"Perry's only concern regards battery life. A heavy-duty industrial application could push the batteries to their limits, and it's unclear whether they will hold up for their targeted 10- to 12-year lifespan. If the batteries last for only five years, that could seriously cut into the Green Goat's cost saving. "If battery life goes down, you are not going to get the cost efficiencies," concurs Stehly. "There is that concern.""
Locomotion
RailPower says its green technology is on track
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Relaxing at home on his Vancouver Island farm, Jim Maier serves the hungry locals lined up at the organic café he and his wife own. "We think we bake the best organic bread on all of the island," he boasts. But the 55-year-old Maier, who has attempted retirement on three different occasions, doesn't spend much time tending his vegetable garden these days.
Instead, the professionally trained engineer, who spent eight years as general manager of GE Transportation Systems, and another four as commercial director at Bombardier, is attempting to revolutionize the railway industry. And as president and CEO of RailPower Technologies Corp. (TSX: P), a young Vancouver-based company that has developed the world's first hybrid-electric switcher locomotive, he seems poised to do it.
Switcher locomotives are critical to the railway industry. When a train rolls into a rail yard, switchers--commonly called "goats" by industry insiders--take over. The goats push and pull train cars from one track to the next, helping to break up rail cars and then connect them to others bound for the same destination. An integral part of rail yard logistics, some 10,000 switchers are in use across North America today. About half are operated by long- and short-haul railroads, while the remaining 5,000 are put to work by port authorities, oil refineries, chemical plants, grain terminals or the military.
Despite their importance, most switchers are between 40 and 50 years old and are desperately in need of an overhaul. The majority were once mainline locomotives, and travelled hundreds of thousands of miles before being demoted to switcher status. Powered by cranky old diesel engines that can be difficult to start, especially in cold weather, goats tend to spend much of their time idling. An average switcher churns through approximately 1,100 litres of fuel a day, and spews tons of greenhouse gases and particulate matter into the atmosphere. They are also extremely noisy.
Tough new regulations introduced by the U.S. Environmental Protection Agency, as well as by the Canadian Ministry of the Environment, combined with the rising price of diesel, have finally prompted railway executives to search for a solution. RailPower's Green Goat may be the answer.
Similar to the auto hybrids currently creating a buzz, the Green Goat runs on a combination of fuel, electricity and rechargeable batteries. First conceptualized five years ago by Frank Donnelly, RailPower's co-founder and chief technology officer, the plan was bold enough to enable the talkative engineer to convince friends to lend him $180,000 to start the project. (He later secured a further $1.5 million from the market.) Money in hand, Donnelly purchased an old switcher and then spent a year in a Southern Railway of B.C. shed in the Vancouver suburb of New Westminster, with only a dog for company, tinkering away to create RailPower's initial prototype.
What he created was completely new in railway circles. The 2,000-horsepower Green Goat has 42 custom-designed racks of lead acid batteries weighing upward of 27,000 kilograms, a generator to charge them, and a digital traction-control system that monitors what power goes where and when. The 70- to 285-horsepower diesel-engine generator only fires up to charge the batteries when required.
The Green Goat provides fuel savings of between 50% and 80%, and decreases greenhouse gas and diesel emissions by 80% to 90%. "It is a great idea," says Mark Stehly, assistant vice-president at Burlington Northern Santa Fe, one of the major Class 1 railroads (those with more than $250 million in revenue) looking into buying Green Goats. "It combines both cost efficiency and environmental benefits. That is a plus." RailPower also offers a mini version, the 1,000-horsepower Green Kid, for lighter switching operations.
Gaining acceptance for the products is no easy feat, however. The railway industry is notoriously bureaucratic, and often resistant to change. And gaining approval for investment in new capital equipment takes an extremely long time. Even Maier himself admits that, before he joined RailPower, he was skeptical about the new technology. "When [chairman] Norman Gish first said to me, 'I have this railway company and we make a locomotive that has batteries,' I said to him, 'You are wasting your time. Absolutely wasting your time. The railways don't like batteries."
