Topic:
RAILROADS; TRANSPORTATION DEPARTMENT;
Location:
RAILROADS;

OLR Research Report


November 17, 2006

 

2006-R-0678

SUMMARY OF MAJOR PROVISIONS OF CONNECTICUT/METRO NORTH RAIL CAR PURCHASE AGREEMENT

By: James J. Fazzalaro, Principal Analyst

You asked for a summary of the major provisions of the M-8 rail car purchase agreement recently signed by representatives of the Connecticut Department of Transportation and the Metro-North Commuter Railroad Company. You particularly wanted an explanation of the provisions relating to the car payment schedule and the car delivery schedule.

SUMMARY

This report summarizes the main provisions of the M-8 rail car purchase agreement involving (1) the car order, (2) costs, (3) cost sharing requirements, and (4) the car delivery schedule. Many of the miscellaneous provisions of the contract have been excluded, but a more detailed summary of them can be provided if necessary.

On August 18, 2006, representatives of the Connecticut Department of Transportation (CDOT) and the Metro-North Commuter Railroad Company signed an agreement to purchase, initially, 300 new “M-8” cars for use on the commuter rail service jointly operated by Connecticut and New York along the New Haven rail line. Options for additional cars makes the maximum number of cars that may be purchased under the agreement a total of 380.

The CDOT/Metro-North agreement calls for purchase of a base order of 210 cars plus another 90 cars called “option cars.” The estimated cost of the 300-car order is $760.3 million. Almost 90% of the costs are associated with the actual building of the cars, but about $33 million will be spent for certain non-recurring costs such as car design, mockups, manuals, and training. Another $47 million is specified for so called “soft costs” such as project and construction management services, acceptance testing, spare parts, and diagnostic test equipment. Connecticut may elect to designate some of the option cars for the Shore Line East rail service or as café cars, but any such cars must be paid for entirely by Connecticut.

The rail car purchase is subject to the same 65% CDOT/35% Metro-North cost sharing that applies to all capital equipment purchases for the main line New Haven rail service under the basic rail service agreement. However, at least initially, Connecticut will be providing considerably more than a 65% share of costs. This is due to the fact that the car purchase order was expanded after Metro-North's five year capital budget was adopted. Thus, the agreement calls for a maximum financial commitment of $660 million from Connecticut and $100 million from Metro-North. After Metro-North's next five-year capital plan is adopted in 2010, it must either assume the car payments until its 35% share is reached or reimburse Connecticut for what it has spent above its 65% share. Connecticut will retain title to the rail cars until Metro-North has fulfilled its obligation.

The agreement calls for the first six M-8 cars to be delivered around July 2009. Car deliveries are projected for regular quarterly intervals until the last 20 of the 300 cars initially being ordered are delivered around April 2012.

CAR ORDER PROVISIONS

The rail car purchase agreement calls for a base order of 210 M-8 rail cars and, concurrent with this base order, exercise of the purchase of an additional 90 cars, known as the “first option.” Thus, the initial order for cars will involve a total of 300 cars. Additional options allow the total number of cars that may be purchased under the agreement to be as high as 380. Any of the option cars may include, at CDOT's election, cars for the Shore Line East service and up to 10 café cars for the New Haven Line service. However, CDOT must pay the entire cost of any Shore Line East and café cars it orders.

The estimated total cost for the 300 car purchase is $760,344,933. This includes the costs of project and construction management, spare parts, and other equipment (designated as “soft costs” in the agreement). The total cost for the 210 car base order is estimated at $582,632,852. This averages to $2,774,442 per car, although the costs include more than the actual car construction costs as noted above. The expansion of the order with the first option cars lowers the average per car cost to $2,534,483.

COST ITEMS

For the 300 car order, approximately 89% of the total procurement cost of $760.3 million is represented by the builder's cost. The remainder includes certain non-recurring costs totaling $33 million and the various “soft costs” totaling just over $47 million. The main soft cost items are $9.39 million for construction management services, $7.5 million for spare parts, and $10.5 million for diagnostic test equipment and special tools.

Table 1 shows the complete cost item breakdown as shown in Exhibit D of the agreement. The total slightly exceeds the $760,344,933 noted above due to rounding in the exhibit.

Table 1: Costs Associated with M-8 Car Purchase

Cost Items and Breakdown for Purchase of M-8 Rail Cars

Builder Cost $680,003,000

Non-Recurring Costs $33,030,000

Design—$10,962,400

Mockup—$1,917,000

Manuals—$4,020,000

Training—$1,931,100

Other—$14,199,500

Soft Costs S47,313,000

Design and Technical Specifications

$2,800,000

2% Car Builder Contingency

$6,800,00

Project Management (DOT and Metro North)

Engineering Labor—$7,422,000

Engineering Travel—$644,000

Miscellaneous Costs—$152,000

$8,218,000

Acceptance Testing

Testing Labor—$196,000

Acceptance Labor—$1,909,000

$2,105,000

Construction Management Consultant Services

Consultant—Design $3,600,000

Consultant—Production $5,790,000

$9,390,000

Spare Parts

(Traction Motors, Wheel and Axle Sets, HVAC, etc.)

