October 2006
STB to reduce time, cost of rail rate cases The Surface Transportation Board’s rate dispute resolution process just got easier. (No, this is not a Halloween trick.) In an announcement late yesterday, the agency said it will reduce the time and expense required for captive shippers to seek relief in large rail rate cases, which in recent years have averaged three-plus years to resolve, with both sides shelling out more than $3 million apiece. The new rules will “save shippers and railroads millions of dollars per case in consultant and legal fees,” commented STB Chairman Charles Nottingham, and place “reasonable restraints on the evidence and arguments” both parties would be allowed to submit. They also will ensure that the “standards both for deciding whether a rate is too high and for setting the floor for rate relief--the lowest level to which rates can be ordered reduced--are applied fairly.”
Captive shippers often seek relief under the stand-alone cost (SAC) test, which protects them “from bearing costs of inefficiencies or from cross-subsidizing other traffic by paying more than the revenue needed to replicate rail service to a select subset of the carrier’s traffic base,” according to the STB. “A stand-alone railroad (SARR) is hypothesized that could serve the traffic at issue if the rail industry were free of entry barriers. Under the SAC constraint, the rate at issue cannot be higher than what the SARR would need to charge to serve the complaining shipper while fully covering all of its costs, including a reasonable return on investment.”
The new rules will improve the “soundness” of SAC decisions by replacing the “percent reduction method” used to calculate maximum lawful rates with a “maximum markup methodology”; adopting a "cost-based method for allocating revenue from cross-over traffic (traffic that would be transported by the SARR for only a portion of the movement) to reflect economies of density”; shortening the “time frame for the SAC analysis from 20 to 10 years"; changing STB's “method of forecasting operating expenses to account for future productivity” gains; using its “unadjusted uniform rail costing system to determine if rail rate levels are below the jurisdictional floor”; and adopting “the proposed new standards to govern when to reopen rate cases.”
Next up for STB: reforming procedures and standards for smaller rate disputes. The proposed new guidelines will “rely on the same principles used in large cases, albeit in a less expensive, less complex manner,” said STB. Final comments are due in late December.
Record backlog marks Portec third quarterIn its third-quarter 2006 earnings announcement, Portec Rail Products, Inc. looked to continued sales growth, a record backlog entering the fourth quarter, and benefits derived from restructuring activities as factors that will improve profitability going forward. The company reported unaudited net income of $1.2 million or $0.13 per share for the quarter, compared to unaudited net income of $1.7 million or $0.18 per share for the prior-year period. Earnings decreased by $131,000 for two non-recurring items: write-down of non-operating assets at its Troy, N.Y. property, and costs associated with restructuring of operations in the United Kingdom, which include closing of two of four operating locations. Net sales during the quarter increased to $24.3 million, compared to $24.2 million during third-quarter 2005.
“We are pleased with our continued growth in sales and enter fourth-quarter 2006 with a record backlog for this period,” said President and CEO Richard J. Jarosinski. “The decrease in our net income for the quarter reflects a number of strategic actions taken that are expected to result in improved profitability in the future. The consolidation of our U.K. operations, from four to two locations, is expected to be complete by the end of 2006. Even though they are performing well this year, the consolidation of the material handling operation in Leicester and the rail operation in Sheffield should further improve profitability for both product lines. The Coronet Rail acquisition in April 2006 is expected to increase sales of our rail product line in our U.K. segment to an anticipated $12 million annually, which is approximately equal to the material handling product line. Additionally, we invested in new technology and equipment for our Canadian rail anchor operation and worked through most of the debugging issues during the third quarter of 2006. We should see benefits from this project beginning in 2007 as we anticipate lower production costs and improvements in operating efficiency, which should enable us to increase both sales and profitability. We have initiatives under way to reduce our selling, general, and administrative expenses, while continuing to fund high priority research and development projects at our Salient Systems and Kelsan Technologies business units.”
