Friday, September 27, 2013

A stronger network, with more capacity

Written by  William C. Vantuono, Editor-in-Chief
Crude oil meets intermodal at Hauser Junction, Idaho. Crude oil meets intermodal at Hauser Junction, Idaho. Bruce Kelly

How BNSF is leveraging a record $4.3 billion in capital investment.

There can be a distinct advantage to having only one shareholder. For BNSF Railway chief executive Matt Rose, answering to Warren Buffett—who put his faith in the freight rail industry and BNSF management when he acquired the railroad in 2009 ("It's going to be around for the next 100 or 200 years, and you can't move it to China or India," he said at the time)—the advantage is the ability to invest what is necessary into state-of-good repair and capital expansion programs, without analysts or shareholders with short-term financial interests looking over your shoulder.

Rose and his management team know where the investments need to be made. For sole shareholder Buffett—who firmly believes that railroads are essential to the long-term health of the U.S. economy, and will continue to grow as the need for efficient surface transportation increases—all he's looking for is "a reasonable return" on his investment.

BNSF's 2013 capex program is a whopping $4.3 billion, the industry's biggest, about a 16% increase from 2012's $3.6 billion. This year's program was initially set at $4.1 billion, but was increased by $200 million "due to more expansion-related spending," Rose said in the railroad's Form 10-Q for the period ended June 30, 2013. "We will spend $2.3 billion in capital in 2013 to maintain a strong core network and related assets. In addition, we will continue investing in our locomotive and railcar fleet and in projects that expand and improve the efficiency of our infrastructure, and continue installing Positive Train Control in response to a federal mandate."

The program includes about $200 million for PTC and $800 million for terminal, line, and intermodal expansion and efficiency projects.

About 50% of BNSF's 2013 capex program is for engineering projects designed "to make our rail network stronger, with more capacity, so that more customers will want to use our services," Rose tells Railway Age. "We are very passionate about our network velocity, and our maintainability," both of which "are code words for better service."

"The policy wonk's delight"

Matt Rose points out that the industry has achieved just about as many personnel-based productivity improvements as possible. "Every major step-level change in productivity—mergers, master crew-consist agreements, for example—has been people-based since deregulation in 1980," he says. "Though we are still nibbling around the edges with productivity, there is nothing more significant now than taking costs out of fuel."

To that end, BNSF—always a leader in technology—is racing ahead with a program to test locomotives fueled by LNG (liquefied natural gas), which Rose says "may be the next big opportunity for taking cost out of our operations." GE Transportation and Electro-Motive Diesel are each providing three test units, which are expected to begin a one-year evaluation in the fourth quarter. Though few details were available at press time for this issue, Rose did provide some insight into the economic and regulatory issues surrounding LNG.

"The public policy issues are significant," he says. "LNG is the policy wonk's delight." Currently, the U.S. Environmental Protection Agency has no regulatory oversight on LNG locomotives. The Federal Railroad Administration, working presumably with the Department of Homeland Security, will need to establish safety regulations for LNG fuel tenders. The Surface Transportation Board will have to acknowledge the capital investment and ROI implications of LNG.

What will drive a conversion to LNG, which Rose says will entail a $6 billion to $8 billion investment for BNSF's 6,900-unit locomotive fleet, is "the spread relationship between the cost of diesel and LNG, which currently is about one-fifth the cost of diesel. Ten years ago, the cost of each was about even. Can we hedge LNG for 10 years? Will fuel surcharges be possible, if needed? At the end of the day, it makes sense to change surface transportation from diesel to gas, but we will need a regulatory framework."

Rose also connects CBR and LNG fuel with the U.S. becoming energy independent—a "big idea" that has taken on more significance in the wake of escalating social and political instability in the Middle East. (See related stories on pp. 39 and 44.)

CBR drives investment

BNSF is allocating a significant amount of capital to its east-west Northern Corridor to handle soaring crude-by-rail (CBR) traffic originating in the Bakken Shale Formation in North Dakota and Montana. "This year we plan to spend about $220 million on CBR-related infrastructure in North Dakota, such as double-tracking, longer passing sidings, and terminal expansions," he says. "We will invest significantly more next year, and we believe we will get our investment back."

At a reasonable rate of return, no doubt.

North Dakota is the second largest oil producing state in the U.S., behind Texas and ahead of Alaska, and BNSF has established itself as the Bakken region's largest crude-hauler. "Crude by rail is backfilling 50% of our coal losses," Rose says. "We have never seen a business that has grown so fast. We're moving 650,00 barrels per day and expect to be moving 750,000 barrels per day by the end of this year. Right now, we're moving 10% of all the oil in the U.S." Recent reports suggest that BNSF could be moving as many as one million barrels per day by some time in 2014.

While the growth in CBR has been rapid (creating a two-year backlog on deliveries of new tank cars), Rose sees a longer-term, "more normal yet creative" marketplace. "In terms of rail vs. pipeline, the mix is going to be dynamic, unlike coal. There is no 15- to 20-year certainty," he says.

