Short Line Investment?

[Anonymous]

An open question to the forum.

How many of you would seriously consider investing in a new short line startup and why?

Please assume that the pro forma financials reflect that the short line has a small existing customer base and is a Class 1 spinoff. The company expects to buy or lease the property and is in negotiations with the Class 1 for the property.

(No, I am not planning a new short line and this is not a request for investors, I'm just curious to see what the general interest level is).

If the investment required a minimum of $10,000 per share with 1,000 total shares would that change your mind?

LC

[Anonymous]

Oh, and also, please assume that the management team will contribute at least $500,000 reprersenting 50 shares and will retain operational control of the company.

LC

[Junctionfan]

For me it would depend on the expected revenues and what kind of customers they were targeting. For example, if a shortline was investing in an area with a high demand for rail in industrialized areas such as say Hamilton, Ontario; Brampton, Ontario or Sarnia, Ontario; that would be such a reason for an investment. If the area is a high revenue generator, than a decent ROI should be expected. Of course it also depend on the kind of competition too (CN and CP operate switching in some areas however places such as Hamilton, Ontario is primarily switched by Rail America).

Another reason would be if I was a farmer, agriculture investor or had some kind of white collar interest in a mine and I need to ship my goods form point A to B and a class 1 wasn't interested in doing it, than I would have no choice but to seek a shortline operator if I was still interested in going that route. It would depend on the tonnage of course and projected amount of cost saving versus any other mode of transportation. Most likely though, rail would be cheaper.

For a political reason, I would say investing in rail would keep the taxes under control hopefully as it would reduce the maintainance cost on roads from truck use. I would also reduce hopefully, gridlock areas prone to such heavy traffic from trucks. It would also give industrial opportunities for future economic development to an area. Large industries that deal with the shipment of large quantities of items in bulk usually prefer a rail option hense a rail operation in an area offers a possible job creation if other desirable requirements are met for the industry to locate to that area in the first place-rail is just an added assentive.

[tormadel]

Yes. When I was still a teenager I bought 200 shares of Pioneer RR stock. Just because I had the money and saw an advertisement for it in Train's magazine. 10yrs later I sold it for 4.5 times as much when my first child was born and needed the cash. But the 10 grand part would hold me back cause I don't have it hehe.

I guess the other cavat for me would be I would want to participate with it, not just own it.

[Anonymous]

yea i think i would lay out the $10k, but only if i had a personal interest in it. if it was to create some sort of a co-op(?) to haul my corn away and/or to haul fertilizer in cheaper or provide overall better service to my area then i'd have no problem.

but to throw 10 large out to B.F. oregon for a shortline to haul logs 3 miles, then no.

i hope that answers your question. if not then i don't know the legalese some of the fast talkers do to explain it in more detail.

[jeaton]

Assuming I was in an investing mode, sure. Maybe 1 to 5 shares if the prospectus indicated that profit was a goal and the business plan indicated that there was a reasonably good chance that the goal could be met.

On the other hand, I don't think I would part with 10k for a vanity investment.

[edblysard]

LC,
Need some clarity...
Is the GM, CEO and CFO, along with the Super, MOW and such all a one man band?
I have seen a few of these, and, in my opinion, one guy can’t be all things at once...so, if it isn’t a one man show, who is the hired talent?

If I could "hire" you, along with mudchicken, Jay and a couple of other with a proven track record, then sure, count me in...

On the other hand, if we are trying to do this on the cheap....

Ed

[Anonymous]

QUOTE: Originally posted by edblysard

LC,
Need some clarity...
Is the GM, CEO and CFO, along with the Super, MOW and such all a one man band?
I have seen a few of these, and, in my opinion, one guy can’t be all things at once...so, if it isn’t a one man show, who is the hired talent?

If I could "hire" you, along with mudchicken, Jay and a couple of other with a proven track record, then sure, count me in...

On the other hand, if we are trying to do this on the cheap....

Ed

Ed -

As I said, this is only a hypothetical question. I wasn't meaning to imply a one man band. Assuming I could get the kind of investment I proposed in the hypothetical I would be glad to participate. If we actually had investors sufficient to purchase all 1,000 we would have a fund of $10,000,000 ca***o buy and run a RR. That would be quite a nice little short line and that isn't even including any borrowing.

Typically, in my experience, a handful of people are involved in starting a new RR (legally known as the "Promoters"). Once they have a deal, they then seek to raise the investment necessary to consummate the purchase. Typically they would have a small cadre of qualified people to initiate the startup including hiring additional necessary personnel.

LC

[edblysard]

LC,

I understood this is a exercise in the hypothetical...

What I was looking for is the specifics of who is going to run the show in this experiment...
And I trying to point out that one man can not do it alone...you have to be able to find, recruit and motivate talent in key positions.

