Presentation - Mr. Gitomer--"Buckingham Branch Rr."--Lease--"CSX," Finance Docket No. 34495--Oral Argument
| MR. BRYANT: Thank you. Good morning. My railroad career began, I have 34 and a half years with the C&O and CSX and then at age 53, I took advantage of a retirement program that enabled me to try something new and different and that is to buy a short line railroad in Buckingham County and operate it. It was scheduled for abandonment.|
During the 15-year experience at the Buckingham Branch, we have provided shippers transportation option. Otherwise, they would only have trucks. We have focused on the customer. We reinvested earnings in deferred maintenance on the lines. We corrected defects in the tracks. We never had an FRA citation. We have never filed an insurance claim. Our safety record is very, very good.
As a result of our very, very good operating record, CSX invited us along with a number of other short line operators to submit proposals for this 200-mile segment. This process began about a year ago and BB was chosen on March 10 and negotiations began. And negotiations became so, I guess you'd say, good that we had to delay the filing with the STB for about three weeks.
But we finally reached agreement and of course, the big issues were freight revenues by commodities and of course service, the interchange times. But anyhow we reached a agreement and this application, we do not consider it a sham. We don't participate in such. We've met with customers and they're ready for change and they've been real nice and about 18 of them have written letters in support of our application.
Of course dealing with the customers has been the exciting part of this process and the industrial development opportunities are very good on this section of railroad because we'll bring some stability to it and a 20-year lease will enable us and enable customers because when you're looking at a long term investment, 20 years seems to be a key timeframe.
Our dialogue continues with Amtrak and we continue and expect to have a good relationship with them. We recognize our responsibility to keep the track in condition and to provide access for the three trains that run daily there, they are on the property about a little over four hours, about four hours and twenty minutes. So we expect to provide and do our part to keep that operating smoothly.
We have enjoyed a good relationship with the Norfolk Southern and the shippers are very interested in this additional option that they will have to reach their market. Buckingham Branch's relationship with the Commonwealth of Virginia has been constructive in the past 15 years. They have been supportive of us because it relates to highway conditions and of course, the optimum for to highway safety and highway conditions is to put some of the heavy loads on the railroad. We expect this relationship to continue.
BB is aware of the magnitude of this obligation and we are fit to maintain and operate the line. We anticipate, as we have in the past putting freight revenues or a portion of it back into the property. And of course, this year the tax credit for short line railroads will be a very helpful part of this process.
Track inspection and maintenance teams will work out of Doswell, the Charlottesville area and Staunton to optimize effectiveness for assigned track segments. Track inspections will be made at least twice weekly on the Amtrak route and at least once weekly between Richmond and Gordonsville. Of course, the train crews will also provide helpful information about track conditions and of course, defects will be corrected promptly. It's much more efficient to correct the defects than to clean up from a derailment and then repair the tracks.
We are confident that our dedicated staff will be effective in meeting our commitments as outlined in our maintenance plan. Of course, when necessary, we will engage the services of responsible contractors. We intend to maintain our good record with the Federal Railroad Administration throughout the term of this lease and we've had a good relationship with them on the Buckingham Branch and we appreciate an extra set of eyes to check our track and it gives us a special comfort level.
BB's team is committed to providing responsive service that meets existing needs and compete and earn new traffic. We and the shippers and receivers are now actively working to meet the growing need for a reliable rail service and options to overloaded highway systems.
We are optimistic and we have ordered three additional locomotives for a total of five to serve this line. Three additional high rail vehicles have been ordered for track inspection. We are hiring people now and are engaged in developing a training program and an orientation program.
We will be ready and we will be successful. BB intends to provide a safe, sound and efficient rail transportation system. I'll be glad to answer any questions that you might have. Thank you.
CHAIRMAN NOBER: Okay. You're all done. Mr. Mulvey. Why don't we ask questions now and then we'll ask other ones of the others.
