Kansas City Southern estimates its 2018 capital program will be between $530 million and $550 million; down approximately four percent from 2017.
Railroad executives explained during the 2017 Q4 earnings call that the slight reduction in the planned capital program is due to a number of large projects wrapping up in 2017 rather than an indication that growth opportunities are limited.
“Reductions in the Sasol Investment, which is now complete and other reductions in [positive train control] and Sanchez Yard have somewhat been offset by investments in new projects and continued growth opportunities,” said Jeffrey Songer, executive vice president and chief operating officer.
Patrick Ottensmeyer, president and CEO, added, “The reduction in CapEx does not reflect that we see lower growth. It’s a function of completing some really major capital projects and in the absence of new projects that come along. It certainly does not reflect that we feel different about the growth outlook or that the growth outlook is going to be weaker.”
Half of the capital program will be spent on maintenance, 34 percent on growth, 7 percent on PTC and 9 percent on IT and other expenditures. Within the growth capital, KCS estimates between $63.6 million and $66 million will be spent on capacity projects and between $42.4 million and $44 million on line rehabilitations in Mexico.
Songer mentioned a few projects KCS is looking to invest in during 2018 including rehabilitation of the F-Line and construction of the Celaya Bypass in Mexico.
Songer said the F-Line is a viable gateway for refined products and cross border shipments and is located between Monterey and the KCS border crossing at Matamoros. KCS will begin a multi-year rehabilitation of the line, which is driven by the long-term outlook for refined product exports to Mexico.
Celaya, in central Mexico, sees the meeting of several rail and rail-highway connections including KCS de Mexico’s main north-south route and FerroMex’s east-west route. According to Songer, construction of the Celaya Bypass will provide benefit to both railroads and improve the overall fluidity and interchange between the rail networks.
KCS will also begin track construction to support and eventually serve the planned 2019 opening of BMW’s San Luis Potosi plant.
Michael Upchurch, executive vice president and chief financial officer, noted that KCS invested $20 million in liquid terminals in Mexico during 2017 to stimulate more line haul traffic for the petroleum segment. He said KCS would continue to look for investment opportunities to grow its business as a result of energy reform in Mexico.
Upchurch continued that the railroad has a good amount of flexibility with its capital to make additional investments, specific to Mexico, should the opportunity arise.
Ottensmeyer added that terminal projects in Mexico could be the key ingredient to drive growth for the railroad.
“We are looking at a lot of other alternatives including technology that could help drive growth of volume and revenues on the railroad,” said Ottensmeyer. “We haven’t included that in the CapEx budget, but I would say I would be disappointed over the course of the year if we don’t have some things to talk about in terms of additional uses of capital that will help drive growth even further.”