EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, May 30, 1995

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[English]

The Chairman: Good afternoon, colleagues. The committee today resumes consideration of Bill C-89, an act to provide for the continuance of the Canadian National Railway Company under the Canada Business Corporations Act for the issuance and sale of shares of the company to the public, also know as the CN commercialization act.

Joining us today from Nesbit Burns is Gordon Lackenbauer, the deputy chairman; from Scotia McLeod is David Wilson, the president; and from Goldman, Sachs is Mark Tercek, the vice-president.

Gentlemen, good morning and welcome to our committee. Thank you for coming. I understand you have a brief submission to make and then we can proceed to questions. When you're ready to begin, please do so.

Mr. Gordon Lackenbauer (Deputy Chairman, Nesbit Burns Inc.): Thank you, Mr. Chairman. I'm Gordon Lackenbauer.

The three firms are working together as advisers to both the Government of Canada and CN on the proper structuring of CN in order for it to become a successful private sector corporation operating in a competitive market with an appropriate regulatory environment and an appropriate capital structure to achieve a successful offering and proper value for the government and the Canadian taxpayers.

Mr. David Wilson (President, Scotia McLeod Inc.): I'm David Wilson with Scotia McLeod. I'm responsible for the team at our firm that has been assigned to this project.

We've spent time since early May becoming familiar with the CN project. I can tell the committee that our conclusions to date are that we are very confident this is an achievable project; an initial public offering of CN shares is achievable. We also believe that with the proper environment, which Mr. Lackenbauer referred to, 100% of the shares of the company can be sold to public investors in Canada and outside of Canada, primarily the United States and some offshore investors.

Mr. Mark Tercek (Vice-President, Goldman, Sachs & Co.): Good morning. My name is Mark Tercek; I'm from Goldman, Sachs.

We believe Canadian National's recent strong financial results and the financial results anticipated in the company's business plans are very much consistent with the positive experience the U.S. railroads have had in recent years. Namely, rigorous cost-cutting, sharp improvements in service levels and overall efficiency have allowed the U.S. railroads to dramatically improve their financial results, and this has been a very positive experience for the investors in these companies.

We think these trends will attract investors to the Canadian National public offering in the fall. We also think they will provide a useful road map for management in benchmarking and targeting for the company to go forward. Finally, we would observe that in the U.S. experience this kind of turn-around and improvement in service and efficiency has been very beneficial for the overall shipping community.

Thank you.

The Chairman: Thank you, gentlemen, for your submissions.

Mr. Wilson, maybe you could round out the submission made to the committee this morning by way of a brief explanation. For example, one of the questions that was asked repeatedly yesterday was about this business of taking CN from its debt status of $2.5 billion down to something a shareholder would appreciate, like $1.5 billion. How is that achievable and where is the money going to come from?

Mr. Wilson: It would be my pleasure, and I'd invite my colleagues to add to my comments.

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To discuss the subject you've raised, Mr. Chairman, it's necessary to talk about specific numbers. I should just preface the discussion by emphasizing that these are very preliminary numbers. The three firms have been working on this project only since early May. We have reached some preliminary conclusions about such matters as value and appropriate debt levels, but they are quite preliminary. There's still a lot of work to be done. I'd just preface the comments with that caveat.

To really discuss the matter you've raised, we have to use some numbers to explain it. So let me launch into a discussion of numbers and try to clarify what you've asked. I'd ask my colleagues to add to it.

CN, the entity, has what we describe in our business as an enterprise value. An enterprise value is the value of the total business - the sum of the debt and equity components of the capital structure of a business. We have estimated to date that the enterprise value of CN is in the range of $3.1 billion to $3.5 billion.

We believe that CN, having an enterprise value in the range of $3.1 billion to $3.5 billion, can comfortably support a debt of a maximum of approximately $1.5 billion. Just using simple arithmetic, by subtracting the $1.5 billion of debt from the enterprise value of $3.1 billion to $3.5 billion, you arrive at an equity value of $1.6 billion to $2 billion. I'm just setting the stage for the value parameters we're looking at.

So you have an equity value of $1.6 billion to $2 billion and a long-term debt of $1.5 billion. The existing long-term debt of CN is $2.5 billion, so you have to reduce the debt from $2.5 billion to $1.5 billion to achieve the capital structure I just described, which we think is appropriate for a public offering.

The sources of the money to bring the debt down from $2.5 billion to $1.5 billion are threefold, in our view - and these are very preliminary numbers.

The first source of the debt reduction will be internal cash that exists in CN right now from the sale to third parties of non-core assets. That's surplus cash from sales of assets to third parties that have already occurred, such as the sale of the CN oil and gas assets, and surplus cash in excess of current capital expenditure requirements. Our estimate is that $300 million to $400 million worth of cash is available from that source. We're looking for $1 billion worth of debt reduction, and there's $300 million to $400 million right there.

The second source of cash for debt retirement is the sale to the Government of Canada of the non-core real estate assets CN currently holds. Those assets, as has been decided by the minister, are to be retained by the Government of Canada. It's not appropriate, in our view, to leave those assets in a company that's being taken public. Public investors will not pay you the value of those assets if they're effectively buried inside a large railway company.

The value of those assets in very preliminary numbers is somewhere in the range of $400 million to $600 million. Those will be sold to the Government of Canada and removed from CN, and the proceeds of that sale will provide additional cash for the debt reduction.

So through those two steps, depending on where we are in the value ranges, sufficient capital is provided to reduce the debt from $2.5 billion to $1.5 billion. Coming back to where I started, for the company that goes public, we end up with a capital structure of $1.5 billion of debt and $1.6 billion to $2 billion of equity.

That's a long-winded answer, Mr. Chairman. I'd invite my colleagues to add to what I've said.

