments for businesses large and small as well as running my own business, decisions are rarely easy and straightforward and often have unintended side effects. Most often its choosing among the best of a bunch of bad options. 

Stock options are part of the compensation package so that the people who make the big decisions have some skin in the game.. Reducing the number of shares outstanding is in my view a good way to bolster the share price legitimately.. the value of the business is spread out over fewer shares. Keeping shareholders happy is one important component of running the business as shareholders today have options like they've never had before. And few of us wear one hat.. the employees and customers are often shareholders as well.. they stand to benefit too with fewer shares outstanding. I guess our views are coloured by our own experiences.. You're on the front lines at CN.. I'm just a shareholder with some experience in management elsewhere. It's sometimes hard to look at things impartially.. 

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Posted by charlie hebdo on Wednesday, February 24, 2021 6:00 PM

Ulrich

 

 
charlie hebdo

There are more stakeholders involved in a business than management, owners, stockholders or bond holders.  Customers, employees, neighbors and the public as a whole should be entities involved in the decision process. In some capitalist societies at least some of them are. 

 

 

 

 

I thought they were.. Zoning issues and the like are on the news almost constantly as railroads and the towns they run through work out issues as they come up. The railroads are also in constant communication with their workers to hash out disagreements and changes brought about by a multitutude of factors. Shareholders are involved too.. they are the owners of the business after all. 

 

But only in an adversarial manner for the most part rather than in an ongoing,  cooperative way.  In some places,  unions and the state have representation on boards. 

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Posted by SD70Dude on Wednesday, February 24, 2021 6:02 PM

charlie hebdo

In some places,  unions and the state have representation on boards.

In most of North America that would be considered communism.

Greetings from Alberta

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Posted by Ulrich on Wednesday, February 24, 2021 6:37 PM

charlie hebdo

 

 
Ulrich

 

 
charlie hebdo

There are more stakeholders involved in a business than management, owners, stockholders or bond holders.  Customers, employees, neighbors and the public as a whole should be entities involved in the decision process. In some capitalist societies at least some of them are. 

 

 

 

 

I thought they were.. Zoning issues and the like are on the news almost constantly as railroads and the towns they run through work out issues as they come up. The railroads are also in constant communication with their workers to hash out disagreements and changes brought about by a multitutude of factors. Shareholders are involved too.. they are the owners of the business after all. 

 

 

 

But only in an adversarial manner for the most part rather than in an ongoing,  cooperative way.  In some places,  unions and the state have representation on boards. 

 

 

Yes adversarial.. because everyone has their own agenda and interests at heart, first and formost. The shareholder wants a bigger return.. the customer wants a lower price and faster service.. unions want better pay and working conditions for their members...communities want quiet neighbourhoods without trains..etc. There's some overlap of course.. but there will always be some element of "my interests are paramount here".. 

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Posted by jeffhergert on Thursday, February 25, 2021 2:22 AM

MP173

 

Regarding TCI and EHH...there was no carcass left behind.  I know EHH is a lightning rod on this forum, but to say CP and CSX are carcasses lying around for the vultures to pick at is not accurate.  Both are very healthy.

Ed

 

A couple of years ago there was an article in Railway Age about CN after EHH.  He had been gone for some time, possibly at that time he was at CSX.  There were few kind words for EHH in that article.

It may not have been a rotting corpse, but they were spending money to undo what EHH did.  Restore infrastructure, equipment and manpower that he had cut.  They needed to grow and EHH had cut to the bone with little or no capacity to grow.

It'a always said that PSR eventually will lead to growth because it frees up so much assests. Yet no practicing railroad ever seems to reach that growth until they pull back from EHH's style of PSR.  That is, focusing only on costs to the point that you no longer want business because it's not profitable enough or negatively affects the operating ratio.

Jeff 

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Posted by CMStPnP on Thursday, February 25, 2021 4:29 AM

nhrand
Let me see how this works.  I borrow a few hundred thousand with a 3.5 percent mortgage and put it all into the stock market buying at the high current levels.  Stock prices fall, my stocks are worth 25 percent less and I have to continue paying the mortgage, principle as well as interest.  Of course, if I wait long enough my stocks will regain the loss and maybe if I'm lucky the stock prices may go high enough to recoup the annual costs of my mortgage and maybe I'll even come out a little ahead.  All I have to do is wait long enough and ignore the volatility of the stock market.  If I live long enough the stock market may actually gain the 7 percent cited as a long term average appreciation.   I'm not against investing in the stock market but I think leverage is risky, i.e., borrowing to buy stock.  Also, regarding railroads replacing their stock with debt, I think it mainly shows that management is mainly concerened with the current book value of the company, and their own personal wealth.  Return on equity is just a snapshot view of the present.  The future of the company seems to be of secondary concern.  

