Canadian National to acquire U.S. lakers along with key rail link

Feb 28, 2007 12:00 AM
Canadian National Railway Co. (CN) will acquire eight U.S.-flag lakers owned by Great Lakes Fleet Inc. (GLF) as part of a $380 million deal expected to close in mid-2004.

Roger Blough, an 858-foot laker built in 1972, is one of eight American-flagged bulk carriers being bought by Canadian National Railway Co. as part of its acquisition of Great Lakes Transportation. It is shown here in the St. Clair River below the Blue Water Bridges in Port Huron, Mich.
   Image Credit: Courtesy Marine Art of J. Clary

CN, based in Montreal, has agreed to buy Great Lakes Transportation LLC (GLT), the parent of GLF. Based in Monroeville, Pa., GLT also owns the Duluth, Missabe & Iron Range Railway Co. (DMIR), the Bessemer & Lake Erie Railroad Co. and the Pittsburgh & Conneaut Dock Co.

GLF's fleet of eight ships includes the 1,004-footers Edgar B. Speer and Edwin H. Gott, along with the 858-footer Roger Blough, that are dedicated to taconite-pellet transportation. The other five self-unloader vessels transport a variety of commodities, including taconite, coal, limestone, grain and gypsum, between U.S. ports on the Great Lakes.

The company's origins date back to 1899, when Carnegie Steel Co., later U.S. Steel, began to develop its own fleet to transport iron ore and other steel-making commodities across the lakes to the company's inland steel mills. GLF and its predecessor companies were technical innovators. Its ore carriers were the first with steam turbine propulsion and with continuous crew passages below decks. The company was a leader in converting vessels to self-unloaders, beginning in 1981 with the installation of 250-foot booms and cargo hold conveyor systems on Cason J. Callaway and Arthur M. Anderson.

Taconite pellets from the Mesabi Iron Range mines have been a major cargo this year for GLF's ships. The taconite reaches the ports of Two Harbors and Duluth, Minn., via the DMIR. During 2003 GLF's ships have transported taconite from Duluth to U.S. Steel's mill in Ecorse, Mich. In November, GLF chartered George A. Stinson to meet additional demand for taconite shipments from Two Harbors and Duluth to Conneaut, Ohio, where the ore was transferred to the Bessemer & Lake Erie Railroad for delivery to U.S. Steel's mill near Pittsburgh.

For other taconite shipments, CN's takeover of the GLT takeover will give it control of a critical 64-mile stretch of DMIR tracks north of Duluth needed to improve rail connections with CN's western Canada mainline. New markets for taconite are increasing internationally.

In November CN began moving 150,000 tons of taconite from Minnesota's iron mines to Prince Rupert, British Columbia, for loading on ships supplying Chinese steel mills. Other pending deals could result in up to 1 million tons of taconite shipped by rail for export to China.

CN's valuation of GLT's individual components is unknown. During 2003, Great Lakes iron-ore shipments were helped by U.S. tariffs on cheaper imported steel that were imposed in 2001.

In November the World Trade Organization ruled that the tariffs were illegal under international trade agreements. The European Union then threatened to impose billions of dollars in sanctions on U.S. exports. In response to that heavy pressure, the Bush administration announced in December its decision to repeal the tariffs.

Possibly helped by the tariffs, taconite shipments on the lakers declined only 8.7 percent during the first 10 months of 2003, compared with the same period a year earlier.

The Bessemer & Lake Erie Railroad and the Conneaut docks that primarily serve the declining Pennsylvania steel mills have uncertain futures. Already the more valuable DMIR has been notified of planned layoffs and facility closings after CN's takeover.

GLF's ships sailing between U.S. ports require ownership by a U.S. entity under the Jones Act. CN told Reuters that it expects an existing CN subsidiary that qualifies under the Jones Act to contract with Keystone Shipping in Pennsylvania to operate and manage the vessels.

CN is an increasingly profitable company with transcontinental Canadian rail routes and a long history of connections with U.S. railroads. In 1999 it acquired the Illinois Central Gulf Railroad, extending CN's reach south to the Gulf of Mexico. In 2001, Paul Tellier, then CN's president and CEO, said, "We're not afraid to change ourselves if it means better performance. And we're not afraid to make a commitment and stand by it."

With the takeover of GLT, the fate of eight lakers and their crews will rest with a CN corporate decision weighing performance versus commitment.

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