Informational
Briefing:
Staff Proposal
For Sale
of the
Panhandle to
the C&OR
July 7, 2005
Project Costs
Project Benefits
* C&OR Pays ORDC $10 Million
* C&OR Better Able to Invest in Line
(Subject to Further
Negotiation)
* State Owned Line Successfully Privatized
* ORDC Retains ROW and Key Rights
* ORDC Nets about $6 Million for Projects
* ORDC Nets $440,000/Yr. in Lease Payments
(Subject to Further
Negotiation)
INTRODUCTION
Through a March 14, 2002 Motion, ORDC Commissioners instructed the ORDC Staff to begin investigations into the possible sale of the State of Ohio owned Panhandle Rail Line between Columbus and Mingo Juction. (See Map included herein as Exhibit “A.”) Since that time, staff has: 1) solicited input from affected local governmental bodies, shippers, and interested citizens; 2) overseen the appraisal and appraisal review of the line; 3) coordinated with the Governor’s Office and Office of Budget and Management; 4) kept interested parties apprized of developments through mailings and posting of information on the ORDC Web Site; and 5) met with the Columbus & Ohio River Railroad (C&OR), ORDC’s contract operator since 1992, to discuss parameters of a possible sale.
The culmination of these Staff efforts to date, is the generation of: 1) a DRAFT Purchase and Sale Agreement to sell the Columbus & Ohio River Railroad (C&OR), a subsidiary of the Ohio Central Railroad, the Panhandle track, fixtures, and appurtenances, including the station building in Coshocton; and 2) a DRAFT long term Lease Agreement to lease the underlying right-of-way to the C&OR. (See Exhibits “B” and “C” included herein.) The final negotiations over the terms and conditions contained in the Sale and Purchase and Lease documents with the C&OR have NOT yet taken place.
Staff seeks: 1) Commissioner input and comment on the lease and sale documents; and 2) direction from Commissioners to continue the lease and sale process as outlined herein.
BACKGROUND
Brief Recent History
Conrail Attempt to Abandon Line: The “Panhandle” Rail Line is comprised of 161 miles of track running from Columbus to near the Ohio River at Mingo Junction through Franklin, Licking, Muskingum, Coshocton, Tuscarawas, Harrison, and Jefferson Counties, and the cities/towns of Newark, Coshocton, Newcomerstown, and Dennison/Uhrichsville. The line includes branches to Hebron and Cadiz/Georgetown.
In the late 1980's and early 1990's, the fate of the Panhandle line was in doubt. The owner of the line at that time, Conrail, had filed to abandon through an expedited “exemption” process a 24-mile section of the eastern part of the line between Dennison and Cadiz Junction. The writing was on the wall that Conrail would eventually abandon the entire eastern half of the line between Coshocton and Mingo Junction. In an effort led by dedicated local officials from Tuscarawas County, and joined by other local officials and the State of Ohio, the proposed abandonment was vigorously fought. In the end, the Interstate Commerce Commission (ICC), the predecessor agency to today’s Surface Transportation Board, denied Conrail’s request to abandon the 24-mile long section.
Rather than pursuing abandonment of the 24 miles through the lengthy, normal abandonment process, Conrail responded to its defeat at the ICC by offering to sell the entire Columbus to Mingo Junction line to a short line railroad. The State partnered with Conrail to help conduct a competitive bid process. The winning bidder was the Ohio Central Railroad, then a small operation serving the about 100 miles of track.
When Ohio Central was unable to obtain private bank financing for the purchase of the line, the State stepped in and acquired the line for $7.3 million through a complex transaction using Certificates of Participation, or COPs. The newly formed Ohio Central affiliate, the Columbus & Ohio River Railroad (C&OR), began operating on the Panhandle as the State’s contract operator on April 7, 1992. The C&OR’s responsibilities included the repayment of the State’s COPs debt in addition to running the railroad. (The COPs debt is scheduled to be paid off in 2012 but can be paid off any time before that date without penalty.)
State Stewardship of Line: The State’s operating agreement with the C&OR was for a 5-year period. In 1996/97, ORDC decided to conduct a competitive selection process to determine which railroad would operate the line for the next five years, from 1997 to 2002. The two tiered competitive selection process resulted in a hotly contested battle for operating rights between the C&OR and the Wheeling & Lake Erie Railway (W&LE). The C&OR won and was awarded another 5 years as operator of the Panhandle. The W&LE subsequently brought suit charging that the ORDC process was biased and that W&LE should have been awarded the operation of the line. The courts upheld ORDC’s selection of the C&OR.
