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February 2015
— by Jeff Stagl, Managing Editor
Last year, BNSF Railway Co. became the first Class I to allocate $5 billion for capital expenditures. This year, the railroad is setting yet another large-road high for capex: $6 billion.
The record-setting 2015 budget includes $2.9 billion to renew and maintain assets, such as track infrastructure; $1.5 billion to expand capacity; $1.4 billion to acquire locomotives, rail cars and other equipment; and $200 million to continue implementing positive train control (PTC). The Class I now has hit a high-water mark for capital investments in three straight years, following allocations of $5.5 billion in 2014 and $4 billion in 2013.
Although this year's $6 billion budget is eye-catching, the dollar-figure isn't the attention-grabbing aspect of the spending plan, says President and Chief Executive Officer Carl Ice. It's what the funds mean to the railroad's business prospects and customers, he says. The railroad has devoted what essentially amounts to the revenue generated in one quarter to improve and expand track, establish bigger and better facilities, and acquire more equipment to both bolster service for existing customers and take on more traffic.
The 2015 budget is a continuation of a capex strategy that began two years ago, says Ice. Since senior executives at the privately owned railroad don't have to answer to Wall Street with their capital reinvestment decisions, they can take a more long-term approach to capex planning.
"It puts us in position to handle our customers' business now and in the future," Ice says. "We know we have good prospects, and customers want to grow with us. We are committed to our customers' service and their growth."
Shippers seek positive service impacts from capex projects — such as a newly double-tracked line, an extended siding or expanded intermodal terminal — and they already have noted encouraging performance results from projects completed the past few years, says Ice. Considering some shippers were frustrated with the Class I's service last year, that encouragement is vital.
The harsh winter and high traffic volumes caused congestion in parts of BNSF's network, especially in the North Region that covers Illinois, Minnesota, Montana, North Dakota, Oregon, South Dakota, Washington and Wisconsin. Traffic flowing in the region includes agricultural products and coal moved to Pacific Northwest export facilities, petroleum products hauled to refineries, consumer products shipped to and from Pacific Northwest ports, and materials brought into the Bakken for crude production.
Two consecutive record grain harvests, strong fertilizer traffic in between them, coal shortages caused by utilities' depleted stockpiles, high crude production in the Bakken Shale and congestion in Chicago tied up BNSF's northern network in a knot, says Stifel Financial Corp. analyst John Larkin, who follows BNSF. Traffic growth in that part of the network — which wasn't necessarily prepped for such growth — has stood out the past three or four years, he says.
To that end, the Class I plans to spend $1.5 billion this year in the North Region to expand and maintain lines, including $800 million on track maintenance, and $700 million on projects designed to boost capacity and implement PTC.
"It appears management is committed to the work necessary to eliminate congestion in the north," says Larkin.
Benjamin Hartford, a Robert W. Baird & Co. Inc. analyst who also follows the Class I, agrees. BNSF had the most severe service issues among the Class Is last year, and it makes sense that one-quarter of its 2015 capex budget is allocated for expansion projects where it's experiencing the most traffic demand and growth, says Hartford.
"This spending is the first step in showing shippers that steps are being taken to avoid service issues," he says.
BNSF execs are hoping many shippers across the network will take notice. Projects included in the capex program will benefit all customers in a given area, and not just one group, such as crude shippers, says Ice. For example, upgrades and expansions in the North Region target service-performance improvements for many shippers that move a variety of freight between the Pacific Northwest and Chicago.
In addition, capex work in the nine-state South Region that's projected to cost $800 million figures to help many shippers that rely on BNSF's high-speed transcontinental (Transcon) route between Southern California and Chicago, while $650 million in Central Region projects are counted on to bolster service for shippers of coal and other commodities through Alabama, Colorado, Iowa, Missouri, Nebraska and Wyoming.
Completed infrastructure improvements already are proving to ramp up track quality and prevent transit delays, senior execs say. For example, rail defects last year decreased 6 percent compared with 2013.
"We had the fewest rail defects in our history," says Ice.
This year, there are dozens more projects lined up that figure to reap additional benefits for operations and help generate more business, he says. Some of the projects might be altered, augmented or cancelled based on changing business or economic conditions.
Overall, the 2015 capital maintenance program calls for completing 270 bridge projects, laying 950 miles of relay rail, installing 3.5 million ties, and performing ballast, undercutting and/or surfacing work on 21,600 miles of track.
In the North Region, planned expansion projects include:
Overall, work in the region involves double-track projects in five subdivisions, a triple-track project in the St. Paul Subdivision, siding projects in six subdivisions — including three new sidings and seven extensions — and CTC projects in seven subdivisions.
In the South Region, the $800 million pegged for infrastructure maintenance and capacity expansion projects includes $175 million for line expansions and continued PTC implementation. Expansion projects slated for the region — which covers Arizona, Arkansas, California, Kansas, Louisiana, Mississippi, New Mexico, Oklahoma and Texas — include 18 miles of new double track in the Panhandle Subdivision between Wellington and Avard, Okla.
The railroad also plans to build nine miles of double track in the Clovis Subdivision between Belen and Clovis, N.M., and connect two sidings in the Mojave Subdivision between Bakersfield and Mojave, Calif., to create a short double-track segment.
