(The following story by Brent Jang appeared on the Globe and Mail website on July 22.)
TORONTO — Canadian National Railway Co. warned yesterday that it’s willing to abandon plans to acquire a Chicago-area rail carrier if too many strings are attached to the purchase.
CN announced in September that it had struck a tentative deal to buy the strategic Elgin Joliet & Eastern Railway Co. for $300-million (U.S.), hoping to bypass train gridlock in Chicago’s core by rerouting traffic through EJ&E’s suburban tracks.
But Hunter Harrison, CN’s chief executive officer, said the railway isn’t wearing blinders when it comes to the deal, which would clear the way to speed up shipments across its network, including from the Port of Prince Rupert in British Columbia to the Memphis hub.
“Would we ever walk? Absolutely. I mean, we’re good business people,” Mr. Harrison said yesterday during a conference call, noting that CN hasn’t fallen deeply in love with the deal.
“We could run this railroad without the EJ&E. We could run it a lot more efficiently with it. But if it gets to the point where the mitigation costs or the timing of the issue is going to drag out for so long. … We’re very good at turning our backs and walking the other way and figuring out another way to skin the cat.”
He made the comments after CN announced an 11-per-cent slide in second-quarter profit as rising fuel costs and a strong loonie eroded the bottom line.
Montreal-based CN is seeking approval from the U.S. Surface Transportation Board to buy EJ&E. The transaction is running into opposition from groups of suburban Chicago citizens, including members of the Barrington Communities Against CN Rail Congestion.
Barack Obama, the Democratic presidential hopeful who is also a U.S. Senator from Illinois, has backed the opponents, saying he is concerned about increased freight traffic, environmental impacts and potential delays for ambulances.
Yesterday, Mr. Harrison acknowledged the criticisms and left the door open for a constructive solution that will satisfy regulators.
“My personal view is that the pendulum is starting to swing a little bit. We’ve got some more people [who] endorse the transaction,” he said. “I think people are starting to understand the not-in-my-backyard mentality. I’m cautiously optimistic that we will have this transaction completed by year-end.”
During the call, CN executives said the railway had a second-quarter operating ratio of 66.3 per cent, compared with 60 per cent a year earlier. The operating ratio is a key indicator of productivity that measures operating costs as a percentage of revenue. A lower number is better, so CN’s efficiency worsened amid a weakness in shipments of forest products and autos. Still, the company managed to post a $459-million quarterly profit while revenue climbed 4 per cent.
“All in all, pretty good results,” said CN chief financial officer Claude Mongeau.
CN expects continued strength in areas such as petroleum, chemicals, metals, minerals, coal, grain and fertilizers. The railway enjoyed a record $2.16-billion profit for 2007, and analysts are forecasting a solid performance this year, despite headwinds such as the U.S. economic slowdown and flooding in the Midwest.
Calgary-based Canadian Pacific Railway Ltd. releases its second-quarter results today.