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Vol. 19, No. 34 Week of August 24, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

AK-WA Connection 2014: Railroad rises to market challenges

Carrier completes Tanana River crossing, pursues other projects, and juggles new business initiatives with programs to cut costs

Rose Ragsdale

Alaska-Washington Connection

One critical link in the supply chain that binds Alaska and Washington state is the Alaska Railroad. In 2013, the railroad celebrated its 90th anniversary, and this year marks nearly a quarter century since the federal government sold the carrier to the state of Alaska in January 1985.

Alaska Railroad Corp. operates 683 track miles that provide both freight and passenger services to the cities of Anchorage and Fairbanks, the ports of Whittier, Seward and Anchorage as well as Denali National Park and military installations. In addition, vessel and rail barge connections are provided from Seattle, Washington, and Prince Rupert, British Columbia.

An independently managed, state-owned institution, the railroad through the years has held its own as a transportation entity in the Alaska-Washington trade.

Recent years, however, have presented the railroad with new challenges, including expansion projects, regulatory mandates and additional market-driven financial pressures.

Major projects

For the first time in more than 70 years, the Alaska Railroad undertook two major capital projects at the same time to expand the rail route, which now stretches from the seaside communities of Seward and Whittier, Alaska, more than 400 miles northward to the Interior city of Fairbanks.

To the north, construction of phase 1 of an 80-mile northern rail extension rolled to completion this spring, on budget and on schedule. About $84 million has been appropriated by Alaska lawmakers in support of the project.

Measuring 3,300 feet, the NRE bridge crossing over the Tanana River at Salcha, is Alaska’s longest bridge. A ribbon-cutting ceremony was scheduled for Aug. 5.

To the south, the railroad broke ground and construction got under way in 2013 on about two-thirds of a 32-mile spur line that will connect Port MacKenzie to the main line near Houston, Alaska.

Since 2007, the state of Alaska has appropriated $268 million for planning, design and construction of both major rail extensions. About $184 million has been appropriated for the Port Mackenzie Rail Extension, including a $23.5 million state grant and a $30 million voter-approved state bond for fiscal year 2013. The Legislature also appropriated another $13 million for the project last spring.

A third mega project is the federally mandated Positive Train Control system to prevent train accidents caused by human error. Recent progress has come by way of state capital funds appropriated in 2013 (and requested in future years) to help buy costly and still-developing technology. The PTC project still needs another $70 million to complete, and the Legislature appropriated $15 million for the project last spring. The deadline to implement PTC is Dec. 31, 2015. However, like most railroads nationwide, Alaska Railroad is more likely to meet the deadline only if it is extended to 2018. The penalty for failing to install PTC ranges from daily fines to curtailing or ending passenger service.

Revenue crunch

Above and beyond new infrastructure via mega projects, the railroad realistically needs to spend tens of millions of dollars annually to maintain and modernize existing track, bridges and facilities. The railroad’s net income is a vital part of annual capital spending, particularly since federal funding for its regular capital program is shrinking. For example, a 20 percent drop in Federal Transit Administration grants in the past decade, has reduced a reliable source for critical infrastructure investments. In 2012, a new federal surface transportation funding bill (MAP-21) cut the railroad’s allocation of FTA formula funds, while more than doubling the local match requirement.

MAP-21 expires this year, meaning the railroad will likely face another difficult fight to keep its FTA formula funds, putting about $28 million at risk of additional reduction or even elimination.

In addition, fewer capital dollars have resulted from reduced commercial activity. Two important freight business lines - refined petroleum and export coal - continued to decline in 2013 and 2014, leaving a substantial gap in operations revenue. 2013 was the first full year that the railroad felt the impact from a North Pole refinery’s 2012 decision to shut down all but one of its three petroleum refining units. In 2014, the refinery ceased all of its refining activities, effectively eliminating the railroad’s Fairbanks-to-Anchorage fuel-hauling business and delivering an annual $11 million blow to annual revenue.

“With the refinery closed, the direction of the supply chain has been reversed,” said Dale Wade, the railroad’s vice president of corporate affairs and government relations. “Nothing will be flowing southbound. (Flint Hills) will be bringing products northward from Anchorage where they have storage tanks with considerable capacity on land they lease from us.”

Some other areas up

While the closure of the refinery is a blow to the railroad’s revenue, Wade said it happened at perhaps “the best time for us to take a hit on a single product line.”

“Our flat car business is significantly up over last year and our rail barge business through Whittier is up.”

A soft global market, meanwhile, has curtailed export coal shipments by a third, but sales of coal to local clients, primarily Golden Valley Electric Association in Fairbanks, has held steady during the past 18 months, Wade said.

In addition, passenger traffic on the railroad is up 10 percent from 2013, which itself was a good year.

Wade said a rebound in the Alaska cruise industry is driving the spurt in rail passenger traffic this year, especially in the railroad’s premium Goldstar service.

In its 2013 annual report released in April 2014, the railroad said employees across the company have rallied to offset the recent fiscal damage. Working in focused teams, the workers developed new initiatives to lower expenses, boost efficiency and generate new business opportunities. As a result, the railroad reported $14.3 million in net income for 2013, which is nearly triple its original budget of $4.9 million.

Some of the revenue growth stemmed from oilfield shipments bound for the North Slope, which drove an increase in rail-barge and trailer/container business.

Customer care a focus

Railroad staff also drew praise and won awards for their approach to customer care and attracted new complex transportation projects, such as moving massive generators for the Matanuska Electric Association’s Eklutna power plant in early fall 2013.

The railroad reported an 18 percent increase in passenger train ridership. Real estate revenues also grew by 7 percent thanks to an uptick in dock activity, land use permits and a full year of lease revenue from the Historic Freight Shed. Recent real estate developments in Seward have solid potential. A revamped ARRC Seward Master Plan provides a blueprint for growth, and renewed land negotiations can facilitate Seward waterfront re-development.

The railroad’s employees combined the quest for new revenues and business opportunities with dogged cost control companywide. The biggest savings came from spending $4.7 million less on utilities and fuel than a comparable outlay the prior year. Locomotive idle reduction policies and savvy train operating practices boosted fuel efficiency.

“We initiated a new facility energy monitoring and management program that reduced electricity consumption in the Anchorage railcar mechanical shop by 40 percent. Such proven measures can be duplicated in other high-demand facilities moving forward,” said Bill O’Leary, the railroad’s president and CEO, in the annual report.

Cost-conscious employees reduced material-and-supply spending by $1.7 million in 2013.

Big savings also came from ongoing personnel reductions, including a round in early 2013 that translated into a $2.3 million reduction in wages and benefits paid compared to 2012. In conjunction with a 54-position (7.3 percent) work-force reduction in the spring of 2013, the railroad restructured the company to elicit greater efficiency from its leadership and rank-and-file. This change came on the heels of a 52-position cut in 2012 and nearly 200 positions eliminated in 2009-10.

“The railroad is lean. Every employee is called upon to work harder, smarter, safer. The proof is in the numbers,” O’Leary added.

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