July 14, 2013

For rail company, rebirth may yield to ruin

The rising demand for crude oil transit gave hope to the Montreal, Maine & Atlantic Railway, but may also be prove to be its undoing.

By Eric Russell erussell@pressherald.com
Staff Writer

The ability to move crude oil along its tracks likely saved the Montreal, Maine & Atlantic Railway from financial collapse a little more than a year ago.

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In this Feb. 19, 2010 file photo, rail cars sit idled on the Montreal, Maine & Atlantic Railway junction in Oakfield, Maine.

AP

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Now, after a 73-car train hauling crude oil derailed from MM&A's tracks and ravaged the small Quebec town of Lac-Megantic only miles from the Maine border, the petroleum product could end up being the company's undoing.

"I don't know the entire situation and I don't know how they insure themselves, but an accident of this magnitude could put a small company out of business," said Richard Beall, a railroad litigation expert based in Georgia. "I've been involved in hundreds of lawsuits and insurance cases over my lifetime and they usually top out at a million dollars or two. This could be billions."

Montreal, Maine & Atlantic Railway is a relatively small company, but it's owned by a much bigger firm, Chicago-based Rail World Inc.

Sandra Dearden, founder of Highroad Consulting in Indiana, a firm that specializes in rail transportation and logistics, said she knows Rail World president and MM&A chairman Edward Burkhardt personally and has some knowledge of both companies' operations.

"The main concern initially is protecting people" and minimizing physical damage, she said. "Once you recover from that, though, it can still be very devastating."

Dearden said until there is a formal finding, it's premature to project how the company will rebound from the accident.

"I'm sure (Burkhardt) has good insurance. Is it adequate? I don't know," she said. "With the loss of life in this case, litigation will be significant."

Rail World Inc. bought about 750 miles of track in Quebec province, Vermont and Maine in 2003 after the prior owner, Iron Road Railways, went bankrupt. Another Burkhardt-led company already owned three lumber mills in Maine, and the railroad offered dreams of synergy.

Trains could haul lumber along the track, which had once been owned by the old Bangor and Aroostook Railroad. Rail World Inc. opened a local office in Hermon, just outside Bangor. The Montreal, Maine & Atlantic Railway was born.

But those dreams never materialized, at least not in the way Rail World hoped.

Almost immediately, MM&A had to reduce employee salaries by 25 percent, after the line's biggest anticipated customer, Great Northern Paper, shut down two mills in Millinocket and East Millinocket.

Demand for lumber continued to drop. Other mills struggled and some shuttered. The recession in 2008 made things worse.

In an effort to stay afloat, Rail World sold 233 miles of tracks in northern Maine to the state for $20.1 million in 2010. The state purchased the tracks with bond money and then turned around and sold them to another company.

The sale didn't solve the company's financial problems. Its remaining tracks were falling into disrepair because there wasn't enough profit coming in to maintain them. The next year, the company put the entire MM&A operation up for sale.

Before a buyer emerged, Irving came along.

The Canadian family -- owners of their country's largest oil empire and the largest private landowners in New Brunswick, Nova Scotia and in Maine -- had an offer to make:

Instead of hauling lumber along the tracks, why not transport oil from Western fields to Irving's refinery in Saint John, New Brunswick?

Irving already owned other stretches of track in New Brunswick and eastern Maine, and had recently purchased the 233 miles in northern Maine that MM&A sold to the state. But the MM&A line from Millinocket to Montreal was the missing piece. It is the most direct route from northern Maine east to the Irving refinery in Saint John and west to Montreal, which connects to the Bakken oil fields in North Dakota.

So, beginning in late 2011, MM&A began shipping crude oil east to Irving's refinery. The company that owns most of the southern Maine rail lines, Pan Am Railways, started shipping oil as well.

In less than three years, the oil-by-rail industry has grown significantly, from 25,000 barrels shipped in 2011 to 5.2 million barrels in 2012. In the first five months of 2013, 3.4 million barrels moved through Maine.