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Mr. Lackenbauer: Also, to the extent that there is a shortfall in those two components in bringing the debt down $1 billion, which is required, it may be necessary to put some of the equity proceeds towards the paying down of the debt. That would be the third component, if necessary.

Mr. Wilson: That third component would be fairly small if the value ranges we talked about are accurate. It would be perhaps $200 million, if necessary.

Mr. Tercek: I agree with the comments of David and Gordon, but would also observe that a debt reduction of the magnitude Mr. Wilson described would be necessary to put the company on even footing with its principal North American or U.S.-based rail competitors, all of which, with one exception, have strong triple B or single A debt ratings.

In our judgment, the kind of debt reduction we are talking about would entitle Canadian National to qualify for a triple B debt rating, which we think is a necessity to succeed as a stand-alone, independent company going forward.

The Chairman: Thank you, gentlemen, for the clarification. We'll now go to questions from my colleagues, in ten-minute rounds.

[Translation]

Mr. Guimond (Beauport - Montmorency - Orléans): Regarding budget projections for the next five years, from 1995 to 2000, I would like to know three things. What could be the

[English]

operating cash flow, the free cash flow after capital spending but before dividends, and the operating income and net income?

[Translation]

Do you have this information?

[English]

Mr. Lackenbauer: The answer is yes, we have that data in terms of internal workings, but it's not possible to talk about it publicly, because it would constitute a projection. At this point that would be viewed as confidential information.

[Translation]

Mr. Guimond: How is this information going to be given to potential shareholders in the new company?

[English]

Mr. Lackenbauer: It may be revealed in the end by the company choosing to put a forecast in its preliminary prospectus, at which point it could be talked about. But unless it is contained in the preliminary prospectus, one can't talk about projections, under securities laws in Canada and I believe in the United States, although Mr. Tercek can speak to that. Once it's put in a prospectus - and that decision hasn't been made yet, to my knowledge - then it would be able to be talked about.

Other than that, basically the street analysts who cover the company would have to make their own estimates, and that is what happens frequently. The analysts make estimates and cover the institutional accounts, and in their own retail systems they provide their recommendations and their outlook. That's the way it would be done.

[Translation]

Mr. Guimond: I hope I won't have that kind of answer for all the questions I'm going to ask. For instance, right now, what is the book value of the company's non-rail assets? Is it possible to know this?

[English]

Mr. Wilson: Is the question about the book value of the assets or the worth of the assets?

Mr. Guimond: Book value.

Mr. Wilson: You're speaking of the non-rail real estate assets. I don't have that number off the top of my head. Do any of my colleagues?

Mr. Tercek: I do not have the number. Our work has concentrated on the rail-related assets that will stay with the company after the privatization.

Mr. Wilson: I did cite in my opening remarks a preliminary estimate of not the book value but the marketable value of those assets. A very preliminary range on the real estate assets is $400 million to $600 million, and there are some other assets that may be sold, which have values in the range of $300 million, including some surplus cash that would be used to retire debt.

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Those are estimates of values that third parties might pay for those assets, and not book values.

[Translation]

Mr. Guimond: Right now, according to you, what would one share sell for?

[English]

Mr. Lackenbauer: That again is a decision that hasn't been made. What we've given you is the estimated range of $1.6 billion to $2 billion, assuming the $1.5 billion in debt.

Really when you come down to the price per share, it's a function of how many shares they decide to put out and what we decide the offering price should be, and then simply that number of shares would be constituted. It's not as much a question of per-share value as it is one of total value. Whether we have shares at $10 or at $20, it's not going to affect the total value of the company. So we haven't made that determination on a per-share basis.

[Translation]

Mr. Guimond: Since you've been confirmed as advisers, have you already been approached by groups or companies and are those primarily from Canada, the United States or outside North America?

[English]

Mr. Lackenbauer: I'd like some clarification. For what purpose would they approach us?

[Translation]

Mr. Guimond: Do you know that there is already a ceiling of 15% in terms of the shares that can be held? Have some groups made approaches? Is there already some interest?

[English]

Mr. Lackenbauer: No.

Mr. Wilson: We've had no one approach us looking to buy shares. The process of involving investors in the buying decision happens much further down the road, after a prospectus has been filed. We've had no approaches.

Goldman, Sachs can speak for themselves.

Mr. Tercek: The same is true in the U.S. Institutional investors in particular, who will be very important to the transaction, now understand, because of the news out of Canada, that a privatization is likely this fall.

They also understand, by way of their experience, that we will approach them in a very carefully orchestrated marketing effort immediately prior to the offering, and it will be at that time that they will obtain the information they need to make an accurate assessment of their investment interests. It will be based on the information in the prospectus and on their opportunity to meet with the company on a marketing road show, as we call it.

And it will be at that time, in answer to your earlier question, that they will independently formulate their own projections for earnings, cashflow and free cashflow and make their own independent decision about whether or not to purchase the shares.

Mr. Lackenbauer: I should add something just for clarification, in case there's any misunderstanding. It is highly unusual - in fact I'm not aware of it ever having happened - that people would come to the underwriters to show interest in advance of a prospectus being filed. This is not a specific situation vis-à-vis the privatization of CN; it's just the normal practice in the underwriting business, period.

Mr. Gouk (Kootenay West - Revelstoke): Yesterday we had a gentleman from Wood Gundy tell us that CN is currently a double A minus, and that with an injection of approximately $1 billion in debt reduction through the sale of assets and an injection of government funds, it would still drop roughly six positions to a triple B rating. Do you see it pretty much that way?

Mr. Lackenbauer: Yes.

Mr. Gouk: So we're going to put about $1 billion in, getting some real estate assets in the process and the rest by cash. He suggested we're going to realize revenues from the sale of something in the magnitude of $1 billion. Do you see it that way?

Mr. Lackenbauer: There are two parts. I was distracted by your first comment, which I'd like to clarify, and then we can come back to the second one about putting in $1 billion.

