State-Owned Railroads Flush with Money; Financial Info Withheld in Audit

November 8, 2013

Investigative Reports

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TrainIf you didn’t know that the state of South Carolina owns and operates three railroads, you’re probably not alone.

“Palmetto Railways” – formerly known as “South Carolina Public Railways” – is a division of the S.C. Department of Commerce. Established in 1969, it operates three freight carriers in the Charleston area:

  • The Port Utilities Commission of Charleston (PUCC) and the Port Terminal Railroad (PTR), which provide cargo switching services at terminals operated by the S.C. Ports Authority, connecting with large, private freight carriers Norfolk Southern and CSX Transportation; and
  • The East Cooper and Berkeley Railroad (ECBR), which serves BP Chemical and Nucor Steel.

Palmetto Railways, which is headquartered in Charleston and owns property elsewhere in the state, has its own website (www.palmettorailways.com or www.scontrack.com), though you won’t find a quick link to it on Commerce’s website (www.sccommerce.com) or even find it listed with other divisions on the Commerce site.

The railways division, according to its website, “promotes the economic viability of the State of South Carolina by providing safe, efficient and cost-effective rail solutions to facilitate the movement of freight and to support economic development efforts.”

But finding financial information on the division is no easy task. Neither Commerce nor the Office of State Budget reports Palmetto Railways’ annual revenues or expenditures in public budget documents. Jeff McWhorter, Palmetto Railways’ president and CEO for the past six years, and other top division executives are not listed in the state’s online salary database, which identifies employees earning at least $50,000 annually.

The division had 45 employees last fiscal year, which represented more than a third of Commerce’s total workforce of 125, according to the agency’s fiscal 2012-13 accountability report. McWhorter is listed right below Commerce Secretary Bobby Hitt in an organizational chart, though the report provides no details about the railway division’s financial operations.

Other records, however, show that Palmetto Railways has plenty of money.

According to its most recent financial statements filed with the Office of State Auditor, Palmetto Railways had nearly $20.3 million in cash and “cash equivalents” as of Dec. 31 – 2.65 times more than its total operating expenses for last year.

The division took in $11.5 million in total revenues in calendar year 2012 – mainly from switching fees and freight charges to customers – and had total operating expenses of slightly more than $7.6 million, with a year-end profit of nearly $3.9 million, according to the financial statements.

Palmetto Railways is expected to do slightly better this year, generating a projected $12.2 million in total revenues and $8.1 in total operating expenses, leaving an estimated year-end profit of slightly more than $4 million, according to figures provided Thursday to The Nerve by Commerce spokeswoman Allison Skipper.

Asked about the absence of public budget information on the railways division, Skipper in a written response said the division “does not receive state appropriations and is not included in the state budgeting process.” She noted that the division runs on a calendar year; in contrast, the typical fiscal year for state agencies, including Commerce, runs from July 1 through June 30.

Most of Palmetto Railways’ employees participate in the state retirement system, according to documents provided with the division’s financial statements.

The railways division in documents describes its revenues as “enterprise funds … used when governmental entities charge customers for services.” Other state agencies record those types of charges as “other” funds in the state budget, though no such listing exists for Palmetto Railways.

As with Palmetto Railways, budget information for certain state-created or state-owned agencies, such as the Ports Authority, utility Santee Cooper and the S.C. Research Authority, are not listed in the state budget.

Palmetto Railway’s total net assets as of Dec. 31 were nearly $80 million, including about $25 million in “unrestricted” net assets, according to its financial statements. Total administration expenses last year were nearly $1.8 million, though individual salaries were not listed.

Skipper in her written response Thursday to The Nerve listed McWhorter and 10 other executives as making at least $50,000 annually, though she didn’t provide their specific salaries. The Nerve sent a follow-up request for their salaries and other compensation but did not receive a reply by publication of this story.

In an audit report submitted to Hitt and Gov. Nikki Haley on Aug. 9 by Deputy State Auditor Richard Gilbert, the Columbia accounting firm of McDowell Pearman said Palmetto Railways failed to provide “certain material disclosures” for its operations last year, resulting in an “adverse audit opinion on the financial statements.”

“These disclosures and information are not in the financial statements because it is exempted from public disclosure pursuant to the South Carolina Freedom of Information Act,” the accounting firm said in its report. “Reporting of such information is essential for a fair presentation in conformity with accounting principles generally accepted in the United States of America.”

The Nerve has pointed out, including as recently as last week, that Commerce typically redacts information in agreements with companies involving taxpayer-funded incentives, citing an exemption in the FOIA for “confidential proprietary information,” which isn’t defined in the law.

In her response Thursday, Skipper said Palmetto Railways “does not disclose competitive rate or fee structure(s) in its financial statements, though the amount of fee income is disclosed,” adding, “The audit opinion has noted this nondisclosure of competitive information since 1998.”

The Nerve earlier requested under the FOIA copies of service agreements between the railways division and its customers. Commerce last month provided 10 main or supplemental agreements from 1995 through April of this year, though it blacked out specifics on charges to customers, which included CSX Transportation, BP, MeadWestvaco and Santee Cooper.

In an analysis filed with its financial statements, Palmetto Railways said operating revenues increased last year by nearly $1.4 million, or 13.8 percent, primarily because of “significant increases in the volume of rail shipments by BP on the ECBR and a new switching customer, Santee Cooper, at the PTR.”  Freight traffic on the ECBR for BP and Nucor was projected to increase this year “mainly due to improved economic conditions.”

Other customers listed on Palmetto Railways’ website include Norfolk Southern, GE, BMW, Mitsubishi, Westinghouse, Duke Power and the Ports Authority.

Palmetto Railways has been involved in several major real estate deals – and lawsuits – in recent years, including:

  • In 2010, the railways division acquired 240 acres and 65 buildings at the former U.S. Navy base in North Charleston through a foreclosure auction. The total purchase price was nearly $21.4 million, according to financial statement notes submitted with the audit report by McDowell Pearman.
  • In 2011, the division entered into an agreement with the Charleston Naval Complex Redevelopment Authority for a renovation project at the former naval shipyard headquarters. Under the deal, the authority would pay $1.5 million for renovations and occupy the building for seven years rent-free, according to the financial statement notes.
  • Last December, Palmetto Railways settled lawsuits with the city of North Charleston and the North Charleston Sewer District so that it could obtain land to build an “intermodal container transfer facility” at the former Navy base to accommodate planned rail service by Norfolk Southern and CSX to a nearby port terminal under construction, according to media accounts and the financial statement notes. Under the settlement, Palmetto Railways agreed to pay the city of North Charleston $8 million over four years to mitigate the impact of planned rail operations at the site, and will assume about $6.5 million in tax-increment financing (TIF) bonds for the former Navy base redevelopment project.
  • In June, the railways division agreed to pay $10 million to buy 12 buildings and 50 acres at the former Navy site so it could proceed with plans to build the “intermodal container transfer facility,” according to media accounts and the financial statement notes.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org. Follow him on Twitter @thenerve_rick. Follow The Nerve on Facebook and Twitter @thenervesc.