Pan Am Railways, For Sale/Acquisition/Merger?

I have been watching for some time now the state of good repair efforts that have been underway for several years. In the face of declining traffic and revenues Pan Am continues to make unprecedented investments in their plant. I have noticed in particular efforts in areas which have not received assistance related to passenger rail service initiatives. The Freight Main Line ("Back Road") between Royal Junction and Waterville is one example and the Worcester Branch in Massachusetts is another. Neither of these sections of railroad have been or are currently receiving any funding for passenger rail related initiatives nor are they part of the Pan Am Southern partnership. Consequently these investments have been almost entirely "out of pocket" for Pan Am. There were some investments made in Northern Maine between Waterville and Mattawamkeag which were almost certainly related to oil train traffic. However, these efforts have since been terminated or substantially dialed back as the oil trains disappeared.

In general Pan Am Railways, whether now or under the previous management of Mr. David Fink, Sr., has never made substantial improvements or investments in physical plant without new or additional freight traffic loads that justified such investments. At this moment I see no new traffic and continued secular declines that are ongoing in Maine especially. While I would accept an argument based on a different operational philosophy between the two Mr. Fink's this only seems to go so far in the face of what appears to be a major effort to bring the plant into an exceptionally good operational state.

One possible explanation for this change that seems to make sense to me is planning related to succession for Mr. Mellon's estate and the likelihood of a sale of the railroad once time takes its inevitable toll. This event seems likely to be closer now than before and so in some senses the actions of the executives make perfect sense. I am certainly open to much simpler explanations (new track foremen, younger civil engineers, routine implementation of best practices, better control of labor costs etc.) but all of those possibilities seem to fly in the face of what has historically been a very conservative organization that I speculate has always remained focused on delivering reliable dividends to ownership.

All of this being said, and given the private ownership structure of Pan Am, which is still substantially a property of Timothy Mellon and a small handful of other minority investors (three or four others at the most), I think we should have an ongoing conversation about this topic which continues to surface on an almost daily basis elsewhere in this forum.

Is Pan Am Railways being prepared for sale or acquisition?

I think it's anybody's guess what will happen with Pan Am in terms of ownership down the road. But, the cash they got from NS in the PAS deal gave them an injection of resources coupled to improved returns having unloaded half ownership of the ex-B&M to NS. Then, too, whether cultural or from necessity, the younger Fink seems to be actively looking to take on new/different traffic. I wouldn't think any of this is particularly to prepare Pan Am for sale, but another stage in the company's history. In terms of previously making capital investments in their railroad, did Guilford contribute anything for the 1990's Hoosac tunnel clearance work, or was that all NS?

I think it's a "yes", even if it the plant upgrades aren't related to that; Mellon just isn't getting any younger. But I am just not knowledgeable enough to know if PAR is doing plant upgrades in preparation of that, though. It easily could be, as plant upgrades will certainly add to the value of the company as long as they're maintained to whatever quality, so it would be a fairly safe way to make sure you could sell out with a somewhat higher price. If industry up in Maine (particularly paper) continues on a downwards slope, it'll certainly force a decision on the part of Mellon if he'd jump ship to avoid losing money.

I suppose another question related to this is who the likely suitor would be: would it be another railroad buying and absorbing PAR, would it get a new private owner, or would it end up going public? PAS obviously complicates things if the new owner wouldn't be Norfolk Southern; as does the chaos that has to be going on inside of NS right now with the looming threat of a hostile takeover, and potentially a merger. There's only a limited amount of railroads connected to the PAR system that could muster the capital to buy it (through their holding groups): CMQ (via Fortress), EMRY/NBSR (via Irving), and SLR/NECR (via G&W). I don't think VTR or P&W would have the capital to be able to eat a railroad larger than themselves, and one that has quite a bit more of owned miles of RoW (all that property is PAR's largest asset); I also don't know how well their systems would synergize with PAR's. But considering how successful the short line holding groups have been, it isn't impossible for some of the holding companies outside the region could enter the game, but I don't know if there's any others that could safely afford a Class II, and/or would want to take on the challenges and uncertainty inherent in PAR.

Inevitably, the writing is on the wall for PAR as we know it. It's just what factor comes first: Mellon's retirement (or untimely death), an external party wanting to consolidate PAR or buy a controlling share, or if their traffic base starts continually sliding (or just drops out suddenly). All the smaller details we can (and likely will) speculate about really are going to affect what the railroad is going to look like after the dust settles. Hopefully it'll come out the other side mostly intact as a whole, if not better than it is now.

QB 52.32 wrote:I wouldn't think any of this is particularly to prepare Pan Am for sale, but another stage in the company's history.

I have been of exactly or very similar mindset for some time. But the level of investment and improvements have been sustained for several years now and they seem to be trying very hard to go "over the top". I feel as if they really are trying to eliminate every last mile of slow orders.

gokeefe wrote:I have been of exactly or very similar mindset for some time. But the level of investment and improvements have been sustained for several years now and they seem to be trying very hard to go "over the top". I feel as if they really are trying to eliminate every last mile of slow orders.

Something else that occurred to me is that PAR is mortally worried about losing traffic with the way Northern New England's traffic has been declining, and they are either:

• Trying to not lose out on what's left by providing better and more expedient service, or
• Trying to bring in other types of traffic than their typical (i.e.: more intermodal).