When my Dad retired from the Navy, he bought a wholesale hardware company.
One of his suppliers asked why he took as many fishing trips as he did,
because he would go off every couple of weeks for a weekend down at the coast, and the guy didnt understand how he could afford to do that.

My Dad's answer makes a lot of sense to me, and I have applied to every business I have been involved in...

"I can’t understand a business owner or manager who is proud of having to work through his vacation....if he is a good business manager, he has hired and trained his people to the point he can afford to take a few weeks off, and be assured the business is still running quite well in his absence.

"A lousy manager tries to cut it so thin he cant afford to take a few days off, much less a vacation...that’s the guy who isn’t managing his business, its the other way around, the business is managing him"...

So, if you could get the number of investors, at the share price you stated, who would you have in mind for the key positions?

You were searching for those interested, just to see how many.
Well, I would be one of them, but this is part of the reason as many "short lines" seem to fade away as any other....they don’t hire the talent to run the business, they let the business dictate who they can hire.

Leadership starts at the top, and filters down...so who would you list in the prospectus as the top guys?

Ed

[mudchicken]

LC - Ed and I are of the same line of thought here. Neither of us would invest in it sight unseen, we want to "kick the tires" and see who the players are. I'm not going to put all of my eggs in one shaky basket (1-2 shares, max) and I have seen shortlines with promise fail and others that appeared high risk succeed by pure dumb luck. Then again I've seen several fail due to myoptic operating management. (Not trying to revisit that disagreement again, honest!) I gotta know more about the variables and fixed assets before I would commit on what's stated here hypothetically...[D)][D)]

[Anonymous]

I'd certainly consider it depending on the circumstances and the revenue base and prospects of the particular line. However, as MC points out, I too would want to "kick the tires" before signing a check [:)].

[Anonymous]

OK. I understand the desire for additional due diligence. Remember that the example below would be one of several that would be possible if the full $10 Million could be raised.

I'll add a few more hypothetical facts. Some have been changed slightly to maintain confidentiality. Remember this is hypothetical only and no offer or other investment opportunity exists. This is merely for discussion purposes. The people described are real some details of their background have been slightly modified to protect their privacy.

Proposed Management Team:

1. President - Background -Locomotive Engineer/Conductor - Class 1, 6 years; Attorney 15 years (significant time spent representing several RRs in different deals and litigation); Past short line management experience 5 years, also experienced with deal structures and financing; DSLE. B.A. J.D. Total of 15 years RR experience.

2. Vice President - Operations/Engineering - Background- Former Chief Engineer - Class 1 RR, progressed thru engineering ranks on another Class 1. Also Locomotive Engineer/Conductor and FRA qual. track inspector. Has operated his own short lines in the past (3). Total of 28 years RR experience.

3. Board Member - Background - Managing Director - Major Investment Bank - B.S. MBA Some RR deal background.

4. Controller - 15 years experience in RR finance. Class 1 and Class 3 B.S./M.S. Accounting

5. Manager Mechanical - 5 years Class 2 Mechanical Dept., Lic. Servicing Engineer, certified carman, machinist. 2 years MOW Experience.

6. General Manager - To be determined upon acquisition.

Property: (First of several)

Location; Southeast U.S.

32 miles. 115# and 112# with some 100# in sidings. Jointed. 2 miles of 115# CWR.
timber ties. 6 bridges all steel. Ruling grade 0.7%. Max curvature 10 degrees. Runs along river. Interchange: NS and CSX. Paper barriers possible.

Traffic: 2,400 carloads coal; 1,000 carloads cardboard; 2,000 carloads wood chips. Total 5,400 current annual carloads.

Revenue projection: $1.42Million Year 1. By year 5 assuming 4,000 additional coal loads revenue grows to $2.62Million+

Cost projection: $1.24MIllion Year 1. By year 5 costs increase to $1.88Million.

EBITDA projection $180,000 year 1 growing to $740,000 or more by year 5.

Potential customers. Recently two mining companies have reopened local mines. Coal is being trucked to a power station 60 miles distant. Power station has rail access which is not currently used. Coal is barged in from other sources. Power company dislikes barge reliability and seeks alternative supplies. Potential additional 4,000 to 6,000 annual carloads from both mines (not all would go to this power station). Some coal is metallurgical grade and other is only fit for steam coal.

Employees: 4 T&E; 3 MOW. To be adjusted as required by growth.

Equipment:

Locomotives: 2 4 axle units(2000hp) and 4 six axle units (3,000+hp)

MOW: Hirail inspection truck, Hirail Boom truck, backhoe, tamper, regulator others as deemed necessary.

Acquisition cost from owner $1.2Million

Financial structure to be determined depending upon need. Hope this is enough to give you some idea. Questions?