FreightCar America, TXU expand agreement FreightCar America, Inc. and TXU Generation Development Company LLC, which already owns 520 FCA-built aluminum AutoFlood III™ coal cars, have expanded their existing contractual relationship to include up to 7,650 cars to be delivered in 2008 and 2009. Under the terms of the agreement, TXU’s railcar requirements may change at TXU’s discretion, depending chiefly on the timely permitting of new coal-fired generating plants in the Electricity Reliability Council of Texas power grid. TXU is expanding its power generation capacity by adding electricity production units at its Monticello, Martin Lake, Big Brown, Tradinghouse, Lake Creek, Valley, and Morgan Creek plants in Texas. FCA will enter unqualified orders into its backlog as TXU provides notices to proceed on railcar production. The revised agreement includes additional cars ordered under the prior agreement to supplement the 520 cars serving existing TXU power generation facilities.
Canadian Pacific posts strong third quarterExcluding the impact of foreign exchange on long-term debt and a one-time special reduction to an accrual taken in third-quarter 2005, Canadian Pacific Railway reported third-quarter diluted earnings per share of C$1.06, an increase of 26% over the prior-year period. Income was C$168 million, up 24%. Operating expenses were virtually flat at C$854 million, despite increases in fuel costs. The operating ratio improved 3.2 percentage points to 74.2% (year-to-date, the operating ratio is 76.2%, an improvement of 2.1 percentage points). Including the special items, third-quarter net income was C$162 million, C$42 million lower than the prior-year period. Total freight revenues improved by 4% to C$1.12 billion, driven by grain (18%), industrial and consumer products (13%), sulphur and fertilizers (10%), and intermodal (8%)—offsetting a sharp decrease in coal revenues of 25%.
For BNSF, another record quarterDouble-digit revenue increases in each of the BNSF’s four business groups during the third quarter of 2006, driven by record volumes—a 10% unit increase in coal and an 8% unit increase in intermodal and agricultural products—led BNSF to its 18th consecutive quarter of year-over-year volume increases. Quarterly earnings were $1.33 per diluted share, 22% higher than third-quarter 2005 earnings per diluted share of $1.09. Freight revenues increased $597 million to $3.82 billion, with increases in volume, price, and fuel surcharges. Operating income of $920 million, an increase of $142 million, or 18%, compared with 2005, set an all-time quarterly record. The operating ratio remained virtually flat at 75.9%, compared to 75.8% in the year-ago quarter. Year-to-date, BNSF’s operating ratio is 76.1%, compared to 76.8% in the first nine months of 2005. Third-quarter 2006 freight revenues increased $597 million, or 19%, to an all-time quarterly record of $3.82 billion compared with $3.22 billion in the prior year. Revenue included fuel surcharges of approximately $500 million compared with approximately $300 million in the third quarter of 2005. BNSF said the increase in fuel surcharges “was driven primarily by rising fuel prices, which was offset by the $293 million increase in fuel expense.” Coal revenues rose by $126 million, or 20%, to $748 million, due to record loadings of Powder River Basin coal. Consumer Products revenues increased $244 million, or 18%, to $1.58 billion due to strong revenue increases in intermodal. Industrial Products revenues increased $128 million, or 17%, to $871 million. Agricultural Products revenues were up $99 million, or 19%, to $621 million. Quarterly operating expenses were $3.02 billion compared with third-quarter 2005 operating expenses of $2.54 billion. The $480 million increase “was principally driven by a $293 million increase in fuel expense primarily reflecting higher prices and a declining hedge position as well as a 7% increase in unit volumes.”
Wabtec: 10 quarters and countingCiting “strong, stable demand in our freight rail markets, growth in the transit market, internal cost-improvement programs, and growth strategies” and a multi-year backlog of more than $1 billion, Wabtec Corp. today reported its 10th consecutive quarterly earnings increase. Excluding expenses of 9 cents per diluted share for a previously announced restructuring plan, third-quarter 2006 earnings per diluted share were 44 cents, more than 40% higher than the year-ago quarter. The special expenses were primarily for pension-related accounting charges and fixed asset writedowns for the downsizing of two Canadian plants. Sales in the third quarter increased 5% to $268.9 million. Transit Group sales grew 15%; Freight Group sales increased 1%, “as demand has remained stable at a high level.” Including $6.3 million in restructuring expenses and other charges of $2.2 million, gross margin was 24.6%. Excluding these items, gross margin was 27.8%, compared to 26.2% in the year-ago quarter. Operating expenses were 3%t higher, mainly due to the recognition of stock-based compensation expenses and amortization expense related to the restructuring. Wabtec’s operating margin for the quarter was 9.5%. Excluding the restructuring expenses and other charges, the operating margin was 12.8%, compared to 10.7% in the year-ago quarter. Wabtec also raised its 2006 annual guidance to earnings per diluted share of between $1.70-$1.73 excluding restructuring expenses, with annual sales expected to be between $1.06-$1.07 billion. “Our strong performance in the third quarter and the outlook for the rest of the year give us the confidence to raise our guidance,” said President and CEO Albert J. Neupaver.
