When CN was created in the 1920s why wasn't CP included?

[Ulrich]

CN was created back in the 1920s to take over and rationalize what had become a dysfunctional network of trackage, much of it overbuilt and underused. It was decided that Canadian Northern, Grand Trunk, Grand Trunk Pacific, National Transcontinental, and the Intercolonial (among other smaller lines) would be included in the amalgamation, but for some reason CP was not included although they too suffered from alot of track going through unprofitable sparsely populated territory. So why was CP left out? Including CP would have avoided the tug of war between private and public enterprise that was to become a unique defining characteristic of Canadian railroading for decades. Nor was CP happy with the status quo...their top people routinely complained about the unfairness of having to compete with a government owned competitor. Had CP been included further rationalization of the rail network might have included the abandonment of  redundant lines in the East and CP's relatively torturous line west of Calgary to Vancouver (in favour of using CN's former Canadian Northern and Grand Trunk Pacific routes).  

 

[NorthWest]

CNoR was bankrupt at the time CN was formed, and the Canadian government owned a substantial interest in the Intrercolonial, IIRC. The Grand Trunk/GTP didn't go bankrupt until a few years after CN was formed, and it was then included. The NTR was included when GT refused to operate it. A lot of the smaller roads were similarly financially strained. CP remained in solid financial health, so they were not included.

[wanswheel]

 

The Magazine of Wall Street, February 18, 1922

The Railroad Whose Territory Comprises One of the World's Few Remaining Open Spaces

By JOHN MORROW

Time was in the United States when we knew “Empire Builders” as men of great vision who flung steel rails into semi-wilderness, blazing the trail for settlers and preparing the way for volume production of food stuffs and raw materials necessary for the factories and mills of the older settled communities of the East.

Time was in this country when the development of transportation facilities was a romance; when independent initiative had free play and when the pioneer railroad men saw almost no limits to the expansion of business as expressed in volume of traffic and in dollars of revenue.

The great transportation arteries within the United States are practically completed. Further expansion of business must be governed by intensive rather than extensive development.

This is not so, however, across our northern boundary and if we go into Canada we can find in the Canadian Pacific a railroad system which, great as it is, must find a more complete expression of greatness in the development of the relatively raw territories which it serves in the western part of the Dominion.

Canadian Pacific is a road which is still in the “empire building” stage, although, of course, there is no inference here that the system is in swaddling clothes.  It is full grown and one of the greatest and most powerful railroad systems in the world, but the agricultural and industrial development of western Canada is still, relatively, in its infancy and comparable, perhaps, to the condition that existed west of the Mississippi in the United States many years ago.

The present picture of Canadian Pacific is enough to fill the mind, and its future easily stirs the imagination. Canadian Pacific operates directly over 13,400 miles of railway, with main lines stretching from the Atlantic Coast of Canada to the Pacific. Through majority stock ownership it controls an additional 5,000 miles located mainly in the United States, and this mileage is necessary to the Canadian Pacific in that it gives entrance into the great shipping and distributing points of our Middle West, notably Chicago. As of December 31, 1920, Canadian Pacific owned ocean and coastal steamers of a total gross tonnage of 301,219, and at that time there were six additional ships being built. These steamships serve Europe and Asiatic ports and go half around the world.

Canadian Pacific, the only road in the Dominion which is not under government control, is much more than a railroad and an operator of steamship lines—it is a landlord of huge estate, principally in the newer and western provinces of the Dominion. Its miscellaneous investments outside of steamship lines and landholdings, but including ownership of the shares of the Minneapolis, St. Paul & Saulte Ste. Marie Railway and the Duluth, South Shore & Atlantic , the two American lines, had a par value of $60,666,000 at the end of 1920 but were carried on the asset side of the general balance sheet at $35,056,000. Assets in lands and properties totalled $92,000,000. Total investments of Canadian Pacific as shown on the latest available balance sheet totalled $272,811,000. Total funded debt and share capitalization of the company is $645,000,000, so that investments are over 40 per cent of this total, and those investments are conservatively valued.

It must be borne in mind that this investment account does not include property investment and acquired securities, which at the end of 1920 totalled approximately $735,000,000. Also included in the investment total of $272,000,000 is the item of $60,000,000 representing the amount held in trust against the maturity of the 6 per cent note issue due 1924.

The financial statement of Canadian Pacific for the year ended December 31, 1920 showed an ownership of 5,611,500 acres of land, most of which is located in Alberta, British Columbia and Saskatchewan. This acreage is carried at $10, $13 and $15 an acre, and lower, with the exception of irrigated lands in Alberta carried at $40 an acre. During 1920 the sale of land brought an average of $17 per acre, including irrigated land sold at $50 an acre, indicating that the sales price was above the price at which the company carried the lands in its account. It is interesting to note in this connection that occupied lands in Canada were valued, in 1919, in the western provinces, at from $29 to $35 an acre, and in British Columbia, as high as $174 an acre.

