A significantly lower retroactive cap on railways’ grain handling revenue for 2007-08 will be challenged, Canadian Pacific Railway (CPR) pledged Wednesday.
The Canadian Transportation Agency (CTA), which caps the amount of revenue CPR and Canadian National Railway (CN) can keep from the handling of Prairie grain, on Tuesday announced a reduction of $72.2 million in the overall cap, which translates to a revenue cut of $2.59 per tonne based on the two companies’ expected grain handle.
The quasi-judicial federal agency ruled that “significant improvements” in railway operating efficiency had reduced the railways’ costs of maintaining federally-owned grain hopper cars.
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Those costs had previously been “embedded” in the railways’ revenue cap at a rate of $4,379 per car, based on data from a 1992 costing review, but the CTA has reset the cap according to “actual” costs, which it pegged at just $1,371 per car.
The CTA’s ruling is retroactive to Aug. 1, 2007, CPR noted in a release Wednesday.
“We disagree, among other things, with the retroactive component of the
CTA’s adjustment, and we will vigorously challenge it,” said CPR CEO Fred Green in the company’s release.
“We believe the decision to make the adjustment retroactive is not supportable, based on the legal advice we have received. We are confident we can successfully appeal the CTA’s decision in the Federal Court.”
CN, as of Wednesday afternoon, hasn’t yet officially responded to the CTA ruling.
Billion-dollar savings
However, the Farmer Rail Car Coalition (FRCC), a farmers’ group that had unsuccessfully sought to buy and maintain the federal hopper cars at a lower cost, cheered the CTA’s ruling Wednesday.
The reduced revenue cap “will also carry forward into future years and has the potential to result in a total of a billion dollars in savings for farmers over the next 15 years,” FRCC wrote.
FRCC president Sinclair Harrison said the CTA’s adjustment “falls directly in line with the estimates that the FRCC provided to the CTA indicating that railways were overcharging for hopper car maintenance by approximately $3,000 per car.”
Harrison said in a release Wednesday that he was disappointed to hear of CPR’s plans to challenge the ruling, but “we are confident that the work of the CTA is sound and will withstand the court challenge.”
Financially speaking, the railway had anticipated an adjustment, but the amount “is higher than the assumptions we made for our 2008 outlook,” CPR chief financial officer Mike Lambert said in the company’s release.
CPR will cut its earnings per share guidance by five cents per share to the $4.65-$4.80 range, he said. The retroactive nature of the adjustment could affect EPS guidance by a further eight cents per share, he added, but “we feel confident that we will succeed in challenging the decision and therefore are not adjusting our guidance for the full amount of the potential impact.”
