Canadian National will spend $1.75B, most of it on its rail network upkeep

MONTREAL – Canadian National Railway Co. plans $1.75 billion in capital spending this year, slightly more than last, with most of the money going to maintain and upgrade its rail network.

The Montreal-based railway said Friday that more than $1 billion of its capital investment will be used for track infrastructure, including replacing ties and other track materials and bridge improvements.

However, the company said it also plans rail yard and technology improvements as well.

“CN’s capital spending is critical to running a safe, fluid and productive network and to attaining our growth and service objectives,” chief executive Claude Mongeau said in a statement.

The increase in spending from $1.7 billion a year ago comes as Canadian National (TSX:CNR) expects intensified competition from its main Canadian competitor, Canadian Pacific Railway Ltd.

Calgary-based Canadian Pacific (TSX:CP) is overhauling operations to improve efficiency and could soon have a new chief executive, former Canadian National CEO Hunter Harrison.

Harrison, who will be 68 this year, ran Canadian National for six years until he retired in 2009. The Tennessee-born executive was credited with turning the Montreal-based railway into North America’s most efficient and profitable rail operator with his relentless focus on cutting costs.

Canadian Pacific plans to spend between $1.1 billion and $1.2 billion on capital projects this year, with about one-quarter going toward business improvements and the rest to cover maintenance costs.

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While the two railways often carry different goods and focus on different parts of Canada and the United States, Canadian National, with more than 23,000 employees, is far more profitable and operates at a lower cost than CP Rail, with nearly 17,000 employees.

Canadian Pacific is focused mainly on delivering minerals, coal, potash, grain and other resources through the Rockies to West Coast ports.

Canadian National, meanwhile, operates across most of Canada and deep into the U.S. Midwest down to the Gulf of Mexico, carrying everything from newsprint and lumber to auto parts and manufactured goods.

In its capital spending announcement, Canadian National said it also plans to make rail line and yard improvements on the Elgin, Joliet and Eastern Railway Company that CN acquired in 2009.

That involves extending sidings along its Edmonton-Prince Rupert, B.C., corridor, and building longer passing tracks in Northern Ontario.

A siding is a low-speed track section connected to a main line where trains and locomotives are stored or wait while others pass them on the main line.

It will spend $150 million on equipment, including the acquisition of new freight cars and locomotive upgrading. CN also expects to spend about $500 million on growth opportunities and to acquire information technology.

Edward Jones analyst Brian Yarbrough said that typically 50 to 60 per cent of capital spending is on maintenance of current tracks.

“If you decided to spend a lot less, then you start sacrificing safety and things go wrong and then you’ve got a lot bigger problems,” Yarbrough said from St. Louis, Mo..

“You’ve got to make sure the tracks are in good shape and everything is running well because if not the next thing you know you will start to have a bunch of derailments and a whole host of other issues,” he said.

CN’s capital spending is in line with what the railway announced in its fourth-quarter earnings in December, Yarbrough added.

Yarbrough said if Harrison does get on board as CEO of rival Canadian Pacific, he could increase capital spending and put more of a focus on technology because “I think he believes that Canadian Pacific could improve its technology.”

CN recently cancelled almost $40 million in future pension and other benefit payments to Harrison, who has said he wants to take the top job at rival CP.

Bill Ackman, head of the U.S.-based Pershing Square activist fund which holds a 14 per cent stake in Canadian Pacific, is pushing for the ouster of current CEO Fred Green and his replacement by Harrison, a move he says will increase efficiency and shareholder value.

It’s believed Ackman has enough support from other investors to force the change.

Meanwhile, Canadian Pacific said Friday it was seeking the help of a federal mediator in a contract dispute with the union representing its 4,800 Canadian train crew employees and rail traffic controllers due to an impasse over pension costs.

Canadian National shares were down 19 cents to $76.40 Friday afternoon on the Toronto Stock Exchange, while Canadian Pacific were up 91 cents at $73.79.