VICE CHAIRMAN MULVEY: In the lease agreement between CSX and Buckingham Branch, it calls for a different annual rate if the connections are made to a line other than CSX. What's the basis for this differential rate, charging a different rate for connections made? It's $140,000 annual rent if the connection is made with CSX. But you suggest that it will be higher and I'm curious as to how much higher. Is that specified in the agreement?
MR. GITOMER: I believe it is specified in the agreement, in the confidential portions of the agreement. But the reason is that CSX calculated the lease of the line based on the interchange of a certain volume of traffic. If there is a different volume of traffic or if traffic is interchanged elsewhere, CSX believes the lease payment should increase.
VICE CHAIRMAN MULVEY: Is there a cost basis for that? Is there a cost basis for that higher payment or is it based upon other considerations?
MR. GITOMER: The additional payment is both cost based and competitive based.
VICE CHAIRMAN MULVEY: I'd be interested in what the cost basis would be. Is there a time limit in the agreement to say ,more for interlining with other? Is this what is called a paper barrier?
MR. GITOMER: No, this is not a paper barrier. It does not prevent the Buckingham Branch from interchanging traffic with any other railroad. The other Class I railroad on that line is Norfolk Southern.
VICE CHAIRMAN MULVEY: Well,as for the barrier to entry is anything, that increase the cost of entering a market for a would be competitor. It doesn't mean it has to be a physical barrier, but anything that raises the cost of a potential competitor that the incumbent market from does not incur is a barrier to entry. So it doesn't have to be a requirement that you pay charges, but if you establish a rate that is so high that it would make it impossible, for other railroads to interchange with Buckingham, that, in effect, would be a barrier to entry, would it not be?
MR. GITOMER: If that were the case in this proceeding. However, in this proceeding, the additional rent that Buckingham pays is not so high as to prohibit them from interchanging with Norfolk Southern. As you heard Mr. Bryant say in his statement, Buckingham Branch and the shippers along the C&O line are looking forward to being able to interchange with Norfolk Southern for additional competitive options.
VICE CHAIRMAN MULVEY: Is that rate, that differential rate, in Article 5, Section C of the agreement?
MR. GITOMER: Please give me a minute.
VICE CHAIRMAN MULVEY: Okay. Sure.
MR. GITOMER: Do you mean Article 5 of Exhibit F to the agreement?
VICE CHAIRMAN MULVEY: Yes.
MR. GITOMER: That is correct.
VICE CHAIRMAN MULVEY: For some reason, although this doesn't say that this is a public copy, I must have gotten a redacted copy. Article,5 it is blank in all the copies that I've seen. I've checked several copies. We thought that there might have been a problem.
MR. GITOMER: No, there was no problem. When we initially filed the application, we filed a public version with that information redacted. We also filed I believe ten or 20 copies of the entire lease agreement that were filed under the Confidential seal in the confidential document.
VICE CHAIRMAN MULVEY: It wasn't here in the public version though.
MR. GITOMER: No, the public one doesn't have it.
VICE CHAIRMAN MULVEY: Okay. I'll look at the private one because as you know, under Section 11324 which governs transactions with the smaller railroads, it does say that the Board shall approve an application unless, and the language says, "as a result of the transaction there is likely to be substantial lessening of competition, creation of a monopoly," which is not the case here,"or restraint of trade in freight transportation in any region of the United States." My concern is whether or not these kinds of paper barriers do represent a restraint of trade and in fact, make it difficult to have competition in these markets.
MR. GITOMER: My response would be that CSX and Buckingham Branch have negotiated the terms of this. Again, as you heard Mr. Bryant say earlier, he expects to be able to interchange traffic with the Norfolk Southern under this lease agreement and under Exhibit F of the lease agreement which provides for this additional rental payment. I don't want to speak for Mr. Bryant but two points (1) he wouldn't have agreed to this if he didn't think he could interchange traffic with Norfolk Southern and (2) the second point being that therefore the additional rent is not high enough to be either a paper barrier or a barrier to entry.
