The Illinois-Iowa Railfan

September 5, 2007
SIOUX FALLS, S.D. - Canadian Pacific Railway and Cedar American Rail Holdings will merge in a deal that if approved would bring the Calgary-based CPR within reach of the Powder River Basin coal fields. As part of the deal, CPR will pay $1.48 billion for Cedar American.

Sioux Falls, S.D.-based Cedar American is owner of the Dakota, Minnesota & Eastern and Iowa, Chicago & Eastern railroads. DM&E owns track from a connection with Union Pacific at Winona, Minn., across the CPR at Minnesota City, and westward all the way to the Black Hills of South Dakota and Wyoming. DM&E holds regulatory approval to build a track into the coal-rich Powder River Basin. IC&E connects Kansas City with Chicago and the Twin Cities, and also owns the "corn lines," which serve agricultural shippers in northern Iowa and southern Minnesota. DM&E and IC&E connect at Owatonna, Minn. DM&E interchanges with CPR at Minnesota City, and IC&E connects with CPR at Bensenville, Ill., west of Chicago.

"We were pleased with the tremendous interest in our railroad and our PRB project that was demonstrated by this process," said DM&E President and CEO Kevin V. Schieffer, in a press release. "We think the agreement ultimately reached with CP is the best for all our stakeholders, which include current DM&E shareholders, employees, customers, and the communities we serve, and the many groups and consumers waiting for the benefits that can be realized by the PRB project. CP has demonstrated the strongest interest in the PRB Project and the ongoing rail operations, but also to the various stakeholders who have been so important to DM&E's tremendous success. Of all the candidates, we chose CP in large part because of its demonstrated knowledge and shared vision in our PRB project, and commitment to employee, customer, and community issues. This is a good deal for all involved."

In a conference call with reporters this morning, CPR President and CEO Fred Green said CPR is not yet committed to building into the Basin. He said there will be a set of benchmarks that CPR will first need to reach, and a decision on building into the Basin will come later. He said that, over the next 3-5 years, CPR will invest about C$300 million to fix DM&E's track and add sidings. Though DM&E has upgraded some of its trackage, much still remains in poor condition.

Transportation analyst Anothony B. Hatch said the deal surprised many in the industry, who thought CN was a more likely DM&E partner, but said the takeover makes sense, even though CPR hasn't expanded its system in recent memory. "As they move forward, I think they're beginning to look for a few things to add to their revenue base," said Hatch. "The existing franchise of the DM&E does seem very much to fit."

Hatch said that fit occurs both in the coal fields, as well as with DM&E and IC&E's current traffic base. The two originate a lot of grain, and also have been able to profit greatly from the ethanol boom. "Just the DM&E, without the project, has value," he said.

Hatch doesn't anticipate trouble getting STB approval because the proposed merger is a minor transaction. He also said BNSF and UP would be hard-pressed to credibly oppose the merger. "They're sitting on 100 percent of the market. It's hard for me to understand how they could," he said. Further, said Hatch, BNSF and UP can take some solace that a known quantity is in charge of the coal project. He said CPR has a strong stake in offering shareholder value, meaning they'd be unlikely to offer wildly low rates on hauling coal. A newcomer would be less predictable.

DM&E first proposed building into the Basin in 1997, and has spent the last decade overcoming regulatory hurdles and securing financing for the project. Below is a timeline of some of the significant events leading up to yesterday's announcement.

The railroads plan to close the deal within 30-60 days, and the final merger will be contingent upon Surface Transportation Board approval. CPR expects that process to take less than a year.

If CPR successfully builds DM&E into the Powder River coal fields, it will pay an additional $350 million for Cedar American, and could pay more if specified amounts of coal move out of the Basin.


Sept. 5, 1986: Dakota, Minnesota & Eastern Railroad begins operations on 965 miles of ex-Chicago & North Western track in Minnesota, Iowa, and South Dakota. Trackage includes a main line from Winona, Minn., on the Mississippi River, west to Rapid City, S.D., on the edge of the Black Hills, and associated branches. The new railroad will survive on mostly grain and clay business. Former C&NW manager J.C. "Pete" McIntyre is named president of the new company.


Feb. 9, 1996: DM&E purchases 203 miles of ex-Chicago & North Western track from Union Pacific in Nebraska, South Dakota, and Wyoming, the so-called "Colony Line." The purchase stretches from Crawford and Chadron, Neb., northward through Rapid City to Colony, Wyo., giving DM&E direct access to key bentonite clay customers.


1995: DM&E's owners "test the market," according to board member Jack Ruse, to see if anybody is interested in buying the railroad. An as-yet unnamed company took an interest and proposed using DM&E as a route into the Powder River Basin coal fields. Though no sale occurs, President McIntyre and company attorney Kevin Schieffer begin exploring the possibility of building the railroad into the Basin on its own.


Nov. 7, 1996: McIntyre retires, and Schieffer is named DM&E's president.


June 9, 1997: Schieffer announces a $1.2 billion plan to build a new line into the coal fields. Three possible routes are identified publicly to get around the Black Hills and into the Basin.