LC

[tormadel]

Doesn't how far you haul it effect the revenue?

[Anonymous]

QUOTE: Originally posted by tormadel

Doesn't how far you haul it effect the revenue?

With short lines, not necessarily. Depends upon your agreement with the Class 1s.

LC

[jeaton]

I wouldn't sell the farm to make the investment, but I would consider adding some share of the railroad to a diversified portfolio.

If I was younger, I might consider taking more shares, thus increasing my level of risk, but I would also be looking for some form of active participation in the venture.

[SALfan]

Other than the coal mines, sure sounds a lot like the Chattahoochee Industrial Railroad.

I'd be interested in making the investment, if I had the money.

[tormadel]

yeah, dang this money thing eh Jodom?

[88gta350]

I wouldn't want to buy a share or two just to say I owned it, but if I had the money to buy a sizeable stake (say at least 10 shares or 1%) and was reasonably assured that I could see a nice return on my investment, then sure, I'm always looking for new investment opportunities.

[tormadel]

Yeah I think Guilford is a good example of what can go wrong when you have someone with money buy into the industry who doesn't really seem to understand it. Guilford has been the black sheep of the family for as long as I can remember now.

[edblysard]

Good so far...
Interchange points, single yard or multiple points?
Last bridge inspections were done when?
And next ones are due?

6 locomotives and 4 T&E...guessing two trains a day working as a turn plus a twice weekly coal drag....
What is the current debt load, and last, why is current owner getting rid of it?

Ed

[tormadel]

I'm assuming the debt load is 0 because it's being had off a class 1. As to why they would want to get rid of it when it has blooming potential, don't know about that one........

[MichaelSol]

QUOTE: Originally posted by edblysard
6 locomotives and 4 T&E...guessing two trains a day working as a turn plus a twice weekly coal drag....

Currently handling an average of 15 carloads a day.

At twice a week, each "coal drag" would average 23 carloads.

The rest of the traffic would generate 8.2 carloads per day, 11.5 per day if its a five day-a-week railroad.

"Two trains a day" sounds high ... and a bit expensive.

QUOTE:
Locomotives: 2 4 axle units(2000hp) and 4 six axle units (3,000+hp)

That's 16,000 available horsepower for something between 11 and 34 carloads a day. The proposal suggests a substantially "over-powered" railroad. Is there a reason for that much available horsepower for these size trains?

Best regards, Michael Sol

[PNWRMNM]

I agree with Michael, sounds like a lot more power than required. Like your experience level for President and Board. It is more than I would expect.

I am constitutionally skeptical of growth projections. Shippers lie. Traffic is where my research efforts would go.

Mac

[edblysard]

Retired or second hand/third hand SD40s...a few GP38s...Models were not listed....you buy or lease what you can get for the money you have, weather it "overpowers" your needs or not.

Before we purchased the MK1500Ds, you would find us flat yard switching with SD9s, SD40-2s, GP 30s, 38s, U30s...just about anything we could beg, borrow or lease...even had one of the last UP rebuilt SW10s for a few years...little rascal worked great, till the electrical cabinet caught on fire!

Ed

[MichaelSol]

QUOTE: Originally posted by Limitedclear
Proposed Management Team:

1. President.
2. Vice President.
3. Board Member.
4. Controller
5. Manager Mechanical.
6. General Manager .
7. 4 T&E
8. 3 MOW

Employees: 4 T&E; 3 MOW. To be adjusted as required by growth.

That's about one management level employee per "worker" bee.

I created an Excel model that shows the following payscales:
1. $70,000
2. $60,000
3. $5,000
4. $50,000
5. $50,000
6. $50,000
7. $40,000
8. $30,000

Total payroll including FICA, FUTA and SUTA is $592,000. Assuming little or no deferred maintenance, that cost should run about $6,451 per mile, maybe less, or about $206,451. $21,000 to finance hyrail and other operating equipment, that leaves the locomotives to be financed over 10 years and that would have to be at $100,000 for each 2,000 hp unit, and about $500,000 for each 3,000 hp unit.

Have to do some real bargain hunting to get under $1.2 million in operating costs.

Best regards, Michael Sol

[Anonymous]

QUOTE: Originally posted by edblysard

Good so far...
Interchange points, single yard or multiple points?
Last bridge inspections were done when?
And next ones are due?

6 locomotives and 4 T&E...guessing two trains a day working as a turn plus a twice weekly coal drag....
What is the current debt load, and last, why is current owner getting rid of it?

Ed

Interchange points are at a runaround and a small yard respectively. You are correct two crews. Probably 1-2 jobs daily depending upon coal flows.

