What Does Buyer See in Small, Bankrupt Maine Railway?

(SOURCE:  Portland Press Herald - Tom Bell)

Why would Fortress Investment Group, a global firm with $58 billion in assets, want a small, bankrupt railroad in a remote region where traditional rail customers have been in decline for years?

Box cars owned by the Montreal, Maine & Atlantic Railway sit idle in Brownville. The small bankrupt railway was sold at auction to a global firm that may like it, experts say, for its beeline between Montreal and Saint John, Canada.

Tom Bell/2013 Press Herald file

The answer, say transportation experts, is Fortress probably sees potential in the railroad’s unique geographic position on the North American continent.

Fortress last week won an auction to buy the Montreal, Maine & Atlantic Railway with its bid of $14.25 million. Although the company has said it plans to continue operating the railroad, it is not speaking publicly about its business plan. The deal has yet to close.

One of MM&A’s biggest challenges has been that its customers are spread far apart. It has only one customer, for example, on the 117-mile stretch of rail between Lac-Megantic, Quebec, and Brownville Junction: Moose River Lumber, outside Jackman. That’s a lot of rail to maintain without much revenue.

Also, some of the railroad’s previous customers have gone out of business, and some of its existing customers are struggling. One of its biggest customers in Maine, Great Northern Paper in East Millinocket, announced two days after the auction that it would halt paper production for up to four months amid high production costs and lower market prices for its paper.

The railroad may travel though some of the most remote areas in the United States, the experts say, but its roughly 500 miles of tracks provide the shortest route between two large Canadian cities, Montreal and Saint John, New Brunswick.

That route could once again be profitable if the Quebec government would allow the return of crude oil shipments on the line, said Chalmers “Chop” Hardenbergh, editor of Atlantic Northeast Rails & Ports, a trade magazine.

Officials in Lac-Megantic and the province have been reluctant to do so since a train carrying 72 cars of oil derailed in Lac-Megantic on July 6 and killed 47 people.

Fortress owns the Florida East Coast Railroad, a well-respected, high-volume railroad that has won numerous safety awards, Hardenbergh said. If any railroad could persuade the Canadians to allow the resumption of oil shipments, it would be Fortress, he said.

The nearly straight-line run between Montreal and Saint John is valuable for not only its potential as a rolling oil pipeline but also for transporting other cargo, Hardenbergh said.

One issue that has frustrated the operators of the Montreal, Maine & Atlantic Railway has been the unwillingness of the federal Food and Drug Administration to allow sealed containers filled with food products to cross the U.S. border, he said.

Tropical Shipping, a Caribbean shipping company that uses the port of Saint John as its Canadian port, for a short period about eight years ago used the Montreal, Maine & Atlantic to ship its cargo to Montreal and points west.

Fortress’ Florida railroad does a lot of business with Tropical and perhaps the two companies would have more clout working together to address the border problems, Hardenbergh said.

At Brownville Junction, the railroad splits into two directions, with one line extending northward to Millinocket and another southward to Searsport.

Searsport, which has a deep-water port, also gives the railroad value, said David Cole, a former commissioner of the Maine Department of Transportation who now consults on trade and logistical issues.

From Searsport, he said, the rail line extends through the middle of a region of 26 million acres of forest land in northern New York, Vermont, New Hampshire and Maine.

“The MM&A is like a skeleton within the northern forest and funnels it right down to Searsport,” said Cole, who works for the Action Committee of 50, a nonprofit group made up of leading business and civic leaders from the Bangor region. “This railroad is very strategic relative to our forest base, not just for Maine but the region.”

Fortress has chosen a veteran railroad operator, John Giles, to lead the new railroad initiative in Maine. Giles’ 40-years-plus career includes executive jobs with CSX Corp, Great Lakes Transportation and RailAmerica, one of North America’s largest operators of short-line and regional freight railroads.

Fortress bought RailAmerica in 2007 and sold it four years later. However, Fortress continues to operate on one of the RailAmerica lines, the Florida East Coast Railway, a regional freight railroad that runs along the east coast of Florida between Jacksonville and Miami.

The Florida railroad plans next year to launch a passenger service, the nation’s first privately run inter-city service in 43 years and the only one that would not be dependent on government subsidies.
Passenger trains operated between Montreal and Saint John from the late 1800s to 1994. Fortress won’t be reviving passenger service along the MM&A lines in Maine because the rails would have to be replaced, at an enormous expense, to accommodate the high speeds required for passenger trains to compete with air travel, said Don Marson, who retired last year as general manager of the Maine Eastern Railroad, which operates freight trains and summer excursion trains between Brunswick and Rockland.

The MM&A railroad’s 500-mile-long corridor also has value for other uses, such as a corridor for a pipeline, fiber optic cables or a highway, said George Betke of Damariscotta, who has an ownership stake in three short-line railroads outside New England.

“They don’t view it as just a railroad,” he said.