Tag: North America

Inside Freight: Takeaways from STB Hearings on Cost of Capital

Posted by | Dec 5, 2007 | |

STB HEARINGS. Yesterday, the STB held public hearings on the Board’s previously announced proposal to revise its calculation of the rail industry’s cost of capital (CoC). The hearings lasted 4 hours and included testimony from the U.S. Class I rails, the DOT and FRA, industry lawyers, lobbyists, and private investors.

BACKGROUND: In August, the STB proposed switching to a CAPM calculation for the cost of equity vs. the existing DCF methodology. For ’05, this would imply a 7.5% CoC vs. 12.2% using a DCF. This is important because a lower CoC implies a lower revenue adequacy threshold for the rails in STB rate cases. Using the current DCF method allows the railroads a higher CoC and thus higher rail rates. Switching to a CAPM and a lower CoC implies relatively lower future rail rates.

KEY TAKEAWAYS: (1) The hearings focused on the merits of CAPM vs. DCF or a combination of the two; (2) Speakers also debated the proposed inputs (specifically the market risk premium) and many argued for a higher cost of equity and implied CoC; (3) BNI and UNP noted a CoC in the low double-digits, while KSU argued for a higher company-specific CoC rather than being subject to the industry avg. of the Big 4 U.S. rails; and (4) The Board seems likely to review the merits of historic vs. replacement costs.

FINAL DECISION LIKELY SEVERAL MONTHS AWAY. Based on comments from the Board members yesterday, it seems like the STB may now favor a CoC based on a combination of the CAPM and DCF calculations. At the end of the day, we expect the STB to arrive at a CoC somewhere between the current DCF and the proposed CAPM numbers. We do not expect a final decision for several months.

REGULATORY NOISE LIKELY TO CONTINUE. While there were positive developments for the rails yesterday, we expect continued noise from the STB and Congress in ’08. Combined with ongoing macro concerns, our sense is the rail stocks could face continued pressure, and we would recommend buying the group on pullbacks.

INVESTMENT CONCLUSION: All things considered, yesterday’s STB hearings were likely more positive for the railroads than we anticipated. Based on the hearings we now expect some form of upward revisions to the final cost of capital adopted by the STB (likely somewhere between the current DCF and the proposed CAPM calculations highlighted in Exhibit 1). However, with likely changes to the original proposals, we believe a final STB decision is now likely several months away. As a point of reference, the STB issued its final decision on simplified rate case procedures this September, nearly nine months after holding public hearings on its proposals. Also coming out of yesterday, we now strongly believe the STB will examine historic versus replacement costs which would be a clear positive for the rails. However, the timing or potential ruling on this issue remains very uncertain given the difficulty in calculating a fair “replacement” value for a railroad.

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Postal Service reach agreement with Rural Letter Carriers Union (U.S.)

Posted by | Dec 5, 2007 | |

A three-member arbitration panel led by neutral Chairman Herbert Fishgold issued its award today, establishing the terms of the new collective bargaining agreement between the Postal Service and the National Rural Letter Carriers’ Association (NRLCA). The award establishes a four-year contract (from Nov. 20, 2006 to Nov. 20, 2010), affecting approximately 68,000 career employees and 55,000 non-career employees who deliver mail to residences and businesses on rural delivery routes.

“We are pleased to have contracts in place with all four of our major unions, bringing the 2006 labor negotiation process to an end,” said Doug Tulino, Postal Service vice president, Labor Relations.

The Postal Service and the NRLCA reached a tentative four-year contract agreement in Dec. 2006, in collective bargaining negotiations, but the two parties entered the arbitration process after the union membership failed to ratify the agreement.

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Western Union and Fundacion Teleton Mexamerica partner to benefit disabled children and families

Posted by | Dec 4, 2007 | |

Zero Transfer Fee Quick Collect(R) Money Transfer Service from Participating Agent Locations in the U.S., Over the Phone and Internet Donations to Benefit Fundraiser

Together with Fundacion Teleton Mexamerica, a leading nonprofit organization in Mexico working with disabled children and families, The Western Union Company), a global leader in money transfer services, today announced a partnership to provide zero transfer fee Quick Collect(R) money transfers within the U.S. – identified as “Teleton Mexico” – in support of this year’s 11th annual Teleton fundraiser.

As an official partner of Teleton, Western Union will provide consumers with zero transfer fee Quick Collect(R) services for money transfers sent from participating Agent locations in the U.S. to the “Teleton Mexico” US account – between December 1 and December 15, 2007. This year, Western Union also will enable consumers in the U.S. to make donations over the phone (1-800-CALL-CASH) and the Internet (www.WesternUnion.com/teleton).