Fall 1997: DM&E announces it prefers the longest route into the Basin that would diverge at Wall, S.D., and follow the Cheyenne River south of the Black Hills.


Dec. 10, 1998: the federal Surface Transportation Board approves the project on its financial merits, but an environmental impact statement must yet be completed.


Jan. 30, 2002: the STB, having approved the environmental impact statement, gives the project the official green light. Opponents of the project, led by the Mayo Clinic and the city of Rochester, Minn., sue the STB, saying they didn't consider some potential environmental impacts.


Feb. 21, 2002: Schieffer announces the creation of the Iowa, Chicago & Eastern Railroad, which subsequently buys the 1,400-mile I&M Rail Link from the Washington Group and CPR. Cedar American Rail Holdings is created as a parent company for DM&E and IC&E. The new railroad serves key rail markets, including Chicago, Kansas City, and Minneapolis/St. Paul.


Oct. 2, 2003: A federal appeals court overturns the STB decision, agreeing with project opponents that certain potential environmental impacts should have been considered but weren't. The STB begins the process of examining them.


2005: The STB re-approves the DM&E project, imposing few additional conditions on the project. Project opponents sue yet again, saying the STB's conditions are inadequate.


Nov. 5, 2005: DM&E applies for a $2.3 billion Federal Railroad Administration Railroad Rehabilitation and Improvement financing loan to fund the project.


Dec. 28, 2006: The 8th U.S. Circuit Court of Appeals rejects arguments of project opponents and dismisses suit against the STB, saying the agency had considered all relevant potential environmental impacts.


Feb. 26, 2007: The FRA denies DM&E's RRIF loan, saying the railroad doesn't have enough credit to justify the loan. Schieffer vows to find a way to fund the project privately.


June 12, 2007: TRAINS reveals Cedar American has winnowed the field of potential bidders to 10. Bidders include CPR, Canadian National, Watco, and Kansas City Southern.


Sept. 4, 2007: Just a day short of DM&E's 21st anniversary, Schieffer announces the agreement to partner with CPR to enter the PRB coal fields.

I was actually happy about this decision. The IC&E is classified mainly as a Class II and Regional Railroad, while the CP is a Class I Major Carrier.

I'm hoping it means more Rail Business here in Eastern Iowa, which is one area the DM&E/IC&E Serves.

Just a Rundown of Some Industries that require rail services in Muscatine/Louisa/Scott Counties:

DAVENPORT-WEST DAVENPORT-WATERWORKS - Kraft Foods, Purina, Multiple Others

BUFFALO-LINWOOD - LaFarge, Cargill Salt, also other industries I cant name of my head

MONTPELIER - IPSCO Steel

HEINZ-MUSCATINE-FRUITLAND - H.J. Heinz Co, Muscatine Foods Corporation, On-Time Delivery, Muscatine Power and Water, Mid-American Energy-Fruitland, Cargill AgHorizons, Union Tank Car Company, Possible Others

LETTS-FREDONIA-COLUMBUS JCT-COTTER - Tyson Foods/IBP

I also know that multiple Ethanol Plants are popping up in multiple places, like Muscatine and Cotter. There was one planned at Buffalo but it is currently put on-hold for construction.

As noted, DME/ICE/CARH were trying to get into the Power River Basin for the Coal Mines, but have not been able to get the funding needed. With this merger, the CP/ICE/DME will now be a Main Coal Shipper in the US. CP will also once again have a link to Kansas City, and an additional one to Chicago. Other sizable towns on the route include Mason City, Dubuque, Ottumwa, Rockford, and Janesville. Rockford and Janesville are on it's own little Branchline however, not a Mainline.

The STB has approved this whole thing for Review and a final decision is expected in the Summer/Fall of 2008. Stay Tuned to ICErail.com, DMErail.com, and CPR.ca.

Also, note my signature below. Muscatine has had so many different Railroads in the area since the 1980s. Started in the 1980s with the Rock and The Milwaukee Road. They both went bankrupt, which the Soo Line came and took the Milwaukee and Rock Island trackage. The trackage from Nahant to Muscatine (Culver Tower) was Joint MILW/RI trackage, however, after the SOO Takeover, the MILW Trackage west of Culver Tower to Washington, that climbed out of the river valley on a Bluff west of Muscatine to access Ardon, Cranston, Conesville, Gladwin, Haskins, and Washington was in such bad condition that it was abandoned in the Mid-1980s. The SOO continued to use former RI Trackage from Muscatine to Washington, then MILW trackage again from Washington to Kansas City, MO. The SOO was bought by CP in the 1990s, shortly before they sold all it's Iowa trackage to MRL. MRL formed I&M Rail Link to operate the trackage, which was bought by the DM&E/CARH in 2002. IC&E was formed then. So technically, the CP/SOO was in the Area from 1985-1997, when the track was turned over to the I&M Rail Link completely.

Later Men.

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Owen C. McCormick
Muscatine, Iowa USA
*Wondering How Many Times We'll See Different Railroads Here*