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The Dakota, Minnesota & Eastern Railroad Corp. (DM&E) has hit another bump on its long, winding road to the Powder River Basin (PRB). And it’s a particularly large one at that.

Yesterday, the Federal Railroad Administration (FRA) announced it denied the railroad’s $2.3 billion Railroad Rehabilitation and Improvement Financing (RRIF) program loan application because the loan posed an “unacceptable risk to federal taxpayers,” the agency said.

FRA officials are concerned about the DM&E’s “highly leveraged” financial position, the size of the loan relative to the railroad’s “limited scale” and whether the railroad could ship the amount of coal necessary to generate enough revenue to pay back the loan, said FRA Administrator Joseph Boardman in a prepared statement. In addition, the application didn’t sufficiently address how the DM&E would handle potential cost overruns and schedule delays, he said.

“While the project met some of the RRIF program’s statutory requirements, there remained too high a risk concerning the railroad’s ability to repay the loan even with an appropriate combination of credit risk premiums and collateral,” said Boardman.

The DM&E had planned to use the loan to help finance its $6 billion project — first proposed more than eight years ago — under which the railroad would build a 262.3-mile line through western South Dakota and eastern Wyoming, and upgrade 600 track miles in South Dakota and Minnesota to access the PRB.

“While the DM&E is disappointed in the … decision denying our loan application, we expect to move forward and will spend some time assessing alternatives to accomplish that objective,” said DM&E President and Chief Executive Officer Kevin Schieffer.

One option might be to line up private financing for the entire project. Last week, Schieffer said the DM&E already had received expressions of interest from private financiers and would soon implement a formal, competitive solicitation process to “get the best terms we can.” But if the federal government considers the railroad a credit risk, it might be difficult to convince private financiers otherwise — especially to lend funds covering all vs. two-thirds of project costs.

Nonetheless, there are more than 100 groups, including “every farm group in our service area, 55 of 56 communities on our lines and the utility industry,” that are convinced about the project’s merits and support the DM&E’s efforts, said Schieffer.

“This project is too important to the future of our company, regional rail transportation and the many supporters in the agriculture and energy sectors, the communities we serve and beyond who are relying on it,” he said.

— Jeff Stagl