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Federal Judge Approves Auction of Bankrupt Maine-based Railroad
12/18/2013   Reported By: Jay Field

Freight trains rolled through Lac Megantic, Quebec today for the first time since the July derailment and subsequent explosion and fire that killed 47 people. In Bangor, meantime, a federal judge has given the green light for a late January auction to sell the bankrupt railroad at the center of the accident. There's already a "stalking horse" bid of just over $14 million for the Montreal, Maine and Atlantic Railway. Eighteen other bidders have expressed interest as well. But as Jay Field reports, it's unclear whether any potential buyer will be able to afford to keep the railroad intact and operating in Maine.

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Robert Keach says railroad cases are different than most of the others he deals with. Keach, a Portland-based attorney with Bernstein Shur, is the trustee steering Montreal, Maine and Atlantic Railway through Chapter 11 bankruptcy.

"In a railroad reorganization, maximization of value is one goal, " Keach says. But it's not the most important goal. Keach says he has a higher calling in railroad cases: the public interest.

"And 'the public interest' is not just some random phrase," he says. "Parties depend on railroads, customers depend on railroads, factories are built at the ends of railroads. And so, when you discontinue a railroad, you have a material impact on employment and on the economic health of the region."

As trustee, Keach wants to find a buyer - or series of buyers - who will commit to continuing rail service on most, if not all, of MMA's more than 500 miles of track.

In federal bankruptcy court Wednesday, Judge Louis Kornreich approved a January auction of MMA and a so-called "stalking horse" offer of just over $14-million that will serve as the initial, minimum bid.

"We think we've designed a set of bid procedures that will maximize the value of the railroad," Keach says, "and, more importantly, ensure that the railroad will continue to operate - not only the U.S. railroad, but the Canadian railroad as well."

Keach says Fortess Investment Group, which made the initial offer, wants to operate the railroad, instead of breaking it apart and selling off the pieces. He says as many as 18 other potential bidders have offered similar assurances.

But industry observers say the decline of paper production in the northern Maine woods, and the indefinite suspension of oil shipments after Lac Megantic, will make it tough for MMA's would-be suitors to follow through.

"The problem is that, while we all may like to see that line retained, it just doesn't have any traffic," says Chop Hardenberg, who edits the newsletter Atlantic Northeast Rails and Ports.

Hardenberg says this drop in traffic is the reason why the "stalking horse" offer is so low. "Fourteen-point-two-five million is pocket change. It's not even the scrap value of the railroad," he says.

It's unclear when, or even if, oil shipments from Quebec to Saint John, New Brunswick will resume. So, despite the low price, any potential bidder is still taking a big risk by agreeing ro acquire all of MMA's track.

It's a big reason why Easterm Maine Railway Company - one of the railroad's largest creditors, and a potential bidder -objected, in court, to the rules for the upcoming auction.

Eastern Maine, a subsidiary of JD Irving, objected to the division of MMA's rail lines into several lots, ahead of the auction. The company argued that, as a potential bidder and creditor, it ought to be able to decide which sections of track it wants to acquire and what it wants to do with it.

But Nate Moulton, with the Maine Department of Tranportation, says that doesn't meet the public interest test.

"Each qualified bidder now, as part of their bid, has to say whether or not they're bidding as an operating railroad, and also what their intentions are: Do they plan to operate it long term? Or do they intend to operate a portion and file for abandonment and scrap the rest?" Moulton says.

The state of Maine would prefer to see a bidder that commits to the long term. Maine businesses that have relied on the MMA railroad will be watching closely when the auction takes place in late January.


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