NS continues its record paceNorfolk Southern set more records this past quarter and also trimmed its operating ratio over five points as all markets, with the exception of automotive, posted significant revenue gains, and several set new revenue highs. NS reported record third-quarter net income of $416 million, or $1.02 per diluted share, a 38% increase compared with $301 million, or $0.73 per diluted share, for the same period of 2005. Third-quarter income from railway operations increased 35%t to a record $715 million. Record third-quarter railway operating revenues of $2.4 billion improved 11%. The improvements “were largely the result of higher average revenues, including fuel surcharges,” NS said. Railway operating expenses were $1.68 billion, an increase of 3%, due partially to higher diesel fuel prices. The railway operating ratio improved 5.4 percentage points to 70.1%. (For the first nine months of 2006, the operating ratio improved 3.1 percentage points to 72.6%.) General merchandise revenues were $1.28 billion, an increase of 13% and a third-quarter record. Coal revenues increased 9% to a record $595 million. Intermodal revenues rose 9% to a third-quarter record of $515 million.
CSX posts strong third quarter earnings CSX Corp. posted third quarter 2006 net earnings of $328 million, or 71 cents per share. (Earnings in the quarter included a 17 cent per-share benefit from Hurricane Katrina insurance recoveries and the resolution of certain income tax matters. Excluding these items, earnings were 54 cents per share, up 50% from 36 cents per share reported in the same quarter of 2005.) The company’s Surface Transportation businesses posted record third quarter revenues of $2.4 billion, a 14% increase from the third quarter last year. Surface Transportation operating income was $489 million, including the $15 million benefit from insurance recoveries. Excluding the insurance recoveries, operating income was $474 million, a 31%t increase over the $361 million reported in the third quarter of 2005. The Surface Transportation operating ratio dropped 2.6 points, to 80.4.
CN operating ratio drops nearly six pointsCN today reported its financial and operating results for third quarter 2006. Highlights include a record quarterly operating ratio of 57.4—an improvement of 5.9 percentage points over 2005; net income of C$497 million, a 21% increase over third-quarter 2005; diluted earnings per share of C$0.94, an increase of 27%; operating income of C$844 million, up 27%; revenues of C$1.98 billion, an increase of 9%; and nine-months free cash flow of C$1.131 billion. Six of CN’s seven commodity groups experienced revenue increases during the quarter, while revenue ton-miles rose by 6%. Operating expenses for the third quarter declined 1% to C$1.14 billion.
Record earnings for UPUnion Pacific’s third-quarter 2006 operating revenue and income were the highest in the history of the railroad, the sixth consecutive quarter of operating income growth. Operating revenue set an all-time quarterly record, growing 15% to $4.0 billion compared to $3.5 billion in third quarter 2005. The operating ratio improved 5.0 points to 81.1. Five of six business groups achieved all-time record results in the quarter. The sixth business team, Automotive, posted its best third quarter ever.
Third quarter 2006 net income was $420 million or $1.54 per diluted share, compared to last year’s third quarter net income of $369 million, or $1.38 per diluted share, which included a non-cash income tax expense reduction of $118 million after-tax, or $.44 per diluted share. Excluding the tax item, third quarter 2005 net income would have been $251 million or $.94 per diluted share. Comparing 2006 to 2005 results without the tax item, net income increased 67% and diluted earnings per share grew 64%. Operating income during third quarter 2006 was $752 million, up from $481 million reported in 2005.
A transcontinental intermodal corridorReplacing and expanding upon an agreement signed originally in 2001, BNSF and CSX are creating what they are calling a “high-volume intermodal corridor” connecting California, Atlanta, and the rest of the Southeast. The new service will initially include two intermodal trains each day between the West Coast and Southeast in each direction, and also allows for continued interline service between Memphis and Florida, as well as improved connections with the Carolinas and other key Southeast destinations.
