CMQ Profitability

[CN9634]

Hello All,

According to parent Fortress, CMQ has achieved profitability in the last 2 quarters. Looks like they may have crossed into a new threshold not seen in many years (without the crude oil traffic anyways from MMA days...)

http://ir.ftandi.com/phoenix.zhtml?c=25 ... sentations" onclick="window.open(this.href);return false;

See Q1 Earnings Supplement slide 12 'Railroad'

[CPF363]

What is CMQ doing differently as compared with the two predecessor owners?

[gpp111]

Being well capitalized helps

[F-line to Dudley via Park]

Yeah. Fortress being a hedge fund means money can get shuffled around in all sorts of nooks and crannies for optimal 'presentation' to Wall St. BAR and MMA didn't have that flexibility, and since both were drowning in debt the chunk of flesh extracted by debt payments handcuffed their ability to put money into the railroad and increase revenues. Now, these hedge fund moves can can giveth and taketh away. It can make a business unit's financial performance look rosier than it naturally is by making debt disappear and making cash infusions appear from outside the business unit's ledger. And it can sack a business unit as dumping ground for debt by milking it dry for management fees, as you see with a lot of leveraged buyout situations.

In this case Job #1 for Fortress was wiping the railroad's slate clean of previous debt commitments and unshackling the railroad from the state-of-repair hole inherited from MAA with infrastructure improvements funded from outside CMQR's books. That wouldn't happen if the ownership weren't a hedge fund, but without the hedge fund they'd arguably have no path for getting out of the hole quick enough to discover what their natural 'level' really was for generating un-encumbered revenue. So there's a somewhat manufactured balance sheet reboot here, but it serves Fortress' interests to find CMQR's true level if it hopes to spin them off for a profit within 10 years. Ergo, the financial presentation was not 'fake'...it was a necessary step, and the type of owner they have was the only one who could do that necessary step. Proof of the railroad's true strength and viability will come in subsequent years. If they build forward momentum and increase their profits, wiping the slate clean to find the railroad's 'level' will be a genius move reaping big rewards for Fortress. If they stay flat or only have modest growth beyond the rate of inflation, and if self-maint expenses beyond this first burst of outside SGR help start eating into their margins...then Fortress is going to conclude their true 'level' isn't viable enough and start cutting costs before divesting (or, worse...start using them as a debt dumping ground).


It's a good and auspicious start, but in real terms CMQR's financial performance is operating on a 5-year plan. One fiscal year in isolation says nothing about their 'level'. You need 2 or 3 FY's strung together to see if they're making good on having their slate wiped clean, simply because of the way Fortress restructured the books upon takeover.

[CN9634]

Well I was hoping for something along the lines of "Wow -- that's great!". The 10 minute long cross-analysis based on more assumption than fact is getting quite old as well (on this thread and many others). Perhaps you should think about all the hard work that has gone into getting this shuttered line from where it was 3 years ago post disaster to where it is now. Also remember, this is the viability of the communities along the railroad, as well as the people who work for the outfit. There are a lot of people who have been looking for this news for many years since the glory days. How about you have a positive outlook on something for once?

Thanks.

[F-line to Dudley via Park]

Excuse me? I'd point out that my post wasn't negative at all and wonder what invisible malice you were reading into it, but that's all secondary concern to this whopper:

RR.net TOS Section 1, Part c -- "Members are asked to not act as 'back seat moderators'."

You started this thread as a discussion topic. It's out in the open now to discuss as the board membership sees fit to discuss it on-topic. You are way, way out of line attempting to pre-emptively shut down any such discussion, attack the first poster who attempts a discussion as warning to others that your word is the only word on this subject, and set rules that affirmative dittos are the only acceptable reply. Don't start a discussion thread on a discussion board in the first place if you can't stand hearing a spread of opinions. Use Twitter instead if the intent is to fling a declarative statement out into the void.

[CN9634]

I'm not so certain, most of your analysis' tend to slant negatively and suspect all sorts of underlying notions or have unnecessary hole-poking. CMQ is financed by Fortress, not run by it, and is in fact managed by several down to earth and local people. To suggest otherwise is a slap in the face. You are right, I probably should reconsider my thoughts and words above (as of now I stand by them), but you should also considering dwelling more on the positive outlook than the worst-case doomsday scenarios (You listed one above). I guess my point is, the over-the-top analysis is a bit much in this thread, let's just be happy for them. Besides, good surprises await us this coming Fall for this outfit.

[fogg1703]

Without stoking the fire any more than it already is, I see not the point of the source of the money but as to how it is spent. No matter who took over the crippled line, a large amount of capital would have been needed to bring it up to where we find the line today both in equipment and infrastructure. What does it matter if the money came from the shrewd business empire of the Irvings, a stockholders pocket at CN or CP or a hedge fund?

I digress

What is CMQ doing differently as compared with the two predecessor owners?

