(The following report by Drew Hasselback appeared on the National Post website on November 26.)
OTTAWA — Canadian National Railway Co. will pay $1-billion to take control of BC Rail Ltd., the Crown-owned railway the government of British Columbia wants to privatize to pay down debt.
The deal gives CN control over Canada’s third largest railroad, a network of 2,300 kilometres of mainline track that connect the ports of Vancouver and Prince Rupert with northern and central parts of the province.
The transaction was widely expected, following several media leaks. “This was not the best kept secret in North America,” said Hunter Harrison, chief executive of CN, in a conference call from Victoria.
Under the terms of the deal, the province retains title to BC Rail’s track beds. In return, CN acquires BC Rail’s operations, a long-term guarantee of access to those rail lines and responsibility for infrastructure maintenance.
BC Rail is a freight operation, generating almost 80% of its revenue from transporting products from B.C.’s forest business. Despite trade disputes between Canada and the United States over softwood lumber, CN thinks there is great potential for B.C. to boost shipments of its lumber, most of which is exported to the United States.
“Purchasing the BC Rail franchise is a strategically important initiative for CN that will strengthen our forest products business,” Mr. Harrison said. “There’s quite a bit of lumber that comes out of British Columbia on the highway, then goes across the border and is [transferred] to rail cars. We’d like to see that go by rail car all the way.”
Mr. Harrison said he is not worried about the softwood lumber trade dispute between Canada and the U.S. “Despite all the hurdles that we’ve had for the past three years, every year we’ve shipped record levels of lumber.”
CN expects to finance the transaction entirely with debt using a $1-billion shelf financing it filed with regulators about a month ago. The deal is expected to close by early in next year’s second quarter.
CN beat out competition from Canadian Pacific Railway Ltd. and a consortium formed by two U.S. companies, OmniTRAX Inc. and Burlington Northern Santa Fe Corp.
The privatization of the railway has generated controversy, especially since the governing B.C. Liberals promised not to sell the railway during a 2001 election campaign.
Recently, the move to privatize the railway has been criticized by former right wing premier Bill Vander Zalm and by left wing labour groups.
Much of the political opposition comes from the threat of lost jobs. Mr. Harrison, chief executive of CN, yesterday confirmed that 430 positions will be cut following the takeover. BC Rail currently employees 1,380 active employees, but CN’s operating plan requires only 950.
Unions have complained the province would be selling a profitable asset, while the government argued BC Rail needed to be sold to pay down a debt of more than $500-million. Retiring the debt should save the province $30-million in annual interest costs.
BC Rail lost $84.2-million in 2002 on revenue of $313-million. BC Rail’s operating losses are actually one of the key selling points of the deal. CN expects to inherit enough tax losses from BC Rail that, starting in the 2005 taxation year, CN expects to cut its annual tax bill by up to $125-million for several years.
CN said it has a three-year plan to turn BC Rail into a cash generator. The idea is to eliminate duplication by combining CN’s existing B.C. operations with BC Rail. CN will close BC Rail’s three rail yards, reduce its locomotive fleet by 25%, and cut its freight car count by 15%.
Claude Mongeau, CN’s chief financial officer, said according to U.S. accounting rules, BC Rail generates about US$115-million a year in EBITDA, or earnings before income tax, depreciation and amortization. He said CN’s “conservative” business plan should increase BC Rail’s EBITDA by at least 25% after three years.
Gordon Campbell, B.C. Premier, defended the sale. He said CN’s investment will create new opportunities for the province. For example, the transaction will open some of BC Rail’s tracks to passenger traffic. Third-party tour operators will be invited to bid for opportunities to use the tracks.
And CN plans to inject capital into northern communities.
CN wants to boost the profile of Prince Rupert, a port on the north central coast of B.C., which is one day’s sail closer to Asia than Vancouver.
CN also said it will make Prince George, B.C., the headquarters of a new regional division and spend $1-million to build a wheel shop there. BC Rail currently contracts out its wheel shop services to a firm in Washington state.