From the government's perspective, and therefore from the taxpayer's perspective, it's not a question of money going in. We're talking about assets being transferred. It makes a whole lot more sense, as Mr. Wilson indicated earlier, to leave the non-core real estate assets with the government for cash, because that will maximize the value so they can be sold in an orderly fashion, whereas if they were, to use Mr. Wilson's words -

Mr. Gouk: I accept that. We will acquire the assets for whatever they're worth, but any way you look at it, there will be $1 billion put in to CN, some of it value-received, some of it not, to reduce the debt to that $1.5 billion.

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Mr. Lackenbauer: The one thing we want to be clear on is that, from our perspective, it's all for value-received. That was the one point I wanted to make.

In the second question, were you asking why we're going to a triple B?

Mr. Gouk: No. You've distracted me from my point now.

Mr. Lackenbauer: I'm sorry.

The Chairman: Maybe you got answers.

Mr. Gouk: No, I didn't.

If we collect these assets, we're going to realize about $1 billion in sales revenues. Is that approximately correct?

Mr. Lackenbauer: Are you talking about the $1 billion in recapitalization from debt to equity? Is that what you mean?

Mr. Gouk: Well, when we sell the shares, we're going to get a million bucks.

Mr. Lackenbauer: Oh?

A voice: A billion.

Mr. Gouk: A billion, yes. Money means so little to the government that I lose track of millions and billions.

Mr. Wilson: To reiterate the numbers I used, we expect the equity value of a recapitalized company to be about $1.6 billion to $2 billion.

Mr. Gouk: Well, that's the equity value. Nobody's going to walk in and give you 100% of equity value.

Mr. Wilson: As I said in my opening remarks, we believe it's certainly achievable for 100% of the shares of the company to be sold to public investors in Canada, the United States and offshore.

Mr. Gouk: How much is that going to net us?

Mr. Wilson: That particular part of the transaction will produce $1.6 billion to $2 billion if all the shares are sold.

I think your point is that the government will take some of that cash to purchase from the company the real estate assets. The range we've been using is from $400 million to $600 million. There will be cash from the $1.6 billion- to $2 billion-sale of all the shares, which will be reapplied to buy assets from CN just before it goes public. I think that may be how you're getting down to $1 billion plus.

Mr. Gouk: I think I'd better write this down, because you're going in circles and I want to make sure we're coming back to the same points.

Right now they owe $2.5 billion. Through a variety of methods, we're going to lower that to $1.5 billion. So we're going to buy some assets from them that we're later going to sell to recapture our money. But in the interim we will hold the assets; we will be out of pocket the money we give them for that.

Mr. Wilson: You'll purchase the assets for cash; that's right.

Mr. Gouk: That will fall short of the $1 billion necessary to reduce their debt to $1.5 billion to produce this magical triple B credit rating?

Mr. Wilson: You're saying the assets purchased by the government will fall short?

Mr. Gouk: I'm asking you if that's correct.

Mr. Wilson: Well, there are three sources of -

Mr. Gouk: Cash on hand, asset value, and the remainder, whatever it is, will be picked up by the government.

Mr. Wilson: No. The remainder, whatever it is, will be financed out of the treasury of the company by the sale of shares as part of the public offering, if there is a shortfall.

Mr. Gouk: Well, that's taking it out of this pocket and putting it in that pocket. The bottom line is if there's a $300 million shortfall, it will come out of the government's pocket, notwithstanding the fact that we replace it by selling the shares. In order to sell that company owing $1.5 billion....

We're not going to sell it owing $1.8 billion and pay off $300 million later, and even if we do, it amounts to the same thing. If we're going to pay off $300 million worth of additional debt, we're going to pay it off. It doesn't matter where we get the money.

Mr. Lackenbauer: You're absolutely right. I understand where you're coming from now. What you're saying is to the extent that the $1 billion is paid out of the treasury, whatever the portion is, you have to net that from the $1.6 billion to $2 billion in terms of the government proceeds, right?

Mr. Gouk: Well, you guys have your own way of doing it. I'm trying to keep this simple.

CN owes $2.5 billion. We want to sell it owing $1.5 billion so it can have this triple B credit rating. So we have to reduce its debt by $1 billion.

Mr. Lackenbauer: Yes.

Mr. Gouk: We're going to buy its assets. We're going to put the excess cash it has lying around into the debt, and any shortfall the government is going to pay. It doesn't matter where it gets the money; it's going to pay. So we've put in $1 billion.

The Chairman: I think we've established that numerous times.

Mr. Gouk: Well, I thought we had, too, and then we started going in -

The Chairman: No, I think -

Mr. Gouk: Let me decide what's been answered, Mr. Chairman, please.

The Chairman: But I can't let you go on with the same question six times, Mr. Gouk.

Mr. Gouk: Why can't you? I have ten minutes. Let me use it the way I will.

Mr. Fontana (London East): He's learning from Judge Ito.

Mr. Gouk: No, I'm learning from you guys, and it's a good lesson.

Mr. Fontana: Get on with it.

Mr. Gouk: You can say it your way when your turn comes, Joe.

Mr. Fontana: You're pestering the witness.

Mr. Gouk: I am not pestering the witness; I am being interfered with by the chair. I would kindly ask -

The Chairman: Mr. Gouk, if you're finished -

Mr. Gouk: - you to stop doing that.

The Chairman: Let's round it out.

Mr. Gouk: Are you finished? Can I proceed?

To get back to this, if we're going to get $1 billion or $1.2 billion or whatever, if we reduce the debt by $300 million less and simply sell the shares for $300 million less, will that work out relatively equitably?

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Mr. Lackenbauer: No.

Mr. Gouk: Why?

Mr. Lackenbauer: Because you don't have an appropriate capital structure. You could, and probably would, jeopardize the triple B credit rating, which, as Mr. Tercek said, is an absolute minimum.

