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September 2008
By Jeff Stagl, Managing Editor
On the 12th floor of Norfolk Southern Corp.’s headquarters, a strategic development team maps out the Class I’s network of the future. They analyze traffic mix changes, freight volume projections and the railroad’s assets, then determine ways to position NS to accommodate demand five, 10 and 20 or more years out. With U.S. freight-rail demand projected to double in 30 years, network planning is rising on the urgency meter.
It’s also is a hot topic on the top floor of the 19-story Norfolk, Va., nerve center. Senior executives cite the need to shorten routes, establish regional corridors and create better long-distance gateways as key elements of NS’ short- and long-range plans. Lately, “partnership” is stamped prominently on portions of those network-of-tomorrow blueprints.
All Class Is are involved in public/private partnerships (PPPs) and interline joint ventures, but NS has been one of the most active on both counts, especially within the past year. The railroad continues to team up with governments at all levels to co-fund and develop intermodal corridors and facilities, and collaborate with other Class Is, regionals and short lines to establish interline services and joint routes.
Partnerships are a means to expand capacity without spending a lot of capital, reduce operating expenses (especially fuel costs), fill in network gaps, reduce transit times and divert more truck traffic, senior execs say. PPPs and joint ventures also are a way to shift from an internal focus on extending the network — via building or acquiring more track — to an external one.
“They play into the way we view the world,” says Chairman, President and Chief Executive Officer Wick Moorman. “We look at where we think we can compete given rail business as it is now and will be, and try to fit our franchise to that view.”
In addition, partnerships — especially PPPs — help accelerate projects that otherwise would take much longer and be too costly to do alone.
“It might take six years to complete a project under a PPP that would take us 20 years to do ourselves,” says EVP of Law and Corporate Relations James Hixon.
With highway congestion worsening in major cities, shippers seeking faster and lower-cost transportation alternatives, more goods being produced in regional centers and global trade shifting to East Coast ports, NS figures to remain an active PPP dealmaker and venture partner to seize market-shift and modal-diversion opportunities, and develop what Moorman refers to as a “coastally agnostic” network.
“Our goal is to be able to handle freight as efficiently and profitably as possible, whether it’s entering our network from an East Coast port or a Midwestern gateway via the traditional transcontinental routing,” says Moorman.
But before NS can arrange another PPP or carry out a project under an existing one, the railroad needs to drum up public support by convincing residents and legislators that a project will provide public benefits, such as economic development opportunities associated with a logistics park.
“NS has been an industry leader in showing how these public-private partnerships can be successfully structured with benefits for all of the participants,” says Moorman.
The Class I also has to clear regulatory hurdles for some joint venture deals and tailor operations for each collaboration to ensure the joint services work as intended.
“The world is not a static place; the marketplace changes and customers change, and we need to be able to adapt.
The challenge is how you implement a deal and make it work for the long term,” says VP of Strategic Planning John Friedmann. “There’s no template to stamp out for each deal — each one is different from economic, regulatory and operating perspectives.”
During the past year, NS has encountered all of the aforementioned obstacles, and overcame most of them.
The Class I forged a major intermodal PPP — the more than $2.5 billion, New Jersey-to-Louisiana Crescent Corridor — and hammered out several joint ventures, including the Pan Am Southern/Patriot Corridor with Pan Am Railways, Empire Link with 10 New York short lines and an automotive co-loading service with Union Pacific Railroad.
NS also continued to work on several years-old collaborations, including the Norfolk-to-Columbus, Ohio, Heartland Corridor PPP, Meridian Speedway joint venture with Kansas City Southern, northeastern co-production pact with Canadian Pacific Railway’s
Delaware & Hudson and Blue Streak intermodal services with UP.
One long-standing PPP took a leap forward last month. Since 2004, NS has been trying to get public constituents on board for the Heartland Corridor, a double-stack route that will run through Virginia, West Virginia and Ohio.
Just as Illinois legislators have debated a budget for more than a year, holding up the state’s share of funds for the Chicago Region Environmental and Transportation Efficiency Program (a $1.5 billion PPP NS is part of) in the process, Virginia residents and lawmakers since 2006 have disagreed on a Roanoke area location for an intermodal terminal, threatening the corridor’s projected completion in second-quarter 2010.
The dispute finally ended in late August, when the Virginia Department of Rail and Public Transportation (DRPT) issued a notice to proceed to NS, enabling the railroad to begin building the Roanoke Region Intermodal Facility in Elliston, Va., by winter and complete the terminal in 2010.
