Fitch Ratings: Railcar phase-out process will be costly

By The Bakken Magazine Staff | August 14, 2015

Regulations for railcars transporting crude oil will be costly for railcar manufacturers and lessors given their short implementation time frames, according to Fitch Ratings—a leading provider of credit ratings, commentary and research. With all mandatory expenses being paid at the top of securitization waterfalls, certain outstanding railcar ABS transactions could see decreased available funds for interest and principal, depending on their respective levels of tanker concentrations, Fitch adds. Low crude prices could also hinder available funds.

The U.S. Department of Transportation and Transport Canada recently issued regulations that require tank cars constructed on or after Oct. 1, to meet the new DOT-117 design, which features thicker shells and head shields, heat-resistant jackets, thermal protection and improved pressure valves. The current fleet of railcars carrying crude and ethanol will either be completely replaced or retrofitted within 10 years.

“Safety has been our top priority at every step in the process for finalizing this rule, which is a significant improvement over the current regulations and requirements and will make transporting flammable liquids safe,” U.S. Transportation Secretary Anthony Foxx, said. “Our close collaboration with Canada on new tank car standards is recognition that the trains moving unprecedented amounts of crude by rail are part of a North American fleet and a shared safety challenge.”

The final rule unveiled a new enhanced tank car standard and an aggressive, risk-based retrofitting schedule for older cars carrying crude oil and ethanol. Under this standard, new cars constructed after Oct., are required to meet the new DOT specification 117 design or performance criteria. Criteria includes the car having a 9/16 inch tank shell, 11 gauge jacket, half-inch full-height head shield, thermal protection, and improved pressure relief valves and bottom outlet valves. Existing cars must be retrofitted with the same criteria based on a prescriptive, risk-based retrofit schedule.

According to the DOT, trains meeting the definition of a high-hazard flammable unit train (HHFUT), with at least one tank car with Packing Group I materials, must be operated with an electronically controlled pneumatic (ECP) braking system by Jan. 1, 2021. All other HHFUTs must have ECP braking systems installed after 2023. The rule restricts all HHFUTs to 50 miles per hour in all areas and HHFUTs carrying cars that don’t meet standards are restricted to operating at 40 mph.

“In our view, the high excess spread structured into railcar ABS transaction as well as increased lease rates should cover a portion of the retrofit expenses,” said Fitch Ratings. “Substantial increases in average lease could turn to foreign oil if lease rates were to increase beyond feasible levels. Railcar lessors are likely to stagger the retrofits, which will avoid pronounced expense periods. In the near term, with limited pipeline options, including the vetoed Keystone XL Pipeline, refineries should maintain their healthy demand for shipment via rail.”

According to the Association of American Railroads, average weekly carloads of crude oil increased substantially in nearly every month from 2009 to 2014. However, in 2015, as oil prices decreased, so did rail traffic in the first quarter. Although the average weekly crude carloads recovered in April and May, the continued low pricing spread will continue to negatively impact demand, Fitch said.