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The $23 million question

The state grapples with questions surrounding Montreal Maine & Atlantic plans to abandon 233 miles of rail line in northern Maine

By Douglas Rooks
 
As the current legislative session draws to a close, efforts continue to keep the trains running on the vast central section of the Montreal, Maine & Atlantic (MMA) freight lines. They are “the lifeline for Penobscot and Aroostook counties,” according to Representative Charles “Ken” Theriault (D-Madawaska), who sponsored a $20 million bond issue to permit the state to purchase the tracks.
 
In February, MMA filed a notice of intent to abandon 233 miles of track, from just north of Millinocket to just south of Madawaska. The reason, said railroad President Bob Grindrod, was not hard to explain. The plunging economy, that disproportionately affected the wood fiber and lumber industries that provide most of MMA’s tonnage, has drastically reduced traffic on these lines, making them unprofitable. In all, the railroad now owns 745 miles of track in Maine, Vermont, New Brunswick and Quebec.
 
In a recent interview, Grindrod said that the railroad has faced major challenges from its very first month in business in 2003. It completed the purchase of the bankrupt Bangor & Aroostook only to find that one of its major customers, Great Northern Paper, was shutting down both of its mills, in Millinocket and East Millinocket. The East Millinocket mill has since reopened as Katahdin Paper, but the Millinocket plant has run only briefly, despite installing a brand-new paper machine: its owners have cited high energy costs as the reason.
 
Nonetheless, MMA was able to rebuild volume for a while, until the construction downturn of 2007 started a free-fall in shipments.
 
From 2003, when the rail lines to be abandoned moved 12,085 carloads, it increased to 15,130 in 2005. But 2008 showed an enormous drop, to 7,905 carloads, and 2009 was even worse – just 5,527 carloads.
Those figures, Grindrod said, count only shipments that originate or terminate on the MMA lines to be abandoned. Counting all shipments that traverse this portion of the system, it moved about 9,000 cars in 2009 – the figure cited in news stories and a recent state feasibility study on the track purchase.
 
Hearings on a bill requiring that study from the Maine Department of Transportation (LD 1678) and the bond issue (LD 1748) prompted solid turnouts from municipalities and businesses affected by the possible shutdown, amply confirming the “lifeline” point made in the testimony by Representative Theriault.
 
The Southern Aroostook Development Corporation said the Tate & Lyle plant in Houlton, which converts tapioca and potato starch into ingredients for M&Ms and Splenda, an artificial sweetener, is just a small part of an international company that’s currently seeking to cut costs throughout its system.
 
Rail service is vital to keeping costs down, said SADC Executive Director Jon McLaughlin, and without it, the plant could close. “The result could be devastating for an area of Maine that has already seen unemployment rates as high as 15.2 percent,” he said.
 
In nearby New Limerick, the Louisiana-Pacific oriented strand board plant was recently revived for lumber production – “engineered dimensional wood manufacturing” – thanks to a $150 million investment and reconstruction from 2007-08. Unfortunately, the plant reopened during the depths of the construction downturn, and now employs 80 workers, about half of the full-production contingent when it opened.
 
Plant manager Travis Turner said, “In addition to the excellent employee base and availability of wood, a key part of the business case for investing in Maine was the availability of rail service.” Losing that service for 1,500-2,000 carloads a year, would increase costs by at least 10 percent, he said.
 
Since the mill is still essentially “in a startup mode,” Turner said, “the next few years are critical to success.” Local benefits included an $8.3 million payroll in 2008.
 
In Easton, McCain Foods estimated that the end of rail service would increase its costs for producing processed potato products such as French fries by as much as $1 million.
 
Further north, abandonment would affect a large number of smaller businesses, such as those in the Skyway Industrial Park in Presque Isle and the nearby intermodal center.
 
Businesses that buy products will be affected, too. Maine Public Service Co., the region’s electric supplier, said it would have to pay $65,000 more for its annual deliveries of utility poles, if delivered by truck instead of rail.

The costs of lost rail service
 
Bob Grindrod is well aware of the dependence of nearly two dozen major shippers – including such familiar names as Huber, Dead River, Seven Islands and Fraser – on MMA’s freight service.
 
