(The following story by Karen Mazurkewich appeared on the Financial Post website on May 27.)
OTTAWA — Ontario Teachers’ Pension Plan is once again investing in the little engine that could.
Yesterday, OTPP announced it would invest $20-million in a secured convertible debenture in Railpower Technologies Corp., a Quebec-based firm that builds ultra-low-emission locomotive switchers. This is the pension plan’s second private placement in the company in six months — making it the company’s sole creditor of $55-million in secured convertible debentures, and partner in a new operational plan.
Railpower, which builds diesel/battery hybrid engines that use 30% less fuel and cut emissions by over 50%, has announced that rather than continue to sub-contract its engines, it would begin building an assembly plant in Saint-Jean-sur-Richelieu, Que. The goal is to have the $17-million plant operational by January, 2009.
“This was the only missing block on our path to success,” said Kamila Wirpszo, vice-president, general counsel and corporate secretary of Railpower.
Over the past two years, the company has subcontracted its locomotive orders to two separate factories — Super Steel Schenectady in Glenville, N. Y., and Canada Rail in Montreal — at a financial loss.
“In order to increase efficiency and optimize production to make it as profitable as possible, it was decided [building a plant] was the only route to go,” Ms. Wirpszo said.
Since Railpower was started in 2001, it has never turned a profit — in part because for most of these years, the company has been in a design and start-up phase. In its last fiscal year ending March 31, it recorded a $69.6-million loss despite executing a large contract with Union Pacific Corp. One reason for the shorfall: the company did not accurately cost out production on its contract with Union Pacific. When the company signed its first orders two years ago, the design concept was still on paper. Because a lot of changes occur from the design to the production line phase, the previous management decided to go with a cost-plus arrangement with the manufacturers, Ms. Wirpszo said. As the cost of assembly increased with each design tweak, profit margins eroded. On top of this, Railpower recalled 59 of its locomotives for upgrades, creating another unexpected $15.5-million shortfall.
Despite the losses, Ms. Wirpszo says Railpower accomplished a lot over the past two years. It delivered 98 locomotives to Union Pacific on time, has proven its design, and finally has a grip on the cost structure, she said. Another factor in its favour: Railpower only has one competitor, and with rising fuel prices and emission-reduction legislation, railways worldwide will increasingly turn to green technologies. The company has completed a prototype for a hybrid diesel-electrical power rubber crane that reduces fuel consumption by 74%.
“We have a product that’s in demand and that’s gaining customer acceptance,” Ms. Wirpszo said. “I like to compare our position as a plane on the runway about to take off and turn into a profitable business,” she added.
OTPP’s Wayne Kozun, senior vice-president of public equities, would not comment on the deal. But the two private placements are his endorsement that this engine can push itself up the financial hill.