Evaluate financial feasibility for proposed $120 million capital project
Hancock County Port and Harbor Commission (HCPHC) in Mississippi had spent hundreds of thousands of dollars for route mapping, alternative analysis, and federal environmental review for a $120 million capital project for the Port Bienville Railroad when the new Executive Director recognized that for all the detailed engineering and environmental work, no one had confirmed the project’s fundamental economics. In January 2017, HCPHC retained SRF to evaluate financial feasibility. In April 2017 SRF presented its findings to the Commission.
SRF reported on the financial health of the organization – the business park, the port, the terminal railroad, and the airport. SRF showed the division of revenue and expense by operating unit, identified sensitivity of the whole organization’s free cash flow to key customers, and provided a valuation of the existing railroad operation. This analysis provided essential context for the proposed $120 million capital project. SRF’s exercise of “backing into” traffic volumes, rates, and customer types required to support such a project revealed the project’s intrinsic risks.
Presenting the data, SRF explained that a $30 million public subsidy, a $450 tariff, and a loan guarantee adequate to support a $90 million RRIF loan would require a 30-year commitment by a bankable tenant committing to 15,000 railcars per year, a volume three times the entire current traffic. Any combination of long- and short-term debt, tariff, and public subsidy was now understood clearly, and in context. In the end, HCPHC would need to attract and close a “grand slam” business prospect to even contemplate such a project. Possible, yes, but planning based on a grand slam is not a game-winning strategy.
Break-even and payback-period analysis brings financial sensibility to site selection; SRF starts all feasibility studies with commercial ends in mind.
- HCPHC was able to halt further investment in the capital project based on a new understanding of the inherent risks and fiscal requirements.
- SRF was placed on retainer to provide advisory and technical support to the Port Bienville Railroad, which we are now doing with rail tariff and service pricing, evaluating rail needs of industrial park development prospects, planning a locomotive procurement RFP, and financial modeling of potential new railroad operations.