Monday, November 12, 2012

Morgan Stanley: “Few new risks" from D.C.

Written by  William C. Vantuono, Editor-in-Chief
Sen. Jay Rockefeller: Still a threat? Sen. Jay Rockefeller: Still a threat?

A newly released report from Morgan Stanley Research North America on the post-election rail regulatory landscape suggest that rail investors “have few new risks to fear from Washington.”

“The political backdrop before the election did not drive significant concerns for rail investors,” says Morgan Stanley’s William Greene. “A similar political orientation in D.C. post-election” suggests that not much will happen. Greene offers these answers to eight key questions:

Question 1: What does the political composition of Congress mean for railroads? “A politically divided Congress with Republican control of the House and Democratic control of the Senate suggests that there is little likelihood of new rail legislation passing both houses.”

Question 2: Will there be any House leadership changes in the key committees that could affect railroads? “In the last Congress, Congressman John Mica (R-Fla.) was chairman of the House Transportation and Infrastructure Committee, which has jurisdiction over all modes of transportation: aviation, maritime and waterborne transportation, roads, bridges, mass transit, and railroads. Mica generally takes a view that aggressive regulation of transportation (including railroads) is unnecessary. He is considered to be a moderate as it relates to [freight] railroads and generally has not raised undue risks or concerns about changing railroad regulation. However, according to Republican rules in the House, Chairman Mica has reached his term limit on the Transportation Committee. While it is possible the House leadership will offer him a waiver on the term limits, current rules designate Congressman Bill Shuster (R-Pa.) as the next Chairman. Similar to Mica, Shuster is viewed as a moderate on rail regulatory questions. As such, we do not expect Shuster to have any interest in taking up legislation to alter current rail regulations.”

Question 3: Will there be any Senate leadership changes in the key committees that could affect railroads? “The key Senator to watch from the perspective of rail legislation is Senator Jay Rockefeller (D-W.Va.). He is Chairman of the Committee on Commerce, Science and Transportation, which has broad jurisdiction over legislation concerning transportation, including railroads. Sen. Rockefeller has long desired to change the current rail regulatory framework established by the Staggers Act, which [partially] deregulated railroads. We expect Rockefeller to remain Chairman. Looking forward, although we would not be surprised to see Rockefeller reintroduce legislation to the committee that proposes to change the current rail regulatory framework (he generally favors more protections for shippers), a divided Congress politically suggests there is little to no chance of such legislation passing both houses. Moreover, it is not even clear Rockefeller could muster enough votes to prevent a filibuster in the Senate anyway to take up a vote on any legislative proposals he wants to move. The most likely risk to rail shares is that Rockefeller holds hearings to address shipper concerns about railroad pricing power. The bottom line is that we believe Congress will likely do little to tinker with railroad economic regulation over the next two years, which we view as a positive for the shares.”

Question 4: What changes could a second Obama Administration make that could affect railroads?“The most obvious change is likely to be at the Department of Transportation, where current Secretary of Transportation Ray LaHood could retire. As it is not uncommon for a second Administration to see some turnover of senior cabinet positions, we cannot rule out the possibility that LaHood will resign. At this point, we have not yet heard who might replace him should he resign his post, but it is likely to be another Republican according to our sources. We doubt the DOT will take any aggressive actions against railroads in most scenarios, but we would need to know more about any change in leadership before reaching a conclusion. LaHood has not created undue concerns for investors. Beyond DOT leadership changes, we do not expect rail regulatory or safety issues to be high on the Presidential agenda.”

Question 5: Will anything change at the Surface Transportation Board? “Dan Elliott is the current Chairman of the STB and he is likely to remain in that role. The term of another board member, Frank Mulvey, has expired and it is anticipated that he will vacate his position around the end of the year. As an economist, Mulvey was generally viewed as being a moderate when it came to rail economic regulation and a commissioner who broadly understood the economic implications of proposals to change those regulations. It is not known who the administration would propose to replace Mulvey, but Obama is likely to eventually nominate a fellow Democrat to fill the vacated seat. We do not expect a replacement in the near-term given the significant issues facing the country (fiscal cliff, tax reform, immigration reform, etc.). A two-person STB is not unheard of, but it does suggest that proceedings already underway may take longer to conclude, which is not a negative outcome for rail investors, in our view. The two important regulatory proceedings before the STB deal with (1) paper barriers and (2) reciprocal switching. We do not expect a near-term conclusion/finding from the STB on either proceeding, but with a politically divided Congress and one seat on the Board vacant, we do not view it as a high probability that the STB would deliver any controversial and far-reaching findings on either issue.”

Question 6: Will anything change at the Federal Railroad Administration? “Joe Szabo is the current Federal Railroad Administrator and it is our understanding that he would like to remain in this role. The FRA is primarily concerned with railroad safety regulations, the foremost of which is PTC. The FRA was tasked with overseeing the implementation of the key parts of the U.S. Rail Safety Improvement Act of 2008. The original deadline for implementation of PTC across the rail network was [Dec. 31,] 2015, but the FRA has recently suggested that this is not feasible and has recommended that Congress extend the deadline. At this point, we foresee little likelihood of Congress taking action on PTC in 2012 and even less likelihood that Congress would fund any of the development of PTC; however, we expect that this will be a legislative aspiration of the rails in the next Congress. With the FRA supportive of legislation to delay implementation deadlines, we expect Congress to be open to pushing back the deadline.”

Question 7: Will the lame duck Congress pass 45G tax credits? “It is difficult to put a probability on such an outcome, but a lame-duck Congress is generally a more favorable time for such tax credits to be reauthorized. Moreover, given the fiscal cliff, there may be a legislative vehicle for the tax credits as well.”

Question 8: Is there any implication for the Fuel Surcharge Antitrust Class Action Litigation? “We do not expect the election results to change the process in the Fuel Surcharge Antitrust Class Action Litigation against BNSF, UP, CSX and NS. On Nov. 6, the U.S. Court of Appeals for D.C. granted the railroads’ request to modify the procedural schedule, which results in a one-month extension of the deadline to the summary judgment motions. The new timeline of events is as follows:

• 1/12/13: Defendants’ rebuttal expert reports due.

• 3/4/13: Plaintiffs’ rebuttal expert reports due.

• 3/25/13: All expert depositions to be completed.

• 5/9/13: All challenges to experts or their opinions and summary judgment motions due.

• 6/20/13: All opposition briefs to those challenges and to summary judgment motions due.

• 7/18/13: All reply briefs in support of those challenges and summary judgment motions due If we assume no summary judgment, the case could stretch into 2014 and, with appeals, into 2015.

Download the complete 119-page report by clicking HERE.