In 2002, ORDC renewed C&OR’s Operating Agreement providing the C&OR with operating rights for another 5 years. The renewal was based on the C&OR meeting each and every requirement for effective operation of the Panhandle line specified in the 1997 - 2002 Operating Agreement. Requirements included shipper satisfaction, financial stability, effective maintenance of track, and other related factors.
Comparative Status of the Panhandle Line, 1992 and Present
Panhandle Line, 1992: When the State of Ohio first took ownership of the Panhandle Line, the line generated about 10,000 carloads per year. The line east of Newcomerstown was not in service except for occasional service to a small customer in Dennison. Track speeds on the east end of the line were 10 to 25 MPH.
Panhandle Line, 2005: After 13 years of State ownership, and C&OR operations, the Panhandle line now generates more than 25,000 cars per year. The east end of the line has new customers and is regularly served. Track speeds on the entire line are generally 25 and 40 MPH. The C&OR has made every required COPs payment in full and on time since it began operations.
Recent ORDC Actions
* On March 14, 2002, the Commission formally passed a motion for ORDC staff to begin examining the “framework” of a potential formal investigation of the sale of the Panhandle.
* From November 2002 to February 2003, staff met with or otherwise contacted many of the local government bodies, companies, and others who had been instrumental in saving the Panhandle from abandonment. In addition, staff talked to others who expressed a desire to comment on the possible sale of the Panhandle. The purpose of these informal investigations was to find out what those close to the Panhandle thought about a sale, and to determine what codicils or covenants ORDC would need to place on any possible sale to ensure that public interest is preserved.
* On January 9, 2003, the Commission passed Resolution 03 -1 which instructed staff to “select appraisal and appraisal review services to prepare for a potential Panhandle Rail Line sale.”
* On September 11, 2003, staff informed Commissioners that a two tiered competitive selection process had resulted in the selection of a team headed by ME Companies to appraise the line, and Continental Appraisal Company to perform appraisal review.
* On August 17, 2004, Ohio Rail Development Commission (ORDC) Commissioners held a lengthy discussion concerning the potential sale of the Panhandle Rail Line at ORDC’s annual retreat. Staff ran through some of the options which ORDC could consider including selling the entire line, selling a 50% interest in the line, selling just the track and fixtures and retaining the property, or selling nothing at all. Several Commissioners commented that staff should conduct whatever negotiations and investigations were needed to develop a potential plan for the sale of all or part of the Panhandle, but that Commissioners reserved the right to amend or reject the staff plan once they saw it.
* On December 14, 2004, the final appraisal review report was submitted to ORDC valuing the track and fixtures at $17 million. The appraiser and appraiser reviewer disagreed on the value of the right-of-way, with the appraiser estimating the value at $14.7 million, and the appraiser reviewer, having done an independent estimate based on the background work done by the appraiser, estimating the right-of-way was worth $7.2 million. Based on the Panhandle track and fixtures appraisal, Staff estimates that nearly $2 million of the appraised value of the Panhandle line consists of materials paid for and installed by the C&OR. (See Exhibit “D”).
W&LE Offer to Purchase
Through a short letter dated October 22, 2004, the Wheeling & Lake Erie Railway (W&LE) offered to buy the Panhandle line for $30 million. ORDC Executive Director James E. Seney responded in an October 27 letter stating that he would be inclined to recommend the rejection of the W&LE offer because of the adverse impacts the fragmenting the Ohio Central railroad system would have on that railroad and its shippers. (See Exhibit “E” for copies of W&LE and ORDC correspondence.)
PROJECT DESCRIPTION
Major Provisions of the Proposed Purchase and Sale Agreement
* ORDC will sell to the Columbus & Ohio River Railroad all the track, fixtures, and other appurtenances on the entire 161 miles of the Panhandle mainline and branchlines as well as the station facility in Coshocton for the price of $10 million (price subject to further negotiation) contingent on proper defeasance of the 1992 Certificates of Participation used to finance the original purchase of the line.
* Conditions of the Purchase & Sale include:
< Any portion of the Panhandle which is abandoned reverts back to ORDC ownership.
< ORDC has the right of first refusal to purchase any segment of track which the C&OR might sell.
< ORDC will retain certain rights to run passenger rail services.
Major Provisions of the Proposed Lease Agreement
* ORDC will lease the Panhandle right-of-way (ROW) to the C&OR for a 30-year period for the proposed cost of $440,000 a year (subject to further negotiation). The C&OR will have the right to lease the ROW for another 30 years at its discretion but at a price to be negotiated.
* The C&OR will have the first right of refusal to purchase the Panhandle ROW.
* The C&OR will have the right to make improvements upon the ROW needed for railroad operations.
* The C&OR will be responsible for the payment of all property taxes.
* The C&OR shall have the right to run passenger service under certain conditions.