In my judgment, it's simply not enough. We're okay there to start, but we have to get ourselves into the A category as a Canadian company. There is no chance in the world for this company to be able to finance itself going forward without a triple B credit rating at a minimum. Also, once you get beyond an optimal capital structure, the market takes off more in value than the incremental debt that's there to put you over the range of optimality. So you'd lose both ways.

To be clear on this, the government is not getting any less out of this recapitalization. In fact it's going to get more, because the enterprise value is what it is, and the government owns it 100%. So in the recapitalization, that enhances the value from a market perspective and makes it marketable in the private sector, which it otherwise would not be.

This is not a shell game with no pea under the shell, with money being moved around and so on. This is enhancing government value and government assets. It isn't a question of the government getting less because of the recapitalization. That's a key point.

Mr. Gouk: You gave some indication of what you think is the value of the assets we will purchase. Is that based on book value, current market value or some other factor?

Mr. Lackenbauer: It's based on an estimate of current market value in terms of what you'd be able to do in an orderly fashion on the sale of the assets.

Mr. Gouk: Market value is determined as what a customer, a client or a purchaser will pay after reasonable exposure to the market?

Mr. Lackenbauer: Yes.

Mr. Gouk: So it's current value.

Mr. Lackenbauer: That's right.

Mr. Gouk: Of the assets we would be purchasing - or the assets that are there, whether we purchase them or not - do you know if they're all CN-owned, or are some of the assets held by CN actually Crown-owned and entrusted to CN? Are there some assets under their control that are not owned by them?

Mr. Wilson: I believe they're all owned by the corporate entity. Subject to correction from my associates, I believe that's the case. They're in CN, the corporation.

Mr. Gouk: Okay.

The Minister of Transport has suggested he wouldn't actually be paying cash for these assets. What he would do instead is put out a credit for value. Is that essentially the equivalent of a loan guarantee?

Mr. Wilson: No. The mechanics of actually paying for the real estate assets that are being sold out of the company and retained by the government would be a temporary bridging facility. So it's a loan, but once the public issue was completed, the loan would be extinguished and the conventional capital structure we've described would be in place for CN, with no loan guarantees in place from the government.

Mr. Gouk: So it's sort of a bridging loan backed by the real estate assets.

Mr. Wilson: It will be retired as real estate assets are actually transferred out of the company and as the public buys the shares of the company.

Mr. Gouk: If I loan you $1 million and I hold assets, and I'm bridging that money to you, if I sell that real estate or if collectively we sell that real estate and it realizes $800,000 or $1.2 million, if it's your asset and I'm simply bridging you, then you would have either a $200,000 shortfall or a $200,000 profit. Is that going to be the case?

Mr. Wilson: No. You may have misunderstood me. I apologize. When I spoke of bridging, I was talking about the mechanics of the assets actually getting transferred out around the time of going public.

After the assets are transferred out and after the public issue, and they're owned by the government, there will be no loan from CN. There will be no involvement. My understanding is the assets will be owned free and clear by the Government of Canada.

Mr. Gouk: So we will pay for them, but we will pay for them out of the proceeds.

Mr. Wilson: That's correct.

Mr. Gouk: So essentially we're paying for them.

Mr. Wilson: Yes, that's exactly right.

Mr. Fontana: Mr. Gouk seems to forget that in fact CN and the government are one. We already own CN.

Mr. Gouk: I think the government forgets that at times.

Mr. Fontana: No. The government is the shareholder of CN, and therefore this shell game you want to play, whether or not you believe there's a pea underneath that shell, is Reform arithmetic. One plus one should continue to equal two.

Thank you, gentlemen. I thank you for the summary at the beginning. I think it was necessary to clarify some confusion in the minds of some people.

It is in fact even possible for there to be three winners in this, namely: the Canadian taxpayer, whom the Reform Party is always concerned about; Canadian National as a private sector; and the clients of CN, who hopefully will find a benefit.

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I want to get back to the debt structure and capital structure that you have indicated are absolutely necessary. The minister, you and others have indicated that a $1.5 billion debt is the absolute maximum that you see vis-à-vis the competitors in the industries.

Based on CN's revenues of about $4 billion and its equity value of about $1.6 billion to $2 billion, even with the capital and debt structure as you envision it, obviously you must have looked at the operating side. An investor also looks at the potential operating capacity of a particular corporation. Have you compared that side of the equation with those of the North American competitors to see how it stands up?

Mr. Tercek: We have begun our work examining the operating side, although I think it's important to state that we have much more work to do over the course of the summer. However, at this point in time, we think that particularly investors in the United States will see a very attractive opportunity for the company, and therefore for investors, to follow the path that has been led by the U.S. railroads, again, in cost-cutting, service enhancement and improvement of asset utilization.

CN does not need to invent a new approach to achieving the kinds of targets it's set for itself. There's a very clearly established framework in the U.S. that's been very successful for the companies, the investors and the shipping community. Based on our work today, we think it's very much realizable for the company to hit the targets it's established for itself.

Mr. Fontana: Thank you.

According to the Nault report and what we've heard, one of the important parts of this legislation is to enable the employees to participate in the share acquisition. Have you begun the thought process on how that could be achieved? We believe employee ownership is important for a number of reasons. Have you begun to look at how that could be marketed or how that plan could be put together?

Mr. Wilson: We really haven't started any detailed work on that subject. However, at this early stage, we've agreed in principle that having some employee share ownership is a good thing. Structuring a program for employees to have capital invested in the shares of the company for which they work is a good thing from the point of view of outside investors, to have employees on the same side of the economic equation as the outside investors. But we simply haven't yet gotten into the details of the structure for employee share ownership.

