DM&E Loan Decision Based on Repayment Doubts

Platts Coal Trader

Marcin Skomial

April 19, 2007

A top official at the Federal Railroad Administration said significant skepticism about the Dakota, Minnesota and Eastern Railroad's ability to repay a $2.3 billion loan it needed to become the third railroad to serve the Powder River Basin was the sole factor in the agency's decision to deny the loan. He deflected speculation that the agency's decision could have been influenced by the project's opponents.

Pressures from the two major western railroads that are serving the PRB and the opposition from communities along the proposed route had "absolutely no impact" on the agency's decision to deny the loan, FRA Deputy Administrator Clifford Eby told attendees at the National Coal Transportation Association's spring conference in Williamsburg, Virginia, Wednesday.

The FRA's financial analysis of DM&E proposal cast significant doubt over whether the railroad would be able to persuade private investors to pour money into the project. The railroad argued that the PRB tonnage that could be realized from gaining access to the coal-rich basin would be sufficient to repay the loan and make the railroad profitable. But the agency's own analysis backed up by Department of Transportation's Credit Council did not support that view.

DM&E CEO Kevin Schieffer has not given up on his plans to build the line into the PRB, but FRA's recent determination that the project is too risky for federal government financing could significantly undercut his position as he tries to convince private investors to finance the project.

In the FRA's analysis, Eby pointed out that there was simply "too high a risk concerning the railroad's ability to repay the loan." The railroad already had a "highly leveraged financial position" and the proposed project was very large considering the current size of DM&E operations.

Eby said the FRA was concerned that the railroad may not be able to ship the projected amounts of PRB coal needed to generate sufficient revenues to repay the loan, which would have been the largest federal loan to a private company. The agency was also concerned that the railroad did not address how it would handle potential cost overruns and delays in the construction of a rail line into the PRB.

In months leading up to the FRA's February decision on the DM&E loan, some Wall Street analysts maintained that the railroad could secure sufficient tonnage to repay the loan based on analysis of potential customers.

Partnerships, not antagonism, needed to spur investment

Commenting on last week's hearing at the Surface Transportation Board concerning railroad investment in capacity, Eby said that he was concerned with the utility industry's focus on railroad rates that have escalated in recent years. He urged utilities to partner with major railroads to come up with solutions to capacity issues.

"Utilities are rehashing the same argument about railroad rates that they have been presenting for the past 25 years that has had little traction and effect," Eby said. "From my perspective, coal shipper and railroad fortunes are married, and they have to get along, but too many times they are acting like parties in divorce or separation."

Eby said rather than arguing with each other, railroads and utilities should focus on creating partnerships across the coal supply chain to prepare forecasts that could be used in developing railroads' capital budgets. He also urged railroads and coal-shipping utilities to look into the idea of developing partnerships with federal and state governments to build projects that private industry might not be willing to undertake on its own.