VICE CHAIRMAN MULVEY: Okay. Thank you. Following up on that, is it your understanding that this additional amount would not foreclose your interchanging traffic with Norfolk Southern?
MR. BRYANT: That was the most difficult issue that we had in negotiating with CSX and we went around and around on that issue because access to the market is very important to us and to the customer and we have reached the terms which we think are workable.
VICE CHAIRMAN MULVEY: Okay.
CHAIRMAN NOBER: Doug.
COMMISSIONER BUTTREY: Mr. Bryant, I was listening to your comments earlier about your early retirement and I was thinking about my early retirement as well. I think you and I both may have jumped from the frying pan into the fire as they say. You mentioned that your line was going to be taking on some more power to be able to meet the demand on that line.
MR. BRYANT: Yes.
COMMISSIONER BUTTREY: What type of specialized cars are there? Do you have those or are you going to have to acquire those or do you require those to meet the customers' demands in that market?
MR. BRYANT: Do you mean rail cars for hauling freight?
COMMISSIONER BUTTREY: Yes.
MR. BRYANT: Yes, and we are talking with people that are in that business, of course, in addition to CSX and Norfolk Southern. We're talking to rail car leasing companies and we have some exciting opportunities that we think will work out very well.
COMMISSIONER BUTTREY: Okay. I was just curious about what the train speeds are like in that part of the world. I'm somewhat familiar with that area, but I was curious what the speed limits are on that line and how your speeds on that line, the velocity on the line, is going to compare to the velocity on the lines prior to the transaction.
MR. BRYANT: Well, we expect to maintain the same speed level and in the case we need to maintain it to enable our train crews to have a reasonable work day. So the track conditions need to be adequate to accommodate trains that can meet the needs of that day.
Of course, we will operate four trains a day and five days a week. All of our train crews will be stationed and they will have a regular assignment and they have their work to do and they'll go home each evening.
DR. FOSTER: If I might, the majority of the traffic on the line moves on either Class II or Class III track which I believe is 25 and 40 mile an hour traffic.
COMMISSIONER BUTTREY: Do you anticipate any major maintenance projects on that segment of the line in the next short period of time? Someone had said earlier, I think the comment was made, that there may have been some deferred maintenance issues on the line at some point and you had said I think pretty emphatically that you had very vigorously attempted to address those matters and those issues.
MR. BRYANT: Yes.
COMMISSIONER BUTTREY: I was wondering if you have some outstanding major maintenance issues that are looming on the horizon.
MR. BRYANT: Well, I don't consider them outstanding. I would consider them normal in our industry and of course, the key is to respond to the need and if there's a track condition that you're fearful is going to put you on the ground, you do something about it right away. But yeah, we intend to do that.
But as far as any large immediate capital expenditures, we have not planned such. We're going to meet the needs. The trains are operating every day now and safely. So we sense and we know when the track inspections show where the needs are to be dealt with immediately and we will do that.
MR. O'BRIEN: If I might, Commissioner Buttrey. They have committed to set aside $1.8 to $2.2 million dollars a year for maintenance projects and each year of the lease they are intending to replace up to 20,000 ties. So they have clearly anticipated and are committed to doing this throughout the term of the lease.
COMMISSIONER BUTTREY: Are those concrete ties or are those just regular standard railroad ties?
MR. BRYANT: No, we would stick with the basics, good wood ties.
COMMISSIONER BUTTREY: Basic good wood ties.
MR. BRYANT: Right.
COMMISSIONER BUTTREY: You had mentioned earlier about some of the customer opportunities that are very exciting from your point of view.
MR. BRYANT: Yes.
COMMISSIONER BUTTREY: Are there certain segments of the market where you see the growth coming on that particular segment?