Mr. Fontana: With respect to the 15% cap, I know there's been some talk that it's artificial. It could have been 10% or 20%. Some people are concerned that 15% is too much. The other party essentially says that 15% is too low. I wonder if you could explain how you came up with 15%. What are some of the advantages or disadvantages of having a 15% formula in terms of the broad ownership capabilities of the new corporation?

Mr. Lackenbauer: One of the things you try to do with a limit is have the threshold high enough so you don't materially constrain significant institutional investors who are running huge pools of assets from being able to buy that particular share simply because they can't get enough of it.

For certain fund managers in Canada, and to an even greater degree in the United States in terms of size of asset pools, to put it bluntly, something like $100 million is an odd lot. I know it's not an odd lot to anybody in this room, including us sitting here, but when you're managing billions of dollars of assets and looking at portfolio diversification, if you get down to too-small levels of ownership in stocks, it's not worth your while to have them in the portfolio.

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The balancing act is to try to find a level where your threshold is high enough that you can get these big players in, subject to the underlying merits of the investment, and at the same time try to prevent people from having effective control, which they might do by obtaining a very significant minority interest, but not outright control, so that they can exercise significant influence. That's the balancing act.

The magic of 15% is that it would be something in the order of $250 million to $300 million at the IPO level. Hopefully that would go up as the company does well and as the value increases over time as a result of the improvement in the cost efficiencies, the service and so on. That threshold level would migrate north if everything works over time, as we all would hope and expect it will.

Mr. Fontana: With respect to that 15%, without an overall cap on ownership, there was some concern indicated by some parties that collusion is possible. As experts in the field, what do you think we can build into the legislation to prevent some sort of collusion from occurring to get effective control through the back door that couldn't be achieved through the front door?

Mr. Wilson: We looked at the draft legislation pretty carefully. We're not lawyers, but our reading of it indicates the legislation provides the directors of CN with sufficient power to prevent the collusion you've described from occurring, or from having any effect if someone attempted to put it in place.

Mr. Fontana: Have you had any experience, in a similar share offering, of these kinds of conditions being put in to ensure and protect the public interest? After all, I think that's what we're trying to do.

Mr. Wilson: The initial public offerings of other previously Crown-owned assets have had ownership restrictions in them. We think the ownership restrictions in the CN act are the most sensible. They strike the balance Mr. Lackenbauer described between not impeding the ability of investors in Canada and outside Canada from buying shares and at the same time not allowing the company to be taken over.

Mr. Lackenbauer: To tie in to what Mr. Wilson just said about sensible rules in that regard, I think the absence of a cap on foreign ownership is a very important ingredient. If we did have a cap, it would definitely affect the overall value of the company and the government, and therefore the taxpayers would not realize the same value as they should without the cap.

Mr. Fontana: Let me recap, because I think it's important. There's something around $400 million in cash in one way, shape or form - internal cash, surplus cash or potential cash. There's $300 million or $400 million that would be used to pay down the $1 billion worth of debt, which is necessary.

The transfer of assets from CN to the government, to be paid on an interim basis, with the value after the share offering is completed being guaranteed by the government, is somewhere in the neighbourhood of $400 million to $600 million, which in your opinion is the market value of those non-rail assets.

Mr. Wilson: Over time the realizable value of those assets should be in that range.

Mr. Fontana: So there is the $1 billion, to get from $2.5 billion to $1.5 billion. Assuming all that takes place and you're able to sell 100% of the shares, which you said you're pretty confident you can do, the taxpayers, on a net basis, should end up with $1 billion in their pockets.

Mr. Wilson: Yes, after reacquiring some real estate assets with ongoing value that the taxpayer can realize afterwards.

Mr. Fontana: So there should be a net $1 billion to the taxpayers or to Paul Martin to do with what he wants.

Mr. Wilson: In cash and some retained value in the real estate.

Mr. Fontana: Of course.

Mr. Lackenbauer: For the sake of clarity, there is a caveat to all the things we've been saying about value. Everything we're talking about is subject to what we would call current and prospective market conditions over the next six months. We're not sitting here saying this could be done under any market conditions. We want everyone to understand that. We obviously need decent market conditions, but that's true on any offering. That's not unique to this one.

Mr. Fontana: On the question of timing, how crucial and critical is it that we get into the marketplace by the fall? I'm sure that as experts in this business you're looking at the market six months, a year or two years down the road. Obviously your investors expect you to do that and to have that crystal ball working very well.

In your opinion, when is the most appropriate time? Obviously the government has early fall in mind. That's why we might have to work all summer in order to make sure the regulatory framework gets done, which I'm sure is also part of the marketing that's absolutely necessary. Is that critical to you?

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Mr. Wilson: Mark, why don't I speak for Canada and you speak for the U.S.?

I wish our crystal ball were as good you seem to think it might be. It isn't. We do try to look forward. At the moment, market conditions are quite receptive to offerings such as CN's planned offering. We believe it's quite likely those conditions will persist through the fall of this year.

Beyond the fall into 1996, it's much more difficult to have that level of confidence, although it's by no means certain that conditions will not be appropriate then as well. With conditions at present and in the near term looking quite amenable to this transaction, we are recommending strongly that every step be taken to move for a fall offering.

Mr. Tercek: From the U.S. perspective, we absolutely agree. In our judgment, stock market conditions and economic conditions right now are perhaps ideal for the Canadian National offering. Therefore we think it's very appropriate to aim for an offering in the fall.

Mr. Lackenbauer: The risk as we get pushed out further is that we are late in an economic cycle here. Everybody's looking for the so-called soft landing and an extension of it.

From our perspective today, once we start delaying into 1996, the risk goes up significantly. If the market starts to turn over - that's the phrase used in the business - because of the outlook for a recession coming or for a very significant economic slowdown, that obviously affects equity values.

