Canadian Railways, Government Have Big Plans For Vancouver And Prince Rupert

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Canadian National (NYSE: CNI) and Canadian Pacific (NYSE: CP), as well as the Canadian government, are investing millions of dollars in infrastructure improvements to support anticipated volume growth at the ports of Vancouver and Prince Rupert

The railways see Vancouver and Prince Rupert as alternatives to the bustling ports of Los Angeles and Long Beach in California because Vancouver and Prince Rupert have cost-competitive access to the Midwest. 

The Canadian government is also throwing its support behind Vancouver and Prince Rupert, with plans to spend millions to support capacity growth at Vancouver and Prince Rupert (see below).

CNI, which is the sole Class I railroad with direct access to Prince Rupert, expects capacity to grow at Prince Rupert amid public and private interest to expand the port’s facilities. 

“Rupert is the gift that keeps on giving,” said CNI chief financial officer Ghislain Houle at a Sept. 11 investor conference sponsored by Morgan Stanley. To keep up with the planned capacity expansions at both ports, CNI has made C$400 million in infrastructure investments in western Canada in 2018 and 2019. 

International intermodal volumes from Asia that come to both Prince Rupert and Vancouver and then head to the Midwest represent about 5% of CNI’s revenues, Houle said. Rupert in particular has an advantage over the southern California ports because Rupert is a shorter distance and there is no congestion, he said. 

Capacity at Prince Rupert could grow to between 6 million to 7 million twenty-foot equivalent units (TEUs) from an annualized business of 1.3 million to 1.4 million TEUs presently because there is space available to accommodate another terminal, according to Houle. Houle also said DP World is seeking to expand its terminal capacity at the port by another 450,000 TEUs for 2022.

Private equity firm AMCI also acquired the Ridley Terminal from the federal government in July. The new owners are considering upping the terminal’s ability to handle export coal volumes, Houle said. The terminal handles 10 million metric tons presently but capacity could grow up to 16 million tons. 

Capacity at the Ridley Terminal could grow even more should the federal government obtain permission from the First Nations of Canada to construct an additional berth at the terminal, which could open the terminal up to more commodities beyond coal and expand terminal capacity to 34 million tons, Houle said.

Meanwhile, CP also sees the port of Vancouver taking some market share from the southern California ports, although much of that shift in market share has already happened, said CP chief executive officer Keith Creel on Sept. 11 at the Morgan Stanley conference.

“There’s a natural competitive advantage in Canada because the cost of doing business is less,” Creel said. 

Advantages in Canada include the railways’ ability to reach markets in the Midwest, cheaper terminal fees and a hedge on currency, Creel said.

CP is hoping to increase its auto exposure in Vancouver through a new Vancouver automotive compound. CP has said the compound’s location enables it to handle imported vehicles and vehicles made in western Canada and northern Washington state. The compound is adjacent to CP’s Vancouver intermodal terminal and it has capacity for 36 multi-level auto racks and nearly 1,200 bays for vehicles.

CP has secured business at Vancouver with Ford Motor Co. which will be realized in 2020, Creel said.

“We’ve got great capacity. We’ve got great service” for auto volumes at Vancouver, Creel said.

While both CP and CNI have invested in capital projects in response to projected demand growth at Vancouver and Prince Rupert, both railways don’t expect crude-by-rail to be a part of that equation in the longer term.

Both railways are waiting for the Alberta government to offload crude contracts to private businesses, they said at the conference. While they expect to get a boost in crude-by-rail volumes in the short term, pipelines are likely to be the preferred transport for crude oil in the long term.

“I believe that crude on a mid-to-long term basis will remain as a niche business,” Houle said. “I think crude wants to go by pipeline.”

Rail-related infrastructure receives federal support

While both Canadian railroads have sought to grow volumes through investments in export-oriented infrastructure, the Canadian government is also doing its share to build rail capacity at the ports.

Transport Canada said on Sept. 5 that the government is investing C$153.7 million at the Port of Prince Rupert as part of the government’s long-term strategy to develop Prince Rupert as a West Coast trade gateway.

The government is planning to invest in three projects: a project led by the Prince Rupert Port Authority to construct a double-track bridge across the Zanardi Rapids to increase rail capacity on key rail routes; a second project to develop a hub benefitting bulk and container facilities on Ridley Island to transfer shipments from one mode of transportation to another; and a project led by the Metlakatla Development Corporation to develop land near the Fairview Terminal and a container yard for import and export logistics facilities. 

Update on track repairs near Lac-Mégantic

In an unrelated announcement, Transport Canada said on Sept. 6 that it found some structural deficiencies on a 125-mile section of the Central Maine Quebec Railway (CMQR) that runs between Farnham and Lac-Mégantic. Lac-Mégantic is where a fatal accident occurred on July 6, 2013, when an unattended Montreal, Maine and Atlantic (MMA) train carrying crude oil derailed and caused a massive explosion that killed over 42 people. 

CMQR consists of the reorganized assets that once were part of the MMA Railway. That shortline declared bankruptcy in 2014 following the fatal 2013 accident. Railcar Acquisition Holdings, a subsidiary of Fortress Investment Group, bought the assets and created the new railroad.

According to a statement from Minister of Transport Marc Garneau, inspectors found defective rails and ties, as well as mud spots and ballast conditions on some locations along the section. Through ultrasound inspections conducted by CMQR, there were 253 defective rails on the section, and as a result, a speed limit of 10 miles per hour was enforced as a precautionary measure.

CMQR has since corrected the 253 directive rails, but Transport Canada has ordered the shortline to perform three ultrasonic inspections over the next 12 months, conduct necessary repairs on the track and maintain the speed limit until Transport Canada inspectors have completed their checks, according to a ministerial order.

On Aug. 28, Transport Canada also said the Canadian government and the government of Québec were continuing to work with the city of Lac-Mégantic to create a railway bypass, which would relocate the rail operations of the Nantes and Frontenac Railway.

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