(The following article by Peter Harriman was posted on the Sioux Falls Argus Leader website on February 27.)
SIOUX FALLS, S.D. — In the end, it was about vision.
Dakota Minnesota & Eastern President and CEO Kevin Schieffer saw a future state-of-the-art railroad hauling Wyoming coal to power plants and agricultural and manufactured products from South Dakota and Minnesota to rail metropolises such as Chicago. It would mean thousands of new jobs and millions of dollars of economic development.
Federal Railroad Administrator Joseph Boardman saw a railroad with annual revenues of about $200 million that might not be able to repay the $2.3 billion loan that would make the grand dream possible.
Now, Boardman’s vision threatens Schieffer’s.
As the DM&E’s vision unfolded, political titans clashed. Former South Dakota Gov. Bill Janklow and Sen. John Thune, R-S.D., added fuel to the debate.
But Monday’s decision came down to the money.
The Federal Railroad Administration on Monday denied a loan DM&E officials hoped would be the cornerstone of financing a $6 billion reconstruction of the railroad across Minnesota and South Dakota and extending it more than 200 miles to Wyoming’s Powder River basin coalfields. It also would repair existing lines.
Vows to continue
As the project developed since its proposal in 1998, Schieffer’s tone has generally been optimistic, frequently jaunty when discussing it, despite political opposition to the project. On Monday, his sentences trailed off, his voice was flat. It was not a good day for the DM&E. But he insists the new railroad will be built.
“The question going forward is not whether to continue, but the scope and pace,” he said.
The federal agency’s decision, however, highlights the DM&E’s fundamental problem.
Schieffer’s bold assertion notwithstanding – “There are always ways to address things like those funding and structural issues. It boils down to numbers” – the DM&E did not receive financing for its project.
This despite DM&E’s regulatory approval in 2002 and ability to withstand legal challenges to that approval.
Through the past decade, particularly the past year, a buzzing hornet’s nest of political opposition has assailed the DM&E’s project and its federal loan application. The Bush administration twice tried to eliminate the Federal Railroad Administration loan program. But economics sealed the DM&E’s doom.
Frank Wilner cast a speculative eye on the the project last year when Schieffer announced he was seeking the federal loan.
“An economist looks at this project and says, ‘If it’s as good as everyone asserts it is, why can’t they get private sector funding?’ “ Wilner said.
“If this is so essential to electrical utilities, why aren’t electrical utilities investing in it?”
Wilner is former chief of staff of the federal Surface Transportation Board, the agency that approved the DM&E project.
During its history, the DM&E has been rumored to be a stalking horse for anonymous investors. Without flatly denying the railroad was developing the Powder River Basin project for behind-the-scenes investors who would take it over, Schieffer has indicated his goal is to build the DM&E as an entity in its own right. Speculation involves the Union Pacific buying the DM&E. Union Pacific and Burlington Northern Sante Fe are the existing coal haulers in the Powder River Basin.
The loan denial revives questions about a huge equity partner like Union Pacific stepping in and acquiring the DM&E to build the new railroad.
The project was conceived as a revenue source to enable the DM&E to resolve a dilemma that threatens its future. The railroad was built on some of the most decrepit rail line in the country, some more than a century old, that had been abandoned by the Chicago and Northwestern in the 1980s. But the DM&E as it exists now cannot carry enough traffic to pay for rebuilding that line. Without new rail, the DM&E would slowly go out of business, Schieffer contended when he sought approval for the Powder River Basin project.
Mayo Clinic money
The DM&E has done what it can to grow and attract investors.
In 2002, within a month of gaining Surface Transportation Board approval for the basin project, the DM&E announced it was buying a neighboring railroad it renamed the IC&E. This doubled the DM&E’s size and gave it access to railroading’s mecca, Chicago. A Federal Railroad Administration loan allowed the DM&E to refinance debt from that acquisition and replace 100 miles of line.
Ironically, the outstanding loan might have convinced the federal agency the railroad was too far leveraged to take on another $6 billion in debt, including $2.3 billion to the FRA.
Until 2005, prospects of major federal financial help in building the Powder River Basin project were limited. That year, Thune introduced changes to the transportation bill highly favorable to the DM&E. The FRA’s loan authority skyrocketed from $3.5 billion to $35 billion. Rail projects that purported to solve energy and rail capacity shortages moved to the front of the line for loans. Even so, the DM&E could not sway the FRA.
Because the DM&E would not give up its dedicated rail corridor through Rochester, Minn., when it appeared the DM&E might gain federal financing for its new railroad, the Rochester Coalition put on a late-game full-court press to derail the project. Bankrolled by the Mayo Clinic, the coalition of Mayo, local government and other entities hammered relentlessly on safety concerns if trains hauling coal and hazardous farm chemicals within blocks of Mayo disrupted sensitive medical equipment or jumped the tracks and threatened bed-bound patients.
The opponents hired Janklow, who has a long and acrimonious history with Schieffer where the Powder River Basin project is concerned, and Mayo appointed former Senate majority leader Tom Daschle to its board of directors.
Thune on Monday said the efforts of the group certainly were not helpful to the DM&E. Schieffer declined to speculate about whether the political pressure was effective.
“I’ll leave that to the Secretary of Transportation. I will not try to pick apart the decision-making process,” he said.
Rail industry analysts Wilner and Luther Miller, senior editor of Railway Age magazine, discount the effect of such tactics. They say the Federal Railroad Administration is highly resistant to political pressure.
Trains will still run
Without the loan, the DM&E is in no danger of going out of business tomorrow, even though it expended millions of dollars in anticipation of getting the federal loan. Those were calculated risks, according to Schieffer, and the DM&E can deal with the consequences.
Railroad officials will consider their options now: other funding sources, equity partners, dividing the project into smaller increments.
But in the wake of the denial, the DM&E is left with the formidable conundrum that prompted it to set out on this journey.
“Do we have a longterm plan to deal with the sections of line that need to be replaced?” Schieffer asked.
“The answer is no.”