It is highly normal and usual, in any equity underwriting when you're in decent market conditions, to go as fast as you can possibly go and then, after the starting line, retain the flexibility to hold back a bit and refine your timing, as opposed to being captive to the process you're in for accessing the market.

The Chairman: We're going into five-minute rounds now.

Mr. Guimond: Mr. Fontana, I want to correct something. As a party, we don't consider the 15% cap too high, but we mentioned there is a possibility of collusion. That is the reason we will suggest an amendment as a preventative measure. It's not that the 15% is too high.

[Translation]

I hope, gentlemen, that you will not invoke confidentiality, as we're going to be talking about taxpayers' money, from Quebec as well as from Canada. It would be easy to answer that it is confidential information, but it is a question on behalf of Canadian taxpayers. What are your fees in all this? What is the basis for calculating those fees? Is it a flat fee, or an hourly rate? If it is an hourly rate, what would you say the total fee is going to be?

[English]

Mr. Lackenbauer: I don't know about the others, but I'm not prepared to publicly disclose our fees at this point. If the company or the government chooses to do that, it's up to them. We would never disclose that in any private sector situation. I don't think it's appropriate to do so here.

Mr. Guimond: But the Canadian government is not a private sector company. The taxpayers of Canada want to know, and I represent the taxpayers in my riding of Beauport in Quebec. We want to know the cost.

I will pay out of my pocket and you will pay out of your pocket for your job. Oh, excuse me. You're an American. I don't know if you pay taxes in Canada.

I think it's a normal question. I think it's a good question.

The Chairman: I don't want to interrupt. It's a good question.

Mr. Guimond: Who will answer?

Some hon. members: Oh, oh.

The Chairman: The situation, Mr. Guimond, is you have three different companies with probably three different structures. But it's a question that most certainly you, as a member of Parliament, can put on the order paper, for example, and get an answer to.

Mr. Guimond: I will ask the question separately.

For Nesbit Burns, what will the fees be?

Mr. Lackenbauer: I'm not prepared to answer that, sir.

Mr. Guimond: For Scotia McLeod?

Mr. Wilson: Let me elaborate on what Mr. Lackenbauer said. We have been in negotiation with the company and the government on our form of compensation. As Mr. Lackenbauer said, I don't think it's appropriate at this stage for us to make the decision on disclosure. That's a question you want to ask our client, the Government of Canada, and the corporation, obviously. Feel free to ask them.

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Mr. Fontana: The client is the minister, so ask the minister.

Mr. Guimond: The client is the minister? It comes out of his pocket?

The client is not the minister. The clients are the Canadian government and the taxpayers.

The Chairman: But he's ultimately responsible.

Mr. Guimond: Oh, oh.

Mr. Wilson: I can tell you we've had discussions with the minister, the Department of Transport and the corporation on the matter you're asking about, but I believe it's their prerogative to make disclosures about our fee arrangements, not ours.

Mr. Tercek, do you agree?

Mr. Tercek: I concur with Mr. Wilson and Mr. Lackenbauer.

Mr. Guimond: Oh, very good answer.

[Translation]

Concerning the market value of CN real estate and rail land holdings - I'm not talking about non-rail assets as you didn't want to answer that question - did you assess that? I'm thinking of rail land holdings used for the railroad, with right of way.

[English]

Mr. Wilson: I'll answer initially, and my associates can add.

We have assessed the value of the rail business, and the lands you speak of are lands that generate revenues by the rail business. We've assessed the value of that business and the cash that those lands deliver, which brings me back to the $1.6 billion to $2 billion of equity value.

That's the valuation work we've done on the rail property, i.e., what earnings those assets can generate. We have not valued them separately as pure land assets or pure track assets. We've valued them on the basis of their ability to generate cash.

[Translation]

Mr. Guimond: Did you take into account, in that valuation work, that fact that some railroad lands might be contaminated? Did you factor in the valuation the environmental dimension? Some land reclamation might be necessary... I'm still talking about lands used for rail business.

Some of those might be contaminated. Did you factor in the clean-up cost, if necessary? Who is going to bear the cost? Is it going to be the taxpayer, who is not even allowed to know how much you will be paid?

[English]

Mr. Tercek: We have not yet completed that kind of investigation. That will be part of our work over the course of the summer.

Mr. Lackenbauer: But the answer is that whatever the cost is, it's a cost to the Canadian taxpayers. No matter how you slice it, it's already in CN. To whatever extent there is a cost associated with it, it's part of the enterprise value in the end. Whether it's left with the government or left in CN and then has to be knocked off what otherwise would be the value, it's the same thing.

So it's not how it's done that will affect the Canadian taxpayer. The reality is that under all circumstances it will affect the Canadian taxpayer.

Mr. Guimond: In conclusion, I'm not very happy about the answer you have given on my first question.

I hope the journalists will not mention that the Reform Party asked this question first. Very often we read that the Reform has asked a tough question, but it was a Bloc member who asked this question.

Some hon. members: Oh, oh.

The Chairman: There are opportunities for you to ask the question, Michel. I can think of two already.

You're both right; it's the Government of Canada, but it's the minister who's ultimately responsible.

Mr. Gouk: I would question the ultimate responsibility of the minister. If there's a debt to be picked up, you can bet it's not coming out of Mr. Young's pocket.

I don't care to get into following that up. We could debate that all day and get nowhere.

Can we go more categorically? Are your revenues from the result of this transaction primarily commission?

Mr. Lackenbauer: Yes.

Mr. Gouk: So the more the shares sell for, the more you will make.

Mr. Lackenbauer: That's absolutely correct.

Mr. Gouk: So it is in your interest to structure it in such a way that we get maximum dollar for the shares.

Mr. Lackenbauer: Absolutely. This is very standard practice. It is an underwriting commission, subject to a work fee in the event that we don't go forward with an underwriting, because we have to spend an enormous amount of time and resources over six to eight months to be able to do that.