To support the planned service, BNSF will expand capacity on its rail lines connecting Avard, Okla., Memphis, Tenn., and Birmingham, Ala. CSX will expand its Birmingham-Atlanta line as well as its intermodal terminal in Fairburn, Ga., near Atlanta. New service will begin early next year, with initial capacity projects consisting primarily of sidings and terminal expansion to be completed by the year-end 2007. The agreement also allows for future capacity expansion along the corridor.
Greenbrier acquires MeridianThe Greenbrier Companies has entered into a definitive agreement to acquire the stock of Meridian Rail Holdings Corp., which principally conducts business under the name Meridian Rail Services, from Stamford, Conn.-based private equity firm Olympus Partners. The purchase price of the acquisition will be $227.5 million in cash, plus or minus working capital adjustments. The acquisition is subject to customary closing conditions and is expected to close within the next 30 days. It is expected to be immediately accretive to Greenbrier's fiscal 2007 earnings.
Meridian is a supplier of wheel maintenance services to the North American freight car industry, with over 25 years’ experience. Operating from six wheel facilities, Meridian supplies replacement wheelsets and axle services to approximately 170 freight car maintenance locations where worn or damaged wheels, axles, or bearings are replaced. Meridian also operates a coupler reconditioning facility and performs railcar repair at one of its wheel services facilities.
With the addition of Meridian's facilities, Greenbrier says its expanded network of 10 strategically located wheelshops and 20 repair, refurbishment and replacement parts facilities “provides a competitive advantage and economies of scale. The combined entities will become the largest wheel service network and one of the largest purchasers of wheels in North America. Together, the two companies' facilities will create an end-to- end shop network spanning much of the continental U.S. and Mexico. As network partners over the past seven years, Meridian and Greenbrier have provided certain customers total wheelset inventory management, utilizing proprietary, web-enabled transaction and reporting systems. Through these systems, Meridian's and Greenbrier's customers realize freight as well as administrative savings on all types of components and procured items. Customers include various Class I railroads.
Headed by CEO Rick Turner, Meridian will maintain its current management team and a workforce of approximately 300 personnel. Turner will become president of Greenbrier's Wheel Services group, reporting to Tim Stuckey, president of Greenbrier's Rail Services group.
Wabtec Acquires Schaefer EquipmentWabtec Corp. has acquired Schaefer Equipment, Inc., a manufacturer of forged brake rigging components for freight cars, for $36 million in cash. Based in Warren, Ohio, Schaefer Equipment has annual sales of about $30 million. Wabtec expects the transaction to be accretive immediately. “With its world-class products, Schaefer Equipment broadens our line of engineered brake components and supports our strategy to provide customers with a complete line of braking solutions to meet their needs,” said Wabtec President and CEO Albert J. Neupaver. “As we implement our internal growth strategies—global and market expansion, aftermarket products and services, new products and technologies—we will continue to explore selective acquisitions to supplement that growth. Our strong balance sheet and cash flow give us ample capacity to invest in these growth strategies.”
Portec acquiring Vulcan’s railroad product lineIn an all-cash transaction, Portec Rail Products, Inc. is acquiring the railroad product line of Vulcan Chain Corp., a Detroit-based manufacturer of freight securement products for the railroad industry. The two companies entered into a definitive asset purchase agreement on Oct. 11. The acquired assets include certain patent interests, equipment, and other intangible assets. The acquisition price is $4.3 million and is subject to a three-year earnings provision based on the sales volume of the acquired product line.
Portec Rail Products, Inc. President and Chief Executive Officer Richard J. Jarosinski said Vulcan's railroad product line “compliments the business of our Chicago-based Shipping Systems Division. Vulcan is a major supplier of new and reconditioned tie-down systems for the shipment of new automobiles and vans by the rail industry. Vulcan's hand-brake chain products will strengthen Portec Rail's relationship with railcar builders. We will now be able to offer our customers an expanded range of products. This is a very synergetic product line especially suitable for manufacture at our Huntington, W.Va., facility."