The latter can be more definitively proven... if we start seeing the height clearances getting up to double-stack standards, particularly south of Portland, that's a pretty good indicator. Even without that, there's quite a bit of traffic that can be obtained now that the whole Guilford mainline is under control of parties that are willing to run traffic over its length; again, perhaps they finally see that, or they're desperate enough to try and get that benefit without trying to make others pay for the improvement cost.

YamaOfParadise wrote:Something else that occurred to me is that PAR is mortally worried about losing traffic with the way Northern New England's traffic has been declining, and they are either:

• Trying to not lose out on what's left by providing better and more expedient service, or
• Trying to bring in other types of traffic than their typical (i.e.: more intermodal).

I wonder how much their service improvements are going to be noticed. I would imagine that it will take years for them to gain back any business lost. But in the meantime at least "what's left" of Maine's mills will in fact get excellent service. Commodity prices right now are very low. This works very much in Pan Am's favor as their fuel prices have crashed but their tariffs likely have not. The mills are energy intensive as well which means their inputs for fiber and fuel are likely very low.

I have been involved in pricing out wood to be cut for pulp recently and right now you can't even get a quote for it. Supposedly the mills are also limiting to a quota how much the lumberjacks can sell each month to them.

gokeefe wrote:

QB 52.32 wrote:I wouldn't think any of this is particularly to prepare Pan Am for sale, but another stage in the company's history.

I have been of exactly or very similar mindset for some time. But the level of investment and improvements have been sustained for several years now and they seem to be trying very hard to go "over the top". I feel as if they really are trying to eliminate every last mile of slow orders.

Time will tell whether it is maintained. They have done "blitzes" before and less than 6 months later its just as bad as it was. If history is to be believed a lot of changes need to be made.

Ultimately, Pan Am is not a sustainable operation. Many argue that a 30+ year history proves otherwise but they have survived off Government subsidies and a strong paper industry. Well, now the T has upgraded most of their mainlines so they've hit a wall with free stuff (And NNEPRA went to Brunswick, not Auburn) and the paper mills are faltering. So it seems the joyride is just about over in my opinion...

So who will it be? In the past I think the conventional wisdom was that it would be a Class I, but with the lucrative paper traffic dying, and the NH coal traffic slipping away too, would CSX or NS really have any interest at this point? Hard to imagine CP or CN being interested either.

Thoughts?

My feeling is that GWI and Irving remain the most likely candidates.

gokeefe wrote:But in the meantime at least "what's left" of Maine's mills will in fact get excellent service.

IIRC, "what' left" is moving only 10% by rail. PAR could theoretically grow traffic significantly.

That is, until the mills meet their final fates.

CN9634 wrote:Ultimately, Pan Am is not a sustainable operation. Many argue that a 30+ year history proves otherwise but they have survived off Government subsidies and a strong paper industry. Well, now the T has upgraded most of their mainlines so they've hit a wall with free stuff (And NNEPRA went to Brunswick, not Auburn) and the paper mills are faltering. So it seems the joyride is just about over in my opinion...

In my humble opinion I agree that PAR, as we've known it, is unsustainable. The railroad's organizational, managerial and operational structure has been fraught with inefficiencies that do not exist is similar operations. As long as coal, paper, and other on-line industries were humming along the "Guilford-style" status-quo was good enough. Now, due to a confluence of circumstances, that status-quo is at an end. The Maine paper industry is in free-fall, coal-fired power plants are falling into disfavor, oil is a bust, the locomotive fleet is pushing an average age of 50 (and acting like it), and years of deferred maintenance is taking its toll. As if that weren't enough, traffic patterns could eventually change in ways unfavorable to PAR. Granted, it is not all doom and gloom. There are some bright spots such as ethanol, propane, and intermodal growth. There have been some recent significant infrastructure upgrades (mostly paid for by others). But are the positives enough to counterbalance the negatives? That remains to be seen and time will tell. Upper management has the power to adapt to new realities if they're willing to make the hard choices. One thing I am sure of - railroading in Pan Am's corner of the world will see more change in the coming decade than it's seen in at least the past three.

My uneducated arm-chair prediction is that District One will turn from blue to green.

Couldn't have said that any better.

Will be interesting to watch what they do next.

I wouldn't be surprised if PAR dumped the MEC mainline north of Waterville relatively soon. With Bucksport gone the only major traffic they have is interchanging with CMQ and PAR has even stopped basing crews at NMJ. It may work to their advantge to work out some sort of trackage / haulage agreement with CMQ between Waterville and NMJ. Maybe the TIGER work starting this summer will change the picture, but I have my doubts.

Why would they put the effort into getting federal grants for upgrades (as well as the upgrades they've done on their own dime, even if it's not that much) between Waterville - NMJ only to dump it? Sure, they might have lost most of the business in the area, but it's still a vital interchange with the CMQ, and indirectly with Irving. East of NMJ? That would make more sense, but I can see Pan Am holding onto it as a way to entice prospective buyers. It's a direct interchange with Irving, and sure, it needs a lot of work, but if you want to cut out the CMQ, then that is what's available.

Also, there is still a NM-1 job for now.