The North Coast Railroad Authority (NCRA) was formed in 1989 by the California Legislature under the North Coast Railroad Authority Act, Government Code Sections 93000, et seq. The Act was intended to ensure continuation of railroad service in Northwestern California and envisioned the railroad playing a significant role in the transportation infrastructure serving a vital part of the State that suffers from restricted access and limited transport options. In 1992, the State purchased the railroad line from Willits north. In 1995, a separate transaction added the railroad line from Healdsburg north to the NCRA's holdings and provided for a joint powers authority, the Northwestern Pacific Railroad Association (NWPRA) to own the right of way from Healdsburg south to Schellville in Sonoma County, where the railroad then feeds a 12-mile shortline through Napa County which connects to the Union Pacific mainline at Fairfield-Suisun in Solano County.

The legislation setting up the NCRA clearly articulated the mandate and intent of the State. A companion bill, which was passed by a bi-partisan vote of both houses of the California legislature would have provided funds to execute the mandate, to preserve and improve the asset, and to fund the NCRA's administrative responsibilities. Unfortunately, that bill was vetoed by Governor Deukmejian. The fact that the NCRA and its railroad, the Northwestern Pacific, have survived to date under the contradiction of a mandate without funding is not only a miracle but testimony to the tremendous dedication and sacrifices of the people involved with the railroad since its inception. It has had continued support from elected legislators representing the area.

Since its inception, the NCRA has been confronted with three substantial challenges: (1) to establish a public-private partnership whereby the NCRA would have policy and oversight authority, while the railroad itself would be operated by a qualified and experienced private entity; (2) to operate an ongoing railroad enterprise without start-up operating capital on a right-of way that had suffered from years of deferred maintenance; and (3) to obtain Federal and State funds to repair the right-of-way, as a result of both deferred maintenance and consecutive years of weather-related disasters, so as to allow the railroad operation to be viable for the long-term future.

Against all odds and overcoming mistakes made in the past, the NCRA and the

New Northwestern Pacific Railroad are now on the verge of meeting all three challenges outlined above. Although the NCRA has already met and overcome the first two of three challenges (established a public private-partnership and begun operating the railroad without any operating subsidy from the State), the third challenge is impossible for us to overcome without the cooperation of State and Federal authorities.

The North Coast Railroad Authority (NCRA) was formed in 1989 by the California Legislature under the North Coast Railroad Authority Act, Government Code Sections 93000, et seq. The intent of the Legislature can be summed up in the following excerpt:

2. A qualified private operator, Rail-Ways Inc., in partnership with NCRA, as originally envisioned in the enabling legislation. That private partner has already invested almost $4 million of their own money in the railroad 

NCRA has spent the past six months focused on two fundamental objectives with regard to the Authority's accounting practices: (1) to reconcile past financial records through a series of audits, and to assure that there was no deliberate wrongdoing or fraudulent activity; and (2) to restructure the financial management of the railroad and assure absolute accountability for the future.

Now that countless federal, state and internal audits have been completed, it is clear that there has never been any evidence of deliberate wrongdoing or fraudulent activity. Instead, the evidence concludes that past management and staff were neither well-prepared nor well-qualified for the challenges of managing a publicly-owned railroad with many levels of Federal and State funding, reporting requirements and operational complexities. Thus, to assure that the mistakes of the past are never again repeated in the future, the current NCRA Board has unanimously passed four key policies:

The NCRA has already implemented the first three policies above, and is currently engaged in a search for candidates for the position of Executive Director.

There are three types of funding that will get NCRA back to a level where it is a normally operating railroad: (1) funds to repair storm-damaged areas of the railroad; (2) funds to rehabilitate the track and bring it back to normalized levels after decades of deferred maintenance; and (3) funds to operate the railroad once the track is rehabilitated. The sources for each of these areas is discussed below.

2.1 Funds To Repair Storm Damage: The Federal Emergency Management Agency ("FEMA") and the California Office of Emergency Services ("OES") have been the agencies that have committed funds to repair damage to the railroad from storms of the past several years. Commitment of these funds is a matter of statute. FEMA is obligated to pay for damage from all federally-declared disasters and OES is obligated to pay for damage from State-declared disasters. The subgrantee is usually required to provide a 6.25% local matching share; accordingly, NCRA has obligated future railroad property rental revenues as its matching share. In addition, NCRA is specifically qualified by statute for State Natural Disaster Assistance Act funds ("NDAA") if FEMA is either unable or unwilling to pay. Release of NDAA funds is under the control of the Director of OES.