The $220 million in 2013 capacity enhancement projects in North Dakota include constructing three new sidings west of Minot near Manitou, Tioga, and Palermo; extending the sidings near Glen Ullin and Hillsboro; improvements to six sidings between Minot and Grand Forks; raising 10 miles of track over Devils Lake by 1 to 5 feet to keep the track above rising water; upgrading the line between Berthold and Northgate on the Canadian border; installing CTC on three sidings near Devils Lake, Hillsboro, and Towner; constructing a new double crossover track east of Williston; and lengthening existing tracks or adding new tracks at rail yards in Mandan, Minot and Williston.

BNSF will also continue its track maintenance program in North Dakota, which will include nearly 1,900 miles of track surfacing and undercutting, replacement of about 315 miles of rail and 415,000 ties, as well as "significant" signal upgrades for PTC.

On top of the $220 million slated for North Dakota, $115 million is being spent in Montana on maintenance and capacity expansion projects. Among the projects are three new unit train staging tracks about three miles east of Glasgow, and safety enhancements accomplished through addition of Machine Vision fault-detection technology at Miles City to help identify damaged rolling stock.

The track maintenance program in Montana will include more than 2,300 miles of track surfacing and undercutting work, replacement of about 100 miles of rail and 310,000 ties, as well as signaling upgrades for PTC.

These capacity improvements will improve service to pipeline operators and short lines, which have built 12 terminals adjacent to BNSF and Canadian Pacific infrastructure in northwestern North Dakota in the past two years, increasing the number of terminals to 16. These terminals are handling crude delivered by truck or pipelines, and according to the North Dakota Pipeline Authority, terminal capacity has increased to 730,000 barrels per day since they were built.

In four other states throughout its 23,000-mile network, BNSF has allocated $750 million for maintenance and rail capacity improvement and expansion projects:

• Washington State: $125 million. Projects include construction of two 7,000-foot receiving and departure tracks at Delta yard in Everett, expanding the automotive distribution facility at Orillia to support growth

in new automobile traffic, and PTC installations. The track capital maintenance program in Washington includes nearly 2,800 miles of track surfacing and undercutting, and replacement of about 175 miles of rail and 110,000 crossties.

• Kansas: $175 million. Capacity expansion projects include completing construction of the Logistics Park Kansas City Intermodal facility in Edgerton; construction of a new 10,000-foot siding and extension of an industry track to 3,000 feet on the Ft. Scott Subdivision near Spring Hill; improvements to the Topeka shops; and PTC. The track maintenance program includes about 2,500 miles of track surfacing and undercutting, and replacement of nearly 100 miles of rail and about 375,000 crossties.

• Missouri: $210 million. Projects include capacity enhancement on the Cherokee Subdivision through extension of a siding at Jeff to 10,000 feet, and improving a bridge over the Missouri River near St. Louis. The track maintenance program includes more than 3,500 miles of track surfacing and undercutting, replacement of 195 miles of rail and almost 390,000 ties, and PTC.

• Texas: $240 million. Projects include capacity expansion at Tower 55 in Fort Worth; completing replacement of the Galveston Causeway Bridge; installation of a siding extension near Somerville; expansion of the Houston Intermodal Facility; construction of a loop track facility in San Antonio; and PTC. The track maintenance program includes nearly 4,400 miles of track surfacing and undercutting, and replacement of about 115 miles of rail and 690,000 ties.

The PTC investments this year, which account for a significant portion of the communications and signaling budget, total $200 million. So far, PTC has been installed across 7,900 miles of right-of-way in 20 states. Investments in new locomotives and freight cars, such as autoracks (based on growth in motor vehicle traffic), and other types of equipment total $1 billion.

Sometimes, it's the small- to medium-sized investments that can make a big difference in capacity and network velocity. One example is Colton Crossing in Southern California, where BNSF and Union Pacific main lines crossed at-grade for 130 years.

A new, elevated 1.4-mile-long overpass on the UP now replaces the at-grade chokepoint and eliminates long waits for stopped trains and the resulting congestion and delays for freight and Metrolink commuter trains and motorists. The $93 million project was a public/private partnership involving Caltrans, SANBAG (San Bernardino Associated Governments), the city of Colton, BNSF, and UP. Funding was provided by state and federal sources, including $34 million from the American Recovery and Reinvestment Act and $41 million from Proposition 1B, a 2006 state-voter-approved transportation bond. The remaining $18 million was provided by UP and BNSF. Original estimates calculated the project cost at $202 million, with completion in 2014. Owing to "cooperation between Caltrans and SANBAG, innovative construction methods, and a competitive marketplace that resulted in much lower bids than expected," the project wrapped up eight months ahead of schedule and $109 million under budget.

In terms of BNSF's immediate future, "We will continue investing to make our network stronger," Rose says. "More customers will want to use us. The net/net will be more freight shifted from truck to rail, and less damage to our highway infrastructure. But we will need a good public policy framework, and right now, there's nothing good out there. Our legislators need to develop an understanding of the role of effective supply chains. More-efficient supply chains will create more commerce, and more jobs. The problem is that too many members of Congress are focused solely on legislating, and on appropriating funds, because doing those things is very tangible, very visible. They will legislate on railroads, but they won't appropriate very much for projects like intermodal and freight connector projects. Congress's role is not building or repairing or expanding railroads. It should be making investments in goods transfer points. That alone can make a huge difference in how efficiently freight gets transported throughout our nation."