But the Green Goat's technology is impressive--and any initial glitches are quickly being resolved. What's more, the system is engineered to fit onto a conventional switcher, leaving the original frame intact. As well, the controls are pretty much the same as those in conventional diesel-powered switchers, meaning operators require minimal additional training. Providing this bit of comfort to those who are wary of change, RailPower is making strides in its quest to convince rail executives to pony up $750,000 for the new machines. The Green Goats actually cost less than buying a new conventional switcher, which typically retails for between $1 million and $1.2 million; a used switcher, on the other hand, runs about $100,000. As well, the industry overhauls about 1,250 switchers a year at an average cost of about $330,000 per unit.
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RailPower's increasingly strong position in the market over the past year can largely be attributed to Maier himself, who was hired in April 2003. Executive vice-president Simon Clarke explains it this way: "When I joined the company [in May 2002], people looked at us and said, 'Great technology. Great market. But that is a small company based in Vancouver. It doesn't have the depth of management or depth of railroad expertise to make it in what is a very big and slow-moving industry.' Jim Maier gave us credibility."
Maier's appointment did more than just bring credibility to the company. It also gave RailPower access to an incredible network of railway expertise. Maier's first mission upon joining what was then a tiny eight-person team was recruiting top talent. "I went through my Rolodex and just started calling guys up," he recalls. "I said 'Here is a ticket. Fly to Chicago [where a prototype was being tested], get on the locomotive, and after you have seen it, tell me whether you like it or not.' They all phoned back and said, 'When do I start?'"
An experienced group of 35 full-time employees and about 15 steady consultants is now on the RailPower payroll. The sales and marketing team consists almost entirely of ex-GE Transportation Systems types who, collectively, have been selling locomotives for well over a hundred years. There's no doubt they know how to negotiate a deal. The research and development team has also been beefed up with loads of engineers. "With some of the new engineering experience they gathered from GE, we have a little more confidence that the equipment will be well-engineered," says Burlington Northern's Stehly. In January, RailPower opened a U.S. subsidiary, based in Erie, Pa. But the company isn't hiring anymore. "We have exhausted my Rolodex," Maier says with a chuckle.
The past year has seen more than just a rapidly expanding workforce. Numerous successful Green Goat trials have been carried out by a diversified mix of end-users who collectively have a switcher fleet of more than 3,400. A 16-month trial with Union Pacific, one of North America's largest railway operators, went well, as did tests with other potential clients, including short-line railroad Pacific Harbor Line in Los Angeles, long-haul Calgary-based operator Canadian Pacific Railway, and Class 1 railroad CSX of Jacksonville, Fla.
Green Kids have also undergone extensive testing by the Fraser Valley's Class 2 railroad Southern Railway of B.C., Winnipeg-based grain merchandising firm James Richardson International, and nitrogen producer Agrium of Calgary. On April 2, RailPower announced that a Green Kid will also be going into a 30-day lease trial at the Dow Chemical Canada site in Fort Saskatchewan, Alta.
Ken Perry, the mechanical specialist at CP Rail who oversaw the Green Goat's trial in Port Coquitlam, B.C., can't stop raving about the product. "It is the first topic to come up in the lunchroom," he says. "To save this much fuel--it is too good to be true." What's more, Perry and his colleagues love the fact that the Green Goat's batteries are almost silent. "I never realized how much the noise of the diesel engines can really tire you out," explains Perry, who is now trying to persuade CP execs to purchase a number of Green Goats.
Perry's only concern regards battery life. A heavy-duty industrial application could push the batteries to their limits, and it's unclear whether they will hold up for their targeted 10- to 12-year lifespan. If the batteries last for only five years, that could seriously cut into the Green Goat's cost saving. "If battery life goes down, you are not going to get the cost efficiencies," concurs Stehly. "There is that concern."
Nonetheless, RailPower secured its first firm sale in January. Railserve, a contract switching operation headquartered in Atlanta, Ga., ordered six Green Kids and one Green Goat, using public funding from the Texas Emissions Reduction Program to pay for its order. (Administered by the Texas Commission on Environmental Quality, TERP provides financial assistance to transportation companies that have operations in the state and want to purchase new equipment in order to reduce nitrogen oxide emissions and improve air quality. In 2003, TERP awarded US$26 million in grants; this year it will give out at least $130 million.)
