Mayo Clinic to Canadian Pacific Railroad: Safety first

Mayo submits safety proposals for railroad

By Jeffrey Pieters, Post-Bulletin, Rochester MN

Flammable and hazardous materials, such as ethanol, propane and anhydrous ammonia, carried through Rochester on the Dakota, Minnesota & Eastern Railroad, pose a bigger public safety threat than coal ever did.

So says Mayo Clinic in a written statement to federal regulators reviewing Canadian Pacific Railway's proposed acquisition of the DM&E.

The statement was to be filed today with the federal Surface Transportation Board, which will decide by fall whether to allow the acquisition, and under what conditions to allow it.

What Mayo wants

Mayo Clinic's proposed safety requirements for the railroad line through Rochester include requiring the railroad company to:

• Build multiple grade-separated road crossings of the tracks, meaning using bridges or tunnels.
• Adhere to local speed limits of 10 mph for trains carrying hazardous cargo and 20 mph for other cargo.
• Inform Rochester emergency services before hazardous materials are sent through the city.
• Limit the number of trains through Rochester.

(The rest is here.)

More 'DM&E for sale' news and analysis

Vox Verax is posting the entire TRAINS article about the pending sale of the DM&E railroad with an insightful commentary by Patrick Dempsey following:

TRAINS exclusive: DM&E/IC&E bidders winnowed to around 10

by Fred W. Frailey
June 12, 2007

SIOUX FALLS, S.D. -- Union Pacific and BNSF Railway -- move over. Another railroad is nearer to laying its tracks into Wyoming's Powder River Basin coalfields. Trains has learned that Cedar American Rail Holdings is auctioning some or all of its Dakota, Minnesota & Eastern and Iowa, Chicago & Eastern Railroads to one of about 10 bidders still in the running. Several of those bidding consortiums include other railroads.

DM&E operates a route bought in 1986 from Chicago & Northwestern, from Winona, Minn., west across Minnesota and South Dakota to Rapid City -- 649 miles. From there it goes northwest to Colony, Wyo., and south to Crawford, Neb. In all, DM&E runs over 1,103 route miles.

For a decade the railroad has sought to compete with BNSF and UP for coal business in the Powder River Basin. It proposes building a new 260-mile line from Wall, S.D., along the Cheyenne River to Edgemont, S.D., and then west into the coalfields. The last regulatory hurdle was cleared in Feb. 2006, when the Surface Transportation Board gave its final approval.

All that stands in the way is financing. The estimated cost of building the new line and rebuilding the existing DM&E back to Winona is $2.3 billion to $2.5 billion. Locomotives and facilities could raise the total spending considerably. A sought-after $2.5 billion loan from the Federal Railroad Administration -- part of the $35 billion Railroad Rehabilitation Improvement and Financing program authorized by Congress -- was denied on Feb. 26, on grounds that the railroad would not be able to repay the loan. (But sources tell Trains that the FRA staff actually recommended approval of the loan, and that the railroad's financial health has improved considerably in the past two years.)

Denied the loan, DM&E's owner, Cedar American Rail Holdings, hired Merrill Lynch and Citigroup to explore other ways to finance the Powder River Basin project. Of some 100 entities approached by the investment bankers, approximately 30 expressed an interest in either buying the railroad or partnering with it in some fashion. All were asked to make proposals.

Trains learned that from those 30 interested bidders, approximately 10 consortiums were invited to hear presentations by Kevin V. Schieffer, president and chief executive officer, during the past two weeks. Three railroad companies are reportedly among the 10 semifinalists: Canadian National, Canadian Pacific, and an unnamed shortline company. Each of the three rail companies is partnering with private equity groups or other deep-pocket entities to avoid the issue of controlling ownership of DM&E. Canadian Pacific's Twin Cities-Chicago main line connects directly with DM&E at Winona. Canadian National connects at Dubuque with the IC&E, a sister railroad to DM&E. The 1,400-mile IC&E, made up of former Milwaukee Road lines, was brought under the DM&E umbrella in 2002.

Sources tell Trains that the 10 consortiums have until the end of this week to either affirm (or possibly sweeten) their proposals. It's believed that one final round of due diligence and bidding may remain before Cedar American makes a decision. That decision could involve selling all or part of both railroads, selling part or all of DM&E only or part or all of IC&E. "The nice thing about the FRA loan was that it would have enabled Cedar American to keep control of the company," said one insider. "Now that may not be possible. They may have to accept being junior partner."

