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Refinery closing will likely cost railroad $11M per year

Posted: March 2, 2014 - 8:43pm

The impending closure of the Flint Hills Resources North Pole refinery could cut $11 million in annual revenue to the Alaska Railroad, adding to the “unholy trinity” of challenges facing the state railroad, its president and CEO Bill O’Leary said.

O’Leary made his remarks Feb. 20 to the Resource Development Council for Alaska.

The Flint Hills closure will also put the railroad’s recent announcement of proposed commuter service between Wasilla and Anchorage on hold. O’Leary said the service, which railroad officials said could start this fall on a trial basis, wouldn’t generate substantial revenue early on and isn’t feasible given the added financial strain caused by reduced freight service demand.

Railroad leaders predict bulk fuel transports in 2015 to be roughly 20 percent of peak volumes in 2003 that were primarily jet fuel shipments from the Flint Hills refinery to the Port of Anchorage. When it’s purchased by airlines, fuel from the port is piped to Ted Stevens Anchorage International Airport.

O’Leary said the $11 million loss in freight business is expected despite a likely increase of northbound fuel trains to meet Interior demand for multiple fuels now provided by Flint Hills.

The overall freight business for the railroad totaled 5.1 million tons of goods moved in 2013, off 23 percent from 6.6 million tons in 2008, O’Leary said.

Gravel and export coal hauls have fluctuated during the time period, but the decline in service is largely attributable to decreased production from Flint Hills. The railroad hauled nearly 2 million tons of petroleum in 2008, while the sum of 2013 fuel shipments was less than 1 million tons, according to railroad data.

To compensate, the Alaska Railroad has cut what was once daily freight service between Anchorage and Fairbanks to five days per week.

“Freight is far and away our largest in the series of business lines,” O’Leary said.

Freight transport accounted for 67 percent of the railroad’s $143.7 million in revenue for 2013. Passenger service made up 18 percent of generated revenue and the railroad’s real estate holdings accounted for 13 percent, according to figures provided by the railroad. The remaining two percent resulted from miscellaneous revenue streams.

The railroad reported $14.2 million in net income last year and is estimating $8.3 million in profits in 2014. In 2011, the railroad generated $13.4 million of income on $187 million of revenue.

Although it is a state-owned corporation, the railroad operates on a calendar year, not the state fiscal year that begins every July 1.

The faint good news in the Flint Hills announcement is that it was made early, he said. The refinery isn’t expected to shut down until June, giving the railroad time to try and soften the blow, he said.

Anchorage Mayor Dan Sullivan told the Legislature’s Joint Transportation Committee Jan. 18 that the Port of Anchorage would likely see “net neutral” business with the loss of Flint Hills jet fuel shipments and the addition of Delta Western’s fuel storage. Last April, Delta Western, which supplies petroleum products to Western Alaska communities, announced plans to build 11.3 million gallons of fuel storage at the port by late this year.

The second challenge facing what O’Leary said is believed to be the last full-service railroad in the nation — offering both freight and passenger service — is “the mother of all unfunded mandates, Positive Train Control,” he said.

Positive Train Control, or PTC, is a national mandate by the Federal Railway Administration to install tracking and control systems that can override human error if a train is going too fast or is in the wrong place, O’Leary said. First unveiled in 1997 and mandated in 2008 after a series of accidents in the Lower 48, the Alaska Railroad estimates full PTC implementation will cost it about $155 million.

Failure to install the system could result in fines of up to $25,000 per day and loss of passenger service.

O’Leary said the current December 2015 deadline to complete PTC is unattainable for nearly all the nation’s railroads, so he said he expects an extension of several years.

To date, the railroad has spent $63.8 million on the capital project. That money, along with the $19.1 million in state funding the railroad received in the fiscal year 2014 budget leaves about $70 million of work unfunded. The railroad has requested an additional $40.8 million from the Legislature over the next two years, O’Leary said.

A change to the federal funding formula for passenger railroads completes O’Leary’s hard-times trinity. The transportation funding package passed in October 2012 known as MAP-21 cut the Alaska Railroad’s allotted funding from $36 million to $28 million despite efforts to stop the cut by the congressional delegation, O’Leary said.

The Alaska Railroad “came under attack” by lawmakers from other states that didn’t think it warranted the same funding provided other passenger lines, even though it meets the requirements, he said.

“We don’t look like the Chicago Transit Administration; we don’t look like Dallas Area Rapid Transit,” O’Leary said.

When an increase to the railroad’s match requirement is added to the federal funding reduction, the hit totals $12 million per year, he said. That money would have gone towards upkeep of railroad’s capital-intensive infrastructure, according to O’Leary.

Surface transportation funding will come up again later this year, and he said the fight over money for the railroad could resume.

Going forward, the focus is going to be more on revenue generation and business expansion to solve the railroad’s financial bind and less on cost reduction, O’Leary said.

Last March, prior to O’Leary taking the helm, 54 positions were cut at the railroad in a cost-saving measure. More than 800 full-time employees worked for the Alaska Railroad in 2008, a workforce that has shrunk to about 580 now as business has dwindled.

Nearly all of the large proposed infrastructure projects in the state would boost business for the railroad, O’Leary said.

In the interim, railroad officials have discussed with the Alaska Industrial Development and Export Authority board the possibility of transporting liquefied natural gas from Cook Inlet north to Fairbanks by rail. Moving the LNG, that would mainly be used for heat, by rail would be much cheaper than by truck and could provide an alternative fuel source for the Interior if the state’s project to ship North Slope gas to the region — the Interior Energy Project — is delayed or falls through.

Since the railroad’s presentation to AIDEA about the feasibility of shipping LNG by rail in December, O’Leary said in an interview that “there has been a lot of interest in the marketplace,” but there have been no further meetings between the railroad and the authority on the option.

O’Leary said further developing the railroads nearly 18,000 acres of real estate available for lease across the state could provide an opportunity for increased and stable revenue. He said real estate holdings amounted for 76 percent of the railroad’s net income in 2013.

“Real estate has long been a tremendous buffer for us over the years as we fight the business cycles in both freight and or passenger service,” he said.

There are no plans for general passenger fare increases as a way to mitigate the financial burdens, O’Leary said.

“We’re going to continue to focus on good customer service,” he said.

Passengers are coming back to the Alaska Railroad, but numbers are still down from pre-recession highs when more than 542,000 passengers boarded the state’s trains in 2008. Recent ridership bottomed out in 2010 at 405,000 passengers as traffic on cruise line-owned railcars pulled by the Alaska Railroad fell. More than 1 million cruisers toured the state in 2013 for the first time since 2009 and the railroad carried more passengers, up to nearly 490,000 last year.

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