CP sought to control its own destiny with Detroit tunnel purchase

Like Central Maine & Quebec, purchase of route to Windsor, Ontario, is a re-acquisition of property sold by previous management
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CALGARY, Alberta — Canadian Pacific aims to control its own destiny by purchasing the Detroit River Rail Tunnel, a key link in its route connecting Chicago with Toronto, Montreal, and Eastern Canada.

The $312 million deal, announced last week and subject to regulatory approval, will for the first time give CP full ownership of the former Michigan Central Railway Tunnel linking Detroit with Windsor, Ontario.

CP executives touted the acquisition on the railway’s quarterly earnings call on Tuesday morning. 

CEO Keith Creel noted that CP’s prior management team reduced its stake in the tunnel to raise cash during the Great Recession of 2009. At the time, CP reduced its 50% share in the tunnel partnership to just 16.5%, earning $110 million in the process.

Now, during the economic crisis caused by the COVID-19 pandemic, a financially strong CP was in a position to fully acquire the tunnel, Creel noted. “It made compelling sense to buy this asset back,” Creel says.

The purchase will reduce operating costs and boost profit margins on the route, Creel says.

CP paid the tunnel’s majority owner, Borealis Transportation Infrastructure Trust, more than $14 million in tolls annually, according to people familiar with the matter.

A CP and Canadian National subsidiary jointly acquired the two-tube tunnel when the railways bought Conrail’s interest in the Canada Southern Railway in 1984. The subsidiary was dissolved in 2001, when CN sold its 50% interest in the Detroit River Tunnel Co. to Borealis, an arm of the Ontario public employee pension fund. 

When Borealis sought to sell the tunnel this year, CP exercised its right of first refusal to purchase it, according to people familiar with the matter.

The tunnel represents the second time in less than a year that CP will reacquire infrastructure sold off by previous management. In June CP officially acquired regional Central Maine & Quebec, which formed part of its shortcut linking Montreal and Saint John, New Brunswick, via northern Maine.

“You’re heard a lot about our opportunity through the CMQ and I think that naturally is a perfect connection with the Detroit River Tunnel and the thought of having steamship lines that can look to bring traffic to the Midwest,” Chief Financial Officer Nadeem Velani says. “And leveraging that routing advantage certainly went into our thought process. It wasn’t the sole driver, but certainly it would benefit from increasing volumes and increasing [the] opportunity to control our own destiny.”

Chief Marketing Officer John Brooks says CP hopes to land transatlantic steamship service at the Port of Saint John next year.

The container terminal at Saint John is undergoing an expansion and briefly saw increased volume this summer when ships were diverted to the port during a dock worker strike in Montreal. CP handled four ships’ worth of container volume at Saint John during the strike, resulting in the first intermodal trains to roll from the port over the former CP trackage in 25 years.

One of the two Detroit tunnel tubes in 1993 was enlarged to handle auto racks and international double-stack containers. But the tunnel cannot handle double-stacked domestic containers. So CP’s current Montreal-Chicago intermodal trains — which include both international and domestic boxes — run via CSX Transportation rails between Buffalo, N.Y., and Chicago.

CP lacks a Detroit-Chicago route. Its merchandise and automotive trains that use the tunnel exercise trackage rights over Norfolk Southern’s former Wabash and New York Central main lines between Chicago and Detroit.

CP and Borealis in 2001 began planning construction of a full-clearance railroad tunnel linking Windsor and Detroit. The project would have converted the existing tunnel into a toll road for trucks to help fund the new rail bore. But local opposition to increased traffic sank the proposed truck-only tunnel, and in 2015 CP and Borealis officially shelved plans for the new rail tunnel.

NEWSWIRETrains News Wire

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