In the Central Region, the $650 million budgeted for infrastructure maintenance and capacity work includes $260 million for line expansions and continued PTC implementation. Expansion projects include the construction of two new sidings on the northern and southern ends of the Hannibal Subdivision in western Illinois, the construction of two double-track segments in the Ravenna Subdivision in Nebraska totaling 18 miles and the extension of sidings at six locations in the Brush Subdivision east of Denver. Each of the six sidings will be extended about 2,000 feet.
In addition to the ambitious slate of trackwork penned for the three regions, the 2015 capex program includes an elaborate amount of bridge work. BNSF plans to:
Count several terminal projects among program work, as well. The projects call for completing a double-track project through the Lacrosse, Wis., terminal that began in 2013, and expanding yards in Everett, Wash., and Dickinson, N.D. In addition, tracks will be extended at terminals in Denver and Sterling, Colo., and receiving/departure tracks will be added at a Tulsa, Okla., terminal.
BNSF also plans to expand the rail-car loading/unloading track, support track and/or parking areas at intermodal facilities in Elwood, Wilmington and Willow Springs, Ill.; Edgerton, Kan.; Phoenix; Haslet, Texas; and Stockton, Calif. Plus, rail-car loading/unloading track and/or parking areas will be expanded at automotive facilities in Elwood; Amarillo and Haslet, Texas; Portland, Ore.; and San Bernardino, Calif.
When it comes to crafting a capex plan and developing projects, the BNSF management team considers three things: where business growth opportunities are unfolding; choke or congestion points; and return-on-investment potential, says Executive Vice President and Chief Marketing Officer Steve Bobb.
Regarding the second consideration, BNSF managers constantly try to identify and address the next bottleneck.
"You can't always predict it," says Bobb.
But BNSF execs have registered some success in forecasting how certain projects will generate more traffic and improve operations for particular business groups. The consumer products group likely will gain traffic-attraction benefits from infrastructure work this year between Minneapolis/St. Paul and Chicago, and on the South Transcon line in New Mexico, where the railroad is "attacking many single-track segments," says Bobb.
Double-track and siding extensions in the Mojave Subdivision, and two double-track projects in the Panhandle Subdivision in Oklahoma also are key portions of the capex plan, he says.
Work on terminals to boost capacity and improve throughput are critical, too. Six to eight significant terminal projects are pegged for this year, such as the Dickinson yard expansion, says Bobb.
For the coal group, central corridor projects in Nebraska — including two double-track projects — are significant because of strong coal traffic coming from the Powder River Basin, he says. In addition, siding extensions in the Brush Subdivision in Colorado will be key for coal business.
"It will allow us to increase train size and improve meets/passes where it was constrained on the line segment," says Bobb.
In terms of bolstering service for the industrial products group — which virtually uses the entire railroad — projects pegged between Minneapolis/St. Paul and Chicago will pay big dividends for fluid operations, he believes. The work there will benefit many customers that use the route, such as crude, lumber and frac sand shippers.
Capex projects also are expected to pay off for the agricultural products group. After expanding quite a bit of capacity last year in the North Region, the additional track and siding expansion projects in the north this year are being counted on to help improve service performance for ag shippers.
So, too, will some of the rolling stock acquisitions planned in 2015. BNSF is trying to transition to longer grain trains, which calls for using a higher number of shorter and stouter covered hoppers.
The cars can boost carrying capacity without making trains significantly longer, says Bobb. The hoppers are wider and shorter in length, enabling ag shippers to maximize the amount of grain they can handle in one train's footprint. While a grain shuttle normally features 110 cars, the new cars allow trains to be extended to about 116 cars.
The Class I has been using the grain hoppers the past few years and acquired 900 of them last year. In 2015, BNSF plans to acquire another 900 of the cars.
The covered hoppers are part of the 2015 equipment spending plan that calls for acquiring 7,800 rail cars, including purchases and long-term leases. In 2014, the railroad acquired about 7,000 cars, including purchases and long-term leases.
In addition, BNSF plans to acquire 330 locomotives this year. Last year, the railroad acquired about 600 locomotives, including purchases and long-term leases.
The Class I wasn't short on locomotives in 2014 despite high volumes — weekly traffic reached 200,000 units 19 times — but the railroad did encounter slower velocity at times, says Bobb. The 2015 capex plan is key to ensuring BNSF isn't short on resources or capacity for traffic now and to come. Overall, the railroad has fashioned itself well the past few years to prep for growth, Bobb believes.
"We have been in great shape and will be in even greater shape [at year's end]," he says.
Around that time, BNSF execs will begin discussing the capex budget for 2016. It's too early to surmise what the budget figure will be for next year. Capex assessments for a forthcoming year are made late in the preceding year based on a number of factors and economic metrics, Ice says.
But since the 2015 budget is 20 percent more than 2014's and about 100 percent more than capital spending in 2010, when Berkshire Hathaway Inc. bought BNSF, it stands to reason that the 2016 budget likely will be lower, says Stifel Financial's Larkin.
Plus, so much work has been accomplished or scheduled over a three-year span.
"I think most of the kinks in the network will be worked out this construction season, so they will dial it back for 2016, perhaps below $5 billion," says Larkin.
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