Of course direct income and profit from land sales cannot go on forever. The number of acres sold in 1920 was 468,390, which suggests that it will be at least ten years before the company has disposed of all its landholdings, and payments will continue for a long time after that because the land is sold to settlers on a deferred payment plan. For example, at the end of 1920 deferred payments on lands were carried on the balance sheet at $70,968,000. Of the total land owned about three-fifths is designated as agricultural lands, located in Alberta and Saskatchewan, and carried at $13 an acre at the end of 1920.

Prior to the war immigration into Canada was creeping toward the half million mark annually, but during the war years the total fell below 100,000, but is again rising. It is a fair guess that immigration is going to be a big factor during the coming few years and may be expected to have a considerable influence upon land values in the western provinces. There is no way of determining definitely what profit Canadian Pacific may derive from its lands, but it can be said that balance sheet values are conservative. Naturally, Canadian Pacific is not depending principally upon immigration, but it is an important factor in that it serves directly and indirectly to increase sources of new traffic.

Western Canada is rightfully looked upon as mainly an agricultural territory, but it is interesting to note that the province of Alberta is producing as much coal as Nova Scotia, which for years was the Dominion's largest producer.  Another interesting mineral development in western Canada is the search for oil. The possibilities are considered very promising, but the development work is still in what might be called a primary stage.

While there is no disposition to stress too much the other than rail assets of Canadian Pacific or to infer that railway operations play a secondary part, the investments of the company in various lines of industry and its landholdings serve a double purpose, in that they are important revenue producers and possibly contain larger speculative conjectures than does the sale of rail transportation.

The special income account of Canadian Pacific, which is responsible for 3 per cent of the 10 per cent dividends on the common stock, does not contain revenue from land or interest from that account. The revenues included in special income account are receipts from investments in coal mining properties, telegraph, steamship lines, the American railway lines and other miscellaneous investments. One of the American railway lines owned by Canadian Pacific, the Duluth, South Shore & Atlantic, does not pay any dividends—in fact has a poor earnings record. This line, however, is considered essential by the Canadian Pacific as a feeder and connecting link. The Soo line pays dividends of 7 per cent on both the preferred and common stocks and is therefore an important income producer, as well as a traffic asset. Steamship earnings are another important source of revenue in the special income account.

The 6 per cent note issue of 1924 is secured upon a special investment fund composed of deferred payments on land and securities in which the proceeds of land sales have been invested, together with interest accruals. As of December 31, 1920, the amount held in trust for the 6 per cent note certificates was $60,000,000, or $8,000,000 in excess of the face amount of the issue. The amount of the trust fund would suggest that the 6 per cent note issue was adequately protected by the special investment fund, and it may be that interest from land sales will again be included in yearly income and appear in the special income statement. There is nothing official on this point, and it is naturally more or less conjecture.

As of December 31, 1920, there was a surplus of $18,580,000 in the special income account, or an amount equal to two and a half years’ dividends at the rate of 3 per cent. In other words, the condition of this special income account was strong enough to allow for some shrinkage due to post war business unsettlement, which was, of course, more emphasized in 1921 than in 1920. 

We have seen that Canadian Pacific has what might be called three sources of revenue: (1) income from investments of many kinds and from steamship lines,  (2) revenue from the sale of land, which is, as previously stated, not directly applicable to income account, and (3) earnings from the railroad lines. It has been pointed out that special income account takes care of 3 per cent of the annual dividend rate of 10 per cent—that revenue from land sales is placed in a special investment account to take care of the maturity of $52,000,000 6 per cent notes in 1924, and this investment account which appears to have satisfied requirements two years prior to the maturity of the notes.

The railway problem of the Canadian Pacific has been similar to the problems confronting the roads in the United States. There has been rate agitation in the Dominion and a more sustained experiment in government control than in the United States and, of course, the usual agitation about wages. Freight rates were increased in September, 1920, by about 35 per cent and passenger rates were increased 20 per cent. Since then reductions have been made, principally in passenger rates as the rate increases were granted on something like a sliding scale. Since the recent election in Canada there has been a renewed clamor from western provinces for rate reductions. There is little or no doubt that the rate increases given Canadian Pacific during the past two or three years have been responsible for the ability of the road to protect its earnings position.  

As previously stated, Canadian Pacific is the only road in Canada not under government control.  At the time of the recent election it was stated that the party which came into power was not altogether in sympathy with the idea of government control of railway lines, and it may be that the question of whether Canadian Pacific will eventually be taken over by the Dominion Government will no longer be of importance or interest.

The dividend record of Canadian Pacific common is of forty years’ duration, although there have been a few breaks. The current 10 per cent rate has been paid since 1912, and earnings on the stock since 1911 have ranged from almost 20 per cent to slightly less than 11 per cent. Beginning in 1918, earnings began to shrink, but increases in rates enabled net income to be kept to a point where there was no vital question of dividend reductions. To show 7 per cent upon the outstanding common stock, the road must earn a net of $18,200,000 after fixed charges and the preferred dividend. Excluding special income the road earned fixed charges, preferred dividends and more than 7 per cent upon the common stock from railroad operations for the several years ending with 1917. The margin was smaller in the three succeeding years, but the required 7 per cent was covered. In 1920 total earnings on the common stock were 11.39 per cent, and special income was responsible for a little over 4 per cent of this total.

