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CP Rail, CN Rail face lasting chill of new ‘knee-jerk’ regulations
The country’s largest railways managed to battle through one of the toughest winters on record to deliver better-than-expected earnings Tuesday.

But the concern for Canadian National Railway Co. and Canadian Pacific Railway Ltd. has now shifted toward a potentially more lasting chill from regulators on both sides of the border as shipments backed up during the winter.

“I’m glad it’s over,” said Hunter Harrison, Canadian Pacific Railway Ltd. chief executive, who has been in the railroad business for 50 years.

“This is probably the worst operating conditions I have ever seen,” he said on a conference call.

The cold weather forced both CP and its larger rival, CN, to shorten the length of trains and slowed shipments.

It also contributed to a record backlog of grain in Canada after a bumper crop last year, and added to the congestion in rail yards in Chicago, both of which caught the attention of regulators on either side of the border.

In Canada, the federal government has implemented several emergency measures to increase the flow of grain and tackle the backlog, including mandating that CP and CN each move 500,000 metric tons of grain a week.

Ottawa also proposed several other, more lasting measures, including increasing the distance at which railroads must transfer shipments at a regulated rate in the Prairies, known as interswitching, which the Canadian railroads argue will open their shipments up for poaching by U.S. railways.

Claude Mongeau, CN chief executive, said he was “disappointed” by the new rules and that he hoped cooler heads would prevail because there are more stakeholders than just the railways contributing to the backlog, including the grain elevators.

“I think it was taken in the heat of the moment for the wrong reason,” he said.

Mr. Harrison echoed his concerns, saying new rules were a “knee-jerk reaction.”

“Will it be less efficient? Yes. Do the regulators understand that? No,” he said.

The weather further congested the Chicago rail yards with the city seeing roughly 79 inches of snowfall. The weather and backlog brought the yards to a virtual standstill and raised the ire of shippers, in particular fertilizer customers ahead of the planting season.

The U.S. Surface Transportation Board held hearings into the rail service deficiencies resulting in congestion in Chicago. The city is the largest rail hub in North America, seeing roughly 25% of all U.S. rail shipments pass through.

Mr. Harrison is well versed in the troubles there, and said Tuesday much of the problems arise from the fact that a lot of the traffic going into the city doesn’t need to.

When he was running CN prior to his retirement in 2009, Mr. Harrison said he tried to mitigate the issues the railway faced in Chicago by trying to buy the Belt Railway Co. of Chicago and the Indiana Belt Railroad. But neither would sell, he said.

CN eventually settled on buying the Elgin, Joliet and Eastern Railway, which allowed CN shipments to bypass Chicago if they didn’t need to go there, he said.

Mr. Mongeau said the EJ&E has been “huge” in avoiding the issues in Chicago.

But for Mr. Harrison, who is back in the business and leading CP’s turnaround, those issues have resurfaced.

He said he thinks the troubles in Chicago make it more likely there will be further consolidation in the rail industry to alleviate pressure on the Chicago yards.

He noted that prior to previous mergers, Chicago was not a big interchange site compared to St. Louis, Kansas City, and ports on the Mississippi.

Mr. Harrison said through further consolidation, you could maintain competition, and have a much better flow of traffic, and re-route trains outside of Chicago.

While he didn’t mention it specifically, several analysts have questioned over the years why CP has not pushed for an acquisition of Kansas City Southern to further expand the Kansas City corridor where their networks meet.

“As you get further growth in Chicago, as the economy picks up, Chicago does not have the infrastructure going forward,” Mr. Harrison said. “There has got to be a better place along the Mississippi to interchange traffic East-West.”

“It’s just a matter of time. For some reason, we gotta get battered and bruised in this industry before we wake up,” he added.

Despite the tough winter, both CN and CP delivered first quarter results Tuesday ahead of expectations.

CN reported net income of $623-million, or 66¢ an adjusted diluted share, compared to $555-million, or 61¢ a share, for the same period last year and ahead of the 62¢ expected by analysts.

CP reported net income of $254-million, or $1.44 a share, compared to $217-million, or $1.24 a share, for the same period last year and the $1.41 a share expected by analysts.

Both railways held their guidance for the year despite the slow start to the year.

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