For nearly a century, Arizona’s Apache Railway has interchanged with BNSF Railway and predecessor Atchison, Topeka, & Santa Fe (AT&SF) at Holbrook, and has served a succession of owners—lumber companies for the first 50 years or so and paper companies more recently.
Beginning in 2008, the railroad hauled inbound recycled paper and outbound newsprint to the tune of 13,000 carloads annually for owner Catalyst Paper Industries’ mill outside Snowflake (named after founders Erastus Snow and William Flake) some 38 miles south of Holbrook. That is, until Sept.30, 2012, when Catalyst closed the mill and announced its intention to scrap it and railroad. For the Apache, that marked the beginning of a period of profound change and uncertainty that will decide the railroad’s future.
Led by Michael Hackman of Hackman Capital Partners, Los Angeles, a group of investors purchased Catalyst and the railroad. Because the mill wasn’t the railroad’s only customer and the Snowflake community was counting on the Apache to help offset the lost jobs, a local group, the Snowflake Community Foundation (SCF), formed in February 2013, appealed to the new owners to give them a chance to preserve the operating railroad. Hackman Capital valued the operating railroad at about $7 million, and provided an interim loan in that amount to the SCF, to be repaid within one year.
Hackman Capital didn’t consider the loan a risky investment because it had hired rail consultant R. L. Banks & Associates to assess the Apache’s liquidation value, and Director-Transportation Engineering Crew Heimer provided an estimate exceeding $9 million. Scrap value seldom exceeds a railroad’s operating value, especially by so much, but Heimer based his assessment on two factors.
First, the Apache had purchased 131-pound rail from the AT&SF when that railroad replaced it with heavier rail in 1972. Eventually, the Apache would relay all 44 miles of main line (from the railroad yard outside Snowflake to Holbrook plus the spur into Snowflake) with some of the heaviest, most substantial rail to be found on any short line anywhere. According to Heimer, another client told him his company would buy the Apache just for that lightly used 131-pound rail, which is desired by many Class I’s for heavy-use sidings and yard tracks.
Second, Apache’s deep limestone ballast figured into the high liquidation value because stone is hard to come by, and expensive, in that part of Arizona.
In the short term, the operating value/scrap value disparity was a big plus, because it allowed the railroad to attract investors when it needed them most. However, the high liquidation value could, in the long term, complicate things for those who want to see the Apache continue as an operating railroad.
Immediately, the Apache and the SCF started looking for long-term financing to repay the $7 million. In the summer of 2013, the Arizona Legislature passed a law allowing the Arizona Commerce Authority (ACA), a state agency tasked with issuing economic development grants, to loan the Apache Railway $2 million. The railroad planned to use the ACA loan as a deal closer for a $5 million Federal Railroad Administration (FRA) Railroad Rehabilitation and Improvement Financing (RRIF) loan. However, lawyers from the conservative think tank Goldwater Institute took aim at the ACA loan, calling it “cronyism” and “unconstitutional.” That legal challenge, coupled with FRA loan-processing delays, allowed the legislation legalizing the $2 million loan to expire. Finally, on Wednesday, November 5th, 2014, the day after mid-term election results were announced, an FRA representative called Apache Railway Superintendent Shirley Cornett to tell her that the $5 million RRIF loan would not be approved.
To make matters more difficult, retiring Hackman Capital’s interim loan isn’t the only challenge facing the Apache Railway. When Catalyst closed its recycled paper mill, the railroad was left with only one consistent online customer, a pig farm operated by Hormel Foods subsidiary Pigs for Farmer John (PFFJ), which requires 90 carloads of feed every month. So rebuilding its traffic base runs a close second on Apache Railway’s list of priorities. In January 2015, I sat down with Shirley Cornett in her office near Snowflake to talk about potential traffic for the railroad. When I asked how things were going, she replied that the railroad is operating and making money. In addition to the PFFJ traffic, BNSF is paying the railroad to store surplus intermodal railcars. Outside Snowflake, long lines of stored flats stretch for miles along Rt. 277, and the Apache is using every inch of excess capacity for this purpose. Apache also stores tank cars for Phillips 66 and others for Preferred Sands and Ergon Emulsions. As well, picking up cars and returning them to BNSF at Holbrook generates additional traffic.
For many years, the Apache shops have repaired other railroads’ freight cars when needed. Beginning in 2013, the railroad has provided car repair, repainting, and cleaning services under contracts with BNSF. As such, the main rail yard near Snowflake is filled with cars awaiting attention.
Superintendent Cornett’s efforts have paid off: For fiscal year 2015, Apache Railway is expected to earn $400,000 profit on total revenues of $2.8 million.
Potential sources of freight ladings include a rapidly expanding wood-stove pellet factory near Snowflake, a biomass-burning power plant at the site of the closed paper mill, a brick-clay quarry just outside Snowflake, phosphate mines being developed outside Holbrook, and second-growth timber for local mills and outbound products from the mills. However, none of these has produced consistent traffic so far.
White Mountain Scenic Railroad hauled tourists from McNary (a mill town on a now-abandoned portion of the Apache 37 miles south of Snowflake) 70 miles south to Maverick (today a ghost town, but once an assembly point for McNary-bound log buggies) beginning in 1964, but scaled back by 1972 to a 20-mile route north to Route 60. The operation closed in 1976 and moved its equipment to Heber City, Utah. When asked if tourists could again provide income for the Apache, Cornett responded that railroad management has discussed running tourist trains, but due to insurance and liability issues has decided against it, at least for now.
What does the future hold for the Apache? SCF filed for bankruptcy protection for the Apache Railway on May 20 in response to Hackman Capital’s legal maneuvering to foreclose on the property. In motions before Bankruptcy Judge Madeleine C. Wanslee in Phoenix, investors’ lawyer Bryce Suzuki argued for a timely, binding payoff date after which his employers could foreclose on the Apache Railway, while SCF lawyers argued that Hackman should wait until the U.S. Department of Agriculture makes a decision on a loan application filed by the nonprofit. The SCF applied in June for a USDA rural economic development loan to pay off Hackman’s $7 million interim loan, and is expecting a decision in mid-September.
Even though contractor R. L. Banks & Associates estimated the railroad’s liquidation value at about $9 million in 2013, the stakes may be considerably higher today. One observer pegs the Apache Railway’s current salvage value at $12-14 million.
Bankruptcy Judge Wanslee has scheduled a hearing for July 28th, and the decision she hands down then could very well determine the Apache Railway’s future. Will the Apache continue as an operating, job-creating, commerce-enhancing railroad? When you consider that the Apache is the only railroad serving that part of Arizona, and that relaying the track in the future would cost at least $1 million per mile, the $7 million needed to preserve today’s operating railroad suddenly doesn’t sound like that much. And, even though Apache Railway has lost its main source of ladings, any potential for additional traffic would argue for preserving the railroad. (Few today would say that the State of West Virginia was wrong to preserve more than 200 miles of track once considered redundant, now the Cass Scenic, West Virginia Central and South Branch Valley railroads.)
The Apache’s history is still a work in progress. The coming weeks and, hopefully, months and years will tell the rest of the rialroad’s story.