The Class I agreed to coordinate the construction with DRPT, Montgomery County, the Virginia Department of Transportation and other organizations to minimize local impacts.
However, Montgomery County officials in late August announced plans to file a lawsuit against Virginia, claiming public monies shouldn’t be used to help fund a private intermodal facility in Elliston.
County officials should consider the project’s public benefits, NS execs believe. The Class I long has touted the benefits associated with the nearly $200 million Heartland Corridor, 70 percent of which is being funded by federal, state and local governments. The corridor will save 1.5 days in shipping time between Norfolk’s port and the Midwest, remove 1.9 million trucks from Virginia’s highways, save 189 million gallons of fuel and reduce carbon emissions by 700,000 tons in the route’s first 15 years of operation, according to DRPT’s projections alone.
After the project is completed, NS will gain an intermodal route that’s about 250 miles shorter than the existing one and save more than 30 hours in transit time. Currently, double-stack trains travel to the Midwest via Harrisburg, Pa., or Knoxville, Tenn. The project also includes a new Columbus intermodal terminal that opened in March, a terminal in Prichard, W.Va., and extensive tunnel work to increase clearances.
The Class I expects to divert thousands of trucks along the corridor annually.
“That’s the main reason for these projects: to take trucks off the highway,” says EVP Hixon.
NS stands to divert even more trucks each year — as in 1 million — after the Crescent Corridor’s first full phase is completed, although that’s at least five years away. The proposed 1,400-mile intermodal corridor would run along severely congested Interstate 81 through New Jersey, Pennsylvania, Virginia, North and South Carolina, Georgia, Tennessee, Mississippi and Louisiana. The route would position NS to capture a significant share of growing regional domestic freight traffic, and speed transit for international containers moving to the Southeast and Southwest.
NS officials currently are determining the corridor’s infrastructure and capacity needs — such as the location of longer sidings and new intermodal terminals — and working with federal and state legislators to drum up funding support. So far, only Virginia has committed $40 million in public funding for the corridor to build double track and add passing sidings between Manassas and Front Royal. Pennsylvania and Tennessee also have voiced support, says Director of Strategic Planning Bill Schaefer.
“The others want the corridor plan to be worked out first,” he says. “You can see the commercial possibilities and how this would be a help to state DOTs and drivers on highways. The corridor can provide economic development opportunities and congestion relief.”
The Crescent Corridor would target large and “attractive” markets that are 600 miles to 700 miles apart, says Schaefer. The route would link Northeast markets with producers in the Southeast and Southwest — via the Meridian Speedway — through truck-competitive intermodal services.
“Our aim is to cover the same ground as the ground covered by a single truck driver, with breaks, in premium intermodal service,” he says. “We serve a small percentage of that now, and zero percent in some lanes.”
However, the project’s scope and level of coordination needed to pull it off are “breathtaking,” says Schaefer.
“I don’t know of another bigger project that we’ve taken on at one time,” he says.
Not all of NS’ PPPs involve mammoth projects. For example, the railroad is working with the state of North Carolina, city of Charlotte and local airport authority to develop an intermodal terminal that would provide additional container-handling capacity.
The state is developing a plan to provide tax credits to help NS fund the facility, says Hixon.
“That would allow us to justify the investment,” he says.
In addition, NS in 2004 rehabilitated the Shellpot bridge in Wilmington, Del., through a PPP between the Class I, Delaware DOT and Port of Wilmington. The parties spent $13.9 million to restore the bridge so NS could serve the port from the north instead of the south via Amtrak’s Northeast Corridor, eliminating the need for freight trains to pass through Amtrak’s Wilmington station.
“It was a way to get the railroad out of the city,” says Hixon.
Conversely, railroad joint ventures are a way to tap into more major cities, as well as gain operational and cost-saving benefits. NS is deriving both from the Meridian Speedway venture with KCS.
In 2005, the Class Is teamed up to expand capacity and increase train speeds on the 320-mile Meridian, Miss.-to-Shreveport, La., line. NS will spend $300 million on capital improvements — projected to conclude next year — such as new signal systems, siding extensions and double-track segments. KCS retains a 70 percent interest in the venture and NS, 30 percent.
The Meridian Speedway provides NS a short, fast and direct route to and from the Southwest to take on a larger share of intermodal traffic moving between West Coast ports and the Southeast.
“We developed a model through which we can effectively extend a component of our franchise and invest to strengthen non-NS routes without resorting to a merger,” says Moorman.
The same can be said of NS’ Patriot Corridor joint venture with Pan Am Railways (PAR). Earlier this year, the companies reached an agreement to establish the corridor between Albany, N.Y., and the greater Boston area. Each would retain a half interest in Pan Am Southern, a newly formed railroad company.
