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The Kansas &
Oklahoma Railroad
Salina – Osborne Operations Analysis
February 1, 2003
Background
The Kansas & Oklahoma Railroad was acquired on June 30, 2001, and is a wholly owned subsidiary of Watco Transportation Services, a division of Watco Companies, the largest privately owned railroad company in the United States. In addition to the K&O Railroad, Watco owns five other railroads, two of which are within this region. The South Kansas & Oklahoma Railroad, located in Southeast Kansas, and the Stillwater Central Railroad, which runs diagonally across Oklahoma from Tulsa to Oklahoma City and southwest to Lawton and Snyder, Okla. Combined, these three railroads make up a 1,200-mile Midwest rail system that is connected by trackage rights
The K&O was acquired with assistance from the state of Kansas to preserve rail service to the agricultural heart of rural central and western Kansas. In the acquisition agreement between the state and the K&O, the railroad agreed to provide service on certain aspects of the line, mainly from Wichita west to the Colorado Border. In essence, the agreement preserved much of this line from the threat of abandonment.
One segment that was exempted from this agreement was the Salina to Osborne branch due to severe economic and track infrastructure limitations.
Summary
After operating the K&O for two years, Watco has developed relationships with customers and now is in much better position to understand the strengths and weaknesses of each branch line. The Salina to Osborne branch needs to be re-invented in every aspect to avoid the necessity of abandonment to obtain the value of the track.
This reinvention includes:
· Service by the Railroad
· Commitment by the Customer
· Participation by the Communities
The K&O Railroad team is committed to providing excellent service on this line, but real participation will be required by a number of stakeholders in order to prevent a partial or complete abandonment of the branch line.
This report takes into consideration the variables facing the line, makes recommendations, and sets a timeline in place for a successful conclusion.
Salina to Osborne
The Salina to Osborne branch of the K&O is an island separate from the rest of the K&O stretching 82 miles from Salina north and west through three Kansas counties and seven rail stations. The track infrastructure received minimal maintenance from the previous owner and has 70-pound rail (each three-foot section of rail weighs 70 pounds), and has severely deteriorating ties and ballast. The weight of the rail places a limitation on the weight and speed of the train traffic. The lighter the rail, the more difficult it is to achieve higher, safer speeds. The heavier the rail, the more forgiving it is and allows for greater diversity in the geology (the base and track bed of the railroad).
To make matters more difficult for the on-going life of the railroad, agricultural conditions in this area depend primarily on the weather for success. There is very little irrigation. So when times are good there is usually more business than the railroad can handle (in part due to operating restrictions) and when times are bad there is not enough business to cover even minimal operating costs, to say nothing of the costs of capital improvements or debt retirement.
On other branch lines of the K&O, new management and customer philosophies have been enough to remove the threat of abandonment. Despite the best efforts of all parties involved, it will take additional effort to preserve this branch line. For the past two years this branch has been operated at a deficit and this must be reversed in the very near future.
Customers
The Salina to Osborne branch is fortunate to have several very progressive and aggressive customers. These customers have entered into several multi-year “take or pay agreements” where the customer agrees to pay for a minimal amount of service whether they use it or not. The commitment these customers demonstrate mitigates some the agricultural conditions discussed earlier.
Agmark, LLC/Farmway Coops, represent a partnership with elevators residing at five different points on this line. With locations at Westfall, Lincoln, Denmark, Hunter and Tipton, Agmark/Farmway have total storage space of almost 2,400,000 bushels alone. Strongly committed to shipping by rail, this customer participates in the take or pay agreement with the K&O which provides them incentive to use rail.
Based on past history, the estimated bushels that will be shipped by Agmark/Farmway annually will reach upwards of 3,300,000.
With their multiple locations, Agmark/Farmway play a vital role in the success of this rail line.
Midway Coop, located in Corinth, Kansas has storage capacity of slightly less than 300,000 bushels. Another extreme advocate of rail, Midway has worked hard to move everything possible on the K&O. Also engaged in a take or pay agreement with the railroad, Midway is looking to further strengthen the line by exploring the option of shipping grain out of its elevator in Osborne, Kansas over this line. Currently served by the Kyle Railroad, this location would have access to the K&O via interchange with the Kyle. Osborne represents an estimated 2-3 million bushels of additional grain for the Osborne branch.
