For CN, integrating a Major Portion of the EJ&E isn't just about bypassing Chicago

On paper it looked like a simple purchase: CN, which has 20,421 route-miles of track in the United States and Canada, proposed buying the principle lines of the Elgin, Joliet & Eastern Railway Co. (EJ&E), 198 miles of track shaped like the letter “C” around Chicago and into northwest Indiana.

CN’s had plenty of experience integrating rail lines during the past decade, and the railroad was no stranger to Illinois residents. CN acquired Great Lakes Transportation L.L.C. in 2004, the Wisconsin Central in 2001 and the Illinois Central in 1999. The Class I closed on the $300 million purchase in January after the deal received the Surface Transportation Board’s final blessing in December 2008. The plan is to fully integrate the “J” within three years.

Many of the 33 communities on the line — and one, in particular — as well as politicians and groups formed to fight the purchase, haven’t made life easy for CN during the past two-plus years. In the North American rail realm, it comes with the deal-making territory. Mastering the art of the deal isn’t just about integrating two rail systems. It’s also about allaying the new neighbors’ concerns.

CN’s made some progress on the mitigation front. As of press time, the railroad had reached agreements with 17 municipalities on the erstwhile EJ&E regarding the work the railroad would need to complete (or financially contribute to) as compensation for the train-traffic increase to come. CN officials, however, are well aware of the community-minded work yet to do.

“We spent the first six months getting on the property and understanding how EJ&E operated before, looking at best practices that stand out and working with communities on agreements and working with them on timelines on when some of the mitigation work will start,” says Gordon Trafton, CN’s senior vice president of strategic acquisitions and integration. “Where we stand, really, is becoming more familiar with the property.”

The ‘Done’ and ‘To-Do’ Lists

CN’s journey started in September 2007, when the railroad made a formal announcement about the EJ&E deal, and CN President and Chief Executive Officer E. Hunter Harrison laid out the rationale for the proposed purchase: It would improve rail operations both for CN and other railroads that operate in Chicago by taking CN’s trains off tracks in Chicago’s core and putting them on the city’s outskirts.

CN proposed buying EJ&E’s principle lines — which skirts Chicago’s suburbs north from Waukegan, west to West Chicago, south to Joliet, east to Chicago Heights and into northwest Indiana — from United States Steel Corp. (See timeline on page 18)

In addition to the $300 million to purchase the line, CN executives said the Class I planned to spend about $100 million to build connections, improve infrastructure and expand capacity, and $60 million on various mitigation measures. Ultimately, CN wants to rely less on lines that it doesn’t own so that it has more control of freight movement.

“We can do a lot more by operating our own property,” Trafton says. “We can control more of our own destiny, and that translates into a better level of service than before.”

As of mid-2009, CN was moving two scheduled daily trains — from Winnipeg to Memphis, Tenn., and Jackson, Miss., to Winnipeg — from inside the EJ&E arc around the Windy City to the EJ&E line, a number Trafton said CN has no current plans to increase. On June 30, the Class I began rerouting one northbound and one southbound train between Toronto and Vancouver, also scheduled daily, onto the EJ&E line. Those trains previously had operated eastbound and westbound across Canada in an effort to improve the company’s system-wide operating efficiency.

Even with the two pairs of trains being moved to the EJ&E line, the train count on the EJ&E overall remains below where it was prior to the acquisition because of lower traffic volumes, Trafton says. The operating plan CN submitted to the STB indicated that some communities ultimately could see an increase of 15 to 24 trains on the former EJ&E tracks in their areas, but CN doesn’t expect that kind of traffic anytime soon, Trafton says.

“They’re in the preliminary stages of utilizing the track,” adds Michael Baudendistel, an associate analyst at Stifel Nicolaus & Co. “Moving trains to the EJ&E is slow, and I would expect that they’ll ramp that up over time.”

The (Lack of) Traffic’s Toll

When the weather is cooperating in Chicago and other freight and passenger railroads are running on time, it can take anywhere from 24 hours to 72 hours to move a train through the core of Chicago, the latter occurring when winter is at its worst, Trafton says. The acquisition gives CN a way to get its trains around Chicago in 24 to 32 hours, although it’s currently moving freight in as few as eight to 10 hours because the weak economy has led to lower train volumes and less congestion, he says.

“Today nothing is sitting, everything is moving and you’d expect that,” Trafton says of the traffic through Chicago. “But when the economy begins moving again, you’ll see congestion building again.”