DM&E and IC&E connect with each other via an IC&E line that runs north-south from Owatonna, Minn., to near Mason City, Iowa. In addition to interchanging with CP at Winona or CN at Dubuque, IC&E could run its own coal trains right into Chicago, via Savanna, Ill. One insider estimates the cost of upgrading IC&E tracks for coal service from Owatonna to Chicago at hundreds of millions of dollars.

In a letter to employees last week, Schieffer pleaded that they be patient and not fearful. "In the coming weeks," he wrote, "we will have potential investors and possible partners on the property. There are lots of lookers, and we will allow many different players to look things over. But just because they are looking doesn't mean they will ultimately be in the deal, or that there will be a deal."

Cedar American is privately owned. But rail supplier L. B. Foster Co. (symbol FSTR) owns 13.4 percent of Cedar American - the result of a $9 million investment made when DM&E was bought from North Western. Foster's filings with the Securities and Exchange Commission state that the value of its share of Cedar American far exceeds that original investment.

Patrick Dempsey comments:

It's hard to say whether Canadian National or Canadian Pacific has a leg up. I know CP did not want to sell to the DM&E its IMRL assets, which became IC&E after the sale. So, there is no doubt they have interest. CN nearly merged with BNSF seven years ago, but was blocked by the STB and UP. CN has plenty of money to buy DM&E and upgrade the line without any financial difficulties and could further enhance their position around the Great Lakes acquiring DM&E/IC&E.

I could venture a guess on the 'unnamed short line' and it would be either RailAmerica or Genesee & Wyoming Rail. RailAmerica and G&W are large corporations that own several regional and short line roads across the globe. They would probably be 'partners' in a DM&E deal rather than a CN or CP, which would probably purchase the properties outright.

Opinion: A DM&E sale would be the worst possible scenario for Mayo/Rochester. CN or CP would not offer Mayo any mitigation and more than that, they wouldn't have to if they haul coal through Rochester at some point. They both have plenty of money to upgrade and expand to the PRB if either acquires the property. Also, a CN or CP purchase would probably mean wholesale abandonments in Minnesota and Iowa along everything except the coal haul arteries. These companies would have no interest in hauling ag products along its coal arteries. They could care less about the co-ops in towns like Jackson and Sherburn, Minn., and Estherville, Iowa. But I suspect a company like Twin Cities & Western Railroad or Progressive Rail would be able to come in and buy the proposed abandonments and operate the branches as short lines.

Note the Trains article indicates that FRA staff actually recommended approval of the loan. It was politics that killed the loan and not the financial health of DM&E, as I had tried to tell people from the start. An independent DM&E would have been the best situation for Mayo and the upper Midwest, but it looks like that will no longer be the case....

Based on some of my sources in the rail business, I think I am right in saying that one of the "unnamed short lines" might either be RailAmerica or Genesee & Wyoming. Since they are "unnamed" and knowing Schieffer to NOT be a quitter, I find it hard to believe he will sell to CP or CN. My bet would be that DM&E will partner with RailAmerica or G&W in a joint venture with each owning probably half of the Cedar American business. That would certainly be good for the rural communities along the DM&E/IC&E routes if RailAmerica or G&W were involved. I doubt abandonment would be in the plan with RailAmerica or G&W in the mix. RailAmerica and G&W have very deep pockets and access to a lot of capital -- more than enough to fund the PRB project.

Vox Verax note: Whether or not FRA staff recommended the $2.3 billion DM&E loan is for insiders to know and the rest of us (perhaps) to find out. Despite arguments by loan proponents, Vox Verax still believes that the loan was denied based on questions about the DM&E's financial future.

Regardless, the FRA loan program was expanded from $3.5 billion to $35 billion because of pure earmark-style politics. If the DM&E loan also failed because of politics, then let's call it "tit for tat."

What's Next for the DM&E?

by Leigh Pomeroy

The DM&E railroad's hoped-for $2.3 billion government loan is now officially dead. According to Minnesota Rep. Tim Walz, there is no appeal, there are no conditions. Over a year of angst and worry, thousands of hours invested, hundreds of thousands of dollars spent and just as many words written, most implying that the loan was a "done deal," and BOOM! Suddenly it's all over.

