Marcellus shale-related activity has been a growth driver for North Shore Railroad Co., but it hasn't been the only one

— by Julie Sneider, assistant editor

Todd Hunter recalls attending a dinner in early 2008 when a Universal Well Services Inc. representative tipped him off that something major was about to hit central Pennsylvania's economy.

"'Guys, hang on,'" the Universal Well Services official told Hunter, vice president of marketing and sales at North Shore Railroad Co. "'[The Marcellus Shale drilling] is coming, and it's going to be big.'"

Around that same time, the two clerks who staffed the normally quiet Recorder of Deeds Office in Williamsport, Pa., were suddenly swamped with visitors lining up out the door to conduct title searches on properties for sale in Lycoming County. Hunter, along with North Shore President and Chief Executive Officer Gary Shields and officials with the Susquehanna Economic Development Association Council of Governments Joint Rail Authority (SEDA-COG JRA), soon learned the visitors were land scouts for out-of-town gas and energy companies interested in buying or leasing property for the Marcellus Shale gas exploration boon that was about to strike.

The well company rep's tip was on the mark. By August 2008, the Williamsport-based Lycoming Valley Railroad — one of six short lines North Shore operates — hauled its first carload of frac sand used in the shale-drilling process. Today, North Shore Railroad Co. is handling about 8,000 to 10,000 carloads of Marcellus-related business annually, Shields says.

The rapid expansion of exploration and drilling in the Marcellus Shale play has had an enormous impact on Lycoming Valley Railroad and the surrounding Williamsport area, which Hunter calls "ground zero" for much of the Marcellus activity.

"And being a regional city, Williamsport has a lot of the attributes that the gas companies want, such as fuel, hotels, people and supplies," he says. "Basically, it's a drop-off point, and incidentally, that's where the railhead is."

The Lycoming Valley Railroad serves customers along a 34-mile line from Montgomery to Avis, Pa. It's been transporting frac sand, pipe and brine water for the gas drilling process, with opportunities for other shale-related commodities to be hauled in the future, Hunter says. As the shale development spreads, North Shore's other lines could end up with some of the spillover business, he adds.

In addition to the Lycoming Valley, the privately owned North Shore Railroad Co. operates the Nittany & Bald Eagle, North Shore, Juniata Valley and Shamokin Valley railroads under a long-term contract with the rail authority.

Northumberland, Pa.-based North Shore also operates the Union County Industrial Railroad, which is owned by a group of private investors. SEDA-COG JRA and the private investors own the track and right of way; North Shore owns, operates and maintains its 25 Electro-Motive Diesel locomotives, maintains the track and employs 96 workers to operate the six lines. The railroad company connects with two Class Is: Norfolk Southern Railway and Canadian Pacific.

Combined, the short lines cover more than 200 miles of track and carry about 32,000 carloads per year.

The Shale Factor

The Marcellus Shale boon's impact on North Shore and the region is evident in a number of ways. In 2010, Williamsport became the country's seventh-fastest-growing metropolitan area, according to the U.S. Bureau of Economic Analysis.

To keep pace with the spurt of business, the JRA applied for and received a $10 million Transportation Investment Generating Economic Recovery (TIGER) II grant to expand rail capacity. The funds were obligated in 2010 and 2011 for 14 rail infrastructure improvement projects, ranging from new sidings to bridge rehabilitations. Most of the projects were necessary to accommodate Marcellus Shale-related business.

Among the TIGER II-funded projects were the construction of 7.8 miles of sidings and the expansion of the Lycoming Valley's Newberry rail yard. Newberry accommodates up to 1,200 cars, making it the largest yard between Harrisburg, Pa., and Buffalo, N.Y., Shields says.

The Marcellus activity required the Lycoming Valley to bump up its service hours from five to seven days a week and from one to two shifts per day. Accordingly, North Shore employment has ballooned from the mid-70s three years ago to 96 as of last month, says Shields. The employees hired over the past three years — including those to fill positions in train service, maintenance of way and maintenance of equipment — have gone to work for the Lycoming Valley primarily for shale-related activity, and for the North Shore, Juniata Valley and Nittany & Bald Eagle lines due to growth in business with other industries.

Finding workers has become more challenging as gas companies move into the area, recruit hundreds of workers and offer high-paying positions. For example, energy company Halliburton, which is building a $10 million facility in the Williamsport area, plans to hire about 600 people.

"The competition for additional quality people has become very intense," Shields says. "The way we [compete] is that we offer family-sustaining wages, we offer probably one of the best employee benefit plans, and we try to provide a great work environment for all of our employees."

Although the shale-related activity has been a significant driver of North Shore growth, it hasn't been the only one. North Shore serves a variety of customers and industries, ranging from food manufacturers to plastics and chemical companies to paper mills and forest-product operations to a nuclear power plant. The customer count — it's about 100 — continues to grow, Hunter and Shields say.

