Green Light for Shortlines

Green Light for Shortlines

Copyright 2004, Traffic World, Inc.

A $234 million federal loan to the Dakota, Minnesota & Eastern Railroad may be as big a boon for the loan program itself as it is for the railroad. And more loans are in the pipeline.

Roughly $195 million of the loan will be used to refinance DM&E''s existing debt, with the remainder to be used for infrastructure improvements in 2004, said DM&E President Kevin Schieffer. The DM&E, along with the Iowa, Chicago & Eastern Railroad subsidiary purchased in 2002, are regional railroads covering over 2,500 miles of track in eight states in the upper Midwest.

"We''ve been working hard to get this loan approved," Schieffer said. "Even though this loan will be used up in 2004, it''s going to affect our capital budgets from 2005 and beyond because of the reduced interest cost. Instead of giving the money to the bank, it will be going toward track rehabilitation and maintenance."

It''s by far the largest loan issued under the Federal Railroad Administration''s Railroad Rehabilitation and Improvement Financing program and only the fourth since the program was created through the reauthorization of the Transportation Equity Act of the 21st Century in 1998.

The FRA "fully expects to approve a significant number of applications in 2004 relative to what has been approved so far in the program''s history," said FRA spokesman Warren Flatau. FRA would not release the number or names of pending applicants.

As important as the loan is to the DM&E, that it was dispensed at all may be just as important.

Other shortlines are seeking funding to upgrade their tracks to support heavier railcars in use by the Class 1 railroads with which they interchange. Some have criticized the complexity of the RRIF application process and say that is one reason just four loans have been issued.

"There''s been so much controversy over the formula used for the test that determines how the loans should be given out," said Keith Hartwell, an attorney with Chambers, Conlon & Hartwell, which represents the American Short Line and Regional Railroad Association. "Shortlines were giving up on the whole process because it wasn''t worth the number of hours that they were devoting and seeing no results. Hopefully the size of this loan will convince shortline CEOs that it''s a process that''s doable and worth their time.

"My hope is that as more of the procedural questions are settled, more precedent will be set that will make the future application process easier for FRA," he said.

Of the total $3.5 billion authorized under the loan program, $1 billion is reserved for shortline and regional railroads. Other eligible borrowers include state and local governments, government-sponsored authorities and corporations, and joint ventures that include at least one railroad.

In addition to the DM&E funding, RRIF loans approved to date include: Amtrak for $100 million; the Arkansas & Missouri Railroad for $11 million; the Nashville and Western Railroad for $2.3 million; and the Mount Hood Railroad for $2.07 million.

Schieffer said none of the money granted to DM&E will go toward financing the 280 miles of new track the railroad intends to build as part of its $2 billion Powder River Basin coal project. That line would allow DM&E to compete with Union Pacific Railroad and Burlington Northern Santa Fe Railway for coal from low-sulfur mines in Wyoming.

However, several years ago DM&E changed the design specifications on its entire system in order to accommodate heavier coal cars in anticipation of the PRB project. "Those specifications have been built into the rehab work that''s going to be done this year so we won''t have to redo them when the PRB project starts," Schieffer said.

Schieffer has yet to reveal any potential investors in the PRB project. But with the loan process out of the way and the acquisition of the IC&E under his belt, he said he will be able to devote much of his time to project financing in 2004. "My plate is now cleared for other things, and focus of PRB project financing will be where most of my time will be spent," Schieffer said.

That doesn''t necessarily mean that the project will be financed this year. "But I feel pretty optimistic about it right now," he said, "because we a have solid plan and good feedback received to date. Life is returning to the financial markets, so that''s another cause for optimism."