"It's a matter of economics," said Jamie Py of the Maine Energy Marketers Association. "We have a lot of oil now in the Western part of the country and it's less expensive than what we've been purchasing off the international market."

MM&A's financial outlook improved once the oil started flowing, although since it's a private company, its budget numbers are not publicly available.

According to the company's website, it owns about two dozen locomotives (the actual rail cars that haul freight are leased) and employs 170 people.

Burkhardt, who addressed reporters when he arrived in Lac-Megantic on Wednesday, said his company is "acknowledging liability."

"We're not standing around saying we don't have responsibility," he said. "We have a lot of insurance, and I'm not going to advise at this point what our limits are. I think our limits are going to be tested."

Even if the insurance is adequate, though, MM&A's line is temporarily shut down because of the investigation. That means Irving is not getting as much oil at its refinery. It may not be long before Irving tries to build up its capacity by relying on another line, such as the one owned by Pan Am that runs north from Portland.

Whether MM&A will continue to ship oil on its tracks in the wake of the accident is not clear. A representative for Irving Oil could not be reached for comment about whether the company will discontinue using MM&A.

MM&A does have other customers. Many commodities move along those tracks, said Dearden, the Indiana consultant, including lumber, particle board and wind turbine parts.

Without oil, though, MM&A would be tying its fortunes to a dying industry in Maine: the lumber and paper industry.

Dearden said Burkhardt is a good manager and "very safety-conscious."

"My heart goes out to him," she said. "I know he's agonizing over this."

Dearden also said railroads are still the safest way to move goods, despite the July 6 tragedy.

In 2011, Montreal, Maine & Atlantic had a train accident rate of 10 accidents per million train miles throughout the company's network. Pan Am had a rate of 3.7, and the national average was 2.8.

In 2012, MM&A's rate was 34.7 per million miles, compared to the national average of 2.3.

The company has said that its rate is higher because it carries freight fewer miles than other carriers. The 2012 rate reflects two reportable accidents.

Burkhardt founded Rail World Inc, in 1999 after he left Wisconsin Central, one of the first private regional railroads formed after the industry was deregulated.

Most of Rail World's holdings are outside the U.S.: Poland, Estonia, New Zealand, Australia and the United Kingdom.

Burkhardt does own the San Luis Central Railroad Company, a 13-mile stretch of tracks in Colorado over which grains, potatoes and fertilizer are hauled, and serves on the board of directors for the Wheeling & Lake Erie Railway, a regional carrier serving Ohio, Pennsylvania and West Virginia.

Even though MM&A's financial picture improved last year once it started to transport oil, it's not clear whether the tracks have been improved, including the stretch in Lac-Megantic. The investigation into that crash will look at whether track conditions were a factor.

From 2006 through 2012, track conditions were the primary cause of 10 of Montreal, Maine & Atlantic's 19 derailments. Similarly, 13 of the 20 derailments on Pan Am tracks were due to poor tracks.

The majority of those derailments were relatively minor incidents without spills or injuries.

Liability aside, MM&A's response to the derailment, which has been widely criticized, also could play a role in the company's future.

Burkhardt did not visit the scene until Wednesday, five days after the accident occurred.

When asked by a reporter how much he was worth, Burkhardt replied, "A whole lot less than Saturday."

Burkhardt also appeared to contradict himself. At first, he said the train had been tampered with; then he acknowledged that the engineer likely was at fault for not properly applying hand brakes to keep the cars from moving.

Beall, the railroad litigation expert from Georgia, said he -- like many -- was surprised to hear that the derailed train was operated by a one-person crew.

"There used to be five-person crews," he said. "If you whittle that down to two people or one person, what's going to happen? They are going to cut corners."

Eric Russell can be contacted at 791-6344 or at:

erussell@pressherald.com

Twitter: @PPHEricRussell

 

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