Well, not quite.

DM&E CEO Kevin Schieffer says he's not giving up. '"It’s obviously a disappointment, but not the first we've had in the last nine years, and I’m sure it’s not the last." Yet it's back to the drawing board for a man whom both admirers and enemies have described as being "driven" and "arrogant."

Those who know him personally say that there is still outside funding available, though undoubtedly the terms would be less favorable than the massive $2.3 billion low-interest, taxpayer guaranteed loan would have been.

The Federal Railway Administration offered several reasons for rejecting the loan, including:

• the DM&E’s current highly leveraged financial position,
• the size of the loan relative to the limited scale of existing DM&E operations,
• the possibility that the railroad may not be able to ship the projected amounts of coal needed to generate enough revenue to pay back the loan, and
• concerns that the application did not sufficiently address how the railroad would handle potential cost overruns and schedule delays with the Powder River Basin construction project ("FRA Administrator Denies DM&E Powder River Basin Loan Application Citing Unacceptable Risk to Federal Taxpayers").
  

The DM&E has steadfastly refused to make its financial records public, prompting the Mayo Clinic and the Rochester Coalition to file a Freedom of Information Act request with the FRA in April of 2006. That request has yet to be honored, which prompted attorneys acting on behalf of the Clinic and the Coalition to recently file suit with the FRA forcing the FOIA request compliance. At the moment the Clinic and the Coalition have not indicated as to whether they will continue the lawsuit.

Despite the DM&E's penchant for secrecy, there was still ample enough public information to cause the loan to be questioned by members of Congress and organizations championing government fiscal restraint. Much of this was contained in a Bearing Point study commissioned by the Mayo Clinic and Rochester Coalition.

Yet the FRA's decision caught at least some members of the Mayo Clinic/Rochester Coalition team by surprise. "This was not expected," said Patrick Connolly, a coordinator for the team's effort. "We're still in utter shock."

Many in the press too must have been surprised, as the underlying theme in many media reports was that "you can't stop the railroad." At least some local government officials, particularly in Mankato, voiced the same opinion. They were opposed to coal trains coming through their city, yet decided they needed to negotiate with the DM&E because they felt the railroad's expansion project was inevitable.

Rep. Walz indicated on Monday, however, that he expected this outcome from the FRA. "The citizens of this district demanded close scrutiny of this loan and they got it," he said. "This loan proposal brought people from all walks of life together to insist that members of Congress better monitor taxpayer funds. I believe that today’s decision is a direct result of congressional and citizen inquiry and oversight."

Sen. John Thune, R-S.D., the former DM&E lobbyist who at the last minute had inserted the DM&E friendly loan provision into the 2005 Transportation Bill, offered a different take. "Simply put, there was a huge amount of money spent to sabotage this project by powerful special interests and their hired guns," he said. "This is a case of special interests beating the little guy."

Rochester Coalition Sues Federal Railroad Administration over DM&E Documents

by Leigh Pomeroy

The Rochester Coalition and the Mayo Clinic filed suit today in U.S. District Court, Washington, D.C., asking the Federal Railroad Administration to turn over documents related to the DM&E railroad requested in a Freedom of Information Act filing made by the group 10 months ago. By law the FRA was supposed to respond within 20 days of the original request.

The FRA finally answered the Rochester Coalition six months after the April 2006 FOIA request, saying that it had located the documents but could not release them until the DM&E reviewed them for trade secrets. The FRA gave the railroad until Nov. 20, 2006, to complete the review. To date, the DM&E has not responded to the FRA's request and the FRA has yet to release the documents to the Coalition, which triggered the lawsuit.

"The public needs to be able to see what the Department of Transportation is doing with hard-earned taxpayer funds; currently there is absolutely no transparency in this process," said Stephen Ryan, legal counsel for the Rochester Coalition and the Mayo Clinic. What the Rochester Coalition wants to know is "who owns the company" and other basic financial information, said Jake Reint, spokesperson for the Coalition.

The DM&E is requesting a $2.3 billion unsecured loan from the FRA for a railroad expansion project so that it can haul coal from Wyoming to markets in the Midwest. The railroad currently has revenues of about $200 million per year and services South Dakota, southern Minnesota and northern Iowa.