In an unusual move, the Port of Vancouver is expected to cut $15.29 million in revenue from its overall 2015 budget because it now anticipates a new freight-hauling venture will not live up to expectations.
Under the “dedicated rail service” plan, the port anticipated $18.57 million in revenue from leasing rail cars to haul oil-drilling materials to North Dakota; those cars would then return to Vancouver loaded with Midwestern crops for eventual export overseas.
But the plan, which the port publicly touted as a big driver of new revenue and which faced internal concerns from the port’s own finance director at the time, isn’t panning out as hoped.
As a result, port managers next week are expected to bring a revised budget to the port’s three elected commissioners. It pegs rail service revenue at $3.28 million, down 82 percent from the $18.57 million commissioners approved in November 2014. At the same time, it drops the program’s expenses to $3.16 million, down 80 percent from an initial estimate of $16.64 million.
The result: a program that was expected to bring the port a profit of $1.93 million is now expected to generate a profit of $120,187.
Port officials say such a supplemental budget is rare but that the port remains on sound financial footing, with record revenues, a rail service program that still has the potential for significant revenue and plenty of other opportunities. During a public meeting last week, Todd Coleman, the port’s CEO, said the supplemental budget “is unusual for the port to do.” But the removal of rail service revenue is “a big enough shift,” he said, that the port needs to adopt a midyear change to its budget.
The markdown would not come as a surprise to Jeff Estuesta, the port’s former director of finance. He internally questioned the credibility of the rail service program before port commissioners unanimously approved it as part of the overall 2015 budget, according to public records obtained by The Columbian.
The rail service plan could, over time, “yield higher margins but this business is predicated on (the port) ensuring ‘covered storage,’ which is an additional investment,” Estuesta wrote in a Sept. 30, 2014, email to port administrators. Similar emails would follow. Estuesta worked for the port from July 2012 to October 2014.
In an email to The Columbian Thursday, Abbi Russell, a spokeswoman for the port, said the port was “very clear when forming and communicating our 2015 budget that we would be evaluating this (rail service) program throughout its development and implementation. Markets and business opportunities evolve, and we evolve with them.”
Meanwhile, the port is expected to make other financial alterations as part of its proposed supplemental budget. Those include a reduction in non-operating revenues of $1.66 million and a $4.59 million cutback in the port’s spending on capital projects.
In total, the port is expected to reduce its 2015 budget from $98.79 million to $80.72 million, an 18 percent decrease triggered largely by taking $15.29 million in revenue from the rail services program off its books. Commissioners Nancy Baker, Jerry Oliver and Brian Wolfe are expected to take up the changes during their regular public meeting Tuesday.
Concerns aired
News of snags in the port’s rail service plan, as well as other budget changes, emerged last week during the port’s July 13 midyear public meeting that lasted for most of the day. Attendees included top port administrators and all three commissioners.
Port officials indicated that what they initially thought was a rail service deal that had been worked out with BNSF Railway later became a no-go.
The talk was a far cry from the summer and fall of last year.
In August 2014, port commissioners unanimously approved a resolution setting the rail service plan in motion. In advance of their public meeting, commissioners received a staff report outlining how the rail service program would work and two draft alternative resolutions.
Those documents were nowhere to be found in the agenda issued to the public. At the time, a civic activist complained about the lack of information to understand the proposed policy.
In her email addressing questions about the change, Russell, the port spokeswoman, said that when the port was developing the rail service plan, BNSF Railway “was managing high demand on its system” and a lot of construction improvements.
Those and other factors led the port to pursue using leased rail cars rather than cars owned by the railroad “so we could create an efficient and reliable system to move products between the Pacific Northwest and midcontinent.”
With BNSF Railway’s completion of some capital improvements and other changes, Russell said, “this is not as much an issue today.” She went on: “So we’ve continued coordinating with our partners and are now moving forward with the (rail service plan) using system cars, which translates into lower risk and lower costs — thus the changes to our budget.”
However, Estuesta’s emails suggest the port didn’t have other certain pieces in place to pull off the rail service plan at the level it wanted.
On Oct. 7, 2014, Estuesta sent an email to senior-level port officials about a “couple of (issues) we need to move forward on with Todd (Coleman) and more important the commissioners.” One of those issues was that the port was paying another party, at a loss of roughly $5 per metric ton, to store proppants — ceramic materials used in the hydraulic fracturing process — coming to the port from China. The oil-drilling materials were to be shipped to North Dakota by rail as part of the two-way dedicated rail service accord. Farm products would be loaded onto the cars for the return trip to Vancouver.
“We need to walk Todd through (the port’s) interim proppants ‘off site’ storage and rail loading until we construct a pole building replacement,” Estuesta said in his email. “Current our average cost is around $19 per metric ton and we only invoice customer for either $13.65 or $14.65. I know we will work on reducing these costs.”
On Oct. 10, 2014, Estuesta sent an email directly to Coleman, and copied senior-level officials. “Before we/you/(port) sign the rail car leases and cars start rolling into the port I am requesting one last management check-in before (we go) live. Delivering and executing customer expectations requires (the port) to be firing on all cylinders — investment in rail cars, covered storage, trans load partners and labor partner efficiencies.”
In her email to The Columbian, Russell, the port spokeswoman, did not reply to specific questions about the concerns raised by Estuesta.
Record first half
Although the port has dialed down its 2015 budget, officials say the port remains in strong financial health.
During the port commission’s regular public meeting last Tuesday, Coleman said the port is on pace for another record year in revenue. “We had a record first half,” he said. “We hope that that maintains through the second half.”
Speaking of the port’s midyear public meeting that included discussion of the supplemental budget, Commissioner Oliver said “this is a regular event. It’s like, ‘OK, we set a plan, where are we on the plan, and we’re doing some reassessment.’ “
And while the reduction in the rail service plan is significant, Oliver said, the port had record revenue last year and record first-quarter revenue. And while second-quarter revenue was “not quite a record,” he said, it was historically very high. “Things aren’t looking too bad for the balance of the year, either,” Oliver said.
In addition to the cutback in the rail service plan’s revenue, the port is reducing by $1.66 million its non-operating revenues. That’s because Maruichi American Corp. “decided not to purchase 9.6 acres of property” at the port’s Centennial Industrial Park, according to Russell. “The company made this decision during its due diligence period,” she said, “which was completely within its rights under the purchase and sales agreement signed by Maruichi and the port in October 2014.”
The port also anticipates reducing its capital expenditures by $4.6 million. That markdown “is related to a number of projects for which schedules are moving based on need, funding and project phasing,” Russell said. “It’s not tied to one particular project or facility improvement.”
