A Canadian Pacific and two Dakota Minnesota & Eastern Railroad locomotives - Date/Photographer unknown - Canadian Pacific Railway.

3 December 2012

CP Rail Takes $180-Million Hit as it Shelves Wyoming Powder River Expansion

Calgary Alberta - Canadian Pacific Railway Ltd. said Monday it would be indefinitely putting off its expansion into Wyoming's Powder River Basin, which was at one time heralded as the Crown Jewel in its purchase of the Dakota, Minnesota, and Eastern Railroad Corp.
 
The railway said it would be taking a $180-million, or $107-million after tax, charge during the fourth quarter related to the write down of its option to expand into the coal-rich region.
 
"It is CP's intention to defer indefinitely plans to extend its rail network into the PRB coal mines based on continued deterioration in the market for domestic thermal coal, including a sharp deterioration in 2012," the company said in a statement.
 
CP purchased the privately-held DM&E in 2007 for nearly $1.5-billion under the company's former chief executive, Fred Green.
 
The deal, which was criticized at the time for carrying too high of a price tag, also came with the option to build a 260-mile extension into the Powder River Basin, which would trigger another $1.05-billion in contingency payments to the DM&E's former owners if it were exercised before 2025.
 
But low natural gas prices and more stringent environmental regulations have dragged on the demand for thermal coal in the U.S. in recent years.
 
Cameron Doerksen, National Bank Financial analyst, said he was not surprised by CP's decision given that the railway had estimated in the past that the expansion into the PRB could cost upward of $5-billion, including costs associated with building the infrastructure and the contingency payments to the former owners.
 
"This would have been prohibitively expensive for CP even with the support of financial partners," he said in a note. "The reality is that the U.S. domestic thermal coal market appears to be in long-term decline and there are already two other Class I railroads serving the PRB so the business case for CP was always going to be a difficult one to make."
 
As a result, CP's new management decided Monday to write down the option to expand into the basin, and to take the charge related to the option, and the engineering design costs, land, and capitalized interest, it said.
 
The news comes one day before CP's new chief executive, Hunter Harrison, is set to unveil his turnaround plan for the country's second largest railway at an investor meeting in New York 4 and 5 Dec 2012. Mr. Harrison was appointed CEO in June after a lengthy proxy battle led by Bill Ackman's Pershing Square Capital Management L.P.
 
Scott Deveau.