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December 2015
By Jeff Stagl, Managing Editor
When it comes to real estate, it’s often more advantageous to own a property than to rent or lease it. One of the benefits: A property can be controlled according to an owner’s wishes rather than a landlord’s dictates.
For that reason, Norfolk Southern Corp. last year sought to purchase a Delaware & Hudson Railway Co. (D&H) line from Canadian Pacific, the route’s owner since 1991. NS previously retained overhead hauling and trackage rights to operate on the line.
NS is the principal user of the D&H South Line, moving about 80 percent of all freight traffic over the 282-mile route between Sunbury, Pa., and Schenectady, N.Y. By controlling the line, the Class I could bolster service performance, tap new markets and better compete for traffic in the consumer-rich, truck-reliant New England region, NS senior executives concluded.
So, the Class I struck a $214.5 million deal with CP in late 2014 to purchase the track segment, which dates back to the Delaware & Hudson Co.’s movement of anthracite in the 1800s. After the Surface Transportation Board signed off on the acquisition in May and the two parties finalized the transaction four months later, NS assumed ownership on Sept. 21.
The D&H South Line connects with NS’ network at Sunbury and Binghamton, N.Y. The Class I now operates single-line routes from Chicago and the Southeast to Albany, N.Y., and intermodal terminals in Scranton, Pa., and Mechanicville, N.Y.
Through the transaction, NS gained a more direct connection to Pan Am Southern, its joint venture with Pan Am Railways that operates a 115-mile corridor between Mechanicville and Ayer, Mass.
In addition, the Class I retained overhead trackage rights for lines into Schenectady, Crescent, Mechanicville and Saratoga Springs, N.Y.; acquired D&H’s car shop in Binghamton; and obtained yards in Taylor, Pa., and Oneonta, N.Y.
For CP, the transaction generated shareholder value and better aligned the route with the railroad that moves the most traffic over it, said Keith Creel, the Class I’s president and chief operating officer, in a Sept. 18 press release. For NS, the acquisition broadened its geographic coverage in the heavily populated Northeast.
“One of the substantial operating benefits is that we now have a direct link to northeast Pennsylvania, New York and New England, which will allow us to provide better service for our customers,” said NS Chairman, President and Chief Executive Officer James Squires in an email. “We are confident in the economic potential of this region and believe that the area will benefit from being connected to our network in the eastern United States.”
The deal enables NS to provide same-line service to its large new intermodal terminal in Mechanicville and open up access to key markets in the region, says Stifel Financial Corp. analyst John Larkin.
“Direct ownership allows them to compete on a more level footing with CSX in western Pennsylvania, New York state and New England,” he says.
The line also will help NS compete with trucks, which transport the majority of freight in the New England area. The Class I now can better control its service product and change train operation plans to adapt to shippers’ demands, says NS Vice President of Strategic Planning John Friedmann.
It became clear to senior execs that a business relationship with CP/D&H was necessary after the Conrail split with CSX in 1999, when NS obtained about 6,000 route miles of track in the Northeast. Leasing D&H’s line since the split provided the Class I a more effective connection “with the rest of the world,” says Friedmann. Their association has evolved over time and the line purchase was a natural evolution of the relationship, he says.
Now, the business relationship between NS and CP might take on an entirely new meaning. CP’s leaders on Nov. 17 announced they sent a letter to NS’ top brass proposing the two Class Is merge via a CP buyout to form a large transcontinental railroad (read sidebar from December issue).
NS senior execs and board members plan to carefully evaluate and consider the proposal in the context of the company’s strategic plans, according to a press release issued Nov. 17. Although CP’s overture likely diverted some of their attention from other important tasks at hand, NS leaders nonetheless tried to remain focused on integrating the D&H line and tapping its business-building opportunities.
“We’ve already started to exploit the potential of the line. Now, we need to go out and get more freight,” says Friedmann. “We think we will see small incremental gains in business.”
NS might be able to entice more shippers now that it simplified and smoothed the line’s operations. The Class I eliminated a number of handoffs with CP, says Friedmann. NS previously interchanged intermodal trains in Binghamton with CP, which then handed off the trains to Pan Am Southern in Mechanicville for the final leg to Ayer, Mass.
Involving three railroads in the moves added costs and increased the risk of a service disruption. NS leaders are hopeful that the advantages of single-line service — such as shorter transit times — will pique shippers’ interest.
For example, a merchandise service conducted with Pan Am Southern from Enola, Pa., to Deerfield, Mass., has reduced transit time more than 24 hours because it’s now a more direct train, says VP of Industrial Products Mike McClellan.
“As the operator of the line, we can improve the quality and continuity of service provided in upstate New York and New England,” he says. “We always want to focus on the customer, and this transaction is all about focusing on the customer.”