Locomotives were projected at six for two reasons. One is there is a local currently that spends a great deal of its time shuttling woodchips and cardboard between a couple of plants. This would likely be one or both 4 axle units. As to the six axles there is the coal. The thought with the six axles is they are cheap now and good protect power and there is a significant possibility of pooling power with one of the Class 1s which would take 2 units off the property for a week at a time. This can create a very favorable horsepower hours situation and will help avoid downtime due to locomotive failures. The offlline move is longer than the online for these coal trains and as such these units should quickly pay for themselves. Also, not all the locomotives are needed immediately. You'd probably want 2 4axles and 2 6 axles to start and grow from there.

Owner is seeking to abandon part of this property to salvage rail. The short line makes sense only if you get the entire line. The purchase price represents a slight discout on the NLV.

LC

[Anonymous]

QUOTE: Originally posted by edblysard

Retired or second hand/third hand SD40s...a few GP38s...Models were not listed....you buy or lease what you can get for the money you have, weather it "overpowers" your needs or not.

Before we purchased the MK1500Ds, you would find us flat yard switching with SD9s, SD40-2s, GP 30s, 38s, U30s...just about anything we could beg, borrow or lease...even had one of the last UP rebuilt SW10s for a few years...little rascal worked great, till the electrical cabinet caught on fire!

Ed

Exactly. Given what I know is available out there right now I'd be looking for B23-7s for the 4 axles (12cyl fuel misers) and perhaps SD40-2s for the 6 axles or possibly GEs, but I don't care much for C30s. I have found them to not be terribly reliable.

LC

[Anonymous]

QUOTE: Originally posted by tormadel

I'm assuming the debt load is 0 because it's being had off a class 1. As to why they would want to get rid of it when it has blooming potential, don't know about that one........

As I said, the financial structure is not set. Management might choose to take on some debt. Is there debt coming in the acquisition, no.

LC

[Anonymous]

QUOTE: Originally posted by MichaelSol

QUOTE: Originally posted by edblysard
6 locomotives and 4 T&E...guessing two trains a day working as a turn plus a twice weekly coal drag....

Currently handling an average of 15 carloads a day.

At twice a week, each "coal drag" would average 23 carloads.

The rest of the traffic would generate 8.2 carloads per day, 11.5 per day if its a five day-a-week railroad.

"Two trains a day" sounds high ... and a bit expensive.

QUOTE:
Locomotives: 2 4 axle units(2000hp) and 4 six axle units (3,000+hp)

That's 16,000 available horsepower for something between 11 and 34 carloads a day. The proposal suggests a substantially "over-powered" railroad. Is there a reason for that much available horsepower for these size trains?

Best regards, Michael Sol

Michael -

You can't apply big road metrics to a short line of this size. Too few resources. See my comments below concerning locomotive reliability and the need to pool power to offline destinations. I'm not sure where the two trains daily is coming from. I'd see a local plus coal trains as needed. Coal trains now are typically once weekly and are 80 cars. Obviously, the trains will grow as the customers do. Given that this line is much closer to the coal than the loadouts that the two new customers are currently trucking to it seems likely they will use it. You'll notice our projections are at the low end of the range given that customers tend to inflate numbers.

LC

[Anonymous]

Michael -

With respect to your pay scale and payroll calculations they are very high. This is Appalachia we are talking about so your payroll numbers are also high. One other point. I'd probably start with my GM and Mechanical guy being among my 7 employees for the first line. Also, senior management will likely have to make concessions initially in exchange for later gains. The Board Member and perhaps Sr. Mgt will receive part or all of their compernsation in stock. Again, the financial structure is open for the time being.

As far as the payroll goes, I make it to be a total of $448,950 including full Railroad Retirement (Tier 1 and Tier 2). An additional $81,000 would give all employees full medical coverage. Total $529,950. People love to work for an employer with great retirement and medical benefits even if the wages are a bit lower.

Concerning locomotives.

B23-7s. I can lease these units (due to industry connections) at $40/day/unit or $14,600/unit annually. Total $29,200.

SD40-2 or SD50. I can lease these units from a friendly source for $200/day or $146,000 for two annually. As mentioned above, I will likely be able to trade horsepower hours with the Class 1 involved as part of the deal meaning I will effectively be getting the equivalent of 5 locomotives for my investment of 2 to haul the coal. This multiple keeps rising the more coal I move until I max out the capability of the available locomotives.

MOW Equipment

Boomtruck, Backhoe and trailer should be a total of about $75,000 from the right suppliers in good shape. Hirail inspection truck will be another $30,000 assuming good used vehicle with hirail mounted and FRA certified. I'd buy these with cash from the invested capital unless I was offered excellent lease terms.

So far, I'm only at $705,150 and I've covered many of my largest costs. I think $1.2M is not only doable, but I might have a few bucks left over, depending upon fuel costs, but as I intend to be junction settlement I'll ask for a cut of the Class 1 surcharge.

LC