MR. BRYANT: Yes. Well, one of the things we're working on now is movement of sand. Western Virginia needs some good sand from Eastern Virginia and so we see a great opportunity there to handle hundreds of carloads of traffic that's now being trucked from that area over there. That's an area of course we'll need to lease some cars for that purpose. Another thing is there's a barrel and paper movement to the Richmond newspapers. There's a shuttle movement that's being developed and designed and very short haul. It's now going around the horn by truck and we think we can help and relieve the streets and highway systems of Hanover County and at that same time, we think we can earn a few dollars doing that.
COMMISSIONER BUTTREY: That's directly from the pulp plant to the newspaper.
MR. BRYANT: Right. Yes. So we go places every day and that's one of the first things on our agenda is to do this experimental move. Our Assistant Vice President and General Manager, Steve Harold (PH), who is here with us today, is designing that and he's readying some retired boxcars that will come out of service and go into that service.
When we use retired boxcar, we won't be doing interchange. So the same level of the condition of the car would not be provided for an interchange service. It would be movement between the paper mill and customer, Richmond Newspaper. A number of things of that nature that customers have approached us about and shippers and receivers as well. So every time we go and talk to customers, they tell us about opportunities that are there for us. All we have to do is just respond to them with the right rates and the right service level. The rates are already established. They'll be maintained. The service levels will be improved.
COMMISSIONER BUTTREY: Thank you, sir.
CHAIRMAN NOBER: I have basically one question which will tie together some of the points that you've all made up to now. Under the statute which for those of you that have come to these, you know where I always start in these kinds of matters, under 11324(d), does it allow the Board to take into account either safety concerns or paper barrier concerns when considering a transaction like this?
MR. GITOMER: Section 11324(d) is very specific in the factors that the Board can consider. Now we've heard argument from the BMWE that the Board needs to take into account the rail transportation policy as well. We have, in our papers, said that the Board can consider the rail transportation policy as informing its decision under 11324(d).
If you take the transportation policy together with Section 11324(d), the Board certainly can consider other factors, but the primary factor, and that's what the Board has said, to be considered is the competitive concern arriving from a transaction. Secondary factors would be safety, would be paper barriers. You may be able to look at a paper barrier as a competitive impact like Vice Chairman Mulvey, was, I think, beginning to say that it might be a competitive issue. Along those lines, I would like to correct a statement I made.
CHAIRMAN NOBER: Right. Let me ask you that. I mean right now the lines are like CSX. CSX isn't under any obligation to interchange with NS, right?
MR. GITOMER: That's correct.
CHAIRMAN NOBER: Mr. Shudtz can answer that.
MR. SHUDTZ: Yes.
CHAIRMAN NOBER: So if they lease the line under the exact same terms they have now, is that alternating the competitive landscape?
MR. GITOMER: No, it's not.
CHAIRMAN NOBER: Now if you say they had a short line and that no one could interchange and it was being bought and they were eliminating that, that might be a, at least in my own view, change in the competitive landscape, but this, at worst, arguably is just maintaining it. Right? And you might say that the current situation is competitive too, but this isn't making it worse, is it?
MR. GITOMER: No, you are just substituting one railroad for another railroad here. You are not reducing the number of railroads. You're not reducing the number of options that a shipper has.
CHAIRMAN NOBER: Okay. And then on the safety front, where is it in our jurisdiction to consider potential safety concerns? I'm going to ask the other side this same question so they can start thinking about it.
MR. GITOMER: I was looking through the statute looking for that as well and looking through some cases where the Board said it can look at safety, but I think the Board's position, and we agree with it, is that the authority to oversee the safety of the railroad has been delegated to the Federal Railroad Administration and they have a very broad safety program.
As the Board does in major mergers, it works in conjunction with FRA and if FRA has a problem, it would bring it to the Board, but I don't think that it has a problem in the transaction before the Board. But in fact, the safety function was removed from the Board when the Department of Transportation was created. So on an individual basis on an individual case, I think there would have to be a major, major safety problem and probably consultation with the FRA for the Board to take any type of jurisdiction over safety.
