Federal officials rejected Monday a $2.3 billion loan application from the Dakota, Minnesota and Eastern Railroad, deciding the ambitious project was too risky for taxpayers to back.

The Sioux Falls-based railroad has no avenue to appeal the decision by the federal Department of Transportation’s Credit Council, but it will have the option of trying to fund the 680-mile upgrade and expansion through private investors.

Congressman Tim Walz announced the decision at 4 p.m., and Sens. Norm Coleman and Amy Klobuchar quickly followed with a joint press conference of their own.

“It’s pretty straight-forward. They didn’t think it could work,” Walz said of the federal analysts. “They asked the same questions I and others asked all along: Can this be paid back?”

Each lawmaker was called Monday afternoon by Secretary of Transportation Mary Peters who summarized the Credit Council’s verdict.

“She was very clear this was a final resolution of the DM&E;’s loan application,” Coleman said. “... This project simply didn’t pass economic muster.”

DM&E; not surrendering

While the government loan application has been thoroughly rejected, DM&E; President Kevin Schieffer isn’t giving up on his long effort to extend his aging rail line into the coal-rich Powder River Basin of eastern Wyoming.

“We’re going to look at different alternatives, make some decisions and go forward,” Schieffer said. “But we certainly are planning to go forward with the (Powder River Basin) project.”

Schieffer wouldn’t comment on whether he is optimistic that private investors will be more willing to back the project than the federal regulators were.

“Some things you can talk about publicly and some things you can’t,” he said.

Walz expects Schieffer will seek private financing but said his gut feeling is that it will be hard to find. The federal analysts decided that the only way the DM&E; would be able to repay the loan is if every aspect of its plan — which involves building 280 miles of new track around the Black Hills and into Wyoming and upgrade 600 miles of existing track through South Dakota and Minnesota — was completed without unexpected complications or time delays.

“There isn’t any realism in basing it on rosiest scenarios,” Walz said. “Before people invest $2 billion, they’re going to ask these same questions.”

Up until late in 2005, when Schieffer announced the government loan application, he had always talked optimistically about finding private investors and insisted it was a task that didn’t worry him.

But Klobuchar, like Walz, was also skeptical about the DM&E;’s prospects for funding the project privately.

“I believe private funders would have to confront the same credit risks,” Klobuchar said.

A decade of contention

If the rejection of the federal loan leaves the project with an uncertain future, that would be nothing new. The project has traveled a long a controversial path since it was announced nearly a decade ago.

City officials and property owners were immediately concerned because the plan would potentially send thousands of additional mile-long coal trains through Mankato, Rochester and other communities each year. Some farm groups and other shippers applauded the project because it would have brought a much needed upgrade of DM&E; tracks and equipment

But the attempt by the DM&E; to get taxpayers to provide the loan — which would have been the largest federal loan to a private company in American history — ramped up the debate and brought intense political scrutiny.

The way the loan came about only added to the controversy. The railroad and Sen. John Thune, R-S.D., announced in November of 2005 that Thune, who had been paid $220,000 as a DM&E; lobbyist just before being elected to the Senate, had quietly added a provision to a thick federal transportation bill making the loan possible.

Former Sen. Mark Dayton attacked the loan application and the process used to make it available right up until his retirement at the end of 2006. Walz and Klobuchar both decried the process during their successful runs for office last fall, and Coleman also became increasingly critical.

Officials in Rochester, backed financially by the Mayo Clinic, were particularly aggressive in pushing for rejection of the loan. Fiscal conservatives and government watchdog groups from around the country joined the opposition.

And earlier this month, Walz, Coleman and Klobuchar announced they were pursuing legislation that would have required congressional approval of any federal loan of more than $1 billion.

‘Too high a risk’

Ultimately, Department of Transportation officials announced that the loan application just didn’t add up.

A short news release from Federal Railroad Administrator Joseph Boardman, who is a member of the DOT Credit Council, said he was “concerned by several factors including the DM&E;’s current highly leveraged financial position; the size of the loan relative to the limited scale of existing DM&E; operations; and the possibility that the railroad may not be able to ship the projected amounts of coal needed to generate enough revenue to pay back the loan.”

The Credit Council had options other than a complete rejection of the loan application. For instance, it could have approved the loan with stringent conditions attached.

Boardman explained that an outright denial of the application was appropriate because “there remained too high a risk concerning the railroad’s ability to repay the loan even with an appropriate combination of credit risk premiums and collateral.”

While all three lawmakers applauded the fiscal scrutiny applied by transportation officials, Klobuchar and Walz said they will continue to push the legislation requiring congressional oversight of loans topping $1 billion.

“I’m a little uncomfortable with seven people behind closed doors dealing with billions of taxpayer dollars,” Walz said.

No end of the line

After nine years of doubts for landowners, cities and businesses along the route of the DM&E;, there’s no guarantee the uncertainty will end — not with Schieffer insisting there are yet-to-be-revealed alternatives for building the project. Walz said it would be unfortunate if the issue is left in limbo in the years ahead.

“I hope not,” he said. “It’s a free country and a free market. But I hope that won’t be his choice.”

Schieffer said land-acquisition negotiations and construction planning will continue on the coal project, and he will detail how it will be financed when the time is right.

“It’s an important project,” Schieffer said. “... We are going to do it as soon as we can.”