The current status of the sources of funds to repair past damage from storms is:

2. 2 Funds For Basic Rehabilitation of The Railroad Line: Stemming from decades of neglect and deferred maintenance by the NWP's previous owners, Southern Pacific and Eureka Southern, the railroad was already in a state of disrepair when NCRA assumed ownership in 1992. Rail-Ways has estimated that the cost to restore the railroad to a commercially viable level of service and normalized maintenance would be approximately $12 million. In 1991, Congress appropriated $8.6 million in Intermodal Surface Transportation Efficiency Assistance funds ("ISTEA") and in 1996 FWHA directed those funds to NCRA for the initial work on the rehabilitation of the railroad. Those funds would substantially reposition the railroad to where it could again function normally and become increasingly self-sufficient. The balance of the funding for future rehabilitation work (approximately $3.6 million) will come from established FWHA, FRA and other grant sources. However, none of this federally-sanctioned money will flow into California and none of this essential infrastructure rehabilitation can be performed without the commitment and cooperation of Caltrans.

2. 3 Funds To Operate the Railroad Once It Is Restored: The sole source of funds to pay for "identified future maintenance and operation costs" of the railroad is Rail-Ways' operating company, the Northwestern Pacific Railway Company, LLC ("NWPY"). Under the proposed agreement between NCRA and Rail-Ways, NWPY will pay all expenses of the rail operation and normalized maintenance, up to a cap of 12% of gross operating revenues. "Normalized maintenance" is a railroad term defined as normal wear and tear and the affects of time once the railroad is brought back to a benchmark of commercial viability (see previous discussion of ISTEA funds). Under the proposed agreement, NCRA, as the public authority, will be responsible for initially restoring the roadway back to a level of commercial viability, and will continue to be responsible for all roadway repairs in excess of normalized maintenance, including repair of all damage from natural disasters -- past, present and future. Additional funds should flow from Rail-Ways to the NCRA through payment of substantial lease revenues and profit-sharing.

Rail-Ways is committed to bringing all NCRA property and Rail-Ways operations into full compliance with outstanding and applicable statutes, regulations, orders and findings. Using the operative checklist of all pending actions which appears on the following page, Rail-Ways is systematically moving to assure that compliance is achieved and maintained for each and every item. Except for items that Rail-Ways believes in good faith are either improper and/or contestable, and except for correction of certain long-standing, unresolved issues in the Eel River Canyon, Rail-Ways expects that full environmental compliance for NCRA and Rail-Ways will be achieved prior to the end of Summer, 1999. This is so important to Rail-Ways that its President has asked the regulatory agencies to inform him directly if they do not believe that substantial progress is being made on this front. Of course, the ability of Rail-Ways to achieve these objectives on behalf of the NCRA continues to depend on the timely receipt of funding to support these efforts which has been promised by State and Federal agencies.

On June 26, 1998 the Federal Railroad Administration (FRA) issued Compliance Order 98-1 which requires the NWP to implement certain mandatory actions to remedy previous violations of FRA regulations regarding the safety and training of railroad employees, and the maintenance of track and equipment. Then in November 1998, the FRA issued a compliance order identifying grade crossing signals which were out of compliance and ordering the railroad to cease operations until these grade crossing signals are restored to full working order.

Rail-Ways, as Operating Agent for NCRA, is required to comply with these orders and has initiated definitive steps to remedy the defects noted in the orders. Rail-Ways expects to be in full compliance with all FRA orders by Spring, 1999. This includes the upgrading of all track south of Willits to Class I or better. Rail-Ways has retained Herzog Corporation to perform this track upgrading work for a fixed-price bid of less than $1 million. The NCRA will provide the funding for this work from a combination of Proposition 116 funds and NWPRA grants. Herzog projects track upgrades will be complete by April, 1999. Rail-Ways will then appeal to the FRA for restoration of full service south of Willits.

On December 24, 1998 the California Attorney General filed a lawsuit against the NCRA alleging contamination of certain railroad properties, including the Willits rail yard. Although the NCRA had been aware and concerned about these environmental issues for quite some time, until only recently the Authority had neither the funds nor the staff to mount any meaningful clean-up action. On October 31, 1998 the Governor signed into law AB 2782 to provide $2 million of interim funding to the NCRA. This funding was earmarked for accounting support and other specified purposes, including environmental clean-up. An as yet undetermined portion of these funds will be earmarked for environmental remediation. It is anticipated that additional funding beyond the AB 2782 funds will be needed to complete all remediation tasks along the railroad.

Rail-Ways is currently in the process of retaining an environmental remediation firm to expedite the clean-up efforts in the Willits yard and at other specified contaminated locations along the railroad, including Island Mountain. Assuming the CTC approves funding of these efforts and that funds are available by March, 1999, clean-up of the Willits yard could be complete by June, 1999. Clean-up of all other identified "hotspots" could be complete as early as October, 1999, subject to the timely and adequate funding of these efforts.