The economy has been CN’s biggest disappointment through the integration process so far and a double-edged sword. No railroad wants volumes to fall off a cliff, but the drop-off has made the integration of the EJ&E easier. Through July 18, carload volume for the major Canadian railroads tumbled 24 percent, and trailer and container volume fell 16.2 percent compared with the year-earlier period, according to the Association of American Railroads.

“We’d like to see a lot more business out there, but that business is dramatically off, especially in the steel business, which had been hot,” Trafton says. “But right now, if we had the business on the railroad, we could handle it and be in good shape with traffic and volume.”

In the meantime, CN is preparing to add and update connections, add and improve tracks, and install and upgrade safety equipment. Among the projects completed, under way or in the design stage:

• a new connection — Freeport to the southwest quadrant of the Leithton Subdivision;
• installation of power switches on EJ&E at Munger, located near Bartlett, Ill.;
• upgrade to a higher-speed connection — Waukesha to the northwest quadrant of the Leithton Subdivision at Mundelein, Ill.;
• a new four-direction loop connection — Matteson Subdivision to the northeast quadrant of the Chicago Subdivision;
• a new connection — Matteson Subdivision and the southeast quadrant of the Chicago Subdivision at Matteson, Ill.;
• a new east connection — South Bend Subdivision to the Matteson Subdivision toward the northeast quadrant of Kirk Yard, and the realignment of main track at Griffith, Ind.;
• an improved connection between EJ&E and Norfolk Southern near Buchanan Street at Gary, Ind.;
• construction of a new run-through track at Joliet Yard to bypass the yard;
• construction of a second, 11-mile mainline track will be re-installed from east Joliet to Frankfort, Ill.;
• construction of a second, two-mile mainline track from Gilmer to Diamond Lake (North Diamond Lake Road to Gilmer Road near Mundelein, Ill.);
• construction of a second, 11-mile main track to connect sidings between the east siding in Aurora and Walker Siding in Joliet (includes Normantown);
• installation of wheel impact load detectors in Sauk Village (completed), Plainfield and Barrington Hills, Ill.;
• installation of hot-box detectors at Gougar Road/New Lennox (completed), Park Forest, Barrington Hills, Smith Road/West Chicago and Route 34/Aurora; and
• installation of a power switch in the Matteson Subdivision to the Illinois River Line.

CN also is working with communities regarding timelines as to when mitigation work will begin, and it has applied for, and in some cases received, the necessary environmental permits to do the work. Design work for the Kirk Yard in Gary, Ind., is in its very early stages, with CN expecting the yard to eventually again be a rail-car-sorting hub, similar to its yard in Memphis, Tenn. In early July, CN moved the former EJ&E onto CN’s service reliability strategy (SRS) operating system, so that EJ&E now runs (and is tracked by various metrics) like any other CN property. About three months ago, the former EJ&E dispatching was moved to CN’s system.

Since the SRS operating system cutover, CN is using many of the metrics it employs with any acquisition to gauge the success of the EJ&E purchase, including how fast trains are moving on the line, car velocity and trip performance. From a financial standpoint, CN is tracking items such as cost per car switched, and crew and equipment costs. Nothing is escaping scrutiny, with everything from locomotives to cell phone usage coming under the microscope.

“The true value [of the EJ&E] will be two to three years down the road,” Trafton says. “It’s controlling your own destiny, running your own trains. It’s the importance of having connectivity in your network. If you want to control your service and get the best asset utilization at the lowest cost, you need that connectivity.”

Like a Good Neighbor . . .

Connecting also is crucial on the relationship-building front. So far, CN’s done pretty well, reaching voluntary mitigation agreements with 17 of the 33 communities directly affected by the acquisition, even though many of those 17 were staunchly opposed to the deal at the outset.

In general, the agreements call for CN to help fund everything from quiet zones to safety fencing to emergency response training. Each agreement is confidential, a request Trafton says CN makes during the discussion phase to avoid conducting negotiations in the media. Every community has agreed to CN’s confidentiality request, he adds.

Many community officials expressed concerns about the increased rail traffic in and around their communities once the deal closed. An average of six trains each day used the EJ&E tracks that wind through the village of Frankfort, Ill., but Village Administrator Jerry Ducay expects to see a “dramatic increase” in the next two to three years, given CN’s comments on the matter and depending on the health of the economy.

