CP NEWS

CP + NS?  (E. Hunter Harrison Still Fighting On!) 

Canadian Pacific Railway released its third white paper on issues related to its proposed acquisition of Norfolk Southern Corp. The latest one, titled "CP-NS: A Comprehensive Approach to Regulatory Approval," details the comprehensive, merit-based process a railroad merger application would be subject to at the U.S. Surface Transportation Board, CP officials said in a press release. "In advancing its proposal to combine CP and [NS], CP is confident that the proposal can meet this standard and its voting trust structure will be approved because a CP-NS combination will more than satisfy the STB's public interest standard by introducing features that will enhance competition through a number of shipper-friendly options," they said in the release. A combination of the two Class Is would form a transcontinental railroad "with the scale and reach to deliver unsurpassed levels of service and safety to customers and communities while increasing competition, supporting continued economic growth and creating significant shareholder value," CP's press release stated. CP has made three acquisition proposals to NS; all three have been rejected to date. In response to CP's release of its third white paper, NS issued the following statement: "The fact that CP has not sought a declaratory order from the STB for its voting trust structure shows that it has no confidence that it would ever be approved. CP's white paper does nothing more than repeat CP's misleading and flatly wrong statements about the regulatory hurdles to a transaction."

 Then In late February Canadian Pacific Railway announced it will move forward in buying Norfolk Southern with or without Norfolk Southern's cooperation.   County officials and business leadersin Juniata Shop area are wasting no time in expressing their concerns.  "We are a railroad community," said Marty Marasco, President and CEO of the Altoona-Blair County Development Corporation.  "Those ashes and cinders are in the lifeblood of this community."   

Canadian Pacific made a $28 billion offer mid-November to buy Norfolk Southern.  "Any time you hear the word 'merger', 'acquisition', 'consolidation', you always have a concern about how your area is gonna fair in that type of a situation," Marasco said. As CP moves forward with the merger, local leaders are reaching out to the U.S. Surface Transportation Board with their concerns.  "We just want the Surface Transportation Board to take a look at that and scrutinize the transaction if it should move forward so that good decisions can be made," Marasco said.  The railroad may no longer be in its heyday, but still more than 1,000 people are employed in Blair County.  That's a payroll exceeding more than $60 million each year.  "If you look at the multiplier effect, the direct economic impact would be probably hundreds of millions of dollars with people that supply product to the shops and vice versa," Marasco said. "So local businesses it would funnel down through. So it would have a major impact on this community."  Leaders for the county's chamber of commerce agree.  "Our concern, naturally, is that Norfolk Southern invests a great deal here," President Joe Hurd said. "The financial impact alone is enormous... To the maximum degree it would bring our local economy to its knees."

 The fate of the Juniata Shops poses a crippling threat to the area.  "There has been a tendency on the part of Canadian Pacific to kind of break up the components," Marasco said. "Naturally, we don't want to see that happen."

 About ten to 15 groups in Blair County have written letters to the U.S. Surface Transportation Board thus far. (Next Star Report)

 The Great Canadian Pacific Magic Show:

The issue then becomes how many internal cuts can you make before it begins to hinder your ability to operate?

Record net profits have been fueling Canadian Pacific Railway's stock price.

Is Canadian Pacific Railway devolving into a giant shell game?

What happens when the quest for profits hollows out CP Rail's ability to operate?

Over the past couple of years the once underwhelming Canadian Pacific Railway (NYSE:CP) has gone from the "other rail company" on the TSX to one of the biggest success stories among Canadian stocks. Its share price went from $48.00 on the NYSE back in 2011 to a high of $220.20 in September 2014, and this was achieved through the quest to cut costs at the railway. Investors who were not reluctant in the dark days of 2011 and 2012 were rewarded with astronomical returns as Hunter Harris took over control of Canada's number two railway.

Since the stock peaked in September 2014 it has been on a steady downslide and closed on the NYSE on Friday at $120.91, effectively erasing the past year and a half of share price gains as the price is now at its lowest point since February 2013.

So how is it that CP Rail's stock price has been able to soar to its greatest heights then begin its downward spiral? Magic, magic is the answer, no I'm not talking about something out of Harry Potter or the Lord of the Rings, I'm talking about classical stage magic which is nothing more than misdirection.