Walker Products, in Lincoln, Kansas represents untapped potential. While using the railroad as a mode of transportation an estimated 30-40% of the time, the majority of the bushels shipped by Walker will travel by truck. With storage capacity of 1,125,000 bushels, this customer is key in the continued success of the K&O.
Over the last 18 months, Walker has shown a gradual shift towards rail with the improved service levels provided under new ownership. The opportunity to pick up a significant portion of the grain shipped by truck exists, specifically with the improvement of this line. This additional share could represent over 1,000,000 bushels of grain annually.
Couch Materials, also in Lincoln, Kansas is a non-grain location, specializing in supplying aggregates. With a quarry of quartzite rock located in a glacial flow deposit, this customer does not currently ship by rail. However, with a history of shipping by rail, the K&O believes that there are opportunities to bring this customer back. Currently, the K&O is exploring a move that would see 430 cars of rock per year move out via rail.
These are the customers that represent the current source of revenue for this branch line. All agree going forward, there needs to be an emphasis on moving commodities by rail. While traditional moves are obvious, customers and the K&O must work together in order to create non-traditional moves that offer the opportunity of additional revenue.
Ownership
One of the ways to mitigate the overall costs of the railroad is to transfer ownership to the public. With public ownership the line can be more eligible to public grants rather than loans, and acquisition costs can be transferred to the broader public good rather than just the railroad. The Kansas Legislature created the City of Pittsburg, Kansas, Port Authority during the 2001 Legislative session to help facilitate such a transaction.
The K&O proposes to transfer the entire branch line from Salina to Osborne to the City of Pittsburg, Kansas, Port Authority, in exchange for a 99-year lease, and a forgiveness in current debt the K&O owes the Kansas Department of Transportation for an amount equal to the net liquidation value (NLV) of the transferred property.
The City of Pittsburg, Kansas, Port Authority is governed by a five-member board:
Commissioner Appointing Authority Background
Mark Werner City of Pittsburg Banker, Former Mayor
Ron Clement City of Pittsburg School of Business, Pittsburg State
John Rosacker Secretary of Transportation KDOT Rail Unit
Gary Beachner City of Pittsburg Grain customer on SK&O Railroad
Jim Emerson Crawford County County Counselor
The Port Authority is a body-politic created in Kansas statute and authorized by Resolution of the Kansas Legislature, and by a resolution of the City of Pittsburg, Kansas.
Improvements
To improve efficiencies and safety on the line, the communities and counties served and the railroad are requesting an “ear-mark” in the 2003 Federal Transportation Bill for $5.73 million; $0.5 million from the Kansas Department of Transportation; and $0.5 million in Income Tax Credits authorized by the Kansas Legislature for a total of $6.73 million. These funds will be used for the following:
- Salina to Lincoln Improved
to 25 mph status
- Rail increase to 90 pound $3,200,000
- Ties $1,100,000
- Anchors $ 150,000
- Switches $ 90,000
- Total $4,540,000
- Lincoln to Osborne Improved
to 10 mph status
- Ties $ 800,000
- Ballast $ 350,000
- Spikes $ 40,000
- Total $1,190,000
- Improve Salina Yard Capacity
- Add track $ 500,000
- Provide for ready-reserve of
grain cars
- 500 Cars $ 500,000
- Total $6.730,000
These improvements will do the following:
Improve speed/safety: Currently the entire branch is in “excepted” class of operation, which means speeds cannot exceed 10 mph but must also be safe for the condition of the track which could be as slow as 1-5 mph. The improvements would allow for 25 mph operation from Lincoln to Salina, and safe constant speeds of 10 mph from Lincoln north to Osborne. If other funds become available or it becomes more economically feasible, improvements could be made over time to the Lincoln to Osborne section to raise the speed to 25 mph
Improve service: Improved speed and safety are cornerstones of improved service. With the ability to move trains at better speeds, without the fear of derailment, the K&O will be able to operate a more scheduled and dependable railroad. This will also allow a better utilization of rolling assets (locomotives and grain cars) as well as train crews.
