Mr. James Bond reports

PHMSA/AAR/FRA-NEW REQUIREMENTS FOR RAIL TANK CARS

Kelso Technologies Inc. has provided an update.

The Association of American Railroads, the U.S. Pipeline and Hazardous Material Safety Administration, and the U.S. Federal Railroad Administration have put forth new requirements recommended for rail tank cars used in the transport of dangerous goods. These requirements establish a minimum threshold for railcars transporting dangerous goods, including petroleum crude oil and ethanol. They cover high-flammable trains defined as trains with more than 20 tank cars carrying Packing Group I or II commodities.

This regulatory proposal (HM251) presents the proposed engineering requirements and deadlines for a new class of tank cars that would be used for the transport of flammable liquids including petroleum crude oil and ethanol by rail. There are three tank car construction options under final consideration:

1. PHMSA/FRA tank car (DOT117) to include full head shields, TIH top fittings protection, nine-16ths-inch shell, thermal protection, 11-gauge jacket, reclosing pressure relief valve, bottom outlet valve handle removed and ECP brakes;
2. AAR 2014 tank car to include full head shields, standard top fittings protection, nine-16ths-inch shell, thermal protection, 11-gauge jacket, reclosing pressure relief valve and bottom outlet valve handle removed;
3. CPC1232 tank car to include full head shields, TIH top fittings protection, seven-16ths-inch (jacketed car) or one-half-inch shell, thermal protection, 11-gauge jacket, high-flow reclosing pressure relief valve and bottom outlet valve handle removed.

New tank cars built after Oct. 1, 2015, will have to be built to the new final standard.

Existing tank cars will have to be retrofitted to meet the new standard (except for the top fittings protection) under the following time guidelines:

1. Legacy DOT 111 tank cars are not authorized for Packing Group I after Oct. 1, 2017.
2. Legacy DOT 111 tank cars are not authorized for Packing Group II after Oct. 1, 2018.
3. Legacy DOT 111 tank cars are not authorized for Packing Group III after Oct. 1, 2020.

Relevant to Kelso in these proposals is that the tank car must be equipped with one or more reclosing pressure relief valves with a start-to-discharge pressure of equal to or greater than 517 kilopascals (75 pounds per square inch). The total relieving capacity and start-to-discharge pressure must be optimized to insure the structural integrity of the tank in a 100-minute pool fire and 30-minute jet fire while minimizing the amount of dangerous good that is released by the pressure relief device and if the tank car is equipped with a bottom outlet valve, the valve must be of a type and be arranged in such a way that the valve remains closed during railway incidents, including derailments.

As previously announced Kelso has filed a patent application for a new externally mounted dual-rated high-flow pressure relief valve (DR5010) design for use on new rail tank cars and retrofits of existing rail tank cars as proposed by Transport Canada.

Kelso initiated its DR5010 design strategy based on regulatory concerns and as a result we have created a new DR5010 that based on mechanical engineering innovations that provide safety benefits in both accident and non-accident environments. In general terms in an accident involving fire the DR5010 will significantly lower its operating pressure rating to a level that will keep the valve open in order to evacuate the tank car in less than 100 minutes as required by the Transport Canada recommendations. This is a dramatic change to current technology capability. The DR5010 will enter the AAR approval process shortly after the prototypes complete testing. The company will announce AAR approvals by press release when they are received.

In addition Kelso has a patent application pending for a new bottom outlet valve (BOV) design for use on new rail tank cars and retrofits of existing rail tank cars. The new BOV involves detailed proprietary and engineering knowledge based on specific customer specifications and adoption criteria. Kelso's new BOV design features several materials and mechanical engineering innovations that are intended to meet all new regulations being proposed by regulators in both Canada and the United States.

Kelso calculates that there is potential demand for approximately 50,000 pressure relief valves per year through Oct. 1, 2017, and another 20,000 pressure relief valves per year from Oct. 1, 2017, through Oct. 1, 2020. Based on the company's knowledge of the market and expertise, Kelso is setting its annual production rates to meet the expected annual market volume to handle the demands of the retrofit requirements and new tank car builds. Production rates can be increased if market share is greater than expected. This is a very large revenue opportunity for Kelso to capitalize on over the next six years.

We seek Safe Harbor.