According to Teleton, there are more than 10 million disabled persons in Mexico, of which 2.5 million are children – living in remote parts of the country with no access to medical resources to meet their needs. The annual fundraiser uses all proceeds to support children rehabilitation centers across Mexico.

“Western Union’s support will afford Teleton the unique opportunity to reach the U.S. Mexican population with the hope to help our children receive the necessary services they need for their rehabilitation and integration process,” said Fica Soriano, director promotional activities, Fundacion Teleton Mexamerica.

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Tesco reveals ambitious expansion plans for USA

Posted by | Dec 3, 2007 | |

Tesco is planning to open a 1,000-strong chain of discount stores in the US meaning shoppers in urban towns and cities could be within a mile of one of its Fresh & Easy stores.

Three weeks after launching in California, CEO Tim Mason says he expects Fresh & Easy’s first 15 stores to rise to around 200 by February 2009. “We want the stores to be no more than two miles apart so no one has to travel more than a mile to get to a Fresh & Easy,”

The company is also planning to open a second distribution centre in northern California. Located near Los Angeles, the centre could serve up to 500 stores. Tesco is pursuing an aggressive hard-discount model in the US, with its US stores having similarities to discounters Aldi and Lidl.

Tesco chief executive Terry Leahy has said Fresh & Easy could one day rival the retailer’s UK business.

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Blockbuster challenges redbox in DVD-rental kiosk market

Posted by | Dec 3, 2007 | |

Blockbuster video stores are located on almost every street corner or shopping center in the United States. Blockbuster has 4,800 stores in the 50 states. But the movie-rental powerhouse recently has seen strong competition from other retailers, most notably DVD kiosk companies such as redbox and DVDPlay.

Now, Blockbuster is moving out of its traditional brick-and-mortar stores and moving into its competition’s territory — kiosks.

The company is testing the Blockbuster Express kiosks at select Papa John’s and Family Dollar locations in the Lexington, Ky., area. Plans are to roll out a handful of test kiosks at rural locations in another state, said Randy Hargrove, a Blockbuster spokesman. Officials say they are firmly committed to the traditional store model, but the company wants to explore different ways of getting videos to its customers.

“It’s our job to find ways to bring entertainment to consumers, the way they want it,” Hargrove said. “Kiosks provide us with a new way of doing that.”

The Blockbuster Express will hold about 250 new-release and popular movies and cost USD 1 a day. This differs from Blockbuster’s in-store practices of charging customers USD 4 a movie for two days.

Papa John’s, based in Louisville, Ky., has partnered with Blockbuster before on promotions for the movies “King Kong,” “Superman Returns” and “Spiderman 3.”

“Pizza and entertainment go hand in hand,” said Chris Sternberg, Papa John’s vice president of public relations.

Despite a large number of delivery orders, many Papa John’s locations average a 20-40 percent carryout rate, Sternberg said. Papa John’s hopes these kiosks will help drive more carryout orders, since customers will be able to pick up a movie only at the store.

Blockbuster plans don’t stop at kiosks. The company wants to help customers connect their iPods and BlackBerries to their favorite movies and games in a service the company hopes will drive traffic back to its stores. Blockbuster chief executive officer Jim Keyes said in a November interview the company is talking to both hardware and software makers about turning the video-rental chain into a destination for loading digital-media players with movies and games via kiosks.

Hargrove said Blockbuster plans to explore these new methods and transition into a diverse and exciting place for consumers.

“We will give (consumers) media however they want it,” he said. “By store, by mail, by vending machine and eventually by digital delivery.”

Redbox provides stiff competition

Blockbuster’s foray into the kiosk space comes on the heels of redbox announcing it has surpassed Blockbuster in number of U.S. locations. Redbox CEO Greg Kaplan said redbox started 2007 with 1,950 kiosks and will end the year with an additional 4,500.

“Redbox’s growth potential is unlimited as we continue to expand in major grocery chains and select McDonald’s restaurants, and continue to explore alternative retail partners such as drug stores and mass merchandisers,” Kaplan said.

Despite redbox’s lead in locations, Blockbuster has a commanding lead in the number of actual DVD rentals, company officials say. Each Blockbuster location carries an average of 5,000 different titles compared to redbox’s limited selection — redbox kiosks carry about 500 DVDs. Neither Blockbuster nor redbox would give exact rental numbers, but redbox did acknowledge it does not have as many daily rentals as Blockbuster. Kaplan says redbox is the fourth-largest renter of DVDs in the United States.

As for Blockbuster’s entry into redbox’s territory, Kaplan said redbox’s services are unmatched.

“Redbox executes extraordinarily well,” he said. “Redbox has become very good at designing and deploying a user-friendly kiosk and related software, distributing millions of new-release DVDs to these kiosks each week and, finally, maintaining the kiosks so they are always up and running.

“The redbox service is unrivaled by any

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