Coal Dust

Coal Dust

Canadian Pacific Railway's proposed purchase of the Dakota, Minnesota and Eastern railroad still faces some serious regulatory hurdles, but the $1.48 billion deal has already succeeded on one front. It's added some electricity to a railroad business that's been looking for a bit of a jolt during a pretty lackluster year.

But as everyone in the sweltering Midwest knows, electricity comes at a heavy cost, and a big part of that cost comes from what it takes to transport the coal that feeds the aging power grids around the United States.

The initial speculation in the shipping community about the CP-DM&E deal has been about the impact CP's expanded network will have on pricing, particularly on the rates for coal transport if the Canadian carrier follows through on the DM&E's ambitious plan to build a third rail operation in and out of Wyoming's Powder River Basin. After all, more competition is supposed to bring down prices, isn't it?

But any attention on the impact of this blockbuster merger (and it's a blockbuster by this decade's standards, even if not by the standards set in the 1990s) that is focused solely on rates is short sighted.

This deal will have an impact on competition, and perhaps on costs. But any shipper looking for lower transport bills probably hasn't spent enough time waiting on a sidetrack at the PRB. The real impact - and it may be years down the track - will come in areas of service, and that may be better for shippers in the long run since, after all, what most utilities are looking for is not cheaper transport but more dependable transport.

As Chuck Linderman of the Edison Electric Institute put it, the CP deal "looks like an interesting development if it leads to more PRB competition."  

But for now, railroads look uninterested in competing on price. Instead, if the DM&E gets to use Canadian dollars to fulfill its strategy, shippers may see more attention to service, faster movement of trains and more dependable delivery. And that, too, won't come without cost.

That's because the $1.48 billion in cash CP is paying for DM&E is already steep - 5.7 times the regional carrier's 2006 freight revenue - and any gains CP would get from the prospective coal operation would carry a cost beyond the basic construction price tag. CP also will pay DM&E shareholders $350 million if it begins construction on the PRB project before 2026 and will owe up to another $700 million based on coal volume it handles before then.

It's no wonder one of the most enthusiastic responses to the acquisition came from a DM&E financial backer, L.B. Foster, which says it will get $151.5 million on the closing of the deal and then up to another $125 million if the PRB plans go forward. As company Chairman Lee B. Foster put it, "This is a wonderful outcome for the L.B. Foster company."

It may be wonderful for shippers, too, but it will take a few more years to total that up.