A Warning Signal for Amtrak

S&P may cut the beleaguered railroad's debt rating due to uncertainty over future funding and operations

Standard & Poor's Ratings Services placed its BBB corporate credit and senior secured debt ratings on Amtrak (officially known as National Railroad Passenger Corp.) on CreditWatch with negative implications, amid concerns over future funding levels and potential changes to the scale and scope of its operations.

Uncertainty over the railroad operator's future funding has increased following the Bush Administration's budget proposal in February, which included a significant reduction in financial support for Amtrak.

There were also subsequent calls by the Secretary of Transportation for an overhaul of the rail operator and a change in the way it's funded. There is also a lack of clarity on the level of funding Amtrak likely would receive from Congress as it goes through its appropriations process.

CALLS FOR REFORM.

  In addition, recent major problems with the Acela trains serving the important Northeast corridor have reduced cash generation in fiscal 2005 and increased scrutiny of the railroad, which could precipitate more calls for reform.

The current rating on Amtrak reflects its important public service role, offset by a weak financial profile and ongoing operating challenges. It also incorporates the expectation that the federal government will continue providing enough support to allow it to continue operating in its current form.

Ratings will remain under review while S&P assesses the current state of support for Amtrak and the likelihood and potential impact of operational changes.

ZERO FUNDS.

  In its budget presented on Feb. 7, the Bush Administration proposed $360 million in funding for the Surface Transportation Board to operate the Northeast corridor tracks and infrastructure. The budget included zero funds for Amtrak for fiscal 2006, pending proposals for reform.

This compares with the Administration's fiscal 2005 budget proposal of $900 million for Amtrak and actual appropriations by Congress of $1.2 billion. Amtrak recently presented its grant proposal to Congress in which it asked for $1.8 billion in funds for fiscal 2006.

Amtrak also announced it will likely spend $1.4 billion in fiscal 2005, and given recent problems with its Acela service, working capital will likely be depleted by the end of fiscal 2005. Amtrak's board also recently presented to Congress a proposal for strategic reform initiatives, including changes in cost allocations, funding, and potential restructuring of certain routes over time.

CAPITAL INFUSION?

  Congress is still in the process of preparing an appropriations bill for fiscal 2006. This is typically a process that takes many months to conclude.

Both chambers of Congress recently passed budget resolutions. The Senate stuck to the Administration's level of funding for Amtrak, while the House maintained flexibility for increasing funding to levels in line with that of recent years.

The House Transportation and Infrastructure Committee recently introduced authorization that would provide Amtrak with $2 billion annually for capital and operating expenses for three consecutive years.

NO BACKUP.

  Appropriation bills passed by each chamber must be reconciled to determine the final funding level for Amtrak. S&P will continue to monitor the process to assess the level of continuing Congressional support.

If it appears that support for Amtrak will fall below what the railroad has indicated it needs to continue operating, or if its structure were to change materially, ratings would be reviewed for a potential downgrade.

Amtrak's liquidity is almost completely reliant on government support, since the system's operations have always generated substantial losses. Amtrak currently has no backup credit facilities, although it has had them in the past.

Appropriations received in the past several fiscal years have been below the levels requested by Amtrak. However, they have been higher than the amounts proposed by the Administration. Amtrak received $1.2 billion in appropriations for fiscal 2004 and fiscal 2005.