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 Post subject: Cumbres and Toltec Scenic Inc. Pres Release
PostPosted: Mon Dec 28, 1998 11:34 am 

The Cumbres and Toltec Scenic Railroad Inc. has released the following statement in response to the notice of material breach lodged against them by the bi-State Railroad Commission:<p><br>Date:September 17,1999 Contact Person: Michael Schwarz Attorney & Consellor at Law (505)988-2053<br>At the September 14th Cumbres & Toltec Scenic Railroad Commission meeting in Antonito, CO, the bi-state Railroad Commission, made up of two Colorado members and two New Mexico members voted unanimously to provide the Cumbres & Toltec Scenic Railroad Corporation with official notice of material breach of the Lease Agreement.The Corporation has 30 days to cure the breach or the Lease will be terminated.The Commission provided the Corporation with a letter detailing in its view the breaches of the Lease Agreement. The Corporation is working at present to cure these alleged breaches, but would like to respond publicly to the letter, since the Commission's letter was read publicly at the September 14th meeting.<br>First, the Corporation would like to point out that it was not provided any meaningful opportunity to address the Commission at the meeting. Second, the Commission failed to notify the Corporation that the Commission would be represented by legal council at the meeting and that the Corporation should bring legal council as well. With those points made, the Corporation would like to address the Commission's letter:<br>The Commission's letter claimed that the Corporation is in breach of the Lease Agreement for Maintenance of Premises with regard to locomotive maintenance. This allegation is false. The Corporation is being made a scapegoat by the Commission. Prior to the Corporation undertaking the lease, the Commission stated that the locomotives were in good operating condition and met all state and federal safety standards. There was no way for the Corporation to independently verify those statements without dismantling the locomotives.Based upon those statements and others, the Corporation entered into the Lease Agreement. The Corporation performed all maintenance as required by the Lease Agreement and in fact did more.The Corporation passed the August 1999 Federal Railroad Administration inspection. There was an exception noted which related to design and construction defect on ten cars. This design and construction defect was not the fault of the Corporation. The Corporation had nothing to do with the design and construction of these ten cars. The Commission undertook this project prior to the Corporation assumming the Lease Agreement. In the past two and half years, the Corporation spent over $1,064,000 on locomotive maintenance.<br>The C&TS locomotives have been maintained so that they are safe, but at the present time they have low reliability. Rather than engage in band-aid repairs, the Corporation deemed it necessary to look at the entire picture. To that end, the Corporation hired a new Chief Mechanical Officer, Walter Rosenberger, a professional engineer. Mr. Rosenberger holds a masters degree in mechanical engineering, and we believe this is the first time in the history of C&TS RR that a professional engineer has been in charge of locomotive maintenance. Through Mr. Rosenberger's diligence and careful analytical examination of the condition of the locomotives, some major long term wear problems were found. These problems were reported to the Commission at their March meeting in 1999. At the time of the June '99 meeting, Mr. Rosenberger estimated that it would cost at least $800,000 to rehabilitate the locomotives. According to an independant Certified Public Accounting firm retained by the Corporation, a good portion of this rehabilitation would be capital improvement expenditures.<br>The Corporation is not responsible for capital improvements or capital expenditures for the locomotives. Many of the locomotives are simply in need of major capital expenditures through no fault of the Corporation. The parts of the locomotives wear out. When a substantial expenditure increases the capacity or operating efficiency or extends the useful life of the asset it is considered a capital improvement and not mere maintenance.Expenditures that increase capacity or improve the property are capital improvements,even though they may reduce or eliminate maintenance expenditures in subsequent years. Expenditures which replace significant portions of worn out property, like the entire roof of a house, are not maintenance repairs but are capital improvements. While the Commission is vested with the discretion to make such capital improvements, it would seem to the Corporation that if such improvements are quintessential for the operation of the railroad, then the Commission would be remiss in its duties not only under the Agreement but also to the people and the communities which benefit from the railroad not to make substantial efforts to have these necessary capital improvements funded. The Commission is statutorily charged as well as under the Lease Agreement to make these capital expenditures. Nevertheless, the Commission has chosen, for whatever reasons, not to fulfill its statutory and contractual obligations.<p>The Commission's refusal to honor the statute and its contractual obligations was made clear subsequent to June 1999 Commission meeting. The Corporation was informed that there was no funding available for capital improvements to the locomotives. The Commission continues to take this position emphasizing that they have no money and the states will not put up money for locomotive rehabilitation.<p>To saddle the Corporation with the capital expenses required to rehabilitate the locomotives when the Corporation does not even own the assets is simply an absurd reading of the Agreement and eliminates the statutory responsibilities of the Commission to the people of Colorado and New Mexico. The Commission neither intended nor could they expect that a private party would invest over $1,000,000 into assets it does not even own for a marginal return. The consequence would interpret the contract in such a way that it would emasculate the other contractual provisions and the intent of the parties and repeal the statute.<p>It is management's sincere belief that some of the long term wear conditions found date back as far as 15 to 20 years. The Commission, not wanting to believe the Corporation's expert, chose to hire their own consultant. Their consultant found the same conditions, but he blamed them on the present management's lack of maintenance in the last two and a half years. What the Commission hides from the public is that their hired expert is not a certified engineer, but more importantly, he was a prior general manager of the line. If this prior general manager were to write a report substantiating long term problems with the equipment, then the report would also implicate deficiencies during his watch. The Corporation feels that the objectivity of the report must be examined in this context.<p>The Commission's letter called the Corporation in breach of the Lease Agreement for failure to purchase and install 2,500 ties per year. We are currently installing ties at the rate of 120 per day beginning 9/10/99. As of today, 9/16/99, 969 ties have been installed. The Corporation has until the end of 1999 to complete its 1999 obligation. Requiring the Corporation to complete its 1999 obligation in 30 days when the contract allows us to the end of the year clearly shows that the Commission is not interested in honoring its Agreement but is looking for some way to back out of it.<p>The Corporation fully intended to begin this season's tie installation program in early August. However, our track work has been set back approximately one month due to the record rainfall we have experienced this year. Since the C&TS RR track is not ballasted properly, crews had to concentrate on fixing severe drainage problems to prevent washouts and derailments. Were the track properly ballasted (a large capital improvement, which is the Commission's responsibility) the rainfall would not have caused such large immediate problems.<p>In the letter, the Commission faults the Corporation because financial statements and rent payments have been received late. At this time no rent is outstanding and all requests for financial statements have been met. It was also stated in the letter that inventories of parts, supplies, and small tools have been severely depleted. We have been using and replacing these supplies as needed for ongoing maintenance and repairs to track and equipment. We welcome the Commission's planned joint inventory.<p>Finally, the Corporation was criticized for our financial responsibility. We have made $1.5 million of expenditures on maintenance of equipment and track over the last two and a half years. We are told by our CPA firm that a good portion of these expenditures fall under the definition of capital improvements, and under the terms of the lease agreement, should have been paid for by the Commission. We discussed a plan with members of Commission at a meeting on August 13, 1999 to seek outside investors who are interested in partnering with the Corporation's three stockholders based upon the value of the Lease Agreement. We also discussed making a portion of the Corporation stock public. The Commission appeared to be supportive of these plans, so the Corporation began discussions with several well qualified parties who were interested in making an investment. But, when the Commission published a meeting agenda for the September 14th meeting, which listed as items:Audit of C&TSRR Corp.;Operating Contract-Executive session as needed; and Operating Contract-Possible Action, this thwarted any attempts to secure additional funding. Who would invest money in a business operation which is being threatened by the Commission to be put out of business?<p>In conclusion, the Corporation is working diligently at the present time to correct any breaches in the Lease Agreement by the 30 day deadline. However, the ability to cure these breaches relates directly to our financial condition, which in turn is directly related to the Commission's inability to fund necessary capital improvements. The Corporation wishes to extend our thanks at this time to members of the Friends of the C&TS RR and the communities of Chama and Antonito who have been supportive of our efforts to grow this business and preserve the Railroad over the last two and a half years and who continue to offer their support during this difficult thirty day period.<br>

