CPR denies merger planned with Union Pacific
Source: BRENT JANG - Globe & Mail
Published: April 23rd 2008
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Co-ordinating delivery schedules simply a way to improve shipping times, Calgary-based railway tells U.S. regulator.

U.S. rail giant Union Pacific Corp. is co-ordinating its delivery schedules with Canadian Pacific Railway Ltd. in an effort to speed up freight shipments, but CPR is denying any merger is on the horizon, regulatory filings show.

"CPR and UP do work closely together to offer shippers efficient interline rail service," Bob Milloy, CPR vice-president of marketing and yield, said in a recent submission to the U.S. Surface Transportation Board. "Those arrangements are primarily operating initiatives designed to improve service reliability and transit time via CPR-UP interline routes between points in the United States and Canada."

Back in 2006, some CPR employees who were anxious about takeover speculation circulated internally by e-mail a portrait of a beaver, representing CPR, resting on UP's blue-topped, red-striped logo.

But Calgary-based CPR doesn't have any "exclusive strategic relationship" with UP of Omaha, Mr. Milloy said in his filing, part of a 254-page document that updates the regulatory board on a variety of issues, notably CPR's acquisition of Dakota Minnesota & Eastern Railroad Corp. (DM&E).

Kansas City Southern Railway Co. of Missouri is worried it will lose some corn shipments if the regulatory board approves CPR's DM&E deal. Adding to its fears, Kansas City Southern describes the CPR-UP alliance as "a commercial bond just short of a merger."

CPR placed DM&E into an independent voting trust last October, after it completed buying the regional railway for $1.5-billion (U.S.) from a group of private equity firms. A regulatory ruling on the DM&E deal is expected by Sept. 30.

Transportation consultant Greg Gormick said yesterday that Kansas City Southern and CPR aren't waging war, and could even reach their own co-operative pacts in future.

CPR could broaden its customer base along the U.S.-Mexico border, if Kansas City Southern gives "running rights" on its tracks to the Canadian firm, Mr. Gormick said.

Kansas City Southern has tracks running into Louisiana and Texas, so that opens the door for CPR to reach north-south strategic alliances with Kansas City Southern, providing competition for Montreal-based Canadian National Railway Co.'s Louisiana and Mississippi lines, he said.

CPR made the regulatory filing amid analysts' concerns the carrier will have a tough time surpassing its record profit last year of $946-million.

CPR said yesterday that it has lowered its guidance to $4.40 to $4.60 in share profit for 2008, compared with its previous share profit forecast of $4.65 to $4.80. Its first-quarter profit fell 29 per cent to $91-million, hurt by high diesel prices and the strong loonie, as well as a 20-per-cent drop in revenue from forest products - hampered by the slowdown in the U.S. housing sector.

Diesel prices rose faster in the first quarter than CPR's fuel surcharges, but the railway said it plans to devise a better formula to cover its energy bills.

Despite scaling back expectations, CPR's share profit could still exceed the record $4.32 posted last year.

National Bank Financial Inc. analyst David Newman noted that the stock performance of CPR and CN have lagged the four major U.S. railways so far this year.

CPR and Montreal-based CN suffered from a particularly harsh Canadian winter, Mr. Newman said.

"It was a tough quarter in terms of weather," said Kathryn McQuade, CPR's chief operating officer.

RBC Dominion Securities Inc. analyst Walter Spracklin said CPR enjoyed lower tax rates in the first quarter, but had to take another $15-million after-tax writedown owing to its original investment of $144-million in asset-backed commercial paper. In last year's third quarter, it also took a $15-million after-tax writedown on its ABCP exposure.

While the U.S. economic slowdown is deeper and longer than many expected, CPR remains optimistic about its train prospects.

"The fundamentals of the industry are incredibly sound," said CPR chief executive officer Fred Green. "I really do like this industry and where it's positioned for the medium and long term. Absolutely."

CPR's operating ratio - a key indicator of productivity that measures operating costs as a percentage of revenue - was 82.7 per cent in the latest quarter. As a lower number is better, so the latest figure was worse than the 79.5-per-cent ratio in the same period in 2007. CN has the industry's best operating ratio - 72.9 per cent in the first quarter, compared with 70.6 per cent in the same period last year.

CANADIAN PACIFIC (CP)

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