Frankfort wanted the STB either to reject the EJ&E deal or at least limit the number of trains on the line, the time the trains could travel through town, and their speed and length. Village officials didn’t get any of those concessions but, like several other communities, thought it best to ink an agreement with CN before the STB’s final environmental impact statement (EIS) was released on Dec. 8, 2008, in case the village was left out of the EIS. The CN-Frankfort agreement calls for noise mitigation that includes berms and fences, as well as other work. But Frankfort, like other communities, wasn’t recognized in the EIS as a municipality that should receive funding from CN for grade separations.

“The STB wasn’t looking local enough — it was looking more regionally,” Ducay says. “We dealt with [the acquisition] the best we could, and we negotiated the best deal we could for our community.”

Frankfort is one of several communities on the EJ&E line that has posted a complaint report on its Web site. Residents with complaints about an incident regarding a CN train traveling through Frankfort can fill out the form and submit it to the village, which will follow up with CN about the matter.

As of press time, Frankfort hadn’t been listed in any of CN’s monthly operational reports to the STB as a municipality where a CN train has blocked a crossing for at least 10 minutes because of a stopped train. CN had filed three of the monthly reports so far and is required to do so each month for five years.

“We intend to be a good neighbor and while we’re not perfect day to day, the reality is we’re working hard with the communities on issues that come up,” Trafton says.

That goes double for the issues CN still needs to work through with the 16 communities with which the railroad has yet to sign mitigation agreements. But any work the railroad does is likely to come up well short of what The Regional Answer to Canadian National (TRAC) wants.

Not On Track With TRAC

TRAC, which comprises a group of government leaders from several Chicago suburbs, still hopes the STB-blessed deal can be reversed. It also has expressed concerns about safety and the increase in rail traffic, noise and air pollution in the communities where the EJ&E line runs. TRAC also is monitoring the monthly operational reports CN submits to the STB, reports that include average daily train counts, accidents, injuries and grade crossing blockages on the EJ&E line.

“Where there is a discrepancy [between what CN reports and the complaints that TRAC receives], we’re notifying the STB,” says Karen Darch, co-chair of TRAC and village president of Barrington, Ill.

In a June 26 letter to the STB, TRAC noted that CN reported 25 grade crossing delays in its May STB report. But TRAC says it received complaints regarding 42 crossing delays.

Barrington has been the loudest critic of the EJ&E acquisition. The village, which had a population of 10,168 in 2000 according to the Census Bureau, and a median household income of $83,085 in 1999, hasn’t reached an agreement with CN and appears unlikely to do so anytime soon.

“Barrington was different [than other communities],” says Stifel Nicolaus’s Baudendistel. “It has high property values and is a high-income area, so they’ve been most vocal about it. There were far more complaints from Barrington than anywhere else.”

Village President Darch says her main concern is public safety — in particular, that ambulances aren’t stymied from getting to emergencies. Barrington wants to avoid a possible emergency situation and keep CN’s trains from slowing vehicle traffic through the village by constructing grade separations where the rails intersect three major thoroughfares. A 6,000-foot train can block two of three intersections, as well as another road, simultaneously, Darch says. Barrington won’t be happy unless CN provides funding for grade separations, which Darch believes is unlikely.

“CN hasn’t given any support for grade separation, and Barrington and other communities can’t support grade separation on their own,” she says. “This is not a little issue.”

Barrington also opposes the deal because there were alternatives — specifically, the funding of the Chicago Region Environmental and Transportation Efficiency (CREATE) Program, a partnership among the U.S. Department of Transportation, state of Illinois, city of Chicago, Metra, Amtrak and the freight rails to, among other things, reduce rail congestion in the Chicago area.

“Having that funded would have gotten rid of a lot of the congestion problems,” Darch says. “With this [deal] you’ve created infrastructure needs for Barrington and other communities. It’s a poor use of money.”

Although Trafton says CN doesn’t comment on speculative matters, the railroad’s view is that the transaction was subject to “unprecedented scrutiny” and that the STB was correct in approving it.

The EJ&E purchase improves CN’s level of service quicker than CREATE would, Trafton adds. CN is still involved in CREATE, and the EJ&E acquisition complements it in part by freeing up federal, state and railroad dollars to complete CREATE work, he says.

The conversation will continue in the village hall, as well as the board room — be it in Barrington, Montreal or any number of other meeting places in North America in the years ahead.

Desiree J. Hanford is a Chicago-based free-lance writer.