 Post subject: Re: Cumbres and Toltec Scenic Inc. Pres Release
PostPosted: Wed Dec 30, 1998 4:54 pm 

The press release above is a thought-provoking document that points out the difficulty of capital budgeting for steam locomotives. A steam locomotive is composed of sub-systems that wear out on differing schedules and demand reinvestment in a "lumpy" fashion. Accounting systems don't deal comfortably with this.<p>The language of the release was a little imprecise, as major overhauls of an engine's boiler or running gear should probably be termed "reinvestments" rather than "capital improvements" since the locomotives can only be rebuilt in kind. But it is correct to point out that these investments can't be financed from current operating revenues: they have to be budgeted for over cycles of many years' length. If no such budgeting was done in the past, than new capital must be gotten from somewhere to do the job.<p>While it sounds like the specifics of the C&TS contract may have to be decided by lawyers, I wouldn't be surprised to find that these complications weren't appreciated by the authors of the concession arrangement. A political governing body more concerned with ridership numbers and hotel-nights may have a hard time grasping the notion that a locomotive can be operable and "legal" under FRA rules and still be on its last legs. But if the steam tourist railroad is to be sustained, then its accounting will have to embrace this concept. One model is the "pavement management" approach used by highway agencies. Road guys have to explain to politicians and the public how they safeguard the assets invested in roads by taking the long view, when the inclination is to paint over potholes with thin repairs. But given the right presentation, officials can understand that the right program of reinvestment will put life back into the property, and reduce and smooth out future expenditures.<p>A fleet of six or seven steam locomotives is a complicated system, but any good systems analyst or roundhouse foreman can manage it. The hard part might be explaining the capital demands, but that can be done, too.<p>Aarne H. Frobom<br>Michigan State Trust for Railway Preservation, Inc.<br>P. O. Box 665<br>Owosso, MI 48867-0665<br>

 Post subject: Re: Cumbres and Toltec Scenic Inc. Pres Release
PostPosted: Sat Jan 02, 1999 12:18 am 

<br>Aarne's comments are correct from the point of view of a "for profit" business, but from a governmental standpoint it is skewed again. I work for a major east coast commuter railroad; and frankly the FTA funding rules have changed what is considered a "capital" expenditure and what is considered maintenance. From the standpoint of how commuter funding is performed, most of the complaints of the operator would indeed be considered "capital" items under FTA rules.<p>Yes, I realize that CATS is neither commuter nor FTA funded, but it is still government capitalized.<p>Presently, the overhauls I do on my coaches each ten years, and on locomotive each 7-8 years, are capital funding; which receive 80% Federal funds. At the same time they purchase "capital" spares, basically those one-of-a-kind and only available in batch quatity items that can't be purchased off the shelf.<p>Under this philosophy, I would consider the old 5 year boiler inspection to be a "capital" expense.<br>

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