By Theo van de Kletersteeg
The Dakota, Minnesota and Eastern Railroad subsidiary of the Canadian Pacific Railway (“CP”) operates across South Dakota and Southern Minnesota, with portions of the railroad extending into Wyoming, Nebraska and Iowa.
DM&E began operations on September 5, 1986, over tracks in South Dakota and Minnesota that were spun off from the Chicago and North Western Transportation Company. After a successful decade of growth, DM&E announced plans in 1997 to build into Wyoming’s Powder River Basin to become the third railroad (after BNSF Railway and Union Pacific Railroad) to tap into the region’s rich coal deposits. DM&E’s expansion would require the construction and upgrading of considerable track, and other infrastructure improvements. The plan would be the largest new railroad construction in the United States in 65 years.
DM&E purchased the assets of I&M Rail Link railroad in 2002, renaming it Iowa, Chicago and Eastern Railroad and combined with DM&E’s network. The combined system directly connects Chicago through Iowa to Missouri, Minnesota and South Dakota, with branches extending into portions of Wisconsin, Wyoming and Nebraska.
In its first twenty years of operations, the railroad’s revenues had increased more than tenfold, from $22 million in 1987 to $258 million in 2006. Its operating ratio (the ratio of operating expenses to revenues) declined to 70.2 per cent in 2006 and was projected to improve further to 67.6 per cent in 2007. Its traffic was a mix of agricultural, coal, and industrial products, and ethanol shipments were projected to exceed one billion gallons in 2008.
On September 4, 2007, CP announced it would acquire DM&E for US$1.48 billion, and future payments of over $1.0 billion contingent on commencement of construction on the Powder River extension and specified volumes of coal shipments from the Powder River basin. Kevin Schieffer, President of DM&E, called CP DM&E’s “natural partner” and the transaction a “natural fit”.
CP has stated its intention to use this purchase to gain access to the Powder River and ship coal to Midwestern and Eastern utilities. The U.S. Surface Transportation Board announced its approval of CP’s acquisition on September 30, 2008, and CP assumed control of DM&E and IC&E on October 30, 2008. CP had planned to invest $300 million in capital improvements to the former DM&E lines by 2011.
Prior to its acquisition by CP, DM&E had sought financing in excess of $2 billion to extend its reach into the Powder River Basin, which it was unable to secure.
One must speculate that the Great Recession of 2008 must have caused CP to rethink its Powder River Development strategy, and that the tepid economic recovery following the Recession did not provide sufficient justification to revisit development plans. One must further speculate that Pershing Square Capital’s moves to seek control of CP, starting in the fall of 2011, monopolized the attention of CP’s management, relegating decisions concerning DM&E’s future to a lower priority. Lastly, given that CP has announced that it is inviting expressions of interest to acquire Western sections of DM&E’s network, it is clear that the present management of CP feels that its attention and resources should not be focused on Powder River opportunities.