Daily Progress, Jacksonville, TX

August 7, 2012

Texas State Railroad Transfer Complete

Faith Harper
Jacksonville Daily Progress

RUSK — RUSK — Months of uncertainty concerninåg the future of the Texas State Railroad were laid to rest as final documents were signed on Monday establishing a new owner for the historic railroad.

In mid-February, Allen Harper, CEO of American Heritage Railways (AHR), the former owner of the rail line, sent a letter to the Texas State Railroad Authority (TSRA) stating if it did not receive cash-flow assistance to help get through slow summer months, it would furlough its 41 employees and shut down operations from a lack of funding.

At the time, Harper said his company had invested $3 million into running and improving the rail line and though the railroad was close to breaking even, it could not afford the expense any more. After consideration, Harper said he would continue to operate the Texas State Railroad for as long as he could. However, a large diesel spill occurred at the Rusk depot on March 1. Harper said the final financial straw for the company was in spending an estimated $250,000 on the remediation effort.

In May, the TSRA announced its intent to transfer the Texas State Railroad to Iowa Pacific Holdings, LLC.

Ed Ellis, CEO of Iowa Pacific, said the company intended to run short-line freight operations in addition to the tourist steam trains in hopes that the addition of commercial revenues would turn the corner on the line's profitability.

After much discussion since May, the TSRA approved a final set of documents Monday morning to complete their part of the transfer.

At the top of the list was a lease agreement on an important three-mile stretch of rail line which connects the Palestine Depot to the Union Pacific Line, making the freight business possible. TSRA officials said the lease agreement is separate from the lease on 25 miles of track between the cities of Rusk and Palestine. The three-mile lease was in negotiations with AHR before the transfer but an agreement was never made.

“It's giving them the right to use that track the way they use the other track,” Steve Presley, chairman of  the TSRA, said. “They don't own it … If they are in default, we can get it back.”

Officials said the 99-year lease stipulates Iowa Pacific pay 2 percent of their gross sales for freight transported over the track. The TSRA also receives a minimum of $100,000 a year for the right to run tourist steam trains, with all of the funding going toward match for improvement grants.

The board made a resolution to forgive AHR's outstanding debts to the extent that they were not paid through 2011. Presley said the company will be responsible for paying the 2012 interest payments on two loans, $500,000 each, given to AHR by the cities of Rusk and Palestine. The principal of those promissory notes was not forgiven and will be transferred to Iowa Pacific for repayment.

Members also passed a resolution stating AHR was not in default of the original lease agreement.

TSRA officials said the original lease, signed in 2007, for use of the land and track included ridership quotas and a certain number of trains to be run out of each depot annually. But a slumping economy and efforts by AHR to make the rail line more efficient equated to full trains to run out of one depot instead of half-full trains run out of each end.

“I think we have to pass this,” Presley said. “AHR folks said point blank if we do not sign this (they would not transfer the railroad).”

The document would release the former operator of any liabilities associated with being in breach of contract. It would also protect all parties, the TSRA, AHR and Iowa Pacific, from being sued because of any incident in the past. It would not, however, protect against fraud.

“This is not good business,” said board member Charles Hassell. “Why did we have a contract?”

Presley and board member Griff Hubbard said they felt they were necessary to keep the train running.

“I personally can't conceive of a scenario where we want to place this railroad and these fine employees and our passengers back in the same position we were in February or March of this year,” Hubbard said. “If we don't adopt this, that is what we are doing. We are turning this clock back to the very dark, grey unknown of what happens tomorrow — with whom and why are we going to operate this all.”

Hubbard said when a railroad shuts down, it is very difficult and expensive to reopen because  of inspections, permits and delayed maintenance.

The board’s attorney, Ronald Steuts, said the wording of the contract states AHR is released from liabilities the board knew or could reasonably know about.

“The concerns I have are small,” he said.

 Harper said on Monday the transition was bittersweet. He extended his appreciation to board members for keeping their communities at heart since 2007, and said he loved the Texas State Railroad and the people working for it.

“I'm sorry that I won't be there as an owner, but I'm also excited because I think Iowa Pacific bringing in their freight services will bring the extra revenue, the extra capital  power than can make that railroad really do well,” Harper said. “I'm excited that the Texas State Railroad is going to be in good hands with people who can make it very successful.”

Ellis could not be reached for comment by press time.