Wednesday, July 23, 2008

CN plays Railway poker Chicago style

"We are good business people. We fell in love with this deal, but we can run this railroad without the EJ&E," -- Canadian National CEO Harrison E. Hunter, providing a bit of a positioning statement for the railroad over roadblocks to the purchase of a key Illinois railroad.

The Port of Prince Rupert doesn't have much in the way of influence on a debate raging in Chicago at the moment, however the result of whether CN purchases the Elgin, Joliet and Eastern Railway could have an impact on the southern desitnation for much of those containers that pass through Prince Rupert.

The 198 miles of track that the E J and E Railway have make the difference between a full days shipping from Rupert to Memphis, a key element of the advantage that the Rupert port is being marketed with to the rest of the world.

The much anticipated purchase of that railroad has hit a bit of a snag, as local community groups banded together to fight the purchase by the railroad with its plans for mile long double stacked container trains each and every day. No less a name than Presidential candidate Barack Obama has come out against the sale and increase in rail traffic in suburban Chicago.

CN has decided to play a little hardball this week, with a declaration that time is short and they will be off to considering other options if the sale doesn't go through.

The Memphis Commercial Appeal had some background on the controversy and the concern that it is causing for CN and for the inland container port of Memphis.

CN ready to drop Chicago track deal; would derail advantage for Memphis
By Jane Roberts
Memphis Commercial Appeal
Wednesday, July 23, 2008

For Memphis shippers who are waiting for faster rail transit times from Chicago, the journey took a lurch this week.

Canadian National CEO Harrison E. Hunter told investors and analysts Monday that CN was prepared to walk away from a $300 million (Canadian) purchase of a portion of the Elgin, Joliet and Eastern Railway Co., which has 198 miles of track encircling Chicago.

"We are good business people. We fell in love with this deal, but we can run this railroad without the EJ&E," Hunter said.

"We're very good at turning our back and walking the other way and figuring another way to skin the cat," he said.

CN said last fall it was buying the railroad with U.S. Steel Corp. The deal was expected to close in the middle of this year.

It would give CN a direct route through Chicago, shaving in some cases a full day of delay out of transit time to Memphis.

Last fall when Harrison spoke to the Economic Club of Memphis, he said the purchase would allow CN to get goods from Prince Rupert, British Colombia, to Memphis in 100 hours as early as 2011.

In the same year, he said Memphis would be receiving a mile-long train a day from Prince Rupert, double stacked with import containers.

Container imports are expected to rise 350 percent by 2020, creating immense stresses for the U.S. transportation sector. Improved rail efficiencies must cope with this problem, he said.

CN has invested nearly a half-billion dollars in Memphis alone, opening a new intermodal terminal at Frank C. Pidgeon Park in 2005, improving track between Memphis and Chicago, and beefing up its railcar yard at Johnston Yard.

The improvements are expected to be complete in the third quarter of this year.

It has also invested $225 million in Prince Rupert and track in western Canada, hoping to sell Asian shippers on shorter transit times from the Pacific.

In the meantime, neighborhood groups in Chicago have banded to fight the purchase of EJ&E.
While Harrison said the "pendulum" is swinging to CN's side, he is not going to forfeit timing and money if they can be better spent on another acquisition.

"The mitigation costs can be better spent on another business deal," he said.

About 80 percent of the intermodal containers coming into port at Prince Rupert are destined for Chicago and Memphis, according to Barry Bartlett, spokesman for the Prince Rupert Port Authority.

"In the first six months of 2008, we had 42,555 containers move through here," he said.
On July 10, the CKYH Alliance made its first call in Prince Rupert and signed a contract to berth one ship there a week.

The alliance, which is headed by COSCO but also includes Hanjin, Kline and other Asian carriers, will use larger ships, potentially increasing the volume of goods coming to Memphis.
While Harrison says the Memphis investment will do fine on its own, it would do better with EJ&E.

The Memphis Regional Chamber wrote a letter of support to the National Surface Transportation Board, which is reviewing the case.

"If you can take 20-23 hours off 130-hour shipping time, you've taken almost 20 percent of the travel time out. That's a big deal," said Dexter Muller, senior vice president for community development at the chamber.

He said it would give Memphis an advantage other cities would not have.
Edward Jones analyst Dan Ortwerth expects the deal will close.

"I don't think CN will walk away. This is Harrison's way of stating a strong case," he said.
Ortwerth said it was clear to him that CN seemed confident it will complete the acquisition on "reasonable terms and in a reasonable time frame."

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