A three-day federal hearing for the $27 billion acquisition of Kansas City Southern by Canadian Pacific Railway is now slated for the end of September, ensuring that completion of the largest railway merger of this century will drag out at least until early 2023, CP executives said July 28.
The US Surface Transportation Board hearing scheduled for Sept. 28-30 will consider the combined "Canadian Pacific Kansas City" with a Calgary headquarters to create the only end-to-end rail network from the Canadian oil sands into Mexico, including crude-by-rail to the US Gulf Coast and refined production shipments into Mexico. The CP-KCS combination is expected to prove more beneficial thanks to the revised US-Mexico-Canada Agreement trade deal. Final argument briefs to the STB are now due Oct. 14.
"We'll see these three nations grow together and benefit uniquely together," Canadian Pacific CEO Keith Creel said July 28 during an earnings call. "The positive momentum continues for our transformational merger."
Although the sale already closed in a voting trust in December, the two companies cannot become integrated until they receive STB approval following the roughly one-year review process.
With only seven major freight railroad companies left in North America, CP's regulatory argument is that only the two smallest, CP and KCS, should be allowed to merge because their networks do not overlap and they meet neatly in Kansas City, Missouri. The larger rival, Canadian National Railway, which offered more money for KCS, received more regulatory pushback because it has more routes that run parallel with the KCS network.
Creel highlighted that KCS also now has a 10-year extension to its concession exclusivity rights in Mexico until 2037, creating "long-term certainty" for the value of the merger.
"We plan to hit the ground running and exceed expectations," Creel said.
In the meantime, Canadian Pacific Chief Marketing Officer John Brooks said CP's sand volumes are spiking because of increased oil drilling activity and, therefore, increased demand for frac sand.
"Our sand producers are well positioned to meet increased demand," Brooks said, and CP has the rail cars to haul the volumes.
Crude and grain
While crude-by-rail exports into the US have suffered from both the pandemic and new, cheaper pipeline capacity that came online late last year, volumes have increased a bit in the late spring and summer.
Canadian National said a big reason why is because weak Canadian grain crops this year -- from heavy rains early this year and into the spring -- opened up more rail capacity to ship additional crude oil volumes to the US Gulf Coast. However, CN Chief Marketing Officer Doug MacDonald emphasized the crude spike is temporary until the new grain crop comes online this fall and winter.
"It's moving (crude) from the Alberta market down into the Gulf Coast, and we've been taking it month by month," MacDonald said. "So we've agreed to take it through the rest of -- partially through the rest of Q3 -- and probably we'll finish in Q3. So when grain starts at the end of September, we expect that to be using the capacity and we are fully planning for it, and we will take the crude off the table at that point."
Matching MacDonald's description, Canada's crude-by-rail exports into the US jumped from 144,169 b/d in April to 173,122 b/d in May, which is the largest average monthly volumes since March 2021, according to the Canada Energy Regulator.
Canadian National's petroleum and chemicals carloads rose 13% in the second quarter from 143,000 carloads to 162,000 carloads -- segment revenues were up 21% because of the higher energy prices -- while grain and fertilizers carloads fell by 12%.
Crude-by-rail exports are expected to rise again in 2023 though as pipeline capacity is expected to again fill up. But that will only be temporary until the delayed Trans Mountain Pipeline expansion is completed -- currently slated for the third quarter of 2023 -- to provide ample pipeline takeaway capacity again.
The ongoing pandemic has created greater regulatory oversight and criticism of the railroad sector because of service problems as the industry struggles to deliver petroleum products, coal, agriculture and more in a timely manner.
Railroad congestion and a workforce attrition have compounded problems as companies seek to quickly train and hire a new generation of workers. But the major Canadian railroads -- despite operating in the US -- have not faced as much scrutiny as the major US-based rails.
Still, the US Federal Railroad Administration proposed a rule this week requiring at least two crew members per train with some exemptions.
Creel called the proposal "disappointing."
Railroads currently rely on one-person cars at times -- especially with more automated transportation and modern technology -- to save costs and keep trains moving efficiently.
"If you don't have people, trains don't move," Creel said.