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Kansas City Southern plans more USGC growth while delaying vote on $30 billion sale


KCS, Savage plan transloading facility in Louisiana

KCS delays vote on $30 billion CN deal until after STB ruling

KCS also growing in Texas, Mexico

Kansas City Southern said Aug. 18 it is partnering with logistics provider Savage to build a new multicommodity railport near Lake Charles, Louisiana, to better help move refined products, crude oil and chemicals along the US Gulf Coast refining and export hubs and also into Mexican markets.

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The announcement showed KCS is continuing to grow in Louisiana, Texas and Mexico even as the Kansas City railroad is on the verge of being sold to Canadian National Railway, or possibly to rival Canadian Pacific if the CN deal falls through.

Also on Aug. 18, KCS agreed to indefinitely postpone its Aug. 19 shareholders vote on the Canadian National sale until after the US Surface Transportation Board rules on whether to approve CN's voting trust considered critical to closing the deal. Because of the greater regulatory antitrust concerns, Canadian Pacific is standing in waiting to potentially acquire KCS if the STB rejects the voting trust. The STB is expected to rule by the end of August.

In the meantime, KCS and Savage said they plan to build the multicommodity railport with transload and railcar storage capabilities in Mossville, Louisiana. Savage will own and operate the railport that is being built on property leased from KCS at its Mossville Rail Yard. The facility is expected to open by January to provide more access to Lake Charles-area refineries and chemical plants.

"The Louisiana railport will provide additional rail capacity and new services for shippers in the Mossville and Lake Charles region, which will expand their supply chain choices and allow for more competitive shipping options," said KCS CEO Pat Ottensmeyer in a statement.

The Mossville railport will include more than 70 transloading spots -- up from the existing 40 spots -- for moving commodities between trucks and railcars. The facility will have 600 spots for railcar storage, while also offering access to move products into Mexico on KCS rail lines, the companies said.

Other growth

KCS also is developing other projects along the USGC with partners.

In July, a new crude-by-rail terminal opened in Port Arthur, Texas, to receive Canadian crude that is processed specifically for rail travel along the KCS and Canadian Pacific railroad networks.

That project was is led by the USD Group and Gibson Energy in a partnership with the two railroad companies to move Western Canadian oil sands volumes to the US Gulf Coast refining and exports hubs via long-haul rail transport.

"We would expect that terminal will gradually ramp up, whereby we will be moving approximately 15-20 trains per month by the end of the third quarter, so it's a fairly rapid acceleration of volumes," said KCS CFO Michael Upchurch in a July 16 earnings call.

KCS also recently announced it is partnering with a private company to build a new truck-to-rail transloading facility in Texas to ship more fuel and petrochemicals into Mexico as demand picks up in the country.

The railway company is lending its land in Corpus Christi to private equity-backed Midstream Texas Operating to build the transload facility, which would load 200 rail cars/month in its initial phase when it comes online in the fourth quarter. The site can be expanded to handle more than 500 rail cars a month, the companies said.

Despite plans to expand refinery production in Mexico, the country remains heavily dependent on gasoline from Texas refineries, especially with demand expected to pick up more as Mexico emerges from the ongoing pandemic.

Acquisition issues

Either CN or CP buying Kansas City Southern would create the only Canada-to-Mexico rail network in North America that could move Canadian crude exports to the US Gulf Coast and refined products to Mexico. That combination is expected to prove more beneficial, thanks to the revised United States-Mexico-Canada Agreement trade deal. With only CN having rail routes stretching from Alberta to the US Gulf Coast now, adding KCS would allow CN to further dominate the crude-by-rail market.

There is less regulatory risk in a potential CP deal because CP is notably smaller than CN, and because CP has no logistical overlap with KCS. However, CP's $27.3 billion offer to buy KCS is lower than the pending, $29.6 billion CN deal.

A CN-KCS merger likely depends on the voting trust because part of CN's argument is KCS shareholders have nothing to lose because they would be paid from the voting trust even if the deal fails to receive regulatory approval in 2022.

With only seven major freight railroad companies left in North America, CP's argument is that only the two smallest -- CP and KCS -- should be allowed to merge because their networks do not overlap and meet neatly in Kansas City, Missouri.

The White House recently expressed concerns about any more major railroad consolidation in a July executive order, and that order came after the US Justice Department already stated its opposition to the CN deal and after the STB said the deal would face a high degree of regulatory scrutiny.

CN has a lot of north-to-south parallel routes with KCS, but the only direct overlap is in Louisiana. CN's existing rail network moves crude to the refining hub of St. James, Louisiana, but KCS additionally offers more direct access to hubs along the Texas Gulf Coast and into Mexico. CN has said it would sell a duplicative section of rail in Louisiana between New Orleans and Baton Rouge to alleviate regulatory concerns.