Canadian Pacific Railway Ltd. (CP) will delay indefinitely plans to expand its track network into the Powder River Basin, which holds the largest coal reserve in the U.S., as prices for the fuel deteriorate.
The railroad will take an after-tax charge of C$107 million ($108 million) on its option to build the 260-mile extension, a right acquired with the 2007 purchase of the Dakota, Minnesota & Eastern rail carrier. Hedge-fund manager William Ackman criticized the deal this year as he sought to improve returns by ousting the chief executive officer.
“The cost for Canadian Pacific to extend out its line to the Powder River Basin was probably prohibitive,” Cameron Doerksen, a Montreal-based analyst at National Bank Financial, said in a telephone interview. “It was going to be a difficult case to make even in a good coal market. It seems pretty obvious that it was something that was unlikely to move forward.”
Coal prices have weakened in the U.S. as utilities switched to cheaper natural gas produced by hydraulic fracturing of shale. Coal carloads shipped by the biggest North American railroads dropped from the previous year in each of the first three quarters of 2012.
Canadian Pacific’s announcement today precedes an investor meeting in New York where CEO Hunter Harrison, Ackman’s pick to replace Fred Green, will outline plans for improvements at the company, the least profitable of the large North American railroads. Ackman’s Pershing Square Capital Management LP holds a 14 percent stake in the business.
Canadian Pacific said in a statement its decision was based on “continued deterioration in the market for domestic thermal coal, including a sharp deterioration in 2012.” The railroad’s stock declined 1.5 percent to C$91.35 at the close in Toronto.
The charge, which amounts to C$180 million on a pretax basis, includes the option, engineering design costs and land, the railroad said. The building rights offered an “extraordinary growth prospect” when Canadian Pacific bought DM&E, Green said at the time.
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