Network Builder

Network Builder

Copyright 2003, Traffic World, Inc.

While the province of British Columbia considers the bids of Canadian National Railway and rival Canadian Pacific Railway for BC Rail, CN has snuck across the border and bought three railroads and a lake vessel company for $380 million.

CN''s purchase of Great Lakes Transportation LLC on Oct. 20 includes the Duluth, Missabe and Iron Range Railway, a 212-mile iron ore carrier; the Bessemer and Lake Erie Railroad, which moves coal, iron ore and limestone between Conneaut, Ohio, and Pittsburgh steel mills; the Pittsburgh & Conneaut Dock Co., a switching railroad that performs bulk transfer operations for the B&LE at Conneaut; and Great Lakes Fleet Inc., a nonrailroad company that owns a fleet of eight vessels carrying bulk commodities on the Great Lakes. The transaction is expected to improve CN''s NAFTA rail link between western Canada and Chicago and expand its role in the transportation of bulk commodities for the U.S. steel industry.

"We believe GLT customers will benefit from being served by the continent''s most efficient railroad," said Gordon T. Trafton, CN senior vice president for the U.S. region. CN, he said, "has the financial wherewithal to invest in freight cars, locomotives, dock facilities and capital works that underpin a crucial supply chain for the steel industry. Second, the transaction will preserve shipper choice, as demonstrated by our commitment to keep open all active gateways."

Last year GLT subsidiaries generated $215 million, over 70 percent of which was from hauling taconite pellets for use in the steel industry. It operates a total of 382 rail miles, owns over 5,600 rail cars and 63 locomotives, and has about 1,000 employees.

A crucial piece of the acquisition is a 17-mile segment of DM&IR track near the twin ports area of Duluth, Minn., and Superior, Wis. CN''s Pokegama rail yard there is caught "in a bit of an island," said CN spokesman Mark Hallman. Owning the section outright (CN currently operates over the section under a trackage rights agreement with DM&IR) will relieve this bottleneck, Hallman said, as well as allow CN to "author its own destiny," instead of being reliant on the DM&IR for interchange.

The DM&IR purchase also will allow CN to incorporate directional running (one-way traffic in each direction) along 64 miles of parallel track between Superior and Virginia, Minn., which will enhance freight train movement along CN''s main line between Chicago and western Canada and avoid capital expenses it otherwise would incur for improvements to its existing line, CN said. The net effect of the operational efficiencies will be to reduce transit times by several hours, Hallman said.

Rail analysts noted that while it made sense to build upon its NAFTA rail network for commodity flows between western Canada and Chicago, "we are not thrilled to see the company deviating from its core competency of running a scheduled railroad network by acquiring nonrail and noncontiguous rail assets," said Morgan Stanley rail analyst James Valentine, referring to the iron ore hauling railroads and the lake vessel company. "We''re hopeful that CNI will divest the nonrail and noncontiguous rail assets from this transaction over time."

However, CN says that''s not in the cards. "If you look at all the constituent parts here, they are an integral grouping as part of a supply chain. We see this as an opportunity as much as anything to become a full-fledged partner in terms of the steel industry. The steel industry in the U.S. is progressing in terms of its restructuring." He added that CN will benefit from the presence of U.S. Steel, one of Great Lakes Transportation''s key customers and operator of one of the most cost-efficient mines in the iron range.

Hallman acknowledged that some of the efficiencies gained as a result of the transaction will be through job loss at the rail carriers. "Obviously we think there are increased efficiencies we think we can accomplish, as well as eliminating duplicative activities," he said, although the number of jobs lost will not be significant, he said.

"The key priority is to mitigate potential job impacts," Hallman said, by helping affected employees find jobs on other parts of CN''s U.S. operations. CN does not anticipate job reductions at the vessel company as a result of the transaction, he said.

The transaction will be subject to approval by the Surface Transportation Board and considered a "minor" one under its merger rules. The lake vessel piece of the transaction also will be subject to Hart-Scott-Rodino review by the U.S. Federal Trade Commission and the Department of Justice. CN plans to finalize the transaction after governmental review in mid-2004.

CN is waiting to hear from the Canadian government on its bid for BC Rail, another transaction that also is expected to boost its U.S. export business. The 2,000-mile regional carrier that operates in western Canada generated roughly $250 million in revenue in 2002, most of which came from hauling forest products. BC Rail interchanges with CN at Prince George toward the northern end of its network and with CP and Burlington Northern Santa Fe Railway at the southern end in Vancouver. CN is competing for BC Rail against CP and a partnership that includes BNSF; a decision from the government is expected within the next several weeks.