MINNEAPOLIS (AP) - Washington turned down the Dakota, Minnesota & Eastern railroad's request for a loan for the biggest U.S. rail expansion in decades. Will Wall Street be kinder?
DM&E chief Kevin Schieffer says the railroad needed investors for the $6 billion project even before the Federal Railroad Administration turned down its request for a $2.3 billion loan last week. Now it just needs more. He said it has hired Citigroup and Merrill Lynch to advise it.
'I've been awfully busy since Monday,' Schieffer said. He declined to talk in detail about the railroad's prospects for finding new investors.
Schieffer said he expects some combination of borrowing and equity in the privately held company.
'They have the environmental approvals, all they need is the money,' said Frank Wilner, a railroad economist and spokesman for the United Transportation Union.
Independent railroad analyst Tony Hatch said private firms have been investing in projects as large as state highway systems (Indiana leased its 157-mile toll road for $3.8 billion for 75 years) to individual bridges.
'Railroads fit into things like this quite easily. Does this one fit in? I don't know. But there are tons of investors and investment banks that would love to take a look,' he said.
It's been almost 10 years since the DM&E, a regional carrier with an east-west line across Minnesota and South Dakota, said it wanted to add 260 miles of new track to extend its line into Wyoming coal country. The idea is to create a shorter, cheaper route out of Wyoming's Powder River Basin than the Burlington Northern Santa Fe Corp. or Union Pacific Corp. offered. Wyoming is the largest coal-producing state, and its coal is clean and close to the surface, so it's much cheaper to mine.
The DM&E once hoped to be hauling 100 tons of coal a year by 2007. But getting environmental and regulatory approvals has proven tougher than it expected.
DM&E's search for investors comes at a good time. Railroad valuations are up -- Burlington Northern and Union Pacific shares are both close to five-year highs -- and there is a lot of private investment money looking for deals.
On the other hand, the Federal Railroad Administrator Joseph H. Boardman said in rejecting the DM&E loan that 'there remained too high a risk' it wouldn't be repaid -- not exactly a 'buy' rating for private investors.
The rejection rattled the share price of DM&E investor L.B. Foster, which makes rail and track supplies and owns about 13 percent of the DM&E. Its stock dropped 29 percent in the week after the loan was rejected. L.B. Foster issued a statement saying it believes the value of its DM&E stake 'significantly exceeds' its investment.
'I don't believe the DM&E is starting from scratch in terms of trying to raise private capital for this project,' said Robert Damron, an analyst for 21st Century Equity Research. 'It does change the landscape a little bit without the public financing, but certainly I do believe there is private financing for this project.'
Much of the attention on the DM&E has been focused on environmental issues and whether its tracks through Rochester are dangerously close to the Mayo Clinic. But its financial impact would be major, too. Utilities are major buyers of coal from Wyoming's Powder River Basin, but two-thirds of coal's cost is transportation. And that is controlled by the Burlington Northern and Union Pacific duopoly on coal hauling there.
Burlington Northern lobbied against the federal loan for the DM&E. Calyon Securities analyst Salvatore Vitale said coal hauling is 20 percent of BNSF's revenue, and most of that is from the Powder River Basin.
'It's your most stable business, and you don't want it upset,' he said of BNSF's opposition to the DM&E. 'It's where a lot of your pricing power is, and you don't want anybody messing with that.'
Utilities would welcome the competition.
Entergy Corp. moved to increase the amount of imported coal it buys after railroad supply disruptions in 2005, but 92 percent of its coal still comes from the Powder River Basin, said Bill Mohl, a vice president who is in charge of purchasing fuel for the New Orleans-based utility.
Mohl has spoken in favor of the DM&E expansion. But he said he couldn't comment on whether the utility would put any money into it.
'Traditionally I think it's fair to say that utilities have really left the transportation piece entirely to the railroad, and left it to them to make the investment,' he said.
Considering the eagerness for an alternative to the Burlington Northern and Union Pacific, the DM&E's approval for building the new rail could be viewed as an asset of its own.
'We are the only railroad in North America positioned to go into the Powder River Basin,' Schieffer said. 'Now it's just a matter of a couple billion bucks.'
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