"The Green Goat technology is extremely unique," says Railserve's controller Tim Benjamin. "We get huge fuel savings. We have put another application in with TERP for 13 more switchers." Montreal-based Canac, a subsidiary of Canadian National Railway, also ordered two Green Goats in January with the help of TERP funding.
TERP, along with California's Carl Moyer Memorial Air Quality Standards Attainment Program, has helped to bolster RailPower's bottom line. The public money allows railroads to test the new technology for long periods of time without taking on much financial risk. The next round of funding decisions for TERP is due in a month, and RailPower management is hoping that as many as half of the 42 applications will be approved.
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Financing from the Canadian government has been useful, too. Sustainable Development Technology Canada, a funding organization supported by the feds, recently granted RailPower $1.5 million to build a demonstration fleet of nine locomotives to be deployed in further field trials, with the goal of generating firm orders in the future. (The first five are currently under construction.)
But for RailPower to truly prosper, it can't rely strictly on public funding. The Green Goats must sell on their economic and operational merits alone. "For the stock to really generate some momentum," says Dlouhy Merchant analyst Blake Hossack, "somebody who operates a big railroad, with deep pockets, outside of Texas and California, because that is where you can get [the Goats] for free" has to buy them. Hossack guesses that CSX, a major railroad with operations principally in the eastern U.S., will fill that bill. And while RailPower won't confirm anything, Clarke says the company has been in serious negotiations with a number of different clients for quite some time. "We expect to announce initial sales with Class 1 railroads during the balance of this year," he says.
The growing cadre of analysts covering RailPower, which went public in 2001 and traded on the Venture Exchange for three years before graduating to the TSX in March, meanwhile, seem confident in Clarke's sales predictions. There are across-the-board Buy recommendations on the stock, which made its debut at $3.50 and is now trading around $4.
Hossack, who has a 12-month price target of $4.75 on the stock, highlights RailPower's niche position in a business with high barriers to entry, its focused management team with extensive railway experience, and its pristine balance sheet--no debt and almost $10 million in cash--as compelling reasons to invest.
Competition doesn't seem to be a major concern, either. Even though RailPower's competitors, such as General Motors, General Electric, Alstom and Wabtec, are significantly larger and have vastly more resources, nobody else is marketing a hybrid-electric engine. GM does produce switchers (they leased out about 50 over the past two years), but they are only compliant with Tier 1 EPA regulations. Beginning in 2005, any new locomotive purchased in the U.S. will have to be Tier 2 compliant--a designation the the Green Goat has already received.
RailPower has also been quite diligent in patenting its technology at every step. What's more, Maier indicates that he has been quite busy keeping the competition at bay. "We talk to the [competitors]; we buy equipment from them," he says. "What we have done is be very open about what we are trying to do in the marketplace, the customer we are trying to serve and how we are trying to serve them. They watch us, but as I say, we work together with them."
Even so, it's too early to say that RailPower has the market totally sewn up. A couple of companies in the U.S. that make mining locomotives that run strictly on batteries have made noise about also getting into the business. And Stehly acknowledges that Burlington Northern is "working on other applications that would be competition to the Green Goat," including a switcher that would use multiple truck engines. But being first out of the gate by at least two years could give RailPower a bit of an edge. It seems likely, though, that RailPower is viewed as a potential acquisition target by GM and GE rather than a competitive threat. Clarke says "it is a company that could fit well into a larger organization"; Maier agrees it will likely be an attractive target one day.
That opportunity is far down the line, however, and RailPower is still just gathering steam. With orders for Green Goats primed to reach about 25 this year, and to jump to 50 in 2005, the new technology is starting to take hold. Just in time, too--RailPower has yet to turn a profit. Last year it had revenue of only $131,271 (from leasing during trials) and lost $3 million. (Clarke says the company has raised a total of $19 million, but still has $11.5 million left in the bank.)
Other RailPower products are in the works, as well. Its patented Compressed Integrated Natural Gas Locomotive, or CINGL, could take the company into mainline or long-haul rail applications, and its Rdirect technology will help improve the production of AC electricity by turbines. "We have lots of ideas on how this market could evolve from a diesel locomotive to diesel hybrid to fuel-cell hybrid to fuel cell," says Maier.
In the meantime, though, Maier's focus is clearly on selling goats. And investors and environmentalists alike are hoping that RailPower's innovation proves to be the little engine that could.
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