CN to be fined for failing to move enough grain; Ottawa mulls size of penalty

MONTREAL - Canadian National Railway (TSX:CNR) will be fined for failing to comply with an order that it move a minimum amount of grain each week, a spokeswoman for federal Transport Minister Lisa Raitt said Wednesday in a move that caught the railway by surprise.

"As CN was not able to meet the minimum volume requirements (under the Fair Rail for Grain Farmers Act), the minister has decided to issue administrative monetary penalties to the company," press secretary Jana Regimbal said in an email.

"The penalty is up to $100,000 per week and that is up to the minister's discretion," Regimbal added, noting it was the first such fine under the act.

It was unclear what time frame was involved in imposing penalties under the act, which was passed last spring amid complaints that CN and rival CP Rail (TSX:CP) were providing poor services to western grain farmers.

In an emailed response, the railway said it "has not been informed of government concerns or any intention to issue penalties against CN in connection with its grain transportation performance."

"If the minister of transport decided to call for penalties against CN, such a step would be unfounded given that it's the current balance of the grain supply chain that has not allowed us to meet the government's order-in-council minimum grain volume requirement," said the email from Mark Hallman, the railway's director of communications and public affairs.

Hallman noted that CN's weekly demand has been less than 5,000 cars per week on average for the last several weeks, which is below the level required to meet the new target of 536,250 metric tonnes per week.

Among other things, the railway said ample storage room is available for farmers to deliver their grain in the Prairies, waterfront elevator stocks are 20 to 30 per cent higher than the five-year average and West Coast terminals are nearly full at 96 per cent of working capacity, meaning they have all the grain necessary to load vessels.

"Finally, Prince Rupert recently closed for about a week to perform its annual maintenance program, and most terminals in Vancouver, being nearly full, did not work weekend shifts lately in order to save overtime and optimize their costs," it said.

Earlier Wednesday, CN chief executive Claude Mongeau discussed the grain issue at an investor conference in Montreal saying the railway doesn't expect a repeat of the problems it faced in moving last year's bumper Western Canadian grain crop, a situation which he indicated is now well in hand.

In fact, Mongeau conceded at the CIBC conference that demand for hopper cars had fallen so low in the past few weeks that the railway wouldn't be able to meet the federal government's delivery thresholds.

"So we can't move what they don't deliver or what they don't order, and I think that's a good sign," he said, giving no indication that a fine was expected.

Meanwhile, next year's crop, while expected to be large would not involve "the surging that we faced last year."

Statistics Canada has said the crop is expected to only be slightly above an average year at 55 million to 58 million tonnes.

Mongeau said there is ample storage room for farmers to deliver Prairie grain since country elevator stocks are in line or below the five-year average since the beginning of the new crop.

Also, waterfront elevator stocks are 20 to 30 per cent higher than the five-year average and West Coast terminals are nearly full.

After a "brutal winter," he said the supply chain of Canada's largest railway is "back in sync."

Despite complaints from grain elevator companies, CN moved a record 25 per cent increase in grain, Mongeau said, rejecting claims that grain only started moving because the railways were ordered to do so by the Conservative government.

"I think people who follow the facts would recognize that winter broke and we were able to raise our game back to where we were before winter, in excess of 5,000 cars per week. So we did exactly what we had promised to do."

Mongeau also said the regulation that extends what are called inter-switching limits from 30 kilometres to 160 kilometres in Alberta, Manitoba and Saskatchewan was not well thought out. Most grain elevators on the Prairies are served by only one railway and the federal government said expanding inter-switching would allow more service by more rail companies.

"For a few hundred dollars, (U.S. railroad) BNSF can access Canadian traffic and move the goods to U.S. ports. That policy effectively exports Canadian jobs," he said, adding it undermines Canadian railway profitability and reduces government tax revenues.

Meanwhile, Mongeau said he remains bullish on several sectors except coal and paper products. Intermodal, potash, automotive and iron are expected to grow. He said lumber will be helped by an eventual increase in U.S. housing starts over the next year or two, and the development of the Asian export market.

CN also expects to be close to doubling its crude volume this year ahead of "solid growth" over the next five to seven years as loading capacity increases and it continues to develop the diluted raw bitumen market.

On the Toronto Stock Exchange, CN's shares hit an new all-time high of $81.62 before falling back to close up 62 cents at $81.34 on Wednesday.

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