$7,500,000

Diagnostic Test Equipment and Special Tools

$10,500,000

Total Procurement Costs for 300 Cars

$760,346,000

Total Procurement Cost Estimate for 342 Cars (PA 05-4 JSS provides funds to acquire at least 342 rail cars)

$896,278,000

COST SHARING PROVISIONS

The basic agreement between Connecticut and Metro-North for providing the New Haven Line commuter service requires costs associated with operation of the main line service, including capital costs for equipment, to be shared with Connecticut responsible for 65% of such costs and Metro-North responsible for 35%. Connecticut is responsible for all costs associated with the three Connecticut branch lines (New Canaan, Danbury, and Waterbury) and Metro-North is responsible for all of the costs of the other commuter lines it operates entirely in New York.

Under the car purchase agreement, Connecticut, at least initially, will provide considerably more than a 65% share of the funding, but will begin to recoup some of these expenditures in 2010 and thereafter when Metro-North adopts a new five-year capital budget. Initially, the agreement commits Connecticut to a maximum expenditure of $660,344,933 for the 210-car base order and the 90-car first option. Metro-North is committed to an expenditure of $100 million, which is the amount it had budgeted in its 2005-2009 Capital Budget for rail car purchases for the New Haven line. At the time Metro-North adopted its 2005-2009 capital plan, discussions for new rail car purchases involved procurement of a base order of 100 cars plus options. Subsequently, Connecticut adopted legislation (PA 05-4 June Special Session) allowing it to buy significantly more cars than the original 100 being discussed. So that the order could be expanded to the current level, and thus take advantage of the economies of scale of a bigger order, Connecticut has had to provide the additional funding. The agreement states that this is consistent with past projects where the parties have provided funding based on cash flow availability without affecting the final percentage allocation of costs.

Metro-North will approve its 2010-2014 Capital Plan in 2010. Upon its approval, and subject to the availability of funds contained in the plan, Metro-North must immediately provide funds for the next payments due under the purchase agreement until it has paid its 35% share of the capital costs for the base order and option cars. As an alternative, the agreement allows Metro North to reimburse CDOT for the amount it has spent that exceeds the 65%/35% cost shares. As protection to Connecticut during the period when its contributions exceed its cost allocation percentage, the agreement specifies that CDOT will have title to the cars purchased with the excess contributions pending reassignment of title to Metro-North when its contributions meet its 35% share of the costs. However, any of the option cars that Connecticut elects to acquire for the Shore Line East service or which are designated as café cars must be paid for entirely by Connecticut and Connecticut retains title to them.

The agreement requires Metro-North to give priority to funding of its allocable share of the rail car procurement over other projects and acquisitions to the fullest extent funding is made available for capital projects under its 2010-2014 Capital Plan.

Table 2 shows the cash flow requirements for the car procurement as laid out in Exhibit C of the purchase agreement.

Table 2: Cash Flow Requirements for M-8 Car Purchase

Cash Flow Requirements for M-8 Car Procurement

210 Base Car Order Plus 90 Car Option

(Figures in Millions of Dollars)

Milestone Date

Car Builder Costs

(includes non-recurring costs)

Soft Costs

CDOT Payments

Metro-North Payments

2005

2.8

 

2.8

July 2006

92.7

0.8

 

93.5

Oct 2006

0.8

0.5

0.3

Jan 2007

20.9

0.8

18.3

3.4

April 2007

0.8

0.8

 

July 2007

20.9

0.8

21.7

 

Oct 2007

20.9

0.8

21.7

 

Jan 2008

0.8

0.8

 

April 2008

0.8

0.8

 

July 2008

41.7

0.8

42.5

 

Oct 2008

0.8

0.8

 

Jan 2009

0.8

0.8

 

April 2009

0.8

0.8

 

July 2009

52.2

19.5

71.7

 

Oct 2009

13.0

1.5

14.5

 

Jan 2010

31.3

1.5

32.8

 

April 2010

39.1

1.5

40.6

 

July 2010

39.1

1.5

40.6

 

Oct 2010

39.1

1.5

40.6

 

Jan 2011

39.1

1.5

40.6

 

April 2011

41.2

1.5

42.7

 

July 2011

48.4

1.7

50.2

 

Oct 2011

85.6

1.3

86.9

 

Jan 2012

52.1

1.3

53.3

 

April 2012

31.9

0.8

32.7

 

July 2012

3.8

3.8

 

Total

713.0

47.3

660.3

100.0

Source: Exhibit C of CDOT/Metro-North Purchase Agreement

Exhibit C notes that the 2010 and 2011 cash flow items are to be modified as Metro-North's funding, acting though its parent organization the Metropolitan Transportation Authority, becomes available. It also notes that the milestone dates specified are approximate and cash flow may be adjusted by three to six months.

RAIL CAR DELIVERY SCHEDULE

The rail car agreement calls for the first six of the new M-8 cars to be delivered around July of 2009. Ten more cars are scheduled for delivery by October 2009 and another 24 by January of 2010. Thereafter 30 cars are scheduled for delivery each of the next eight calendar quarters from April 2010 through January 2012. The final 20 cars of the 300 car order are projected for delivery by April 2012.

JF:ro