Why and How does MRL profit and exist?

[Railway Man]

Both Railroads are same size and experience the same problems.

FEC, 386 route miles

MRL, 940 route miles (difference 243%)

FEC, participates in through rates

MRL, primarily feeder line rates or haulage-contract basis

FEC, traffic dominated by terminating or originating

MRL, traffic dominated by overhead 

FEC, serves densely populated, intensively farmed, coastal plains

MRL, serves marginally populated, lightly farmed, inland mountainous region 

Other than gauge and dark blue paint, what's similar here?

RWM

[arbfbe]

It is time for a little catching up.  The gold bond question was keeping a number of lawyers busy trying to discern the implications.  BN and Washington Corps wanted the deal to go through without unusual delay so by leasing the ROW and selling the branchlines they could avoid potential lawsuits.  The bonds have since matured and been retired, I suspect a physical transfer of gold was not part of the transaction.

With regard to the traffic guarantees, all MRL asked for and had written into the contract was that the traffic BN routed over the line would never be less than what was currently routed over that line.  The guarantee is based upon 1987 levels when MRL started up and that was not a banner year for railroad traffic.  Rob Krebs did his best to starve the MRL out when Washington Corps refused to sell the lines back to BN with 50 years remaining on the lease.

There is no coal traffic going north from Mossmain to Great Falls to Mossmain.  BN managers always viewed this routing as an option to move a higher volume of traffic to the preferred GN routing.  In fact, that was the plan put forth in the Wyer report which was the basis for infrastructure reduction once the merger was implemented. Unfortunately, there are ground stability issues north of Great Falls, lack of signals on the line and the fact the south line traffic is dumped onto the GN tracks at Shelby where additional line capacity is hard to add.  There are massive single track bridges at Shelby and Cut Bank, the Glacier National Park boundry at the ROW edge, Bad Rock Canyon, Whitefish Lake, the Flathead Tunnel and north Idaho east of Bonner's Ferry which provide impediments to double track without MASSIVE capital expenditure to handle more trains when the high line traffic is heavy in it's own right.  While the Wyer report planned on a down grade of the NP mainline west of Laurel, implementation has proven to be not as easy as once thought.

Is the MRL more profitable than the BNSF?  In total dollars, no way.  Relative to the operating ratio, certainly there have been years where the MRL operating ratio is notably below the BN level.  Over time the ratio has equalized a bit.  You have to keep in mind MRL operating crew wages have gone up and BNSF wages have gone down especially in the number of arbitraries now paid.  If MRL profit sharing is factored in the MRL wages to operating crews are pretty close to industry standards in some areas.  The unions have had something to do with that.

I am sure there are those in the BNSF who really want the MRL back for any number of reasons.  I doubt they would be doing as well as the MRL is doing to serve local customers.  MRL recognizes this and has been able to coax more traffic from the BNSF with contract "adjustments" which allows BNSF rate incentives to keep the traffic on the MRL.  The boom in coal traffic has made this especially attractive to the BNSF and traffic tonnages and car numbers on the MRL in 2007 were probably at record levels for the railroad.  It should have added additional revenues to the BNSF bottom line as well. 

Why doesn't the BN just buy the MRL back?  Because the line is profitable and has every sign of being profitable, it is just too expensive to be a reasonable purchase at this time.  The value of future earnings to Mr Washington are very important to him and he is likely to have that sort of income stream from MRL for the next 40 years.  If the BNSF wants to buy out the lease they have to offer Mr Washington a package which replaces his cash flow from the railroad which he has shown he can use to expand his empire.  Given the ATSF was purchased, after an inflated price rise due to the UP offers for aroung $5 billion, it would seem foolinsh to pay a reasonable price for  MRL's 40 year income stream which might come close to the ATSF purchase price.  It all has to do with the compounding of interest, the present value of future earnings and all that high finance stuff.  Besides Mr Washington does not want to sell and he has no large number of outside investors who want a quick payout to move on to the next trendy purchase.  Mr Washington's investment advisors, railroad industry advisors and legal advisors saw to it he was protected in his gamble when negotiating with the BN team.  No other sale/lease agreement has been done the same way in subsequent sales.  Many of those companies have fallen aside or sold out and the MRL continues to make money for itself and the BNSF.

[chefjavier]

Both Railroads are same size and experience the same problems.

FEC, 386 route miles

MRL, 940 route miles (difference 243%)

FEC, participates in through rates

MRL, primarily feeder line rates or haulage-contract basis

FEC, traffic dominated by terminating or originating

MRL, traffic dominated by overhead 

FEC, serves densely populated, intensively farmed, coastal plains

MRL, serves marginally populated, lightly farmed, inland mountainous region 

Other than gauge and dark blue paint, what's similar here?

RWM

Mr. Encyclopedia:

I was talking about financials!