CALGARY, Jan. 12, 2016 /PRNewswire/ - Canadian
Pacific (TSX: CP) (NYSE: CP) today released a white paper stating
that a change in the railroad industry status quo is necessary to
support continued growth in the North American economy.
The full text of the white paper, A 21st Century Railroad for
a 21st Century Economy, is below. A PDF version can be
downloaded at: http://www.cpr.ca/en/investors.
A 21st Century Railroad for a 21st Century Economy
The status quo is not an option for North American rail
Continued growth in the U.S. economy is dependent on North
American rail service meeting current and future demand. In order
to meet that demand, the railroads must add capacity. The question
of how to create additional capacity to accommodate growth is a
critical one. Adding infrastructure and building more track has
become increasingly difficult, if not impossible.
Additionally, the demands of the common carrier obligation must
be taken into consideration. Specifically, all Class 1 carriers
must transport goods tendered to the railroad, no matter how
dangerous. This comes into direct conflict with staunch resistance
from communities of all sizes to add infrastructure in the form of
new tracks and terminals. The prospect of increased traffic is also
unpalatable in many instances, even if it improves the overall
efficiency of the broader transportation network.
The solution lies in adding capacity without adding
infrastructure, increasing the efficiency of the overall network
and addressing critical issues, such as congestion in Chicago.
Canadian Pacific (CP) believes that industry consolidation
offers the best opportunity to improve efficiency of the existing
network and creates much needed incremental capacity without adding
infrastructure, all while improving service for shippers.
CP is pursuing a combination with Norfolk Southern Corp. (NS)
that it believes will:
- Enable far better utilization of existing infrastructure.
- Introduce alternative options for re-routing traffic around
areas of congestion.
- Create new opportunities to generate the most efficient route
for rail shipments.
- Allow CP-NS to provide end-to-end service to customers, without
hand-offs and interchanges, which improves safety.
- Improve overall service for shippers of all sizes across the
network.
The status quo is not an option for North American rail. Change
is necessary to support continued economic growth, and that change
needs to happen now.
Rail: A Proud History of Delivering Public Benefits
Since the deregulation of the U.S. rail industry in 1980, the
industry has undergone a renaissance and is now, once again, the
backbone of the North American economy. Demand for rail service has
grown significantly and is expected to continue to do
so.
The growth in demand for rail service has delivered – and
continues to deliver – numerous public benefits. An efficient
railway network:
- Is the most environmentally friendly and economically efficient
long distance land transportation option.
- Reduces highway congestion by taking trucks off highways, which
in turn reduces fuel consumption, noise pollution, tax-payer funded
highway maintenance and construction costs, and lost productivity
due to traffic.
- Improves safety for the transportation system in general.
- Does not require public funding.
However, to meet current and future demand for rail service,
railroads must add capacity. The service disruptions stemming from
the severe winter weather of 2013-2014 proved that the rail network
is vulnerable. An unexpected surge in freight volume during the
period pushed the rail supply chain to the upper limits of its
track capacity just as the weather turned. The combination wreaked
havoc on rail operations, particularly in Chicago. The severe weather lasted well into
the spring of 2014 and service disruptions were felt into the fall
of 2014.
Traditionally, railroads have primarily relied on adding new
infrastructure to increase capacity. Building new track or sidings
for passing, expanding rail yards to accommodate more cars or
longer trains, and adding new connections to facilitate more
efficient routings have all been important tools for expanding rail
capacity. While railroads continue to reinvest record amounts of
capital to add capacity, it is becoming increasingly more difficult
to add physical infrastructure. Local and state opposition to
building new infrastructure is more prevalent and vocal than ever
before. This is especially true in urban areas where many rail
customers are located and where many railroads interchange
traffic.
Addressing Congestion in Chicago
Nowhere is the need for additional infrastructure more critical
and the ability to add it more difficult than in Chicago. With six major Class 1 railways and a
significant Amtrak and commuter train presence, Chicago is the most critical hub within
North America's rail system. In
2014, roughly 25 percent of all rail traffic traveled through
Chicago. In short, what happens in
Chicago affects the entire
network.
Although substantial effort has been made to improve
infrastructure in Chicago, those
efforts have fallen short. The CREATE project, for example, which
was designed to invest billions of dollars into critically needed
infrastructure to improve Chicago's congested transportation system,
including freight rail infrastructure, has been largely
unsuccessful. A multitude of stakeholders with various competing
interests make it difficult, if not near impossible, to achieve
consensus and identify a path forward. As a result, very little has
been accomplished to improve the freight and passenger rail
congestion issues in Chicago in a
meaningful way.
Today, the rail supply chain and Chicago are fluid and the system is performing
well. This is largely a function of a weakened economy, lower
shipments and favorable operating conditions. But we are living on
borrowed time. The time to act is now. The rail industry cannot
wait until factors converge again and gridlock resumes. It is
imperative for the economy and the public interest that we take
steps now to unlock additional capacity.