The Old Switcheroo

I wrote previously about how eventually CP Rail would run out of internal cuts to fuel its rising net income and would have to rely on gimmicks and PR misdirection to keep itself in favor with investors. Last time I covered this strategy with CP Rail it had to do with the fact that it had begun to explore the possibly of divesting or developing many parcels of property. The plan was to develop or sell up to 30 properties mainly in the downtown areas of Toronto, Montreal and Edmonton along with a 30 hectare site in Chicago.

Most recently CP Rail has attempted to use the publicity from its attempted acquisition of Norfolk Southern Corp. (NYSE:NSC) to pull its stock out from the quicksand. Unfortunately for CP Rail this rather brought its stock to its lowest point in the last 12 months. The stock price was then only able to recover and find some gains after it had hinted that it would be abandoning its bid for Norfolk Southern. The matter was settled even further when a representative from Norfolk Southern sited the "substantial regulatory risks and uncertainties that are highly unlikely to be overcome" concerning CP Rail's "grossly inadequate" takeover bid.

But why would CP Rail go through this exercise in the first place? The short answer is the same as its plan to sell off properties, to stimulate the stock price. CP Rail's skyrocketing stock has been built on one thing alone its net profits which have broken records for several years. The issue is that the amount of cuts CP Rail is able to make is quickly running out and it now has to resort to these types of tactics to keep investors interested in the number two rail company in Canada. This attempt to purchase Norfolk Southern with all of the seemingly impossible hurdles which it would have had to overcome to actually materialize is further evidence to the case for PR misdirection.

 How Far Is Too Far?

Over the past few years CP Rail has been able to fuel its quest for better a better operating ratio through a series of layoffs and the mothballing of equipment. When the Hunter Harrison experiment began CP Rail's operating ratio was staggeringly high and did need some adjustments. The issue then becomes how many internal cuts can you make before it begins to hinder your ability to operate? Recently CP Rail has announced another 1,000 layoffs on top of the 1,800 layoffs last year and the total of 7,000 layoffs since 2012.

With all of these cuts to staff and service the consequences are beginning to emerge at CP Rail as Transport Canada has reprimanded the railway over its fatigue-management practices. A follow up investigation from CBC News has found that "a number of locomotive engineers have told CBC News that changes to staffing levels and CP scheduling practices are taking their toll and leaving train crews increasingly exhausted". This is just one example of how the quest for unlimited net income is actually hollowing out the company and greatly hindering its ability to operate and to protect its market share from Canadian National Railway (NYSE:CNI). There have also been allegations of decreased safety practices and growing discontent from customers.

By the Numbers:

In  the end for investors it all comes down to the hard numbers behind a company. CP Rail's fourth quarter report shows that revenues fell to C$1.68 billion from C$1.76 billion, while net income also fell to C$319 million (C$2.09 per basic share) from C$451 million (C$2.66 per basic share). Adjusted diluted EPS for the quarter rose to C$2.72 from C$2.68, but missed analyst's expectations by C$0.04.

The year end numbers show that revenues rose to C$6.55 billion from C$6.46 billion, despite the increase it is still well below the C$10 billion target set by Hunter Harrison when he took over the company. Much of the lost revenues came from its crude shipments which only generated C$393 million in revenues, down from C$484 million last year. Net income for the year also fell to C$1.35 billion from its record high last year of C$1.47 billion. CP Rail through its aggressive job reduction program was able however to lower its operating ratio from 64% to 60% for 2015, compared to the 58.2% operating ratio CN Rail posted in the same period.

It should be interesting for CP Rail in the coming year as it will benefit both from lower fuel prices and the state of the Canadian dollar, as it generates almost half of its revenues in American currency. Savings which could be swallowed up by CP Rail's aggressive share repurchase program which rose to C$2.78 billion in 2015, up from C$2.05 billion in 2014. Then again the savings could be mitigated by the Canadian grain crop which generated C$1.06 billion in revenues in 2015, which may or may not repeat its recent record performances.