The following factors may adversely affect the ability of the NCRA to meet its funding obligations and should be considered when evaluating the ability of the NCRA to timely complete its obligations:

Real Estate and Easement Sales. The NCRA projects future real estate and easement sales amounting to $2.7 million. While there have been discussions with various entities regarding the purchase of the Willits and Ukiah depots, and the sale of a fiber optic easement, the financial ability of any such persons or entities offering to purchase these properties and easements, or their capacity to obtain the financing necessary to close the purchase of these properties or rights, is not known and consummation of these transactions can not be assured at this time.

Landslide Disputes. There is potential exposure to "deobligation" of approximately $3.7 million in OES/FEMA damage repair recovery attributable to a possible adverse interpretation of FEMA's landslide policy. If repair costs incurred at certain disaster sites are determined to be the result landslides rather than erosion or other cause, FEMA may declare such costs to be ineligible for reimbursement. The NCRA would not be able to recovery these costs from FEMA.

Q-Fund Issues. The performance of certain rehabilitation work funded with the ISTEA demonstration funds could possible trigger an acceleration of repayment of the Q-Fund Loan. Additionally, there are policy issues that require investigation regarding the NCRA strategy to re-invest real estate proceeds into rehabilitation. FHWA may require re-payment of the Q Fund loan with any asset sale proceeds.

TCI "Match. The three TCI match options presented in the Business Plan require further discussion with Caltrans and the CTC regarding policy interpretation

FEMA Reimbursement. Reimbursements for past and future disaster repair expenses claimed by the NCRA are subject to audit by both OES and FEMA and such audits may result in the disallowance or deobligation of specific emergency and/or permanent repair claims. In addition, there can be no assurance that FEMA or OES will approve all, or any part of, other unclaimed cost over-runs and supplemental expenses incurred by the NCRA in connection with storm repairs.

SB 45. Policy decisions and/or legislation will be required for NCRA to access SB 45 funds.

In late 1997 NCRA solicited proposals for the private operation of the railroad.

The Authority received four proposals, and one of those proposals stood head and shoulders above the rest under every criteria for evaluation. Since selecting RailWays in January, 1998 NCRA has continually been impressed by the expertise, honesty, and commitment that the company's management and personnel have demonstrated to the mission of restoring the NWP to an efficiently running railroad, one that is working toward the goal of self-sufficiency. In fact, Rail-Ways has shown the ultimate commitment and level of confidence in the future of the railroad by investing almost $4 million of its own money over the past several year.

The Rail-Ways Business Plan reflects realistic objectives with regard to the increase of revenue on the railroad and the costs needed to operate the line once it is restored to its pre-storms condition. Rail-Ways has in fact been very conservative in its Business Plan projections. Two major projects which will move once rail service is restored -solid waste-by-rail and gravel-by-rail -- have the potential to provide millions of dollars of new revenue to the operation and to significantly diversify the freight business from its dependence on timber. Solid waste is particularly important in that the garbage is produced in a steady, daily stream of carloads and can provide the daily baseload business that the railroad has heretofore never had. Humboldt County and the cities therein have unanimously ratified a 15-year contract for the waste-by-rail system. Shipments can begin as early as Spring, 1999 if the line from Eureka is restored to service.

With regard to timber shipments, according to the three largest shippers -- Simpson, Pacific Lumber, and Louisiana-Pacific -- their carloadings in the last full year of the railroad's operation were only 15% of their total shipments. If the companies had the railcars available from the Union Pacific and if they had confidence in the NWP operation, they state that they would have shipped at least double the amount by rail. All that has now changed since Rail-Ways has come aboard. To alleviate the railcar availability problem, Rail-Ways has a pending order for 200 center-beam lumber cars which will be dedicated to the North Coast shippers. Those cars will go out onto the national rail grid (UP, BNSF, et al.) for lumber deliveries throughout the country, but will then return directly to the NWP. For timber deliveries destined for the Bay Area, Humboldt County's waste-by-rail contractor is working with timber shippers to combine daily baseload solid waste carloads with timber carloads so as to have two or three dedicated Bay Area unit trains each week. The above initiatives, along with a new confidence by the shippers in the private operations of Rail-Ways, have brought about a tremendous change in the commitment of shippers to utilize the rail once it is restored to normal service. This will translate into substantially higher revenues and a strong move by the railroad toward self-sufficiency of operations in the future.

California

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2. Intervene with FEMA regarding current funding blocks, including restrictions on work in Eel River Canyon
3. Obtain relief from Q-fund repayment obligation of NCRA.