VitalRail Capitalization

VitalRail Finance Innovation: Three Decades of Revitalizing America's Railroad Infrastructure

Professional Experience and Philosophy, by Michael Sussman, CAPSI Founder

I have specialized exclusively in rail-related business solutions, particularly financing, since 1994. In the 30 years since, I have overseen the financial turnaround of rail operations by bridging gaps in understanding between rail companies, banks, and government funding agencies. Orchestrating collaborative private and public-sector funding structures, we expanded access to growth capital for the Dakota, Missouri Valley and Western, Iowa Interstate, Progressive Rail, Iowa Pacific, Laurinburg & Southern, Iowa Northern, and other rail companies.

In each case, we identify a railroad's unique characteristics and service, underscoring how that section of the rail network contributes to local, state, and regional vitality. We then engineer unique financial presentations that educate private and public funding entities on the underlying sources of stability and growth on which to base expanded capitalization. Along the way, I have overseen the growth capitalization of rail suppliers, contractors, and service providers. I have advised the U.S. Congress, the Executive Branch, and state and local governments on rail finance.

Under contract with the Nevada DOT, we wrote the 2021 Nevada State Rail Plan, extending our insights into the value of single rail lines to an entire state's industrial systems and economy. The Nevada State Rail Plan, a statewide rail-enabled economic development action plan can now be applied to the entire North American continent through VitalRail.

Personal Journey and Industry Introduction

I remember standing alongside a General Motors EMD switcher locomotive in 1995. I asked my client, "What horsepower is this?" He responded, "1000 Horsepower." I asked how a unit only 2.5 times the horsepower of a "muscle car" from my youth could pull twenty loaded railcars. I knew three Oldsmobile 442s lined up on the track could not budge those cars. He patiently explained how the low friction of steel wheels on steel rails allowed the 1000H.P. to be efficiently transferred into the train's pulling power. I was immediately struck by the realization that railroads, with such energy efficiency at the core of their business model, were significantly undercapitalized and underappreciated by lenders, investors, citizens, shippers, and elected leaders.

Historical Context and Industry Challenge

This prompted me to conduct an extensive study of why this industry, which was the reason capital flowed into North America from around the world in the 19th century, arrived at the end of the 20th century with its U.S. network reduced from 240,000 route miles to now less than 140,000. Understanding why and how our society has evolved to drive capital toward highways and trucks, a dramatically less efficient mode of land freight transportation, tells us everything we need to know to steward the re-growth of freight rail service.

Case Study: Iowa Interstate Railroad Financial Innovation

In 1996, the owners of Iowa Interstate Railroad asked me for a solution to save a close-to-expiring $10.5MM Net Operating Loss Carryforward. They also needed more capital to upgrade track. Even experienced railroad leaders require outside-the-box thinking to fund their growth plans. I started by studying everything about their financials and history.

The key financial statement item I zeroed in on was a $3.5MM loan they had received from the state of Iowa that their accountants had retained on their financial statements as a Long-Term Liability. In studying the loan documentation, I read that it was 100% forgivable once a Maytag manufacturing plant, for which a rail line was funded and constructed, had operated for 10 years. We were, therefore, able to shift this $3.5MM to a Contingent Liability, significantly improving the company's financial position.

I was then struck by the fact that Archer-Daniels-Midland, Iowa Interstate's largest customer, had acquired a 3% option alongside its recent purchase of 48% of Iowa Interstate stock. Upon further investigation, I learned that due to mid-90s Class I railroad mergers, ADM was concerned that they could be left with only Union Pacific service and wanted the ability to gain a controlling interest in the Iowa Interstate, their only other remaining service provider. Eureka! I directed my client to ask ADM to guarantee the new financing because, with such a significant commitment already, they would undoubtedly want to maintain track and service quality by guaranteeing the new funding. With ADM's guarantee in hand, I knew we were heading toward a New York bank approving a $10.5MM sale-leaseback of Iowa Interstate's 550 miles of track and right-of-way. Track upgrade could proceed, and this innovative solution saved the Net Loss Carryforward.

The VitalRail Capitalization Approach

Rail finance requires understanding each railroad or project in its own light. It defies cookie-cutter approaches. Lacking this focus is a key reason why railroads and rail projects, particularly the smaller ones, have been undercapitalized. As a networked system, the entire rail network will grow from capitalization of local branch lines as well as higher-volume trunk lines. That is why VitalRail illuminates the value and potential of every mile and foot of track, whether active or inactive.