New Logistics Park under way in KansasThe Logistics Park, a concept introduced by BNSF, places distribution centers and warehouses immediately adjacent to an intermodal hub center. BNSF’s first two Logistics Parks, located just outside Fort Worth, Tex., and Chicago, were developed in partnership with third-party developers and “have helped create thousands of new jobs and several billion dollars in economic development,” the railroad says. This type of facility “is considered a leading edge supply chain concept because it helps significantly shorten local truck trips between intermodal hub centers and distribution facilities.”
BNSF’s third Logistics Park, which will be located near Gardner, Kans., is expected to open in late 2008. It’s being developed with The Allen Group, a developer of industrial sites, and will occupy 1,000 acres. BNSF has already purchased nearly 800 acres of undeveloped property, and has options to purchase the remaining acreage. Design plans for the new intermodal facility are expected to be completed within a few months, and BNSF has begun the permitting and review process with local, state and federal agencies in order to begin construction in 2007.
EMD acquiring Turner Diesel’s rail services businessElectro-Motive Diesel, Inc. has signed a memorandum of understanding to acquire Scotland-based Turner Diesel Ltd.’s rail services business focusing on EMD locomotives. From locations in Aberdeen, Scotland and Stoke-on-Trent, England, Turner Diesel supplies EMD aftermarket parts and services throughout Europe and the Near East, and is a distributor and service provider of EMD power, marine, and industrial engines. These locations will be transferred to a new, Aberdeen-based subsidiary, Electro-Motive Services International, Ltd.
Rail fatalities down 4.3% in seven monthsPreliminary statistics show that there were 509 railroad fatalities in the January-July period of 2006, down 4.3% from the 532 deaths recorded in the corresponding period of 2005. Trespasser fatalities in the period were up 5.5% to 288 this year, and grade crossing fatalities were down 0.5% to 211. Total accidents/incidents were down 7.5% in this year’s first seven months, to 7,431, compared with the same period last year. Collisions were down 24.9% to 108; derailments were down 9.8% to 1,214; and yard accidents were down 18.2% to 855.
Union Pacific raises revenue and spending forecasts Union Pacific told an analysts’ conference in St. Louis that a combination of strong demand in major business sectors and strong pricing could translate into revenue growth in 2007 in the range of 6% to 8%. Earlier guidance projected 5% growth. UP plans to increase spending on capital improvements next year by around 9% to a projected $3.2 billion. Capital spending is estimated at $2.8 billion this year. It was $2.86 billion in 2005 and $2.4 billion in 2004.
NYC Transit to test composite tiesTieTek, a subsidiary of North American Technologies Group, Inc., announced that it has received an order from MTA New York City Transit for 11,000 composite crossties. NYCT’s Division of Track will test the composite ties on yard turnouts and in panel track. TieTek CEO Neal Kaufman said the order “further confirms the applicability of TieTek’s products across a wider range of customers, including large transit authorities.”
RMI enhances RailConnect TMS systemThe 330 short line and regional railroads that use RMI’s RailConnect transportation management system now have added features available. “Additional report capabilities, including a train performance report, have been added to enhance work lists, manage industrial changes, improve yard visibility, and assist rail managers in planning for and scheduling trains,” said RMI. “A car order module update allows for automatic creation of car orders based on data contained within inbound EDI waybills, and users can now define thresholds that will allow orders to expire automatically.” “We have listened to our users and incorporated their ideas into the product,” said David Booker, vice president and service design executive for RailConnect TMS.
FECR installs drawbridge damage-monitoring systemUSA Signal Technology, Inc. announced that it has installed a wireless video surveillance camera system for Florida East Coast Railway at its Stuart, Fla., drawbridge. The idea is to capture evidence should a boat or barge collide with the bridge, “which happens about once or twice a week somewhere,” according to the signal company.
“The system has been running for several months, transmitting high resolution video from four cameras to a server where the railway can view and record any damages that have occurred,” said Bob Stevenson, CEO of the Dallas-based company. This is the company’s first installation. “Field tests have resulted in several customer requested system enhancements,” said Stevenson. “This includes capturing high-resolution ‘snapshots’ that are emailed to a technician to pinpoint damage. We have also provided for transmitting low resolution continuous video images where there isn’t a DSL link with a bandwidth high enough to send high resolution video.”