The C$6.55 billion in 2015 revenues is still a far cry from the C$12.6 billion posted in 2015, while increasing its net income from C$3.16 billion to C$3.53 billion. These results show that the track CP Rail is on may not be as straight-and -true as one would have expected, and that further attempts to use unconventional means to fluff its stock price could be over the horizon

Going forward there is still the potential for some short term gains with CP Rail as the average price target on the NYSE is still sitting at $145.09, and the lower cost of fuel and the diminished Canadian dollar should help out matters. However there is a growing concern that CP Rail is no longer a railway but an income generator and that as time passes on its ability to operate is being diminished. For investors this has created an opportunity to ride the tide of its stock price, especially for this who cashed out when the stock was at $220.00 but going forward CP Rail's ability to repeat these gains will evaporate and when the smoke clears CP Rail will be nothing more than an empty husk of what it once was, giving CN Rail the opportunity to solidify its position as the number one rail company in the north.

The Investment Caboose Disclosure: I am no longer at CNI.  I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.  Article posted in www.teamstersrail.ca  

Calgary Train Derailment Occurs Near Site of 2013 'CP Fail'?

CP said on February 1ith, 2016, 14 cars went off the rails near the intersection of 15th Street and 19th Avenue S.E. in Calgary's Inglewood community, but this one is believed to not pose an immediate threat, unlike a 2013 incident that led to mass evacuations in the same area.  CP Rail spokesman Martin Cej said about 14 cars left the tracks at a "very slow speed" of roughly six kilometres per hour. Three empty cars were lying on their sides off the rails, according to Calgary Fire Department spokeswoman Carol Henke. One other car that derailed but was still standing upright had been carrying a sulphur-containing material, Henke said, but fire crews didn't believe it posed a threat.  Cej said that car and two others were used to carry hazardous materials but were mainly empty at the time of the derailment, with only a small amount of residue inside them. The one full car involved in the derailment was carrying vegetables. 

A hazardous-material team was on scene, but Henke said some of the firefighting apparatus that initially responded to the derailment began to leave once it was determined they weren't needed. She said the biggest challenge facing emergency responders was a downed power line that forced crews to wait until it was de-energized. Here's an insight into the infrastructure damage caused by this morning's train derailment.  An EMS spokesman said there were no reported injuries. The Transportation Safety Board of Canada (TSB) said it is deploying a team of investigators to the derailment site. Cej said the company is sorry for the impact the incident had on area residents and people driving through the area Thursday morning. "Obviously, it made the commute very hectic for commuters and, for that, CP apologizes," he said.

That incident led dozens of Inglewood residents to protest dangerous goods being carried through their community, many of them chanting "CP Fail" during a rally outside the company's Alyth Yard. The Calgary Fire Department later sent CP   an invoice for 500K because the derailment forced firefighters to remain on scene around the clock for days In addition to the TSB investigation, CP Rail plans to conduct a "full investigation" of its own into Thursday's incident and Cej said the results of the probe would be shared publicly.

"All of that will be disclosed as soon as we have those facts," he said.

VIDEO FULL CBC REPORT:

 CP OWEN SOUND, ON:

There could soon be a business operating out of the long-vacant former Canadian Pacific Railway station on Owen Sound's harbour front. City officials say they are in the process of negotiating a lease with a potential tenant. Community services director Pam Coulter said she is hopeful an agreement can be achieved and will be presented to council by June. The name of the prospective tenant and type of business cannot be revealed, she said, until the lease is finalized.

Owen Sound purchased the 70-year-old building, which is designated under the Ontario Heritage Act, from the federal government for $153,500 in 2010. Since then, it has spent about $200,000 - mostly from Ontario Heritage Trust and other grants - to fix up the building's exterior, including its roof, canopy, windows and doors.

The city issued requests-for-proposals for potential tenants in 2010 and again in 2014. Two bids were received in August 2014. A month later, council authorized staff to begin negotiating a lease with one of the bidders, identified as a "preferred lessee."

At a council meeting Monday, council approved a site plan for the east-side property, which was proposed by city staff. It includes a patio at the back of the building, a parking lot with 29 spaces south of the building and an area for storm water management.

Council also set aside $327,000 in the 2016 capital budget to cover those site improvements, but also to do some off-site sewer repairs, which Coulter said must be done no matter what happens on the property. The on-site work will not be undertaken until a lease is finalized, Coulter told council. The city would then foot the bill for that work, but recoup the money through the collection of rent.

Coulter said the site plan for the property was developed in consultation with the prospective tenant."However, the parking, landscaping and storm water management proposed will be suitable for any future tenant and use of the building." (Denis Langlois - Sun times)

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