A very simpleton example without stop loss orders or other limits on investing.   It is risky to borrow to invest if you make it so.   It is up to you.    It's smarter to invest money than pay off a mortgage in this environment currently.    Yet people opt to pay off the mortgage because of fear vs being rational.    Thats their issue I guess.   The whole purpose of maintaining an emergency fund is to have cash in a downturn or in case of layoff so that you do not risk your home.    Emergency funds do not need to be and quite honestly it would be stupid to have them be 100% cash.

In regards to Corporate Finance.   Leverage in any compentently managed company is used in such a way as outlined earlier.   Nothing wrong with having debt on the books as part of your total finance package.    It is only a problem when it is the majority of your finance package and it become way out of balance with other approaches.    Though I might add BNSF, CP, CN and UP are Western railroads with long term haulage contracts some lasting 10 years or more still on the books.   Those haulage contracts should be treated as an annuity and borrowed against (as Insurance companies do with insurance premiums) and I am sure they are doing that in some cases.......which would raise their leverage rates higher.

If UP borrowed say against it's coal contracts and as we see the coal contracts are declining now.     If they cannot replace that traffic with another long term haulage agreement with another commodity and they have money borrowed against it.   I believe (not 100% sure) they can write that off as a loss on expected revenue.    Though I think they have to repay the portion of the loan no longer covered by a haulage contract if they cannot find new collateral.    Thats even if they engage in monetizing their haulage contracts.

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Posted by CMStPnP on Thursday, February 25, 2021 4:33 AM

SD70Dude
I see you've never worked for a railroad. 

Even so, most readers of these forums by now should realize it is TOP DOWN management style and a very militaristic approach to rules and regulations.  I've never worked for a railroad and have known that since age of 17-18.

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Posted by CMStPnP on Thursday, February 25, 2021 4:36 AM

SD70Dude
CN plans to spend over $2 billion on share buybacks this year.  One could build a lot of double track and/or decongest yards for that amount of $$$. Suck, suck, suck.......

Because Executive bonuses are tied to share performance and in some cases where large shareholders sit on the board shareholder returns.   Nobody cares about infrastructure unless it is an obstacle or impediment to expansion of profit.   At some point infrastructure investment matters.    In the case you mentioned the priority is probably not there for that specific project maybe because a threshold of inefficiency has not been crossed yet?    Whats the metric of CN's network fluidity and is it declining or increasing?

My personal view, slowing train speed limits over major bridges in order to defer replacement is a shortsighted practice but railroads do that all the time.

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Posted by MP173 on Thursday, February 25, 2021 8:41 AM

I have no reference point with EHH, other than as a CN shareholder there were massive gains over the years.  It appears that there was restoration after EHH left.  I am not going to question that.  It will be interesting to see how CSX evolves.  One issue is that NWO terminal - North Baltimore which EHH wanted to shutter, is fairly active, in fact it seems to be a very important terminal.

Years ago(perhaps 2014) during the CBR era and before coal began retreating, the big issue was capacity.  I questioned a rail analyst why the rails wouldnt curtail dividend and buybacks in order to expand capacity in order to handle this enormous growth which appeared to be on a constant glidepath upwards.

Within two years the energy component of the rail industry was retreating rapidly, coal was being replaced by low cost natgas and CBR was being shipped by an ever growing pipeline infrastructure.  Tank cars and coal gons were being parked.  I read in this months trains that locomotives are parked in Wyoming, probably never to be used again.  Capacity is being removed.

I was wrong in 2014 to suggest that CN and others cut back on payments to owners and instead increase capacity.  I have no ability to manage a large corporation.  EHH said "you dont build a church for Easter service" or something to that effect.  What I am saying is that it is very easy to say what should be done with other peoples money.  Ulrich has stated his concern over making decisions on his turf.  I respect that. 

Rail has been on a decline for years.  The growth days of 2000-2014 are over.  The challenge will be to replace that high paying freight (coal and general freight) with lower margin intermodal in a manner that is efficient and properly compensated.

Throw in the changing economy - electric vehicles, driverless trucks, etc.  

Quite a challenge for todays transportation managers.

Ed

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Posted by Ulrich on Thursday, February 25, 2021 9:35 AM

Alot of future growth will have to come from sectors that rail traditonally hasn't excelled at... like shorthaul, and probably the best way to do that is to start from scratch on the marketing side. Are we a railroad or are we a transportation company? The answer to that simple question would probably lead them in the right direction. In CN's case, they currently enjoy a simple route structure with mostly long hauls. The trouble with that is that long hauls are tied to foreign trade, and customers would much prefer shorter hauls at lower cost. If manufacturing ever does come back from Asia in a big way CN and others will suffer as Peoria to Chicago replaces Shanghai to Chicago. Now's the time for the marketing people to get ahead of it.. sure.. wring as much as you can out of Prince Rupert, but don't turn your back on the short hauls where most of the traffic is and likely will be in the future.

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Posted by SD70Dude on Thursday, February 25, 2021 10:43 AM

You guys should call up ttrraaffiicc and join his pity party.