PAR plans to transfer its 155-mile mainline between Mechanicville, N.Y., and Ayer, Mass., to the joint venture, along with 281 miles of secondary and branch lines (including trackage rights) in Connecticut, Massachusetts, New Hampshire, New York, and Vermont. PAR’s Springfield Terminal Railway subsidiary would provide all rail services.
NS plans to provide cash and property valued at $140 million, $87.5 million of which would be spent the next three years to improve the corridor, such as through terminal expansions, and track and signal upgrades.
In July, NS and PAR announced plans to build a $40 million intermodal and automotive rail logistics center on the site of a former rail yard in Halfmoon, Mechanicville and Stillwater, N.Y. Construction will begin in first-quarter 2009 and conclude in April 2010. The state of New York will provide $3 million for the facility.
The corridor will provide opportunities to increase automotive and intermodal traffic, and ease bottlenecks.
“We determined you can’t always resolve bottlenecks yourself with your own network,” says EVP of Planning and Chief Information Officer Debbie Butler.
The Patriot Corridor also will be the second high-speed route into Boston, says Director of Strategic Planning Marcellus Kirchner.
“CSX has the first, which they got in the Conrail deal,” he says.
But NS and PAR need to obtain Surface Transportation Board (STB) approval before they can establish the route. In June, the board ruled it would scrutinize the deal as a minor transaction. Comments on the joint venture were due Aug. 11 and rebuttals were due Sept. 5. The STB expects to issue a final decision on or around Oct. 20.
However, NS is concerned how the deal will be perceived by the board, says Butler. Last year, STB members didn’t judge a joint venture with the Watco Cos. Inc. in Michigan the way NS execs expected, and the deal was called off.
The companies had planned to change ownership of several lines in the state from NS to Watco and form the Michigan Central railway under a joint venture. Watco would have been the short line’s parent company and operator, and NS would have been a minority investor in the deal.
Michigan Central would have operated line segments between Ypsilanti and Kalamazoo; Jackson and Lansing; and Grand Rapids, Mich., and Elkhart, Ind. The short line planned to acquire NS’ trackage rights for an Amtrak-owned line between Kalamazoo and the Michigan/Indiana state line.
“The STB determined NS was pulling all the levers, when the agreement wasn’t written that way,” says Butler.
There’s no consternation about the way the board would judge a recent joint venture NS forged with 10 short lines in New York because the deal doesn’t require government scrutiny. In May, the Class I and short lines formed the Empire Link venture to divert short-haul truck moves in New York, New Jersey and Pennsylvania.
The short lines include the Bath and Hammondsport Railroad; Central New York Railroad Corp.; Finger Lakes Railway; Livonia, Avon and Lakeville Railroad; New York, Susquehanna & Western Railway Corp.; Ontario Central Railroad; Owego & Harford Railway; Rochester and Southern Railroad; Wellsboro and Corning Railroad; and Western New York & Pennsylvania Railroad.
NS worked with the American Short Line and Regional Railroad Association to develop the Empire Link to help the Class I exploit under-utilized capacity on its Southern Tier mainline between Binghamton and Silver Springs, N.Y., and branch lines between Corning and
Geneva, and Waverly and Ludlowville, N.Y. The short lines will obtain resources to design and offer services in truck-competitive, less-than-500-mile lanes.
Any of the 10 short lines can market a move — originating or terminating on their line — that involves one or more other short lines and NS as the bridge carrier on the mainline.
The Class I initially will provide all equipment (the short lines have the option to use their own). Rates are set by a series of per-car charges based on the commodity, such as salt or paper.
The Empire Link, which targets single carload traffic, is a new model that NS will pilot to see how it works, says Butler.
“Shippers are part of it. They’ll help us determine what service and price they need,” she says. “We need to prove we can make it work.”
To make any partnership-related project work, NS needs to understand the parameters and plan contingencies, says Moorman.
“A deal requires a lot of upfront planning, both on the transportation and engineering side,” he says.
For example, transportation managers believed certain trains would have to be re-routed from the Heartland Corridor during construction, but because of careful planning, they weren’t, says Moorman.
With each deal, NS continues to learn valuable lessons about PPPs and joint ventures, from regulatory hoops that need to be cleared to public concerns that need to be eased to service designs that need to be tailored to a region. Ultimately, senior execs want the Class I to be known as a preeminent dealmaker.
“We want to be as aggressive and creative on this as anyone,” says Moorman. “Externally, partnerships are our focus now.”
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