Canadian Pacific underwent, in 1921, about the same general experiences as befell the American railroads. Gross returns were down, as compared with the previous year, and the question before the management apparently was one of keeping expenses as low as consistent with efficient operations. In the eleven months ended November 30, 1921, gross revenues showed a decrease of approximately 10 per cent as compared with the same period of 1920. Operating income for the period was $30,931,000 with December yet to be reported. It may be roughly figured that operating income of between $33,000,000 and $34,000,000 is necessary to take care of fixed charges, preferred dividends and 7 per cent upon the common stock. Judging by the November returns and by the eleven months’ totals, it is possible that Canadian Pacific ended the year with the above mentioned requirements covered by railway earnings. There is no exact way of determining what was the amount of special income for the year. This, of course, is aside and in addition to railway operating income.

In December, 1921, Canadian Pacific sold $25,000,000 4 per cent consolidated perpetual debenture stock which was offered at 78 to yield 5.13 per cent. This stock is a first charge upon the whole system, subject to a relatively small total of prior lien securities and is, of course, a security of the first grade.

The $80,000,000 4 per cent non-cumulative preferred stock is also a Grade A investment. That conclusion needs no elaboration or explanation. The common is now selling on an 8 per cent yield basis and, relatively speaking, is not high. It might be thought that much of the speculation has gone out of the junior shares because of the recognized earning power, asset position of the system and general recognition of worth. But, when the undeveloped resources of western Canada are considered, and when the mining, agricultural and timber possibilities of that region are allowed to take a place in the imagination, it will be realized that the statement that the speculative possibilities in Canadian Pacific common have gone is a statement far from the truth. It is not a stock which should be purchased with the idea of a quick turn or trading profit but should be bought for the pull. The buyer of Canadian Pacific common, in addition to becoming a partner in an amply demonstrated successful railway, steamship and landholding enterprise of gigantic scope, also buys a share in the development possibilities of western Canada, one of the few great open spaces of the world where agricultural, mining and industrial possibilities conjure up a picture of infinite attraction.

[NorthWest]

Thank you, wanswheel!

The Magazine of Wall Street

One of the American railway lines owned by Canadian Pacific, the Duluth, South Shore & Atlantic, does not pay any dividends—in fact has a poor earnings record. This line, however, is considered essential by the Canadian Pacific as a feeder and connecting link. The Soo line pays dividends of 7 per cent on both the preferred and common stocks and is therefore an important income producer, as well as a traffic asset.

More like it was considered essential to block any Grand Trunk expansion west, which was also a contributing factor to the Soo purchase, IIRC.

[wanswheel]

The Sault Ste. Marie News, May 19, 1888

Another Railroad Rumor

The CPR officials have left Minneapolis and are now making a tour of inspection over the DSS&A in company with President McMillan, vice president Bine and other officials of the road. In Marquette it is thought the CPR are not content with their traffic arrangement with the Soo line. They want more feeders, and it is intimated that they now desire a proprietary interest in the South Shore, and in this way officially bottle up the Grand Trunk. The latter road would be in a pretty pickle if after reaching the Soo it found the two western roads under the control of its big rival.

The Statist, July 14, 1888

Last year there was a good deal of talk about the control of roads to give the Grand Trunk of Canada Company access to Duluth, and to afford it communication at that point with the Northern Pacific Railway, so as to secure North-West and through business, the Grand Trunk Company apparently aiming not only at the traffic to be thrown on to its system by the Northern Pacific, but also striving to secure some of the Manitoba business. A contemporary this week states that the line which everybody said the Grand Trunk would secure, namely the Duluth, South Shore and Atlantic road from Duluth to Sault Ste. Marie, has just been gobbled up by the Canadian Pacific road; so that the anticipated North-Western connections of the Grand Trunk Company would appear to be cut off. The Canadian Pacific secures by the transaction a double line west of Sault Ste. Marie, as it has control also of the Minneapolis, Sault Ste. Marie and Atlantic, which gives it access to St Paul.

[AgentKid]

NorthWest

CNoR was bankrupt at the time CN was formed, and the Canadian government owned a substantial interest in the Intrercolonial, IIRC. The Grand Trunk/GTP didn't go bankrupt until a few years after CN was formed, and it was then included. The NTR was included when GT refused to operate it. A lot of the smaller roads were similarly financially strained. CP remained in solid financial health, so they were not included.

 

The CPR has paid dividends in every year of its' existance with the exception of 1932. The only RR in NA able to make such a claim as I recall.

Bruce

[CSSHEGEWISCH]

Even in its earliest days, CPR was a lot more than just the railroad.  I'm sure that the non-railroad divisions (steamships, hotels, Cominco, etc.) also made a sizable contribution to the bottom line.