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Alaska Railroad sees hope in marijuana industry and elsewhere as profits drop

  • Author: Alex DeMarban
  • Updated: October 21, 2016
  • Published October 20, 2016

Hit with a sharp plunge in profits, the Alaska Railroad is pinning its financial hopes on new opportunities that include increased ridership, shipments of liquefied natural gas, and lease revenue from marijuana retail stores.

The state agency's income is down dramatically from just a couple of years ago, thanks largely to crashing coal markets from weak demand and reduced petroleum shipments stemming from the closure of the North Pole refinery in 2014.

The headwinds facing coal this year created an "ugly inferno" that forced the railroad to put the Seward Coal Loading Facility in "cold storage" in September, said Bill O'Leary, chief executive of the Alaska Railroad, speaking Thursday to the Resource Development Council.

That marked the end of Alaska coal exports to overseas markets until the industry rebounds. Just a single ship was loaded this year.

The railroad hauled less than 70,000 metric tons of coal this year, a fraction of the 1.2 million metric tons in 2011, he said.

"This is a really significant shift for us," said O'Leary.

The railroad's "grim" situation has forced it to cut about 300 jobs over six years, roughly a one-third reduction in a workforce that now totals about 600 employees. Annual net income is expected to drop to $6.1 million by the end of this year, from $14.1 million in 2014.

Another headwind is the federal safety requirement that the railroad develop a positive-train-control system by 2018 that uses global positioning systems and other technology to automatically stop trains to prevent crashes.

The $165 million upgrade is a "big, big bite" for the railroad, though it has been in the works for years.

The upgrade was recently paid in part with $34 million from the Legislature before the state's fiscal crash prevented lawmakers from providing more money in 2015, officials said. The railroad issued $37 million in bonds that year to finish paying for the project.

There will be benefits from the improvement, but the railroad will have to pay at least $8 million in operations and maintenance costs to support the system. That money will cut into gross revenues — totaling about $150 million last year — reducing funds available for maintenance.

O'Leary also pointed to opportunities that include getting more out of the 36,000 acres the railway owns in Alaska, including near railyards in Fairbanks and Anchorage.

The railroad is working on a possible residential development in the Ship Creek area, he said, but he did not provide additional details. Anchorage TV station KTUU in June reported that the railroad is working with developers on a deal in the area involving a 24-unit housing complex.

The railroad is also beginning to sublease space to marijuana retail shops, such as in Fairbanks near the railyard.

The opportunity stems from limitations on where those shops can be located — away from schools or residential areas — opening up industrial spots where the railroad owns land, said Tim Sullivan, the railroad's external relations manager.

"It doesn't make any changes to the bottom line now but it helps in the long-term by sustaining our leases," Sullivan said.

Elsewhere, the railway is surveying wetlands it owns to see if they can become part of a "mitigation bank" for other projects, possibly allowing developers or agencies to purchase ecologically important land from the railroad to offset development elsewhere.

There's also liquefied natural gas. The railroad is the only one in the U.S. with federal permission to ship LNG. The line has been testing deliveries between Anchorage and Fairbanks using liquefied gas from Cook Inlet.

There's a small market for LNG in Fairbanks, with truck deliveries currently meeting demand. The railroad may be able to move LNG more efficiently, officials said.

The agency is also planning to boost ridership that has already been on the rise.

Event trains like the adults-only beer trains in Fairbanks and Anchorage have been hugely successful, along with a new kids Halloween train set to leave Anchorage for Girdwood on Oct. 22.

"That sold out very, very quickly, and you'll see more of them next year," O'Leary said.