CHAIRMAN NOBER: Does somebody else have any more questions?
VICE CHAIRMAN MULVEY: Yes, I think the difference between what CSX can do today with Norfolk Southern and what Buckingham Branch can do with Norfolk Southern is that there's now a lease in place which has differential rates, differential charges, for interchanging with one railroad than the other and that is a different situation than we have today. CSX has no extra cost when interchanging with Norfolk Southern on this line.
Let me ask you a question about something you said early on in your statement that you didn't have any derailments on this line since 2002. Given that we're talking about 200-miles of rail here and given the size of the overall rail network, is not having a derailment on a 200-mile segment particularly unusual? I mean how many are expected? What is the expected value, if you like, of the number of derailments you would get for a 200-mile line segment in this country? It seems to me that that's not exactly a stellar performance. Does anybody know how many derailments there are in the United States every year on a 200 mile rail system?
MR. GITOMER: I do not have that information.
VICE CHAIRMAN MULVEY: You handle 62 trains a day for Amtrak right now including some with cargo Would you say Amtrak is currently satisfied with CSX's performance recently?
MR. GITOMER: I'm not sure that we can characterize Amtrak's position. They will be speaking later and I'm sure they'll be glad to characterize it. However, what we can say is that for 2004, and I may get these backwards, but there is a 95 percent on-time performance for the westbound Cardinal on this line and I believe either 70 or 79 percent on-time performance for the eastbound Cardinal on this line. So I think that's a pretty good performance, especially on the westbound.
VICE CHAIRMAN MULVEY: That's pretty good relative to some other Amtrak routes. I congratulate you for that. To Buckingham, one more question that is currently you're operating a 17-mile railroad. Now you're going to be taking over a 200-mile line from CSX. Do you have any concerns about your ability to increase the size of your operation by a factor often? Does that concern you at all? I know it may not be relevant to our decision, but I was just curious. It has been raised as to whether or not your firm has the experience to do this.
MR. BRYANT: Yes, we can do it. We consider it a great opportunity and the principles are the same for maintaining track and operating trains and being responsible, making commitments on interchanges. We have some pretty strict requirements on that. It doesn't look good if you don't meet your interchange and you don't serve your customers. We do that and we can do that.
And we can just look at this 200 miles as a series of short lines, where it's in two general segments, but really four segments with four train operations. We think we have a good handle on it and we're comfortable with it. Our greatest concerns probably are motorists running into our trains and that really fouls up your day and vandalism. Of course, we will deal with those if they are there too. But no, we feel very comfortable. We're confident we can do the job.
VICE CHAIRMAN MULVEY: Thank you very much.
MR. GITOMER: Vice Chairman Mulvey, if I may. I misspoke earlier when I agreed with you and said that Section 5(c) of Exhibit F governed the additional rent. It does not. That is the trackage rate compensation that CSX is going to pay to Buckingham Branch for operating overhead trains on the line. The additional rent provision is in the lease itself. It is confidential, but it is in Section 4(b) of the lease. If you look at the confidential version, you will see the dollar amount spelled out there.
VICE CHAIRMAN MULVEY: Okay. That's not Exhibit F?
MR. GITOMER: No, it is not. It is in the draft lease agreement itself and it would be Article 4, Subsection b which is entitled "Additional Rent" and that was been redacted from the public version of the lease agreement.
VICE CHAIRMAN MULVEY: We have that, don't we? Okay. Thank you.
CHAIRMAN NOBER: Okay. Now you're going to reserve some time later.
MR. GITOMER: Yes.
CHAIRMAN NOBER: With that, we will turn to our next presenters who are Richard Edelman representing the Brotherhood of Maintenance of Way Employes and Amtrak as well. I'm not quite sure who is speaking for Amtrak.
CHAIRMAN NOBER: Is Amtrak's representative here? Bill, why don't you come up and we'll just do it as one panel if that's okay with you all. Does anybody have an objection to that? Do you?