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All I can tell you on behalf of all of us - and my colleagues may want to add to this - is the toughest negotiations I have ever been in, in 27 years in the business, were surrounding this CN.

I sure would like to have Mr. Young negotiating for me in the future, because he got the tightest and toughest deal that anybody who's done an IPO has ever gotten in this country. That much I can tell you.

Mr. Gouk: Perhaps after the next election we can arrange that for you.

Some hon. members: Oh, oh!

Mr. Gouk: You're telling me that if we reduce the debt to $1.5 billion, it will produce a triple B credit rating and that ultimately will make the shares as marketable as we could reasonably expect. Is that right?

Mr. Lackenbauer: Yes, sir.

Mr. Wilson: That's our preliminary opinion at this stage.

Mr. Gouk: Do you see a problem with the legislation being drafted in such a way to ensure taxpayers' money will not be used to reduce the debt lower than $1.5 billion, other than if it happens through cash on hand and sale of assets?

Mr. Lackenbauer: Yes, sir, I do.

Mr. Gouk: What is that problem?

Mr. Lackenbauer: The problem is it may impede the financing flexibility of the company because, for whatever reasons, we may be into too shaky a part of the triple B category. It would not be in the company's or the government's interest, and therefore the taxpayers' interest, to do that. As we said before, we're talking about a total enterprise value here.

To the extent that we take the debt down more than $1.5 billion, that enhances the equity value accordingly. This is not a case of eroding the government's or taxpayers' value by reducing the debt even more. Tying anybody's hands with a fixed number I think could be a potential error in terms of eroding value.

Mr. Gouk: So you're saying it is quite possible that we could pay off even more of the debt than what we're currently looking at.

Mr. Lackenbauer: I don't want to be that categorical. What I'd say is when you're trying to divest an asset and properly structure it, you don't ever want to be put in the situation of having your hands tied by a number that, depending on market conditions and everything else, may have to change. I'm not predicting for a second that it will.

Mr. Gouk: So what you're saying, in your way, is we may pay the debt lower than $1.5 billion.

Mr. Lackenbauer: It is not something I would want to see precluded artificially.

Mr. Gouk: So in other words, we may do it.

Mr. Lackenbauer: You may.

Mr. Gouk: Under some circumstances, we may pay more than $1-billion worth of debt.

Mr. Lackenbauer: That is not the expectation at all at this stage, but it's a possibility.

Mr. Gouk: And you don't know at this point in time what we're going to pay for the assets or how we're going to determine that value?

Mr. Lackenbauer: Which value?

Mr. Gouk: The asset value of the real estate assets we take from CN.

Mr. Lackenbauer: That's being worked on over the next little while, so it's not conclusive.

Mr. Gouk: You see, the problem I have - and I mentioned this yesterday - is I am being asked to vote on this legislation. I'm being asked to vote on it before we know how much debt the taxpayers are going to be asked to pay down and before we know how much we're going to pay for the real estate assets or how we're going to determine that value.

In other words, what we're being asked to do is sign a blank cheque. I think you can understand the reluctance of the opposition side to sign blank cheques for the government.

Mr. Lackenbauer: With all due respect, I think you're wide of the mark here, sir.

Mr. Gouk: Please correct me.

Mr. Lackenbauer: That's what I'm going to try to explain.

We start with the principle of an enterprise value. I presume you accept that. Adding the debt and the equity has a total value in the marketplace.

Mr. Gouk: Within certain parameters.

Mr. Lackenbauer: Yes, as long as we're within the range of optimality of a capital structure. So given that, as Mr. Wilson outlined, all three firms are in the range of $3.1 billion to $3.5 billion.

Let's talk about the real estate assets and so on. To the extent that you pay $600 million, you've enhanced the value of CN on the other side by $600 million.

You keep saying the taxpayers are paying down the debt and not getting anything back. That's not what's happening. We're talking about a shifting of assets from cash to equity in order to optimally capitalize the company so it does get the maximum enterprise value in the marketplace. The government has real assets over here, which it can then realize.

This is not an issue whatsoever of the taxpayer getting boondoggled by debt reduction. It is all there to maximize value.

Mr. Gouk: Provided we sell 100% of the shares at the predetermined price.

Mr. Lackenbauer: That isn't even necessarily a proviso, but under normal conditions, that would help to maximize value.

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Again, you have to make caveats, because if we're in market conditions that won't take 100%, in that context you maximimize value by not selling 100%. If you're in a position where you could sell 100% and the government chooses to hold some back, in my judgment we probably wouldn't get as good a value as we otherwise would get because of the ongoing overhang that would be there.

But the government, from everything I've seen and heard, has explicitly stated that its desire is to sell 100% of CN, and we're taking them at their word on that. My view is the only reason they wouldn't sell 100% is if we tell them that in order to sell 100% they virtually have to give it away, or that the market simply won't take 100% no matter what price they put on it, and you have to scale it back. It would be under those conditions.

Mrs. Terrana (Vancouver East): During the task force hearings we heard that it would be better if we divided the selling of shares over three offerings, for instance, instead of going out with only one at 100%. You seem not to agree with that, and I would like you to tell us more about it.

Mr. Wilson: If market conditions permit, we think the optimal way for the Government of Canada to divest of this asset is to sell all of its shares at one offering. The main reason for that view is when the government is left with shares that are unsold but that the market knows are ultimately for sale and will come on to the market later, that will have a dampening effect on how the shares trade and the prices at which they trade.

That's not to say it's impossible to do it. There have been cases where some shares are sold and others are held off the market for a period and then sold later. But the optimal way to divest of these shares is to sell all of them, if market conditions will allow it to be done efficiently.

Mrs. Terrana: I'm glad you are so positive. In fact you seem very positive about this sale.

