December 3, 2012 / 1:32 PM / 6 years ago

CP Rail drops plan to push into Powder River

TORONTO (Reuters) - Canadian Pacific Railway (CP.TO) will take a C$180 million ($181.2 million) charge to abandon plans to expand into the Powder River coal-mining region in the U.S. states of Wyoming and Montana, citing weakness in the thermal coal market.

A Canadian Pacific Railway locomotive sits at the Obico Intermodal Terminal in Toronto, May 23, 2012. REUTERS/Mike Cassese

Canada’s No. 2 railway acquired the option to build a 260-mile extension into coal region of northeastern Wyoming and southeastern Montana as part of its C$1.48 billion purchase of the Dakota Minnesota and Eastern Railroad in 2007.

The decision comes as no surprise because CP had estimated the expansion project to cost more than C$5 billion, said National Bank Financial analyst Cameron Doerksen.

“This would have been prohibitively expensive for CP even with the support of financial partners,” Doerksen said.

“The reality is that the U.S. domestic thermal coal market appears to be in long-term decline, and there are already two other Class I railroads serving the Powder River Basin.”

CP’s decision to defer the option indefinitely could signal plans to sell parts of the DM&E network, said Doerksen.

CP’s new chief executive, Hunter Harrison, will reveal his turnaround plan for investors in New York on Tuesday and Wednesday. Harrison was the hand-picked choice of CP’s biggest shareholder, William Ackman’s Pershing Square Capital Management, during a bruising proxy battle this year that unseated the former CEO and board chairman.

In a push to improve operating efficiency, Harrison is expected to announce deep job cuts, the closure of rail-classification hump yards, and the relocation of the company’s headquarters in Calgary, Alberta.

Harrison told U.S. union officials in September that CP planned to sell the 365-mile section of its DM&E rail lines west of Pierre, South Dakota.

The purchase of closely held DM&E under former Chief Executive Fred Green gave CP access to lucrative markets in the booming U.S. Midwest, but it was viewed as a costly acquisition.

CP said on Monday it would take a pre-tax, non-cash charge of C$180 million, or C$107 million after tax, in the fourth quarter to write down the Powder River Basin extension plan. The charge includes the option, engineering design costs, land and capitalized interest.

CP shares dropped 73 Canadian cents, or 0.8 percent, to C$91.97 on the Toronto Stock Exchange in early trading on Monday. Year-to-date, the stock has climbed about 30 percent on hopes for performance improvements under Harrison.

Doerksen, who rates CP stock “underperform”, said the current valuation has already priced in a significant turnaround.

(Additional reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Bob Burgdorfer)

This story was corrected to remove superfluous second graph

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