Adequate supply of grain cars: One of the strengths of trucks is their ability to immediately respond to the customers needs. By having an adequate supply of grain cars that are actually stored under the grain elevators spout we will be able to capture the portion of the market that will allow this branch to be profitable. We will also work with our partners at the Class I Railroads to increase the flow of hopper cars to this branch line.
A scheduled railroad and adequate grain car supply will make the K&O the transportation mode of choice on this branch line.
State and Local Benefit
With the rehabilitation of this rail line and an adequate supply of grain hopper cars the benefit to the state of Kansas, as well as the counties and cities through which the rail line runs, would be in the form of limiting the increase of, and very likely, reducing truck traffic on roadways. Based on existing and projected rail traffic, if this line were to be abandoned an additional 4,500 to 6,000 semi tractor-trailer units would be on the roadways, resulting in increased pavement damage and adding to roadway and bridge maintenance costs. These additional maintenance costs will stretch already tight budgets at all levels of government.
In addition to potential roadway and bridge maintenance cost savings, the state of Kansas, its counties and cities, as well as the shippers and their customers…the farmers... will see economic benefits from staying connected to the nation’s rail system. By staying connected to the national rail system, they will stay connected to both key domestic markets and world markets for the export of Kansas agricultural products. Staying connected with these markets requires a rail line that can be operated at an efficient operating speed in a safe and reliable manner.
One additional benefit that should be pointed out is that by maintaining rail service for the shipment of products, competition will continue. Having a shipping choice for products allows for more competitive shipping rates and improved profit margins. Improved profit margins allow both the shippers and their customers the ability to reinvest additional monies in capital improvement projects.
Community Support
An operational briefing was held with Customers and communities in Beloit, Kansas, late in December 2002. At that meeting Customers articulated their need to stay connected to the national rail network in order to have access to key markets. These Customers expressed the commitment necessary to ship by rail provided certain service conditions were met by the railroad, mainly timely service and adequate grain car supply.
Each of the counties, cities and economic development officers present also expressed their support to work to maintain rail service in north-central Kansas.
Synergies
There are other branch lines that connect to the Osborne to Salina branch line that are in jeopardy of abandonment. There is grain that can move over the K&O to make both branch lines profitable. However, the Salina to Osborne branch must be preserved first before any other acquisition can be considered.
Timeline
Despite the fact that the Salina to Osborne branch has been operated at a loss for the last two years, the opportunity has presented itself to reverse this situation with decisive, specific and direct action.
The following timeline has been developed:
January 2003 -- Planning
February 2003 -- Letters of support for this plan from Customers, Communities, the City of Pittsburg, Kansas, Port Authority, and the Kansas Department of Transportation
Briefing of specific groups:
Key Kansas Legislative Committees
Kansas Department of Transportation
Kansas Governor
Kansas Departments of Agriculture, and Commerce
Senator Sam Brownback
Senator Pat Roberts
Congressman Jerry Moran
Kansas Agriculture Alliance Members
Formal presentation to Congressional Delegation
Formal presentation to Port Authority
March 2003 -- Negotiate contract between KDOT, Port Authority and K&O, transfer ownership by March 31, 2003.
May 2003 -- K&O deploys extra grain cars to Salina to Osborne branch line
June 2003 -- Summer harvest begins
November 2003 -- Congress reauthorizes Transportation Bill
December 2003 -- Construction Planning begins
January 2004 -- Construction begins (As weather permits)
May 2004 -- Construction complete
June 2004 -- Summer harvest begins
Summary
This analysis details what needs to occur to preserve the Salina to Osborne branch line of the Kansas & Oklahoma Railroad. Specifically this reports recommends:
- Removing of the cost of debt by transferring ownership of the line to the City of Pittsburg, Kansas Port Authority, with consideration from the Kansas Department of Transportation.
- Improving the integrity of the rail line and the speed of operation by specific targeted investments in infrastructure.
- Positioning of additional grain cars on the line.
- Improved scheduling of service by railroad due to track improvements.