(The Associated Press circulated the following article by Josh Funk on February 27.)
OMAHA, Neb. — Hundreds of millions of tons of coal are hauled from northeast Wyoming each year as fast as the nation’s two largest railroads can carry it away.
But Union Pacific and BNSF haven’t been quick enough to satisfy utilities in the last few years, and America’s appetite for coal is expected only to grow.
That’s why the Dakota, Minnesota & Eastern Railroad had hoped federal officials would approve its $2.3 billion loan request, but the Federal Rail Administration denied the loan on Monday.
The regional railroad still wants to vault into the big leagues and compete against UP and Burlington Northern Santa Fe Corp. for coal customers. But without the federal loan, it’s not clear whether DM&E will be able to reach Wyoming’s coal-rich Powder River Basin.
The railroad will have to find other ways to cover the estimated $6 billion cost of the project or adjust its plans. DM&E officials had promised their coal project would lower energy prices, improve railroad reliability and spur economic development all along the company’s tracks.
Utilities have generally supported the project because of the potential for better coal delivery prices and more reliable deliveries, both of which could help lower electricity bills for consumers.
But the DM&E project has faced concerns about coal traffic in Rochester, Minn., and Dubuque, Iowa, and at least one of the railroad’s competitors actively lobbied against the federal loan.
DM&E President Kevin Schieffer said the project was too important to abandon, because of the strong support from utilities and the coal mines’ plans to increase production.
“This line will be built,” Schieffer said before the loan decision. “It’s a project that makes too much sense not to happen.”
On Tuesday, after the loan decision, he said: “This is not something that changes our focus on getting this project built or our confidence that it will be built.”
The railroad will explore various other options for financing the $2.3 billion, but “it’s not something we’re going be announcing today.”
And, Schieffer said, there was little chance that his railroad would scale back the project.
“I think it pretty much needs to be the entire project,” he said. “You can’t build a part of the railroad and skip over a few miles.”
DM&E’s project plans are unusual for the industry because they call for building about 260 miles of a new rail line in Wyoming and South Dakota. Most rail construction today adds capacity to existing rail lines — usually by building a new rail line parallel to the old one — rather than building a new line, American Association of Railroads spokesman Tom White said.
“This would be the largest new rail construction in this country since well before World War II,” White said.
DM&E also plans to upgrade its 600-mile line through Minnesota and South Dakota so it could transport coal to power plants farther east. And the company plans to carry coal across Iowa, Missouri and Illinois on its sister line, the Iowa, Chicago and Eastern railroad.
Skeptical industry
Railroad industry analyst Don Broughton with A.G. Edwards & Sons said before the loan decision that he wasn’t sure how much of a difference DM&E could make in the coal trade because the amount of coal it would be able to haul would be considerably less than what BNSF and Union Pacific already haul.
“It’s like trying to drain a swimming pool with a soda straw,” Broughton said.
Schieffer counters that his railroad could serve as an important relief valve for the Powder River Basin because annual coal production is expected to continue growing to 500 million tons a year, and he predicted DM&E could eventually carry 100 million tons of coal a year within six years of when it could start.
Broughton questioned the viability of the DM&E project because Schieffer hasn’t attracted much private investment yet. And he said Wall Street will invest in nearly anything if investors think there will be a return.
Federal Railroad Administrator Joseph H. Boardman said in his loan decision that the risk that DM&E would be unable to repay the loan remained too high. He said DM&E’s highly leveraged financial position worried him.
“I have concluded that there is an unacceptable degree of uncertainty with regard to the project and too high a risk concerning whether the obligation can reasonably be repaid,” Boardman wrote in his rejection letter.
Schieffer said before the federal loan decision that he felt pretty good about the investors his railroad has been able to attract, but he declined to identify any investors or say how much has been committed to the project. Schieffer has also said DM&E might go public and sell stock to raise money.
Utility yearning
The utility industry is in a building phase, according to a trade group that represents nearly three-quarters of all U.S. utilities. The group, the Edison Electric Institute, says most of the proposed new power plants are coal plants.
If all those coal plants were built, the existing rail lines out of the Powder River Basin would quickly become clogged, said Chuck Linderman, director of energy supply policy for the trade group.
The Edison Electric Institute backs the DM&E project and has been critical of BNSF and UP for their past coal delivery problems.
Utilities look at the DM&E project as a way to help ensure more reliable deliveries because there would be an option if problems arose on the BNSF and Union Pacific lines.
Utilities already make sure they have multiple ways to deliver power over their lines in case of an emergency, so it makes sense to them.
“Competition begets better service and lower rates,” Linderman said. “That’s why we’re for the DM&E.”
Critical competitors
Burlington Northern and Union Pacific have responded differently to the DM&E plans, but neither railroad appears thrilled about the idea of a new competitor in the coal business.
BNSF officials lobbied against the federal loan.
Matt Rose, BNSF’s chairman, president and chief executive, has said lending DM&E money for its coal line would have been bad public policy because those tax dollars would have subsidized DM&E and discouraged private investment in other railroads.
BNSF has also suggested in formal written comments to the Surface Transportation Board that DM&E’s plans to haul coal could cause “potentially serious disruptions” on its own heavily trafficked lines in Illinois where railroads cross.
Union Pacific’s chairman, chief executive and president Jim Young declined to answer questions about DM&E and how its plans might affect the Omaha-based railroad except to say: “We will compete.”