SMART Projected to Lose at Least $400,000 per Year Hauling Freight

Among its critics, SMART, the North Bay’s passenger rail service, has gained a reputation as an opaque money-pit of an agency. Unfortunately, the agency’s takeover of freight service is proving no different.

Last May, the board of directors voted nearly unanimously to take on freight service in the North Bay. At the time, SMART had not formally studied the money-making prospects of the new business venture, but State Senator Mike McGuire and state officials vouched for the plan—and allocated millions of dollars to cover the agency’s start-up costs.

At a May 20, 2020 meeting, SMART board members largely embraced the idea, with some speculating which North Bay companies would be interested in switching to freight rail service. The idea of having direct control over all of the trains operating on the agency’s lines also appealed to board members.

Still, there were plenty of reasons to be skeptical. The privately-owned Northwestern Pacific Railroad Company has run freight in the North Bay since 2011, but the company’s CEO, Press Democrat-investor Doug Bosco, has long been secretive about the company’s specific revenues and operating costs. At the May 2020 SMART board meeting, Bosco said that the company had revenues of around $2 million per year but declined to offer specifics, claiming that that information is “proprietary.”

(As we reported recently, Bosco’s NWP Co received $7.47 million from the state as part of the process of passing the freight management from another state agency to SMART. NWP Co is currently running and storing freight cars on SMART’s lines for free throughout the takeover process. For more details, read “Freight Railroaded,” Nov. 3, and “Train Lines,” Nov. 10.)

However, a year and a half after SMART’s May 2020 meeting the agency is projected to lose hundreds of thousands of dollars a year on freight for the foreseeable future.

At their Nov. 17 meeting, SMART’s board of directors discussed handling freight in-house or through a private contractor. The presentation promised to offer rail enthusiasts a glimpse at the agency’s developing freight plans.

Instead, staff largely offered potential freight revenues based on “conversations with NWP Co” and neglected to highlight an in-depth study which the agency hired a Marin County–based business consultant to prepare.

In February, SMART signed a contract with Project Finance Advisory Ltd. “to conduct a thorough and unbiased analysis of existing and potential freight rail customers within the North Bay Area.”

Over the summer, SMART staff told the board they would receive an executive summary of the full freight market report by Sept. 1. SMART staff have said they sent the summary to board members, however the agency never published the document for public consumption. Matt Stevens, an agency spokesman, did provide the Bohemian with a copy in early September upon request.

As we’ve previously reported, the executive summary estimates that NWP Co brought in between $1.2 and $1.3 million in revenue last year. However, Project Finance Advisory Ltd. could not estimate what it will cost SMART to operate freight trains, because NWP Co declined to share “detailed, itemized financial records.”

Curiously, the one-page Nov. 17 staff report for the freight discussion did not include any mention of Project Finance Advisory’s study, which, according to the February contract, will cost SMART up to $67,726. The Nov. 17 agenda packet did not even include a copy of the executive summary, which was completed months ago.

Instead, the agenda packet only includes staff reports from past board discussions about the freight takeover. Even more strange, a Powerpoint presentation for the agenda item cites revenue data based on “conversations with NWP Co,” Bosco’s private company. In short, instead of presenting the “thorough and unbiased” analysis of the freight market the agency paid a contractor to prepare, SMART staff opted to cite vague revenue estimates from NWP Co itself.

During the meeting, SMART Director of Finance Heather McKillop said that “we don’t feel super comfortable with the [revenue] numbers and what those costs are at this time.” McKillop suggested that SMART should gain experience and information by handling freight in-house to start, with the option to contract with an outside company later on. SMART General Manager Farhad Mansourian said that Project Finance Advisory Ltd.’s final report would be completed and published “within two weeks” of the Nov. 17 meeting. 

Mansourian, Stevens, SMART board chair David Rabbitt and vice chair Barbara Pahre did not respond to questions about staff’s decision not to cite or include Project Finance Advisory Ltd.’s executive summary with the meeting documents.

Still, comparing the available financial projections offers a rough picture of SMART’s freight prospects. Financially, they range from bad to worse.

The executive summary completed by Project Finance Advisory Limited Ltd. estimates that NWP Co brought in between $1.2 and $1.3 million in revenue in 2020, with about 49% of revenues coming from storing rail equipment and cars filled with Liquid Petroleum Gas—commonly known as LPG—for processing at refineries. The executive summary also states that “The study did not reveal any new traffic opportunities that are likely to increase freight volume dramatically on SMART’s trackage.”

The executive summary offers three possible outcomes. The most optimistic projection, which assumes that SMART will increase “track capacity for car storage” and make other pro-freight choices, projects revenue growth from $1.4 million in 2021 to $2.5 million in 2030.

In contrast, SMART’s Powerpoint, “based on conversations with NWPCo,” estimates the company’s current total annual revenues at $1.7 million, with $1.2 million coming from freight hauling cargo and $466,000 from the storage of rail equipment and LPG. All told, 27% of current revenues come from LPG storage, according to SMART’s presentation.

Freight also comes with political considerations. The possible impacts of freight on communities neighboring train lines was a major issue of debate in the lead-up to the passage of Measure Q, the 2008 sales tax which currently provides a significant portion of SMART’s revenue. There are still political considerations today because SMART needs to pass another tax measure by 2029 when Measure Q expires.

Since 2016, NWP Co has stored LPG cars near Schellville, near the City of Sonoma. Well-organized residents have raised concerns about the safety of storing the potentially-explosive cars.

So, SMART’s freight takeover left the agency’s board of directors with a politically-sensitive choice: Continue storing LPG, which accounts for a considerable chunk of the projected revenue from SMART’s newly-acquired freight operation; or risk the rage of Sonoma Valley voters next time a SMART sales tax is on the ballot.

Susan Gorin, a SMART board member who represents Schellville and surrounding areas on the Sonoma County Board of Supervisors, laid out the situation bluntly at a Nov. 17 SMART meeting: “Sonoma Valley has probably 20,000 voters … . And we’re looking at reauthorization of the sales tax. This could be a political issue for the Valley if in fact there is no movement on the tanker cars … . This very visible, graffiti-laden reminder is not a good representation of the possibilities of SMART.”

Ultimately, the board conceptually supported the idea of ditching the LPG storage business as soon as possible and handling the freight business in-house rather than contracting with a private company. 

According to SMART staff cost projections included in the Nov. 17 Powerpoint presentation, it will cost the agency approximately $1.7 million to run freight in-house.

That means, if the SMART board decides to continue storing LPG—and NWP Co’s revenue estimates cited in the Powerpoint prove to be accurate—SMART will just break even on its freight operations.

However, since the board favors ditching LPG, it appears the agency will lose over $400,000 on freight every year until it finds new revenue streams, according to SMART’s Nov. 17 Powerpoint. If Project Finance Advisory Ltd’s projections—baseline revenues of approximately $1.3 million, including LPG storage—are accurate, then SMART’s freight business will be even deeper in the red.

At the Nov. 17 board meeting, McKillop, the chief financial officer, said that, given the boards’ support for ditching LPG, SMART staff will prepare short- and long-term proposals to fill the financial hole. It’s not yet clear where the money will come from. However, since Measure Q funds are earmarked for passenger rail costs, SMART can’t use that pot of money to pay for the freight losses.

Will Carruthers
Will Carruthers is a news reporter for the Pacific Sun and North Bay Bohemian. Email tips to [email protected] Follow him on Twitter at @Carruthers_W.
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