* ORDC reserves the right to grant a wide variety of easements and licences for overhead or underground fiber optics, communications, utilities, pipes, conveyors, or other conveyances.
* ORDC reserves the mineral rights.
* ORDC reserves the rights to any outdoor advertising revenues.
* ORDC reserves the right to provide easements for trails but only if the proposed trail generally conforms to select “best practices” established by the Federal Highway Administration and only if trail advocates can reach agreement with the C&OR on indemnification and liability issues.
* ORDC reserves the same “Non-Exclusive Operations” rights it now has in its operating agreement with the C&OR to enable connecting railroads serve new customers for a mandated trackage rights fee.
* ORDC reserves the same “Rights on Contiguous Lines/Right of First Refusal” it now has to mandate trackage rights for other railroads over lines of the Ohio Central at either end of the Panhandle, and for ORDC’s right of first refusal to purchase these connecting lines.
* ORDC reserves the rights to mandate passenger service over the Panhandle under certain conditions.
WHY ORDC STAFF IS RECOMMENDING SALE AND LEASE TO C&OR/BENEFITS OF
PROPOSAL
Benefits of Sale and Lease to C&OR
* The C&OR has 13 years of “sweat equity” in the line which includes the payment of all COPs debt (over $9 million), the improvement of the condition of the tracks through C&OR and Ohio Central investments (over $12 million NOT including equipment costs), the over twofold increase in rail traffic from about 10,000 a year to over 25,000 last year, the overwhelming positive shipper approval rating (100% positive on the last ORDC shipper survey), and other related work and investments.
* The C&OR proved to ORDC that it is the best operator for the Panhandle in the 1997 Competitive Selection Process.
* The C&OR ownership of the Panhandle track and fixtures and long term lease of the ROW will better enable it to raise capital for necessary future investments.
* State ownership of the Panhandle is no longer needed. Resolutions passed by the General Assembly concerning the State’s purchase of the Panhandle stated that preserving the Ohio portion of the last direct rail corridor between Columbus and Pittsburgh was important to the future commerce of Ohio. The State’s purchase of the Panhandle prevented the abandonment of the Panhandle east of Coshocton. The Panhandle is in no danger of abandonment and the shippers are overwhelmingly satisfied with C&OR service.
* ORDC will retain key rights important to rail users, public officials, and concerned citizens.
* ORDC will be able to use about $6 million of the sale proceeds and about $440,000 a year in lease payments (depending on final sale and lease negotiations) for ORDC projects.
Problems With a Sale to the W&LE
* Payment of such a high price for the line, $30 million, could result in problems down the road with the viability of the Panhandle line. ORDC does not want to risk being in the position of having to save the Panhandle again.
* The Panhandle is the backbone of the Ohio Central Railroad System in Ohio. Without the Panhandle, Ohio Central operations on the Ohio Central and the Ohio Southern would suffer significant adverse impacts. The overall profitability of the Ohio Central would be diminished impacting the Ohio Central’s Youngstown area railroads, the Youngstown Belt, the Youngstown & Austintown, the Mahoning Valley, and the Ohio & Pennsylvania, as well as the Ohio Southern and Ohio Central.
* The loss of the Panhandle would adversely impact the Ohio Central’s ability to serve the new Coshocton Ethanol LLC plant locating on the Ohio Central line in Coshocton.
* Rail service to the AEP Conesville power plant would be adversely impacted because W&LE would need to duplicate the Ohio Central’s Muskingum Transload facility and would not be able to transload coal as close to the plant as the Ohio Central does today.
RECOMMENDATION
Although Staff recommends a sale and lease of the Panhandle in line with the general provisions of the documents enclosed, ORDC Staff seeks no resolution by ORDC Commissioners at this time. Rather, Staff requests that Commissioners provide direction to Staff so that the final Purchase & Sale and Lease Agreements can be effectively negotiated with the C&OR, and public input can be obtained. Staff believes that it would be possible to finish negotiations and public input in time for the Commissioners to approve a sale and lease at the September 8, 2005 meeting, or another Commission meeting later this year.
Staff further recommends that the option of not selling and leasing the line at all remains open if negotiations with the C&OR are not successful, or if there are compelling reasons discovered through the public input process for ORDC not to proceed.
LIST OF EXHIBITS
Exhibit “A” - Panhandle Map
Exhibit “B” - Proposed, Draft Purchase and Sale Agreement for Panhandle Track and Fixtures
Exhibit “C” - Proposed, Draft Lease Agreement for Panhandle Right-of-Way
Exhibit “D” - Estimation of Value of Materials Installed by C&OR
on Panhandle
Exhibit “E” - W&LE & ORDC Correspondence on W&LE Offer to Purchase Panhandle