Tuesday, April 29, 2008

What the heck did we just buy? The NP View of the Seattle Lake Shore & Eastern

Edwin Harrison McHenry, Receiver, St. Paul, Minnesota, to Edward Dean Adams, Chairman, New York City, April 10, 1896. (Courtesy J.R. Masters, Office Engineer, N.P. Ry., Ret., via Northern Pacific Collection at the Minnesota Historical Society.)

Transmitting report of [John William] Kendrick, General Manager, concerning the Seattle, Lake Shore and Eastern Railway (the Lake Shore).

You are already familiar with the general subject of the earlier financial transactions of this company. The record is a disgraceful one. Even before the acquisition of stock by the Northern Pacific, the enterprise appears to have been robbed by its promoters.

It was originally intended to complete the line across the Cascade Mountains to a connection with the Spokane Branch, but the amount realized from the sale of bonds being insufficient to defray the expensive construction work of the mountain section the line was not completed The cost of the portion constructed was considerably above the expected amount, and in order to raise more money, the company bonded a number of spurs and sidings.

Under ordinary circumstances it would have been expected that after the consummation of the sale of stock to the Northern Pacific, that the road would have been operated in the interests of the purchaser, but control was not secured until the Northern Pacific had paid for 80 [percent] of the stock, and in the interval the officials and others interest in the Lake Shore apparently devoted their time and attention to looting the property.

The sale to our company was rushed through in a very peculiar manner, and without proper examination by the Traffic and Engineering departments of the Northern Pacific.
The specifications for the construction of the uncompleted portion of the line were accepted by our ex-General Counsel Mr. McNaught, and our Chief Engineer Mr. Kendrick was not allowed an opportunity to examine and comment on same.

The specifications were so drawn as to comply with the kind of road which it was expected to build, and allowed but two miles of sidings in 65 miles (105 km) of main line, and made entirely inadequate provision for operating facilities. The worst feature, however, was the clause which provided that the track would be ballasted with adjacent material, instead of train-hauled gravel ballast. The soil is particularly wet, and a large portion of the line traverses muskeg swamps; this omission would be better understood by a physical examination of the line than words can convey. The natural surface was so bad that the construction company [was] forced to haul in ballast in order to get construction trains over the track.After the Northern Pacific assumed control, it became necessary to incur great expenditures in providing additional sidings, spurs and other facilities for the ordinary transaction of business, and to perform additional ballasting.

The townsites along the line are held by the Virginia Townsite Company, under some deal engineer by the ex-general counsel, who subsequently unloaded same to the Northern Pacific. So valuable was the real estate supposed to be, that no extra width of right-of-way was provided at stations north of Sedro-Woolley, Washington.
A contract was also entered into for the benefit of the townsite interest at Anacortes, whereby the Northern Pacific agreed to operate the Seattle and Northern [a subsidiary of] the Oregon Improvement Company, paying [three percent] upon the appraised valuation, and a wheelage portion of expenses, in addition to a further sum of $80,000, expended in purchasing and interest in Syndicate Addition, and in the construction of improvements costing $35,000, entirely disconnected with the property of the Northern Pacific or the Lake Shore. The operation was shortly discontinued by the general manager on account of the heavy loss incurred, but the rental charges still continue to this day.

Valuable real estate at Seattle and at Snoqualmie Falls, which was formerly supposed to be property of the railroad, was claimed by private parties, and ownership of the Gilman coal mines at Issaquah, Washington, which were currently reported to have been paid for by the railroad, are in possession of outside interests.

Before the purchase by the Northern Pacific of the stock, the Lake Shore, finding it impossible to provide adequate terminal facilities at Spokane from the proceeds of [their] main line bonds, organized a company under the title of the Spokane Union Depot Company, to which the Washington and Idaho Railroad (a branch of the Union Pacific System), were admitted to half ownership. Bonds were issued amounting to a little over $400,000. The stock issue of $500,000 was divided equally between the two companies.

The Lake Shore was reimbursed for the work on that portion of their main line within the limits of the depot grounds from the proceeds of the depot bonds, but to the best of my knowledge and belief, the railway bonds were never cancelled. This property I have nominally estimated at $600,000 . . . but its real value is probably at least $1,000,000. It is used by the Oregon Railway and Navigation [Union Pacific] and the Great Northern systems, and these companies would have to expend at least $1,000,000 to provide equivalent facilities of less actual value. I have made repeated efforts for several years past to have this matter investigated, but owing to the circumstances have thus far been unsuccessful. If this depot stock does not come under the line of the Lake Shore bonds, it could doubtless be attached to satisfy some claims of the Northern Pacific against the Lake Shore.

