New Rosenberg facility, rebuilt Victoria-Rosenberg line will make KCS a cross-border intermodal railroad at long last

By Pat Foran, Editor

The tone permeating Kansas City Southern’s April 30 first-quarter earnings Webcast was straightforward and sober, and for good reason. Carload traffic fell 15.2 percent compared with the same 2008 period. Revenue dropped 23.2 percent, with automotive revenue declining a whopping 57 percent.

To be sure, the “is what it is” tenor of the Webcast/teleconference fit. But not just because of the Q1 results. At KCS, it’s always been about the longer haul. The shift in North American trade patterns. The prospects for truck-to-rail conversions and cross-border intermodal growth. And it still is.

Hence the resolute sobriety.

“The economy is the only factor affecting us from a revenue point,” said KCS Chairman and CEO Mike Haverty in kicking off the Webcast. Once the economy recovers, the Class I’s “long-term growth will be driven by new business opportunities,” he added.

Those opportunities could surface sooner rather than later.

This summer, Rosenberg Intermodal Terminal, a 100-acre facility just outside of Houston, will open for business. KCS also will complete the long-awaited rebuilding of the 90-mile Victoria-to-Rosenberg, Texas, rail corridor.

Together, the terminal and line represent the culmination of a cross-border intermodal strategy that serves as the centerpiece of the railroad’s “NAFTA Rail” notion. The Victoria-Rosenberg line will enable KCS to improve cross-border traffic transit times; the terminal will facilitate container and box-car business expansion between key U.S. and Mexico markets. The result: traffic volume increases by later this year.

“This is a real milestone for us,” said KCS President and Chief Operating Officer David Starling in an interview. “We’re trying to be more of an intermodal railroad, and this gets us there.”

A Truck-Competitive Product

The quest dates back to 1996, when the KCS-Transportación Marítima Mexicana S.A. de C.V. partnership won the concession to operate Mexico’s Northeast Railway, re-christened “TFM S.A. de C.V.” In 2005, KCS acquired the controlling interest in TFM, which serves northeastern and central Mexico, and the port cities of Lázáro Cárdenas, Tampico and Veracruz. That gave Haverty and his team the “franchise” it needed to begin developing a “north-south” game plan.

KCS subsequently began completing a number of projects on the Meridian Speedway — a KCS/Norfolk Southern Corp. joint venture line between Meridian, Miss., and Shreveport, La. — to boost the line’s capacity. In 2006, KCS’ Texas Mexican Railway Co. landed a $30 million Railroad Rehabilitation and Improvement Financing (RRIF) program loan to re-tie, re-rail and add sidings to the line so the corridor could accommodate faster trains. But the Victoria-Rosenberg line rebuild was the key.

It’ll enable KCS to shorten the existing route by 70 miles. In addition, the Class I no longer will need to access 160 miles of Union Pacific Railroad’s Rosenberg-to-Victoria line via Flatonia, Texas, reducing the use of UP trackage rights by 41 percent.

“We really didn’t have a good intermodal product from Kansas City and Shreveport into Mexico,” Starling said. “It just makes KCS more of a high-speed, truck-competitive product by getting off the UP trackage rights.”

Specifically, the rebuilt rail corridor will afford several benefits, even if KCS has had to foot more of the bill than originally planned. This year, the Class I’s capital budget was “frontloaded” to fund the line rehab — $43 million of the $100 million KCS set aside went to the Victoria-Rosenberg project, Starling said during the Webcast. To date, the project’s been funded via the capex budget, even though KCS applied for a $100 million RRIF loan in 2007 to help fund it. The railroad currently is not pursuing the RRIF loan.

Regardless, the rebuilt line will help the Class I cut costs. The project was “cost-justified” based on the elimination of trackage rights fees, Starling said.

“With the savings we’ll get by the time this opens, it’ll more than take care of the debt that we recently took out this last year,” Haverty said during the Webcast.

Over the longer haul, the route will pay off much more handsomely. It’ll give KCS access to Houston and enable the Class I to boost transit times “between 12 and 24 hours,” as Starling put it, making the route truck competitive.

“We’re very close to having it tied together,” he said. “We’re still looking at finishing the line by July.”

Ditto for the Rosenberg Intermodal Terminal. Developed jointly with CenterPoint Properties, the facility is part of an 800-acre intermodal logistics park in Fort Bend County, Texas, located 35 miles southwest of Houston.

From Theory to Practice

Phase I will be fully operational when the Victoria-Rosenberg line opens. It’ll consist of two 5,000-foot intermodal tracks with associated parking and loading/unloading facilities. In Phase I, there will be parking for about 500 containers, and space for 620 vehicles for auto unloading. Future phases might include up to six intermodal tracks with total capacity of 45,000 track feet.

“We’re working with CenterPoint to develop an integrated logistics hub similar to what we’re doing with them in Kansas City,” said Executive Vice President of Sales and Marketing Patrick Ottensmeyer.

The Kansas City, Mo., facility features 11,340 feet of mainline track, paved parking areas, gate security, and access to U.S. Highway 71 and state highway 150.

“With the Victoria-Rosenberg line and ramp, we’ll have cross-border, single-line intermodal service, particularly in the Houston-to-Mexico market,” Ottensmeyer said. “That utterly has not existed until now.”

Now that it does, KCS execs are focusing on executing the game plan.

“We’ve gone from the theoretical to the practical,” said Senior Vice President of Intermodal & Automotive Brian Bowers.

Recession or no recession, there’s already considerable interest in KCS’ now-viable cross-border intermodal network, particularly among “truckload carriers not operating in this market, or not on a large scale,” said Ottensmeyer. Meanwhile, all eight of the Mexican automotive plants KCS serves are operating, albeit at reduced levels. Of the four KCS-served General Motors plants, only one is slated to shut down for any length of time.

“In Mexico, you’ve got a modern plant network that’s going to be part of any automotive [post-recession] solution,” Bowers said. “Regardless of who operates the plants, we’ll be part of the equation.”

To hear KCS execs tell it, the railway always was.

“This franchise can’t be duplicated,” Starling said.