The federal loan request, one of the largest ever for a U.S. company, had been loudly criticized by the Mayo Clinic and by Minnesota lawmakers in Washington.

The Federal Railroad Administration (FRA) found the project presented "too high a risk concerning the railroad's ability to repay the loan."

Federal officials said the railroad cannot appeal the decision. Kevin Schieffer, railroad president and chief executive officer, said he would pursue other options to obtain the financing.

Factors in the decision by FRA Administrator Joseph Boardman included the size of the loan relative to DM&E's existing operations and uncertainty over whether the railroad could ship as much coal as projected.

In addition, the railroad didn't sufficiently address how it would handle any cost overruns and schedule delays, the government said.

While the decision was based largely on financing for the $6 billion project, much of the opposition to it focused on safety and noise.

"The concerns of Rochester and the Mayo Clinic needed to be addressed before the project moved forward," said Gov. Tim Pawlenty. "Those concerns weren't addressed."

The DM&E Railroad wants to build about 280 miles of new line to Wyoming's Powder River Basin coal mines and reconstruct 600 miles of existing track in South Dakota and southern Minnesota.

Schieffer said he will pursue other avenues for financing, although he didn't specify what they might be.

"We've had disappointments before, and we'll keep moving forward," he said. "I think obviously we will be looking at different options," he said.

Schieffer maintains the support of Minnesota farm groups, which expressed disappointment in the loan decision

"This is not good news for agriculture, and it's not good news for rural Minnesota," said Blue Earth County corn and soybean grower Kevin Paaps, who heads the Minnesota Farm Bureau Federation. "The problem is my customers aren't at the end of the farm driveway. Transportation is extremely important to us."

Paaps predicted that the decision could also be a setback for the state's growing renewable fuels industry, which relies heavily on transportation infrastructure.

"It's not just railroads," he said. "It's roads, it's bridges, it's the Mississippi River."

In Rochester, the business community rallied around the Mayo Clinic's opposition and turned the expansion into a potent political issue.

"This is a victory for good government and accountability," said newly elected U.S. Rep. Tim Walz, a Democrat who represents southern Minnesota.

Train traffic through Rochester would have greatly increased, critics said.

The Rochester Coalition, the main opponent group, said that DM&E could have added up to 34 mile-long coal trains each day going 40 to 50 miles per hour through Rochester. Today, DM&E typically runs two to four trains of fewer than 100 cars each at between 5 and 10 mph, according to the coalition.

Politicians pleased

Sen. Norm Coleman, R-Minn., said he'd love to see a "good, solid rail" project through southern Minnesota that would ease transportation costs. "But that could only be done and can only be done if it doesn't pose an unacceptable risk to the communities involved, to the taxpayers," he said.

Sen. Amy Klobuchar, D-Minn., also criticized the loan. "While I support more rural rail in Minnesota, DM&E should not be allowed to sneak a $2.3 billion loan -- the largest in the history of the country -- past the American people," she said.

Rep. John Kline, R-Minn., said the railroad agency's decision settled many of the economic questions surrounding the project. "The loan application has clearly not met the justifiably high standards set by Congress," he said.

The decision represented a turnaround in the fortunes of DM&E's proposed railroad expansion, which until now had received help from Congress, the courts and other federal agencies.

In December, a federal appeals court ruled against environmental challenges to the controversial rail line.

The Eighth U.S. Circuit Court of Appeals rejected opponents' claims that the federal Surface Transportation Board had not ordered sufficient sound barriers to reduce train noise in Rochester.

Much of the impetus for the railroad expansion had come from South Dakota's Republican Sen. John Thune, a former DM&E lobbyist, who had quietly promoted the loan by increasing the FRA's lending authority.

Thune's provision was added at the last minute to a 2005 transportation bill.

Congress, however, is considering new legislation that would have required lawmakers to sign off on the $2.3 billion loan sought by DM&E.

Source: Minneapolis Star Tribune