The MaineDOT-commissioned report, by Railroad Industries, Inc. of Reno, Nevada, calculates economic, safety and environmental costs of abandonment. Those costs include $6.5 million a year for additional fuel costs for trucking and $3.5 million in additional pavement costs. The report estimates 202 accidents will result from increased freight traffic on the roads. Using trucks instead of rail also would add 160 tons of carbon dioxide and 2,800 tons of nitrogen oxide to the atmosphere.
 
Both the paper and construction businesses are highly cyclical, and they will remain the mainstays of rail traffic, Grindrod said. MMA has moved some new cargo, such as the giant turbine blades used in the state’s new wind farms, but those are usually short-term deals, rather than the steady demand produced for moving pulp, wood chips, lumber and manufactured wood products. Connections involving expansion of port cargo facilities at Searsport would be a big deal for the railroad, but those improvements are years away at best.
 
State-run benefits?
 
Concerning a possible state purchase, while the figures are preliminary, they seem to show that public ownership could produce profitability far sooner than the current management. That’s because the state would not be burdened with MMA’s substantial debt service, nor much of the $1.3 million in state taxes it now pays.
 
The likely asking price for the 233 miles is about $23 million, about equal to the net salvage value. MMA estimates there’s also about $19 million in deferred maintenance. (The $19 million figure is one derived from standards set by MaineDOT in the TIGER (Transportation Investment Generating Economic Recovery) grant application. It is the cost of restoring the main line between Millinocket and Madawaska to 40 mph and all the branch lines to 25 mph. This would be accomplished over several years.)
 
Some of the discussion at recent sessions of the Maine Legislature’s Transportation Committee focused on whether the central section of the system is viable on its own, and whether including the line through Madawaska and the Fraser mills would improve it. Fraser, too, has gone through a near-death experience, with the company saying it would close its Maine mill without its 900 employees agreeing to an 8 percent pay cut. The employees agreed to the pay cut.
 
Grindrod acknowledged that the Madawaska section, with a direct connection to Canada, is one of the most desirable parts of the system, “but that’s why we need to keep it,” he said. “Our aim is to retain the profitable lines, and that’s one of them.”
 
A ‘jobs bond’?
 
While the price for the track proposed for abandonment – about $100,000 per mile – might seem modest, coming up with the money will be no easy feat. Purchase of the freight lines was one of a number of Maine projects submitted for a TIGER grant that was part of the federal stimulus package, but it was not funded. (Maine also did not receive a requested $70 million for two bridges spanning the Piscataqua River between Kittery and Portsmouth, New Hampshire, nor funding for the Caribou connector. Yet, it did receive a total of $14 million for projects at the state-owned ports in Portland, Searsport and Eastport.)
 
Grindrod was not surprised by the application’s lack of success, noting that there were $50 billion in applications for $1.5 billion in grants.
 
So, without federal help, where will Maine find the money? One strategy legislators have discussed is including the rail purchase in a prospective “jobs bond.” That would parallel a successful effort in 1992, during a previous recession, but no decisions are likely until near the end of the session.
 
House and Senate Democrats unveiled a “jobs bond” proposal in early March, in which $20 million slated for MMA. Governor Baldacci’s bond proposal included $17 million for the purchase, and Maine’s Senator Susan Collins recently extracted a promise of federal help from U.S. Transportation Secretary Ray LaHood, as well.
 
If the state does purchase the lines, it would likely contract with a private operator, such as Maine Eastern Railroad, that offers freight and passenger service on the Rockland Branch that terminates in Brunswick. MMA could be a bidder for that contract.
 
At the hearing on LD 1748, MaineDOT Commissioner David Cole said that he saw state involvement as far from his first choice, but that the alternative of abandonment was unacceptable.
 
“It is inconceivable to me that the largest county east of the Mississippi, and whose economy is largely dependent on the movement of natural resources, would be cut off from rail service,” he told the Transportation Committee.
 
A lobbyist for Irving Woodlands, Jim Mitchell, framed the issue in even larger terms. He said, “This really is a statewide economic development enterprise that has enormous implication for our manufacturing economy and the economy of the state as a whole.”

 

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