The Spokane Branch is of little value, apart from the rails, which may be taken up and used elsewhere, with the exception of about two miles of line connecting with the Union Depot property, over which the Great Northern Railway now secures an entrance into Spokane from the west, and for the use of which they pay the heavy annual rental of $72,000.

On the Western Division, that portion of the line from Woodinville Junction to the terminus [at] Sallal near North Bend, Washington, is of little present value, but its earnings power will constantly increase. The remainder, which includes the section between Seattle and Woodinville Junction, and [Woodinville Junction] and the International boundary line at Sumas, Washington, I consider as very valuable property. Its present earnings afford no index to its prospective earnings in the future, and if it is not secured by our company at this time, the omission will be bitterly regretted.

The development of the region is necessarily slow, but I think it is also certain. There is every reason for expecting a steady and progressive increase in earnings for an indefinite period in the future. I am not in entire accord with the general manager's statement that the business secured from this branch may be replaced from points on our own lines. Contrary to the belief, the supplies of cedar in western Washington are comparatively limited, and the greatest reserves of this timber are along the line of the Lake Shore. I think it but a matter of a few years when the cedar will be exhausted on our other lines.
There is also reason to believe that the rate on shingles can be materially advanced without affecting the tonnage, as the present low price of the shingles is brought about wholly by local competition. It was not possible, however, to obtain a higher rate, except by concurrence of the Great Northern, which could not heretofore be obtained, on account of James Jerome Hill persistent effort to reduce the gross and net earnings of our system in order to facilitate his plans.

I understand the reorganization of the Lake Shore has been affected upon favorable terms, but have never had an opportunity to see the plan. I would every strongly recommend the purchase or least of the western divisions of the system, if favorable terms may be obtained. I would also advise the purchase of the Spokane Branch, if the property could be acquired upon satisfactory terms, which in my opinion would be based upon the value of that portion of the line within the city limits over which the Great Northern now gains access, including any liens the bonds may constitute upon the depot property, and the salvage value of the rails upon the remaining portion of the branch.
I further add, for your information, that I do not think the bondholders of the Lake Shore appreciate the fact that the bonds covering that portion of the line sold to the [Spokane Union] Depot Company were not cancelled, but I may be in error regarding this.

McNaught, James.
Counsel for Receivers.
Office: Postal Telegraph Building, New York, New York.

Born: September 9, 1842, at Lexington, McLane County, Illinois.
Education: Wesleyan University, Bloomington, Illinois.
Entered railway service: 1871 as director and counsel Columbia and Puget Sound; since which he has been consecutively 1879 to 1887, division counsel Northern Pacific, jurisdiction extending over Washington and Idaho, with headquarters at Seattle, Washington; 1887 to 1889, general solicitor, headquarters St. Paul, Minnesota; 1889 to October, 1893, general counsel same road; October, 1893, to May, 1895, counsel for receivers, same road.
Busbey, T. Addison, editor. The Biographical Directory of the Railway Officials of America, Edition of 1896. Chicago [Ill.]: Railway Age and Northwestern Railroader, 1896, p. 304.

McHenry, Edwin Harrison (January 25, 1859-August 21, 1931).
Fourth Vice-President New York, New Haven and Hartford Railroad and First Vice-President Consolidated Railway, Hartford, Connecticut.
Born: January 25, 1859, at Cincinnati, Ohio.
Educated: Pennsylvania Military College at Chester, Pennsylvania.
Entered railway service: 1883 as rodman on Black Hills Branch, Northern Pacific, since which he has been consecutively rodman, chainman, draftsman, leveler, transitman, assistant engineer, division engineer, principal assistant engineer, and November 1, 1893, to January 1, 1896, chief engineer; October, 1895, to October, 1896, also receiver same road; September 1, 1896, to September 1, 1901, chief engineer reorganized road, the Northern Pacific, in charge of location, construction and maintenance; 1901 and 1902, visited China, Japan and Philippine Islands; June 1, 1902, to May 10, 1904, chief engineer, Canadian Pacific; October 1, 1904, to date, first vice-president, Consolidated Railway, in charge of construction, operation and maintenance of the trolley lines owned by the New York, New Haven and Hartford, and also fourth vice-president, New York, New Haven and Hartford, in charge of Electrical Department covering electrical construction and maintenance of lines operated by electricity.
Busbey, T. Addison, editor. The Biographical Directory of the Railway Officials of America, Edition of 1906. Chicago [Ill.]: Railway Age, 1906, pp. 381-82.

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