Canadian Pacific bets on DME buy
From Post-Bulletin reports
Canadian Pacific Railway Ltd.’s gamble on the Dakota, Minnesota & Eastern Railroad and the odds of it paying off are the focus of a Wall Street Journal article this morning.
CP announced plans last month to buy DM&E for $1.48 billion. The City of Rochester and Mayo Clinic have been in conflict with DM&E for year over its plans to expand into Wyoming’s Power River Basin. That expansion could greatly increase the train traffic through Rochester.
While low sulfur coal is the focus of that gambit, the Wall Journal article points out that DM&E is already growing in hauling an energy source — ethanol.
Kevin Schieffer, president and CEO of DM&E, was quoted as saying ethanol shipments on the railroad have surged to more than 5,000 carloads last year from 500 carloads in 2003. "Ethanol is by far and away our fastest-growing commodity right now," he said.
The article also explored the possibilities of the expansion and if the DM&E expansion to tap that vein of coal will pay off.
Some energy experts questioned the timing. "Certainly, they are investing at the top of the energy cycle, which would expose them to significant risks in the event of a major downturn," Alex Gorbansky, managing director of Frontier Strategy Group, was quoted as saying.
A Canadian Pacific spokesman told the WSJ that the moves mark the railroad’s effort to seek out opportunity in general, not a targeted move toward energy.
The article went on to cover the topic.
"Coal is going to play a major role in electric generation for years to come," it quoted Jack Koraleski, executive vice president of marketing and sales at Union Pacific, as saying.
Major railroads will generate more than $13.5 billion in revenue hauling coal in 2007, according to Donald Broughton, an analyst at A.G. Edwards in St. Louis. Coal is 13 percent of total revenue of Canadian Pacific, compared with 19 percent at Burlington Northern Santa Fe and 20 percent at Union Pacific. The two big Eastern U.S. railroads, CSX Corp. and Norfolk Southern Corp., receive about 26% of their revenue from coal.
Skeptics worry about the acquisition's price and the potential costs of upgrading the DM&E and then extending it 260 miles into the Powder River Basin. About 100 miles of the DM&E track in South Dakota is built on wet, shifting clay, for example, restricting trains to 10 miles an hour.
Some analysts think the cost of the Powder River Basin project could top $5 billion, including contingency payments to DM&E's current owners, but Schieffer told the WSJ that it’s too early to know. "There is everything from the Chevy to the Cadillac version," he said.