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Moving the North American economy - An update on CP’s network

CP continues to deliver goods safely and efficiently for its customers, shareholders, employees, communities and the broader economy.  

We know that winter is coming each and every year, and we plan extensively for it. This year, however, we have experienced extreme cold and snow. The unusually harsh winter conditions we have dealt with require significant changes to our operating plan in order to operate safely. The weather challenges have been compounded by capacity issues our competitors are also having, specifically in the northern part of Canada; loss of pipeline capacity and other supply chain constraints; and unforeseen changes in market conditions that have driven demand upward. Despite this winter’s atypical conditions, CP has been able to able to perform at, or above, year-over-year levels in many respects, and we are continuing to build on this momentum. CP’s network is getting stronger and more fluid every day.

The facts regarding the weather

  • From Alberta to Quebec and through the U.S. Midwest, we have experienced unseasonably cold weather. In fact, a two-week period from December 25th through to January 7th was the coldest and most extensive low temperature event across 90 percent of CP’s network since 1993/1994. Seasonally, it was the earliest recorded period of such a prolonged stretch of extreme cold since the winter of 1886/1887.
  • Since this extreme cold period, and until very recently, temperatures have remained well below seasonal. When compared to last year, temperatures are on average 46 percent* lower system-wide and there has been a 167 percent* increase in the number of days with temperatures under -25 Celsius.
  • At -25 Celsius and colder, we must take additional steps, such as reducing train speeds and train lengths, in order to continue to move products to destination in a safe, efficient manner. No amount of planning can change this fact. 
  • In British Columbia and Alberta, snowfall records for the month of February were shattered this year, leading to significant challenges throughout the entire transportation supply chain.
  • As we move into avalanche season and the potential for spring flooding, our crews are staffed up and ready to act for the benefit of the supply chain and North American economy.
  • We are optimistic that the weather is turning in our favour. Each day, CP’s entire network is growing more fluid. Our focus is on delivering safely for the supply chain and we are on the road to recovery.

The Facts regarding demand

  • Demand for rail service was particularly volatile this past year, which is difficult to match against fixed rail infrastructure and resources that are time - and capital - intensive to expand.
  • The movements of most commodities are up year over year, taking up capacity across the rail network.
  • Particularly, demand has been very high and densely concentrated for a variety of commodities that originate in western Canada.
  • CP has a common-carrier obligation to reasonably accommodate all customers who wish to move their products to market on our network.
  • Balanced against that, CP strives to ensure customers can continue to have access to rail service at the lowest possible total transportation costs, and thus continue to enjoy the lowest average freight rates in the world. As such, to remain competitive, CP cannot build and resource for extreme peaks and unexpected and short-term demands.
  • The supply chain works best when all of the players are functioning at a high level, including both Canadian Class 1 railroads. When one railroad struggles, or a shipper is dealing with a labour outage, or a vessel captain refuses to load in Vancouver due to rain, the entire supply chain suffers. The same applies when temperatures drop below -25 Celsius for long periods of time. Each of these factors impact demands, and this year, it was particularly amplified.

Grain

  • This year’s grain crop was originally forecast to produce around 65 million metric tonnes, but will end up being closer to 71 million metric tonnes, close to a 10 percent increase.
  • CP is experiencing unprecedented and unexpected grain demand from dual-rail-served territories in the northern catchment areas of our network. Our shipments in this area are up 30 percent crop-year to date.
  • Year-to-date grain shipments through Week 32 (March 4-10) are up 3 percent or 450,000 metric tonnes.
  • With the impending opening of the seaway in Thunder Bay, Ont., an important export outlet for Canadian grain, and continued network improvements, we are confident in our ability to deliver for the grain supply chain.


CP’s grain shipments vary greatly week to week depending on demand, weather and other factors. The annual closure of the St. Lawrence Seaway (indicated by red boxes above) removes the port terminals of Thunder Bay from ship-loading operations, forcing shipments to take longer routes to market and reducing overall grain throughput.

Crude

  • The present crude-by-rail demand, similar to 2014/15, is unpredictable; it was unanticipated and surged rapidly.
  • CP has not planned for movements at the current demand level, nor was it clear to the industry in a reasonable time frame to plan resources against this demand level.
  • Demand came 8–10 months sooner than expected and at higher levels as a result of pipeline capacity reduction due to the Keystone XL leak and widening price spreads that support crude-by-rail.
  • The surge in crude-by-rail and all other demand is compounded by issues facing our competitor, causing an imbalance in demand and extreme, unplanned pressure on our network.
  • CP calls on crude producers, loading terminals and others in the supply chain to align to ensure a clearer and more realistic picture of demand, capabilities and timing.
  • To the best of CP’s knowledge, pipelines are being permitted and constructed that, a few years down the line, will capture the crude that would now move by rail. It is difficult to justify investing in long-life assets like rail and locomotives based on short-term demand.

The Bottom Line

As the safest railway in North America, safety is the foundation of everything we do. As such, all current and any additional traffic needs to be handled with due care and attention. Incremental demand, particularly where it relates to the movement of dangerous commodities, needs to be accommodated ratably and responsibly, and not rushed. We owe that to our current customers, our future customers, our employees, shareholders and the 1,100 communities we operate through.

CP is adding more than 700 new employees (currently in various stages of training), as we work to proactively deal with high attrition rates and hiring in key locations across the network, and will add 100 additional locomotives, which will be integrated into the fleet through the summer.

CP continues to invest in service, productivity and safety and has earmarked between $1.35 billion to $1.5 billion in capital programs for 2018. From 2012-2017, CP invested nearly $7 billion in capital expenditures.

The Senate needs to swiftly pass Bill C-49 to bring more certainty to the entire supply chain.

An extraordinarily complex, interdependent supply chain requires collaboration and cooperation from all.

As noted in the Emerson report, "[N]ational railways are taking steps to improve their networks to haul historically high volumes of freight at high velocity, reduced cost, and with precise timing."

* Previously, it said that this winter was 60 percent colder and had 78 percent more days below -25 Celsius, that calculation was actually based on a subset of the network. In fact, for the period of Dec. 20, 2017 to Feb. 4, 2018, system-wide it was 46 percent colder (or approx. 6 degrees colder on average) with 167 percent more days below -25 Celsius (or approx. an additional 10 days below -25C during that period, as compared to the previous year).