Midwestern coal shippers can breathe a sigh of relief as a proposed rail merger fizzled out yesterday, burying fears about potential costs and delays.
Canadian Pacific Railway Ltd. announced it would end its monthslong pursuit of rival Norfolk Southern Corp., whose track network connects mines and coal-fired power plants across West Virginia, Ohio, Kentucky and Indiana, among other states.
On Friday, several Norfolk Southern customers had raised concerns about an arrangement that would have seen CP CEO E. Hunter Harrison take over as CEO of Norfolk Southern while putting his former company’s stock in a trust.
Critics of the move argued that it would amount to a de-facto merger before regulators at the Surface Transportation Board or antitrust enforcers could properly consider the deal between two of North America’s largest freight railroads.
Ohio-based electricity giant FirstEnergy Corp. said Canadian Pacific’s plan could have affected the millions of tons of coal it ships annually to its power plants via Norfolk Southern, according to a regulatory filing.
FirstEnergy’s comments to the Surface Transportation Board harked back to "serious and, in some instances, persistent" service problems associated with past mergers of major railroads, such as Union Pacific’s acquisition of the Chicago and North Western Transportation Co. in the mid-1990s.
The energy company, which controls a generating capacity of some 17,000 megawatts, added that Harrison could have raised shipping rates and slashed train crews "to justify the premium CP intends to pay to purchase NS’s stock."
For its part, Canadian Pacific claimed it could have eased freight congestion by streamlining operations at a "true end-to-end railroad." Its track network crosses New York and North Dakota’s Bakken Shale play, and extends to Canada’s western coast.
"We have long recognized that consolidation is necessary for the North American rail industry to meet the demands of a growing economy, but with no clear path to a friendly merger at this time, we will turn all of our focus and energy to serving our customers and creating long term value for CP shareholders," Harrison said in a statement yesterday that effectively closed the door on the company’s overtures to other Class I railroads.
Norfolk Southern said in a statement that it would continue to focus on productivity savings, adding that it is "confident the continued execution of our plan will deliver superior value to all of the company’s stakeholders."
But the company had also been skeptical that the deal would pass muster with the Justice Department. A statement last week from Assistant Attorney General Bill Baer of the Antitrust Division seemed to confirm those suspicions.
"Canadian Pacific’s voting trust proposal would compromise Norfolk Southern’s independence and effectively combine the two railroads prior to completion of the STB’s review," Baer said. "That makes no sense."
‘Legitimately concerned’
FirstEnergy, Norfolk Southern and the Justice Department weren’t the only ones to raise doubts about the merger. The American Chemistry Council, Freight Rail Customer Alliance and National Industrial Transportation League were among the long list of organizations to weigh in with STB.
Coal and natural gas producer Consol Energy Inc. said in its filing that Canadian Pacific’s effort "seriously threatens shipper interests."
"As a [Norfolk Southern] shipper, CONSOL is legitimately concerned about the effects of an acquisition of NS by CP on service, safety, investment levels, rates, and a host of other transportation factors," noted Stephanie Gill, vice president, general counsel and corporate secretary at Consol.
A Consol spokesperson did not respond to requests for comment on Canadian Pacific’s decision yesterday to abandon the merger.
The Pennsylvania-based firm joins a long list of energy producers, oil refiners and power utilities to have taken their rail service issues to regulators at STB in recent years. A harsh winter that snarled rail traffic two years ago stoked concerns about coal deliveries in particular, as many utilities neared the end of their stockpiles.
In FirstEnergy’s filing, senior attorney Rick Giannantonio suggested the decision to approach STB on Friday was not made lightly, a sign of his industry’s antipathy toward the merger.
"[FirstEnergy] has not always seen eye-to-eye with the railroads transporting coal for it, but FE has generally resolved its disputes with the railroads through commercial means, rather than in regulatory proceedings at the STB," he said. "Even when FE, like so many other rail shippers, was having substantial rail service issues with various railroads in 2013-15, it did not resort to the STB for relief, relying instead on commercial means to deal with those issues."
A FirstEnergy spokesman declined to comment on Canadian Pacific’s decision yesterday beyond what was contained in its filing.
