(The Virginian-Pilot posted the following article on its website on December 3.)
NORFOLK, Va. — Norfolk Southern Corp. agreed to form a joint venture with Kansas City Southern to increase shipments from Mexico and the southwestern United States to the Southeast, in a deal announced Friday.
Norfolk Southern, based in Norfolk, will invest $300 million in the venture, while Kansas City Southern will contribute its 320-mile rail line – known as the Meridian Speedway – between Meridian, Miss., and Shreveport, La. Norfolk Southern’s investment will pay for capacity increases along the line.
Kansas City Southern, based in Kansas City, Mo., will own 70 percent of the joint venture, and Norfolk Southern the remaining 30 percent.
The venture must be approved by the U.S. Surface Transportation Board, the nation’s rail regulatory body.
“This is an important initiative that will enhance fluidity of the nation’s rail network and improve connections among rail carriers,” Wick Moorman, Norfolk Southern’s president and chief executive officer, said in a statement. “We believe that the transaction represents an innovative way for carriers to work together to add critical rail capacity.”
Michael Haverty, Kansas City Southern’s chief executive officer, called the Meridian Speedway the “best route between the Southeast and the Southwest,” on a conference call with analysts and investors.
“By being able to put additional capacity into the line, we expect to see traffic increase,” Haverty said. “We also expect, as we develop Mexico, to be able to see traffic coming out of Mexico and potentially moving over that line.”
Kansas City Southern doubled its route network to 6,000 miles in April with the purchase of Mexico’s biggest railroad.
The value of rail trade between the United States and Mexico totaled $42.5 billion in the 12 months through September, up 12 percent from the same period a year earlier, according to U.S. Department of Transportation statistics.
Norfolk Southern expects its investment in the venture to reduce earnings 1 to 2 cents a share in the first two years, said Henry C. Wolf, the railroad’s vice chairman and chief financial officer, on the conference call. By the fourth year, the venture should add 1 to 3 cents a share to profit, Wolf said.
Norfolk Southern is forecast to earn $2.70 a share this year and $3.10 a share in 2006, according to the average estimates of analysts in a Thomson Financial survey.
Two-thirds of Norfolk Southern’s investment will occur during the first year after the venture is approved by federal rail regulators, Wolf said.
Norfolk Southern’s stock slipped 8 cents to $44.13 in Friday trading on the New York Stock Exchange. Kansas City Southern shares fell 53 cents to $25.
Kansas City Southern will operate the line, while Norfolk Southern will have the right to haul goods moving by a combination of rail and truck. The venture expands on an agreement between the two railroads that began in 2000.
The agreement includes a guarantee from Kansas City Southern that traffic on the line will at least double to as many as 49 trains a day. The railroad thinks traffic will increase more than that, Haverty said.
Kansas City Southern’s Mexican rail line runs, in part, from the Port of Lazaro Cardenas, on Mexico’s southwestern coast, to Laredo and Brownsville in Texas. The venture with Norfolk Southern will allow shipments from Mexico to move “not only into Texas and the Midwest, but directly into the Southeast as well,” Haverty said.