The impression I get from the last couple posts is that railroads are on a unstoppable downward spiral, we should get out while we still can, and management should ride this horse for as long as possible while squeezing as much money out as they can. 

Also if railroads have a future it is in short haul intermodal, which requires fast, reliable schedules to be competitive with trucks. 

These two visions are not compatible with each other.  Even with a dramatic decline in traffic you can't achieve truck-competitive schedules on the existing infrastructure.  One cubic foot of priority higher-speed intermodal requires far more track capacity than the same amount of grain (still gonna be a lot of that moving by rail), as delays at meets hurt it far more.

I don't know the situation in the rest of North America, but in western Canada freight traffic has held steady or continued to increase over the last few years, we are actually busier right now than we were just before the pandemic started.  A good portion of that is international intermodal, but finished petrochemical products from the Edmonton area have also skyrocketed.  This traffic will most likely be around for decades, based on the lifespans of the plants that produce it, and more are under construction. 

Starting when Hunter Harrison was still here, CN management adopted the strategies you suggest, failing to invest for the future and actively reducing capacity, including removing some double track (none of those sections have been rebuilt).  They did build some additional double track over the last few years but it has not been enough.  Traffic levels out here have defied everyone's lack of faith by continuing to increase over the last 15 years. 

I should also note that priority truck-competitive intermodal really doesn't exist on Canadian railroads.  Ditto for short hauls.

Greetings from Alberta

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Posted by charlie hebdo on Thursday, February 25, 2021 10:53 AM

CMStPnP

 

 
SD70Dude
I see you've never worked for a railroad. 

 

Even so, most readers of these forums by now should realize it is TOP DOWN management style and a very militaristic approach to rules and regulations.  I've never worked for a railroad and have known that since age of 17-18.

 

Very true.  The broader,  objective view is often better from a distance.  "Can't see the forest for the trees."

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Posted by charlie hebdo on Thursday, February 25, 2021 11:00 AM

MP173
Rail has been on a decline for years.  The growth days of 2000-2014 are over.  The challenge will be to replace that high paying freight (coal and general freight) with lower margin intermodal in a manner that is efficient and properly compensated.

Perhaps stagnant is a better descriptor?  I still contend that one reason why intermodal is low profit is because trucking companies take the end portion(s). If this were made into actual vertical integration, that could increase revenue and profit. But management lacks much vision for growth. 

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Posted by Overmod on Thursday, February 25, 2021 11:06 AM

charlie hebdo
The broader,  objective view is often better from a distance.  "Can't see the forest for the trees."

But all too often it's a variant of an old public-policy-school aphorism: Where you stand is where you're used to sitting...

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Posted by Ulrich on Thursday, February 25, 2021 11:12 AM

SD70Dude

You guys should call up ttrraaffiicc and join his pity party.

The impression I get from the last couple posts is that railroads are on a unstoppable downward spiral, we should get out while we still can, and management should ride this horse for as long as possible while squeezing as much money out as they can. 

Also if railroads have a future it is in short haul intermodal, which requires fast, reliable schedules to be competitive with trucks. 

These two visions are not compatible with each other.  Even with a dramatic decline in traffic you can't achieve truck-competitive schedules on the existing infrastructure.  One cubic foot of priority higher-speed intermodal requires far more track capacity than the same amount of grain (still gonna be a lot of that moving by rail), as delays at meets hurt it far more.

I don't know the situation in the rest of North America, but in western Canada freight traffic has held steady or continued to increase over the last few years, we are actually busier right now than we were just before the pandemic started.  A good portion of that is international intermodal, but finished petrochemical products from the Edmonton area have also skyrocketed.  This traffic will most likely be around for decades, based on the lifespans of the plants that produce it, and more are under construction. 

Starting when Hunter Harrison was still here, CN management adopted the strategies you suggest, failing to invest for the future and actively reducing capacity, including removing some double track (none of those sections have been rebuilt).  They did build some additional double track over the last few years but it has not been enough.  Traffic levels out here have defied everyone's lack of faith by continuing to increase over the last 15 years. 

I should also note that priority truck-competitive intermodal really doesn't exist on Canadian railroads.  Ditto for short hauls.

 

Lots of shorthaul work available at primo rates.. but they'll  have to buy trucks to get it. I wouldn't suggest having trains run in 200 mile hauls.. that makes no sense... but rebranding the biz as a "transportation company" verses "a railroad" and buying the necessary tools.. i.e. trucks to offer the service is what I'm suggesting. Lots of low hanging fruit to be had.. why not haul London, ON to Mississauga, ON.. 103 miles for $1200.00? CN could easily capture a part of that business. IMHO making trains work in short haul markets is as pointless as trying to make trucks competitive in longhaul bulk markets.. different tools for different purposes.. Personally I'm bullish on CN.. I own alot stock in the Company and have since the IPO in 1995.. great business (albeit like all businesses it has its problems).. but the long term outlook is good I think.

 

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