NETEX updates on $42 million proposal

After the Northeast Texas Rural Rail Transportation District (NETEX) March regular meeting, the group is one step closer to determining whether or not they will continue to provide rail service for the area in the foreseeable future and possibly accept a bid from Sabine RailWerks for $42 million for infrastructure improvements in the tracks. Intragroup conflict emerged during March, and although their lawsuit with operator Blacklands Railroad is over, complications for NETEX are not at an end.

DELTA COUNTY REPRESENTATIVE

At the meeting to represent Delta County was Paul Burt, who was appearing in the place of Dr. Jason Lee Davis. As previously reported by the News-Telegram, on Feb. 3, Davis appeared before his Delta County Commissioners and in a 4-0 motion was put on a 90-day probationary status on the NETEX board.

During the Feb. 6 regular NETEX meeting, Davis nominated himself as secretary and was voted in by a margin of 4-3. By the March meeting, however, Delta County had rescinded Davis’ status on the board, and via email, Delta County Judge Jason Murray directed NETEX to accept Burt in his place.

However, some on NETEX felt uneasy about accepting Burt into the group, they said. According to board chairman Judge Brian Lee, this stems from the fact that Burt is the owner of Sulphur Springs-based Feeders Supply Company, which is a customer of the rail line.

In the NETEX bylines, it specifies “no board member shall have a pecuniary interested [sic], be benefited directly or indirectly, in any contract or agreement to which the District is a party.”

“We do business with Blacklands Railroad; we get cars and put them out,” Burt clarified. “Other than that, I live in Delta County.

Lee stated the group should look to precedent regarding appointing shippers on the board. In March 2019, the board voted not to accept the Hopkins County nomination of Brad Johnson, who serves as general manager of the Northeast Texas Farmers Co-Op.

In a Jan. 14, 2019 letter to Hopkins County Judge Robert Newsom, Lee argued against Johnson’s appointment to NETEX. Lee stated in the same letter that Titus County NETEX member Nate Priefert does not have a financial conflict of interest although Priefert manufacturing uses the rail to ship.

“I’m not sure that, no matter what our bylaws say, we can exclude an appointee from a commissioner’s court,” Collin County representative Cheryl Williams stated.

Both Collin County representatives Williams and Duncan Webb faced a similar reaction from Davis, Franklin County representative Sam Young and Hunt County representative Bonnie Hunter in September 2019 when they arrived at budget hearings. At that time, Williams and Webb informed the board they verified their installment with the Collin County attorney and did not need NETEX approval to sit as voting members of the board.

“It’s how we’ve interpreted it in Collin County is that we have a right to appoint whoever we want, period,” Williams said.

“We’ve already decided it once, and our bylaws states it very clearly,” Young said.

NETEX’s lawyer advised them that the appointment of Burt would not conflict with their bylaws, as long as Burt recused himself when NETEX set rail rates or negotiated Burt’s own terms.

Blacklands’ owner Wayne Defebaugh clarified to the board that shipping rates are not set by NETEX or Blacklands, but rather by Union Pacific.

However, according to Executive Director Phil Davila, because Burt and Feeders Supply leases a rail spur directly from NETEX, this does put Burt in pecuniary conflict and should disqualify him from serving on the board.

“Not that we’re searching for technicalities, but that seems to be legitimate,” Lee stated.

“The strategy of having customers on the board and talking about sensitive things…how does that work?” Hunt County representative Greg Sims asked.

“Do you give out inside information?” Delta County representative Mark Baird asked. Sims replied that he did not. “Then why the hell would you say he [Burt] would?” Baird inquired.

Sims expressed concern for what he termed “stacking the board” with shippers.

“What if over time you got this board filled up with nothing but customers? Over time you lose the representation of the counties,” Lee stated.

However, Defebaugh expressed that he felt it would be helpful to have shippers on the board, as they could help to accurately convey their needs to elected officials.

“I’ve got to rely on the commissioner’s court. If they want to appoint a customer, that’s up to them,” Webb said.

“I do have a concern about going against the wishes of a commissioner’s court in any instance,” Hopkins County representative Mickey Barker agreed. “If Delta County chooses that person, we should accept that person.”

