(The following story by Inyoung Hwang appeared on the Medill Reports website on October 22.)
CHICAGO — The chief executive officer of Canadian National Railway Co. affirmed Tuesday his confidence in obtaining regulatory approval for the company’s $300-million purchase of Elgin, Joliet & Eastern Railway around Chicago.
CEO E. Hunter Harrison said during an earnings conference call he thought the transaction will be completed by the year-end and that company officials met with Chicago Mayor Richard Daley last week.
“I do think when the elections are passed, there could be a little shift in certain areas,” Harrison said. “If you’ve been following closely and looked at the various editorials and papers and interacted with some of the townships, the momentum has swung a little bit back in our favor from where it was at one point in time.”
The Montreal-based company, operator of the most extensive rail network in Canada and one of the largest in the United States, has been trying to expand operations in Illinois and Indiana. In 2007 it offered to buy the EJ&E, which spans from Waukegan, Ill. to Gary, Ind. in a 198-mile arc around Chicago, from U.S. Steel Corp. The purchase would help CN expedite movement of trains and cars through the Chicago area.
CN expected to close the deal in mid-2008 but currently, still needs approval from the U.S. Surface Transportation Board. The transaction has faced resistance in suburbs such as Barrington, Ill. and Gary and Griffith in Indiana that are located along the EJ&E, because of concerns about greater traffic creating noise and blocking grade crossings.
In September, CN filed an appeal with the U.S. Court of Appeals in Washington to speed up the Surface Transportation Board’s decision on the sale, after U.S. Steel expressed it wanted to finalize the agreement by Dec. 31.
“I think it’s fair to say that [STB has] to approve the transaction based on the merits and the competitiveness,” Harrison said. “Nobody’s raised an issue about the competitiveness. The only issue has become the litigation of the environmental issues.”
“We have said to the court and the STB we will hold and freeze and have a status quo, not change any operations, until they feel comfortable that the environmental issues have been dealt with,” he added.
Stan Dobosz, a town councilman of Griffith, however, said that if the decision is made before Dec. 31, the much-needed environmental study may not be thorough enough.
“Griffith would be the community most impacted in Indiana,” Dobosz said. “Virtually, it would cut our town in half, and we would have chaos. If we were to have an emergency, our fire department and ambulances wouldn’t be able to cover the town from one end to the other.”
He felt that Harrison’s confidence in winning the STB’s approval stemmed from how “in past history, that’s the way it’s gone.” Dobosz said the widespread opposition indicates that a decision should not be rushed.
CN posted late Tuesday an unexpectedly strong third quarter profit increase of 14 percent, mainly because of fuel surcharges and freight rate increases. The stock dipped in Wednesday’s broad market decline, however.
The company saw its net income increase to C$552 million, or C$1.16 per diluted share, in the third quarter ended Sept. 30, from C$485 million, or 96 Canadian cents per diluted share, in the year-ago period. Revenues surged 12 percent to C$2.3 billion from C$2 billion. The Canadian dollar is worth 80 cents U.S.
Analysts had predicted a profit of 97 Canadian cents a share, according to a survey compiled by Zacks Investment Research Inc.
“First and foremost, pricing remained pretty solid, and the company is able to focus on productivity to offset the headwinds that are associated from the weaker volume numbers,” Lee Klaskow, an analyst with Longbow Research LLC, said.
CN’s net income for the nine months ended Sept. 30 was flat at C$1.3 billion, or C$2.74 per diluted share, compared with C$1.3 billion, or C$2.59 per diluted share, in the same period last year. Revenues rose to C$6.3 billion from C$6.0 billion.
An analyst asked Harrison during the call if because of the recent downturn in the economy and CN’s financial stability, the company would be interested in taking advantage of the current environment and look for additional acquisitions. Harrison responded that the focus is currently on EJ&E but CN might consider such opportunities after the EJ&E purchase is completed.
“That’s one of things I do every night when I get on my hands and knees is talk about EJ&E, so we hope it’ll all be done by year-end,” Harrison said.
CN stock closed at $39.56, a decrease of 24 cents.