Adding Capacity Through Efficiency
Unfortunately, recent government regulations have reduced
capacity. For example, regulations have been imposed that restrict
train speeds for certain commodities in certain areas. While these
regulations are intended to increase safety, reducing train speeds
reduce system capacity.
Some have suggested that the capacity problem can be addressed
by adding more trains. When the physical operating footprint of a
railroad line or yard is constrained and near its sustainable
capacity, introducing additional locomotives and rail cars into the
system is the wrong answer. It is like adding more cars to a
highway blocked with rush hour traffic.
At CP, we have successfully added capacity by improving
operational efficiency. CP has improved asset utilization
significantly by cycling railcars faster and decreasing dwell time
for locomotives and railcars at terminals. Between 2011 and 2014,
CP's network speed increased 19% and terminal dwell time dropped by
20% (excluding winter of 2013/14). While we continually strive to
be more efficient, the law of diminishing returns applies and we
need to find other ways to address capacity issues.
We have also added capacity by making record levels of
investment, but are finding it increasingly difficult to do so.
Efforts to add physical capacity, particularly in key choke points
such as Chicago, St. Paul, Minneapolis and in other cities and
communities is often greeted with considerable local opposition.
Often, we find ourselves struggling to protect existing capacity as
municipalities increasingly seek to encroach on our rail right of
way and passenger rail and commuter rail consume increasingly more
railroad capacity.
If we are to meet the challenges of today and tomorrow,
something will have to change.
How Rail Consolidation Adds Capacity, Optimizes Existing
Infrastructure
CP believes that industry consolidation offers the best
opportunity to increase capacity without adding infrastructure,
which is why we believe consolidation is inevitable and why we are
pursuing a combination with NS.
Consolidation enables far better utilization of existing
infrastructure. For example, trains interchanged in Chicago today must be broken apart and rebuilt
in yards within the city and then delivered to receiving carriers.
The process involves multiple interchanges between multiple
carriers in multiple yards. A merger would allow these activities
to be performed elsewhere so that trains moving through
Chicago can move smoothly through
the city without exiting the mainline.
An expanded network also introduces alternative options for
re-routing traffic around areas of congestion and creates new
opportunities to generate the most efficient route for rail
shipments. For example, a large amount of agricultural shipments
from the Upper Plains states move through classification yards,
over connecting carriers to milling markets east of the
Mississippi. This traffic could move in a more expedited manner
over alternate gateways in seamless, single-line movement. Likewise
automotive traffic currently moving over Chicago could be expedited through other
gateways, significantly reducing automobile companies' inventory
costs.
A merger would allow CP-NS to provide end-to-end service to
customers, without hand-offs and interchanges. Reducing these
disruptive activities can significantly improve velocity, lower
costs, and enable the combined company to move more goods more
quickly without increasing rates. Faster single line movements,
which remove inefficient handlings, would improve the bottom line
for all customers, especially those that own their own
railcars.
Additionally, if Chicago
becomes gridlocked as it did in the winter of 2013 – 2014, a
combined CP-NS would have greater expanded routing optionality that
would allow our customers' products to get from origin to
destination without having to suffer through extended delays in a
gridlocked Chicago.
Tangible Benefits to Shippers from a CP-NS
Combination
Clearly, industry consolidation can improve service and
efficiency over the existing rail footprint. And while a CP-NS
combination would not reduce rail competition as our two networks
are end-to-end (they do not overlap), in order to address
competitive concerns, assure regulatory approval, and because we
are confident we can improve service, CP proposes adopting
competitive enhancements that shippers have been
demanding.
For example, the new company would give shippers the choice of
where they can connect with another railroad along its network,
bringing an end to the practice of "bottleneck pricing" in the
U.S., further enhancing competition. Currently, railroads are not
required to quote separate portions of haul when there is only one
single carrier operating on a particular segment. We also see
significant opportunities to improve operating efficiencies on NS'
system, unlocking additional capacity while providing faster and
more reliable service to NS served customers.
Second, in terminal areas, the combined CP-NS would allow
another carrier access to its railway to serve CP-NS customers if
the new company is not providing adequate service or competitive
rates in those areas.
Additionally, we do not believe that a CP-NS combination would
spur additional transactions in the industry. The CP proposal will
enhance competition, not diminish it, which is good for customers
and competitors alike. A more fluid Chicago, for example, provides other carriers
with new opportunities to provide enhanced services to existing and
potential customers. And with no overlap between the CP and NS
networks, no shipper loses a transportation option.
Change in Rail is Necessary to Support Continued Economic
Growth
Despite these pro-competitive initiatives, shipper and public
interest benefits, the clear and immediate need for added capacity,
and public opposition to physical expansion, some have voiced
opposition to further industry consolidation, which raises the
question: What are we to do? The status quo is not the answer to
this question.