NS leaders believe there are prime opportunities to build intermodal and automotive traffic along the line due to improved service performance, such as auto shipments involving a large Ford plant in Ayer and a facility in Mechanicville that handles Ford, Chrysler and Toyota vehicles.
The intermodal facility in Taylor is near several large retail distributors and an alcoholic beverage distribution center that’s served mainly by trucks. Longer term, NS also might be able to grow international
intermodal business at the Port of New York and New Jersey. For example, the Class I could establish a service from the port to markets in Albany and Buffalo, N.Y., and Ayer that rely heavily on trucking.
Other traffic sectors show promise, too. By opening up new markets and supply points along the line, NS can target freight involving such commodities as machinery, paper and certain agricultural products, says McClellan.
“We are also looking at the transload footprint in the region and how we might expand our Thoroughbred Bulk Transfer network there,” he says.
From a carload perspective, the railroad for the first time has direct service to northeastern Pennsylvania, especially the Scranton and Wilkes-Barre areas, where Marcellus Shale activity is heavy, says Friedmann. In addition, NS can pursue traffic from many shippers located on adjacent short lines instead of just along the line proper, he says.
The acquisition provided NS access to short lines it hadn’t connected with before. The three main short lines that either are new to NS or have improved connections with the Class I are the Luzerne and Susquehanna Railway Co., Delaware-Lackawanna Railroad and SMS Rail Lines, says Friedmann.
SOURCE: NORFOLK SOUTHERN CORP.
Overall, NS expects to grow business on short lines that connect with Pan Am Southern in New England. Opportunities might include paper products, ag, plastics and building materials traffic.
The Class I aims to convert service-sensitive truck traffic to rail in the region. To that end, NS boosted service frequency for merchandise trains from the three operated by CP per week to one each day.
The Pan Am joint venture was a vital part of the deal, providing a more seamless connection with Pan Am Railways, says Friedmann. CP crews previously helped move Pan Am and other traffic, but now NS uses its own crews. NS hired 150 former D&H crew members — from among its more than 400 employees — to help operate trains on the line.
Pan Am Railways supported the acquisition because it provided another competitive routing option for the company’s customers, said Cynthia Scarano, the railway’s executive vice president, in an email.
“We believe that the transaction will improve opportunities for NS, Pan Am Railways and customers, and we continue to review options to further leverage these benefits through operational and commercial programs,” she said.
In the meantime, NS is trying to further leverage the line’s business-growth potential by upgrading and repairing it. Crews are inspecting the track to search for any rail or tie defects, including joint issues in curve rail.
Workers also are inspecting 100 bridges along the route, which should be completed by 2015’s end, says Eddie Otey, the chief engineer for NS’ Northern Region.
NS has hired 62 track and bridge workers that previously were employed by CP on the D&H line. The Class I also hired a former CP supervisor and assigned six of its own supervisors to the route “to have an NS presence there,” says Otey. In addition, NS added 34 jobs for production gangs from among former D&H workers.
The Class I plans to install 32,000 wood ties and resurface 40 miles of track next year, plus a possible 40 additional miles, says Otey. The tie installation and surfacing work is expected to continue at a steady rate on the line over the next five to six years.
In 2016, crews also will replace 14 miles of curved rail where there are joint issues and install 10 switches.
In addition, workers will perform some tunnel door work to prevent ice build up, and complete some maintenance and switch work at the yards located in Binghamton, Oneonta and Taylor. Moreover, NS plans to perform “fly mapping” procedures to prep the line for positive train control, says Otey.
The line purchase is among a trilogy of key initiatives in the Northeast that includes the 2009 Pan Am Southern joint venture and one large infrastructure improvement project that just got underway: the replacement of the Portageville Bridge in New York’s Letchworth State Park, says McClellan. In late October, NS marked the start of construction on a 900-foot, single-track, steel arch bridge about 75 feet south of the current rail bridge that spans the Genesee River Gorge.
After the $70 million bridge is completed in about three years, the three main objectives will be accomplished, says McClellan.
To help cap off the D&H line integration, NS needs to get service performance to a regular pattern of consistency, says Friedmann.
“We want to improve local service to customers and short lines, and get consistent transit over the line for trains,” he says.
CP likely will keep the other portion of the D&H line because it’s a better fit for their operations, particularly for ethanol and crude oil traffic, such as from the Port of Albany, says Friedmann.
As for the D&H South Line, it’ll suit NS just fine both now and for the future, senior execs say. The route will facilitate strong economic development opportunities for many years to come, said CEO Squires in his email.
Looking back at the acquisition, it helped that NS already operated over the route for a very long time and was quite familiar with it, says Friedmann. Typically, a railroad purchases a line it’s never operated trains on before.
“We didn’t have to start with something we didn’t know,” says Friedmann. “It helped to know a lot of things about it first."
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