New EPA Rule Could Disrupt Navistar Engine Plan

A new federal regulation could keep truck builder Navistar International Corp. (NAV) from offering customers a popular engine size for the company's heavy-duty trucks next year.

The pending rule on stockpiling engines from the U.S. Environmental Protection Agency raises the potential for Navistar to be left without a 15-liter engine option until 2011. That would trigger a drop in the company's second-place share of the North American heavy-duty truck market since an estimated 60% of its heavy-duty trucks are sold with 15-liter engines.

Only the 15-liter engines would be affected in this case because the new rule could prevent Navistar from stockpiling that size engine from Cummins Inc. (CMI) while Navistar completes work on its own 15-liter engine. Navistar manufactures other engine sizes for its trucks.

Navistar maintains it will be able to provide 15-liter engines next year to customers who want them and said the EPA has signed off on its engine-supply strategy.

The Illinois company plans to rely on 15-liter engines built this year by Cummins until a 15-liter engine being developed by Navistar and Caterpillar Inc. (CAT) is ready for sale near the end of 2010. Navistar expects to purchase enough Cummins engines by the end of the year to cover its anticipated demand for 15-liter engines in 2010.

Navistar won't be able to offer customers the 2010 version of Cummins' 15-liter engine because it will have an emissions-reduction system that's incompatible with Navistar's trucks. Navistar's rivals - Freightliner, Paccar Inc. (PCAR) and Volvo - are all using the same reduction system as Cummins.

The threat of losing access to 15-liter engines next year caused J.P. Morgan on Thursday to lower its rating on Navistar's stock to "neutral" from "overweight."

Other industry analysts, however, said the rule poses little risk to Navistar's use of 2009 engines as a stopgap solution.

The EPA would "have to prove you're intentionally doing it to avoid the new emissions standards, and that would be hard to prove," said Brian Rayle, an analyst with Northcoast Research in Cleveland.

Stricter federal standards on nitrogen oxide pollution have forced engine builders to add elaborate systems for treating diesel-engine exhaust beginning next year. Those components have added several thousands of dollars to the cost of 2010 diesel engines.

The EPA wants to restrict 2009 engine production to 2009 truck orders by prohibiting truck makers from stockpiling lower-cost engines this year.

"An engine manufacturer cannot sell engines in a current model year for the purpose of having them installed in a future model year's vehicles ... when the number of such engines exceeds normal inventory requirements," the EPA said in an explanation that accompanied the release of the rule last month. Final adoption of the measure is expected by the middle of December.

Navistar Chairman and Chief Executive Daniel Ustian on Thursday said the company's engine plans have been vetted by the EPA.

"They're well aware of what we're doing," Ustian said in a conference call with Wall Street analysts. "Our transition engine build is consistent with what the EPA has outlined in the rule making."

A spokeswoman for the EPA declined to comment on how the proposal would affect Navistar.

The company is already at odds with the agency over its guidelines for complying with the 2010 emissions standards. Navistar has accused the EPA of disregarding its own procedures in certifying Selective Catalyst Reduction, which douses diesel exhaust with a mixture of urea and water to reduce nitrogen oxide emissions. Navistar is the only truck maker in North America not deploying the system. It's using a reduction technology that recirculates diesel exhaust through its engines. Navistar's objections are pending in the U.S. Court of Appeals.

Navistar's stock was recently trading down 0.52% at $41.95 a share.

-By Bob Tita, Dow Jones Newswires; 312-750-4129; [e-mail]