In the blink of an eye, or in 138 years, rail has entered Alberta and become critical to the logistics network. 138 years is long but in the same breath, it really seems incredibly short.
May, 1883 CP Rail reached the future Alberta/Saskatchewan border on its steady, westward march from Winnipeg. By May 31, 1883 the rail arrived in Medicine Hat, continued towards Calgary, and onto Banff. In the southern portion of the province, east and west was connected in 1885 when CP Rail joined Medicine Hat and Lethbridge in a twin-steel belt. In subsequent years, the spider web of rail spread throughout the province, country, and continent as CN Rail added to the network too.
Let’s get a bit of an understanding of the industry, the costs, types of railroads, and participants. Then we can focus on short line rail and discuss specific considerations and opportunities.
The nature of the industry is capital intensive (1km of rail will cost $500,000 to $1 million or more – depending on land and rail bed preparation needed) and it is very difficult (better known as “expensive”) for rail to react and accommodate the rises and falls of industries and towns. So as times change existing rail can become underused and the option becomes to either recover the rail and ties or establish a short line rail.
What is a short line rail is besides a space on a Monopoly board? Short line rail is a short rail line, is that clearer? That definition really does cover it though. Class 1 rails are the likes of CP and CN and transport nationally. CP and CN do have American-based operations too, under the names of Soo Lines Corporation (CP) and Grand Trunk Corporation (CN). Then there is Class 2, which is more regional in nature and would move freight between cities in the region. Class 3 is the short lines and the topic of this article. These smaller entities service the needs of local industry such as coal, wind energy construction, oil, and agriculture. A short rail line would have 50 or 100 kilometres and is often privately owned.
The Western Canadian Short Line Railway Association has 17 members: one in Manitoba, two in Alberta, and fourteen in Saskatchewan. The high figure in Saskatchewan is surprising given its population but is an excellent example of their usefulness in servicing industry regardless of population base.
Focusing on Alberta’s two short line rails, they are Battle River Rail in central Alberta and 40 Mile Rail Inc. in southern Alberta.
How Can a Short Line Thrive?
What makes a short line successful when it wasn’t considered profitable by a larger company? Let’s break our focus into two sections: operations and market demand.
Section One is the operational issues such as operating costs (wages, fuel, repairs) and, obviously, as these costs go, so go the likely prospects of the rail company. If cost increases can be passed onto customers, that is ideal, but business and life don’t always line up so perfectly. The smaller rail lines own very little equipment; they might own or lease a locomotive or two and maintenance equipment. Staff is largely limited to maintenance crew(s) and a small office staff. The lower expenses are what make it possible for short line companies to profitably operate.
Section Two would be the factors to determine demand for rail services. The better the economy, the more positive the fortunes for the railroad as would be for many other segments of the transportation industry. However social forces can have an impact, and, at the moment, it is a positive one. As the demand for renewable energy continues to rise, the need for trains to transport the large windmill components has been increasing too. The short line rail gets the windmill pieces closer to the installation sites than a national rail line can. This decreases the cost of construction and lowers the impact on all of us because the large blades are not being trucked as often on the highway causing delays.
Like many, if not all industries, politics can be a factor. The national and international conversation around oil pipelines is well known. While government is not responsible for macro supply and demand, government does play a role in providing permits for construction. The delays in making an ultimate decision led to rail taking up a lot of the heavy lifting transporting oil from production sites to ports or refinement centres because the pipelines are at capacity.
Not all lines are economically feasible, even being operated as a short line, so then what? Well, there are companies that will pull the rail up and sell the steel. Where is that steel? Beyond the creative geniuses that repurpose the steel into artwork or jewelry, like Novo Watch in Lethbridge, one use is razor blades. The empty railbeds have been converted into recreational paths and these wonderful routes are perfect for human-powered adventure because the ground is solid and the grades are easy (trains do not do steep hills).
If you like talking about financial ratios, get ready! In industries that require infrastructure or equipment that is very long lasting, it is often the case that the cost of the equipment is significant. So when a company wants to expand it will have to layout of substantial cash. This cash would be a mix of cash-on-hand and borrowed. When a company has to borrow a lot of money their debt to equity position will reach the high range at the outset. If the company already had a high ratio, it would not be able to secure the funds needed to grow, so it is important for a rail company to have a low debt to equity ratio at about 0.05. Just to underline how low that number is, an auto dealership’s figure is 4.00 – 5.00. Liquidity will be measured by working capital or the current ratio and debt-servicing coverage, often quoted as EBITDA (Earnings Before Interest Depreciation/Amortization) to Interest. EBITDA to Interest represents how many times the company’s cashflow could pay its annual interest liability. The standard range is about 7 times. The current ratio will likely be in the 1.25-1.35 range which is not particularly unusual.
Ultimate success is determined by disciplined management that can make profitable agreements with its clientele, keep costs in line, and maintain a strong equity position that allows them to manage economic downturns but also respond to opportunity.
Coming full circle to the introduction, over the 138 years of railroads in Alberta, the tracks were the base western Canada was built upon. The cargo atop those steel ribbons is ever-changing but as critical as ever and the sound of this progress is as rhythmic as the second hand of the watch on our wrist.