"We are enjoying the resurgence of the rail renaissance," says Shields. "Some of it has to do with rail being an environment-friendly mode of transportation."

A sampling of the commodities North Shore carries includes anthracite and bituminous coal, steel, aluminum cable, asphalt, scrap, chemicals, fertilizer and products used to make cat food, Pop-Tarts®, Cheetos®, potato chips, diapers and plastic bags. It's easier to name the commodities North Shore roads don't carry — coil steel, traditional intermodal on flat cars and new vehicles, Hunter and Shields say.

"One of the benefits of our operations is that no one customer has more than 10 percent of our business," says Hunter. "Obviously, we have a lot of operations related to the Marcellus Shale. What is interesting is that the Marcellus gets all the press, but we could live without it [because of] our core business. While it's fantastic to be participating in the shale development, it's not our total book of business."

It's Not Just About Shale

North Shore's book of business has evolved quite a bit since Dick and Mimi Robey founded the company in 1984. A year earlier, SEDA-COG formed the rail authority as part of a public effort to preserve rail service to local industries in eight central Pennsylvania counties.

At the time, Conrail was selling off or abandoning unprofitable rail lines that served central Pennsylvania as far back as the mid-1800s. Local manufacturers were concerned the line sell-off might hurt their access to freight-rail service, so SEDA-COG formed the rail authority to ensure service would continue. The authority started with the Nittany & Bald Eagle Railroad, currently a 70-mile line, and the 43-mile North Shore Railroad, in 1984; it bought what became the Shamokin Valley Railroad in 1988, and the Lycoming Valley and Juniata lines in 1996. The 12-mile Union County Industrial Railroad was formed out of leftover track resulting from a number of railroad mergers and sold by Conrail in 1995; North Shore has operated it since then.

The company has operated JRA's roads in a public-private partnership that has worked well for the region's manufacturers, says JRA Executive Director Jeff Stover. The success of the partnership was noted in a recent World Bank report, which cited the public-partnership as an example of using freight-rail service to attract economic development to rural areas. The report, "Freight Transport for Development: A Policy Toolkit," features 30 case studies from around the world and cites the "coordinated efforts" between public and private stakeholders for retaining and increasing thousands of jobs in central Pennsylvania.

"While the impetus for the initial preservation efforts was simply to preserve existing industry, the stakeholders — the JRA, the railroad operator [North Shore] and to some extent even the shippers — took a long view towards leveraging the public rail investment to achieve economic growth," the report states.

The financial arrangement between the JRA and North Shore has helped fund capital improvement projects, the report notes. Under the arrangement, the JRA receives 10 percent of gross rail carrier revenue from North Shore. When NS uses the short lines, the JRA receives 15 percent of gross revenue associated with the traffic. The authority also generates revenue through utility easement leases, property rentals and sales.

The authority's revenue — about $1.5 million per year, according to Stover — is recycled back into the rail system's infrastructure. North Shore is responsible for infrastructure maintenance and JRA is responsible for the larger capital improvements. Currently, the authority is pursuing four major bridge projects through 2013, Stover says.

"We're trying to get through 2013, then we will take stock of where we are," he says. "The system is strong, and we're looking to improve what we have and continue to build partnerships with a variety of entities, developers and the industrial development community."

A Customer-Focused Partnership

Most of the manufacturers that campaigned to preserve rail service in the early 1980s no longer exist in the area, but the partnership has helped attract new companies to replace those that left. Despite the turnover, the railroad service "hasn't just survived, it has thrived," says Hunter.

And from what Stover hears from the railroads' existing customers, they're satisfied with the rail service they're getting through the public-private setup. That's why the JRA has gone on record as being opposed to a recent unsolicited offer to buy the short lines' assets, he says. If a private entity bought out the SEDA-COG JRA's rail lines, there would be no certainty that a private owner would continue rail service to other manufacturers over the long term, which would ultimately impact the entire region's employment picture, says Stover.

"We feel the model we have best serves the region, and the important part of it is that the customers that are provided the service do not want to see a change," he says. "In today's business climate, uncertainty is not something they want to have as far as rail transportation goes."

Customer satisfaction has been at the heart of North Shore's mission since the Robeys founded it in 1984, says Shields, who became CEO when the Robeys retired two years ago. Keeping customers happy is key to North Shore's future, he says.

"It sounds corny, but basically what we want to do comes down to four distinct areas: to be the most customer-focused and safest transportation system possible; to provide quality regional rail service to our customers; to conduct our business with the highest degree of integrity and professionalism; and to be responsible civic partners with the communities we serve," Shields says. "That's our mission statement, and that's what we're going to do as we move forward."