Lee expressed his wishes to table the item, and Hopkins County representative Neal Barker expressed his wishes to vote on the item. Young made a motion to table the item and the motion failed 3-5. Neal Barker made a motion to accept Burt’s nomination contingent upon establishing Burt did not have a financial conflict of interest, and the motion passed 5-3.

LEGAL FEES

Chairman Lee updated the group that since the Surface Transportation Board ruling on Feb. 14, the group had incurred additional legal fees for which he sought approval to pay.

According to Lee, after receiving the ruling from the STB stating that Blacklands Railroad could take leave of the rail as early as March 15, Lee said he “felt the need to act quickly.” Having previously been instructed not to contact Blacklands directly because of the now defunct lawsuit, he said he contacted their attorneys to draft a letter to Blacklands in order to ask them if they intended to stay until March 15 or later.

Meanwhile, according to Baird, another conversation allegedly occurred wherein Davila emailed the group’s lawyer regarding what he felt was Neal Barker’s improper behavior on the executive board. Neal Barker confirmed the existence of such an email chain.

The product of these conversations and alleged conversations with the group’s lawyer now resulted in an outstanding bill of $1,025 which needed to be paid, according to Neal Barker.

Neal Barker expressed that he did not want the group to pay the bills. Webb expressed that he did not believe the group had any choice but to pay them. The group voted 7-1

The group voted 7-1 to pay the fees, with Neal Barker voting against paying the fees. Lee stated the attorneys have now been instructed they are not to speak with Davila.

NEGOTIATIONS

Present again at the March meeting was John Crew of Sabine RailWerks. Crew appeared in February to propose $42 million worth of private investment on the line, and the presence of Sabine RailWerks is what led Blacklands to drop their lawsuit against NETEX, according to Defebaugh.

On March 5, Crew and Defebaugh were requesting an extension of three months past the March 15 date to prepare a proposal for their $42 million investment to present to the board. Crew and Defebaugh’s request contained an exclusivity clause: that in those three months, the NETEX board would not seek another operator.

However, Sims stated he believed the group needed to look at more options than just Crew’s proposal.

“There needs to be a new request for proposals that goes out to the world and says, ‘Y’all can put in a bid for it,’” Sims said. “Big, big shortlines have had an interest in our railroad… to ignore others would be a disservice to our customers.”

Sims specifically mentioned larger rail lines, such as the Dallas Garland and Northeastern (DGNO); however, according to Matt Jasmer of Feeders Supply, customers have already heard from the DGNO and the company was not able to make it work in the area. Crew told the board he

Crew told the board he believed that if any other entity “came into these board meetings without knowing y’all, they wouldn’t touch this with a 10-foot pole.”

“We’ve tried this once already,” Defebaugh said. “We’re just asking for some exclusive time here to work with this board to get a proposal together to get some upgrades.”

Lee stated that any meetings the executive committee of NETEX have had with potential operators who could take Blacklands’ spot were “just coffee dates.” Davila, on the other hand stated there were “lots of credible people” ready to take over the rail line.

Neal Barker expressed that he was concerned as he stated he has heard that David Stevenson of Custom Commodities is considering pulling his business from the line. The board stated Stevenson’s business represents 55% of the rail line.

Furthermore, Sims claims Blacklands is deficient to the tune of $30 million of investment into the rail line.

“That man [Defebaugh] does not owe you $30 million,” Neal Barker told Sims.

“I guess what we’re saying is one in the hand is better than two in the bush,” Crew stated about Sabine RailWerks proposal. “You’re dealing with the guy [Defebaugh] that can give you the best deal. That’s my opinion. … He’s [Defebaugh] got a vested interest, and we’re going to put up all the capital necessary to rehabilitate the whole line.”

“We’ve got an opportunity sitting right here, and it has merit,” Defebaugh said. “If the board can work with us, we have a really good shot.”

The board took executive session regarding a contract with Blacklands and Sabine RailWerks from 3:41 p.m. to 4:29 p.m.

After emerging from executive session, the group voted to maintain its relationship with Blacklands until June, with no exclusivity. Defebaugh and Crew stated they found this conclusion acceptable and would work on their proposal.