Serious consideration must be given to this innovative option if
the industry and economy is to grow and prosper, even as the
opposition to building new infrastructure is more prevalent and
vocal than ever before.
Ironically, some have voiced concerns that consolidation will
lead to service disruption. The fact is, merger-related disruptions
are not inevitable, as current CP management demonstrated in the
CN-IC combination.
Without industry consolidation, however, future service
disruptions are a certainty.
Forward Looking Statement
This news release contains certain forward-looking information
within the meaning of applicable securities laws relating, but not
limited, to CP's proposal to NS regarding a possible business
combination, the anticipated results and benefits of the proposed
transaction and matters relating to regulatory approvals and
changes. This forward-looking information also includes, but is not
limited to, statements concerning expectations, beliefs, plans,
goals, objectives, assumptions and statements about possible future
events, conditions, and results of operations or performance.
Forward-looking information may contain statements with words or
headings such as "financial expectations", "key assumptions",
"anticipate", "believe", "expect", "plan", "will", "outlook",
"should" or similar words suggesting future outcomes.
Undue reliance should not be placed on forward-looking
information as actual results may differ materially from the
forward-looking information. Forward-looking information is not a
guarantee of future performance. By its nature, CP's
forward-looking information involves numerous assumptions, inherent
risks and uncertainties that could cause actual results to differ
materially from the forward-looking information, including but not
limited to the following factors: the ability of the parties to
agree to the terms of a proposed transaction; the ability of the
parties to obtain the required regulatory approvals; the ability to
recognize the financial and operational benefits of the
transaction; changes in business strategies; general North American
and global economic, credit and business conditions; risks in
agricultural production such as weather conditions and insect
populations; the availability and price of energy commodities; the
effects of competition and pricing pressures; industry capacity;
shifts in market demand; changes in commodity prices; uncertainty
surrounding timing and volumes of commodities being shipped via CP;
inflation; changes in laws and regulations, including regulation of
rates; changes in taxes and tax rates; potential increases in
maintenance and operating costs; uncertainties of investigations,
proceedings or other types of claims and litigation; labour
disputes; risks and liabilities arising from derailments;
transportation of dangerous goods; timing of completion of capital
and maintenance projects; currency and interest rate fluctuations;
effects of changes in market conditions and discount rates on the
financial position of pension plans and investments; and various
events that could disrupt operations, including severe weather,
droughts, floods, avalanches and earthquakes as well as security
threats and governmental response to them, and technological
changes. The foregoing list of factors is not exhaustive.
These and other factors are detailed from time to time in
reports filed by CP with securities regulators in Canada and the United States. Reference
should be made to "Management's Discussion and Analysis" in CP's
annual and interim reports, Annual Information Form and Form 40-F.
Readers are cautioned not to place undue reliance on
forward-looking information. Forward-looking information is based
on current expectations, estimates and projections and it is
possible that predictions, forecasts, projections, and other forms
of forward-looking information will not be achieved by CP. Except
as required by law, CP undertakes no obligation to update publicly
or otherwise revise any forward-looking information, whether as a
result of new information, future events or otherwise.
Rule 425 Disclosure
This announcement is neither an offer to purchase or exchange
nor a solicitation of an offer to sell securities. Subject to
future developments, additional documents regarding the proposed
transaction may be filed with the SEC. Investors and security
holders are urged to read such disclosure documents regarding the
proposed transaction, if and when they become available, because
they will contain important information. Investors and
security holders may obtain a free copy of the disclosure documents
(when they are available) and other documents filed by CP with the
SEC at the SEC's website at www.sec.gov. The disclosure documents
and these other documents may also be obtained for free from CP at
http://www.cpr.ca/en/investors or by directing a request to
Canadian Pacific Railway Limited, 7550 Ogden Dale Road S.E.,
Calgary, Alberta, Canada, T2C 4X9,
Attention: Office of the Corporate Secretary.
CP and its directors, executive officers and other employees may
be deemed to be participants in any solicitation of CP or NS
shareholders in connection with the proposed transaction.
Information about CP's executive officers and directors is
available in CP's Annual Report on Form 40-F for the year ended
December 31, 2014, which was filed
with the SEC on February 23, 2015.
Additional information about the interests of potential
participants will be included in any proxy statement filed in
connection with the proposed transaction.
About Canadian Pacific
Canadian Pacific (TSX:CP)(NYSE:CP) is a transcontinental railway in
Canada and the United States with direct links to eight
major ports, including Vancouver
and Montreal, providing North
American customers a competitive rail service with access to key
markets in every corner of the globe. CP is growing with its
customers, offering a suite of freight transportation services,
logistics solutions and supply chain expertise. Visit cpr.ca to see
the rail advantages of Canadian Pacific.
SOURCE Canadian Pacific