CN Optimistic Despite Wildfires, Congestion And Delta Variant

Canadian railway CN is still recovering from a nearly two-week outage of a bridge that is part of a key route to Vancouver. The impacts of the outage remain to be seen, as the bridge outage, as well as wildfire conditions, have contributed to a backlog at the Port of Vancouver, said CN executives during the railway's second-quarter 2021 earnings call Tuesday.

"With some of the conditions out there in the backlog, we're not seeing a huge impact right now. But if we see big spikes in weather, along with that extreme fire danger, we will have an impact" on operational costs, said CN Chief Operating Officer Rob Reilly.

Wildfires in British Columbia damaged a bridge between Kamloops and Boston Bar, putting it out of service on June 30. The bridge was restored on July 13. During the time it was out of service, fewer trains ran and both CN CNI and Canadian Pacific CP relied on each other's tracks to get trains to and from Vancouver.

The segment with the bridge averages about 25 trains a day, and its closure contributed to a backlog at the port, according to Reilly.

Additional wildfires have also sprung up in British Columbia, causing the provincial government to declare a state of emergency.

"It's a very active situation in British Columbia with the fires, and so there are starts and stops out there, with some 300 fires out there. But the road to recovery is on and it will probably be a couple of weeks … before we're fully recovered," Reilly said.

Out of concern that freight rail operations might spark a wildfire in dry and hot conditions, a ministerial order from Transport Canada is requiring freight trains to slow down in British Columbia should weather conditions reach a certain threshold, Reilly noted.

Despite the bridge outage and evolving wildfire conditions in British Columbia, as well as uncertainties over the direction of the COVID-19 pandemic given the Delta variant, CN on Tuesday maintained its financial guidance for the year, which consists of double-digit adjusted diluted EPS growth versus 2020 adjusted diluted EPS of CA$5.31, as well as high single-digit volume growth in terms of revenue ton mile.

But in light of the pandemic, sustained e-commerce activity and supply chain challenges, CN's customers have been managing their inventories in such a way that market demand for freight rail service will persist into 2022, executives said.

"When we talk to our customers that are bringing products from overseas into North America, they see this [trend of managing inventories] continuing well into 2022," said Keith Reardon, senior vice president of CN's consumer product supply chain.

In addition to discussing bridge impacts and second-quarter 2021 earnings results, CN leadership reiterated its interest in acquiring Kansas City Southern KSU, saying a combined CN-KCS would "preserve all existing gateways and create new single-line routes," according to CN's Q2 presentation.

CN's bicoastal reach in Canada, coupled with KCS' operations in Mexico, would provide shippers, particularly in the Upper Midwest and at the U.S.-Mexico border, with more options to convert from truck to rail, they said.

CN's "meaningful touchpoints" with beneficial cargo owners, as well as relationships with Canadian wholesale customers and IMC customers with or without assets, provide them with opportunities with many different sales channels, Reardon said.

CN said it agrees with the broad points expressed within President Joe Biden's executive order to encourage more shipper-friendly practices and passenger rail-friendly practices as they relate to freight rail operations. The application to acquire KCS will show how customers will have more shipping choices and not less, CN said.

"We'll clearly demonstrate the benefits of this transaction, and we think we'll do so in a way that recognizes the comments made by [Surface Transportation Board] Chairman Oberman on the executive order," CN Chief Legal Officer Sean Finn said.

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