Fundamentally and operationally things look much different. Here are a couple of my thoughts as to why things are better:

1. Partnerships with connection roads. The PAR/CMQ maritime traffic agreement is huge. Farming out Newport switching to VRS saves a crew (poor service and overall dismal attitude to Vermont traffic notwithstanding). The SLR/CN Richmond gateway is also flourishing as well as a friendlier CP to expedite westbound traffic.
2. Reliable motive power. Once those ugly duckling GP20D's left, things normalized.
3. Track work. Hedge fund money for sure, but higher speeds in Canada makes for faster transit times for #1 and #2. NMJ work in partnership with PAR has really expedited moves there.
4. Grants. State IRAP grants and Federal dollars have brought some of the yards to at least the 20th century standards for modern freight cars allowing for less dwell times/switch moves
5. Addition of the Rockland Branch. Traffic is above ME levels on the branch with minimal investment. A good relationship with PAR also helps immensely.
6. Construction industry doing well. Finished lumber out of Aroostook has been a steady traffic source since the take over namely due to Irving's mills and Maibec's purchase of Fraser Masardis. Lets not forget the large merger of Moose River and Pleasant River Lumber.
7. Customers shipping more. CMQ has enjoyed expanded businesses such as AIM, Dead River, Pleasant River Lumber and various propane outfits system wide.

Now one can also list the difficulties to profitablitly they have faced:
1. Took ownership of a maintenance deferred road.
2. Complete loss of all paper traffic except for a trickle from Twin Rivers
3. Loss of a large amount of CP overhead traffic to NB
4. Loss of oil trains
5. Unable to capture any of the new Potash traffic to Saint John
6. Bust after bust in the Millinockets for any new traffic
7. The general anti-business mentality of the State of Maine
8. Soothing over a distrustful, fearful community in Megantic

I for one view CMQ profitability as a huge success. A bigger success for the Maine taxpayer as well as it did not involve any state money and it has helped the state owned Aroostook lines to become the rolling conveyor belt they are today.

[CN9634]

Not sure why you all keep calling it hedge fund money, FT&I is an asset manager not a hedge fund. Even still, their assets are slightly hedged but all exposed within the transportation industry still

[Cowford]

"Fortress has previously been recognized by Institutional Investor as “Institutional Hedge Fund Manager of the Year” in 2014, and “Credit-Focused Hedge Fund of the Year” in both 2012 and 2011."

http://www.businesswire.com/news/home/2 ... nager-Year" onclick="window.open(this.href);return false;

[CN9634]

Fortress Transportation and Infrastructure is a subsidiary of Fortress Investment with their own stock symbol (FTAI) which was created during their IPO not too long ago. They manage physical assets and not client's money. Further, money was not just gifted to them for their CAPEX, they actually have a $20M line of credit with their parent FTAI. They already pay principle and interest on this expense.

[CPF363]

One thing that does help with getting the railroad in better shape is the low price that Fortress paid to acquire the system from the bankruptcy court. Does anyone know how much Iron Roads paid to acquire the BAR and the CAR systems and how much Rail World paid to Iron Road's bankruptcy for the combined BAR-CDAC system?

[Ridgefielder]

Fortress might manage some hedge funds-- just like all of their competitors-- but they're really known as a Private Equity shop.

The difference is important. A hedge fund generally seeks to profit from market movements, by taking positions and "hedging" the downside risk to those positions. Classically the focus is short-term.

Private Equity seeks to invest in or outright buy a business with the idea of fixing it up and reselling the entire thing at a profit. Rule of thumb is that PE has a 7-year time horizon from initial investment to exit, but it can spin out to 10 years or more. Much more patient money.

FWIW that's why I was skeptical of all the talk of Fortress buying the Moosehead with plans to make a quick $ by scrapping it-- that's not their business model. If they did that, their investors-- the pension funds, insurance companies and foundations that gave FIG capital to manage-- would not be happy, and might even have grounds to pull money from the fund.

While I'm obviously not privy to FIG's business plan for the CMQ, it sounds to me like they're ahead of schedule if they're turning a profit at this point.

[csx2039]

Major cuts coming to CMQ, the vermont job 710 is about to be abolished. Several jobs in maine as well. Several large prospective contracts have fallen through. On yet another note-Most cmq Vermont customers will be getting traffic from the south avoiding cmq as much as possible. Look for the rest of the system to start looking like vermont a little more in the not too distant future... Not that I couldn't see this coming, so yes they should stay profitable...

[CN9634]

There are some operational curtailments coming and service reductions to meet the current business but nationally carloads are way off for railroads as gas prices are way down keep loads on the roads. However, no layoffs are coming and there shouldn't be a dramatic reduction in transit time, perhaps add in 2 days to quoted delivery dates. Not sure what prospective large contracts you are talking about, but CMQ's customer base is quite diverse and they continue to grow, even amidst the 'freight recession'. Your 'prophesy' of a failed railroad is lightyears off. Also, I think you'll see some delightful changes in the coming weeks/months indicative of a healthy and long-term system.