We know a few changes have to occur to regulations. Is what the minister is proposing enough for you to feel confident that by the time the changes in regulation are in place, we'll be okay and we'll be able to go out and sell these shares, or would you want to see something else?

Mr. Wilson: There are further changes in regulations and legislation still to come. We can't comment on things that haven't been tabled yet, but we understand that those are in process and are being designed to commercialize the railway so it can be sold to public investors.

Mrs. Terrana: Are there any changes you would want to see in order to make it more palatable and easier to sell?

Mr. Wilson: I'm not sure I follow the question.

Mr. Tercek: It's difficult to comment on the legislation today, but again, we understand that it will permit management the flexibility to run the business on a commercial basis that will be approximately equivalent to that in the U.S. That will encourage investors to anticipate that management will take the steps necessary to generate maximum returns. Again, we think that's the right backdrop for a successful offering.

Mrs. Terrana: My last question again has to do with you being so positive about this sale. Considering that Canada is different from the United States, do you feel this sale is as attractive as the sale of railways in the United States? You seem to constantly compare our CN to U.S. railways.

Mr. Tercek: We think the comparison to the U.S. railroads is a very appropriate one. The U.S. railroads, due to earlier changes in the regulatory environment, are a little bit ahead of the Canadian railroads. In the more liberal regulatory environment they have taken very tough actions to lower costs and enhance service levels and efficiency. As I said in my opening comments, that's been a very positive experience for the companies, their shareholders and the overall shipping community.

As we understand Canadian National, we think it very much parallels Conrail, for example, at the time of its initial public offering about ten years ago. Our firm was responsible for leading that transaction. We anticipate that if the transaction is properly structured, we can generate in Canada, in the United States and in Europe the same kind of demand for the shares that we experienced in the case of Conrail. We think that should lead to a very successful offering.

Mr. Jordan (Leeds - Grenville): As Anna said, you seem very enthusiastic and positive about it. But I guess we wouldn't expect you to be otherwise, because this is your business and you'll probably be making some money.

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The value of a share really, though, is what somebody will give you for it, isn't it?

Mr. Lackenbauer: Sure.

Mr. Jordan: It's just that simple.

If you determine the value of a share based on the assets and all those complications you can put in, wouldn't you at some point have a rough idea of what a share is likely to be worth? Do you field test it or do you phone your friends?

Some hon. members: Oh, oh.

Mr. Jordan: Where do you start? Is it worth $20 or $200? You must have a rough way of calculating the value of a share.

Mr. Wilson: As we've said today, our rough preliminary number, as an aggregate for all the shares, is in the range of $1.6 billion to $2 billion.

Just by way of example - and we haven't determined the price per share - if there were 200-million shares outstanding in the capital structure of CN, and the $2 billion - just to make the numbers easy - were the aggregate value achieved in the market at the top end of this range we've talked about, then each share would be worth $10.

Mr. Jordan: Pretty soon you'll be coming up with that figure.

Mr. Wilson: That's right - the per-share number.

As Mr. Lackenbauer said earlier, the per-share number is simply a function of how many shares you authorize, and then you divide that into the aggregate estimated value. Our estimate of the aggregate value, which we've done some preliminary work on, is $1.6 billion to $2 billion.

Mr. Jordan: Your enthusiasm for it, though, is because you're in the business of dealing with shares. Just remove yourself from that and be a taxpayer like the rest of us. Is this a pretty good deal?

Mr. Lackenbauer: I'd like to take issue with your first throw-away there.

Mr. Jordan: You're not making money?

Mr. Lackenbauer: No, no. I don't want to take issue with that, because if we didn't expect to make money, we wouldn't be sitting here. That's what we're in business for.

Mr. Jordan: That's where the enthusiasm comes from.

Mr. Lackenbauer: No, sir. The enthusiasm is in part due to the fact that obviously this is a very important transaction and it's one that we all dearly want to be associated with and be involved in managing and so on. There's no question about that. But the fact is if we didn't think it was a doable deal and that it could be successful....

Reputationally, it's not a whole lot of fun to bring out something that's a dud for anybody. Our enthusiasm can't be generated simply by the fact that we're going to make some money.

At all times in our business, we have to assess what the investors - the financial markets, both from an institutional and an individual perspective - will value these things at. We're coming up with our estimates of value using those yardsticks and approaches, not because we're enthusiastic in our own right about making some money.

Mr. Jordan: Well, I guess it's hard to separate the two.

Do you think it's a good deal for Canada?

Mr. Lackenbauer: I think it's an excellent deal for Canada, yes.

Mr. Jordan: You're going to dispose of a lot of CN's assets because they couldn't turn them around and make money. Recently they've been able to turn them around and make some money, it seems. That would make it attractive, I suppose.

But they're also going to keep some assets. Wouldn't it have been better for the government to get out of this stuff altogether - things like the CN Tower? If they're making money at it now, they probably won't be in a little while. Why not just dispose of all the assets?

Mr. Wilson: The non-rail assets are being disposed of before the public issue. The real estate assets are being packaged up and effectively transferred to the Government of Canada for the government to realize value on later, and some other smaller non-core assets are being sold.

What we will take public are the core rail assets. Those are the assets the investors will buy within a regulatory framework that allows management, even after the public issue, to close and restructure the rail assets still in the corporation.

Mr. Jordan: But they'll still be in debt, even after you dispose of these assets. There will be a lot of debt left over for the CN to absorb, right?

Mr. Wilson: Yes. We believe the debt the company can comfortably carry is about $1.5 billion.

Mr. Jordan: Who's going to pay that?

Mr. Wilson: Cashflow from the rail operations over time will service that debt.

Mr. Jordan: Do you really think they'll be able to allay that debt over a period of time in this deal they're proposing?

Mr. Wilson: Yes.

Mr. Lackenbauer: That will be attested to by the credit ratings. There's no way in the world you'd get a triple B credit rating or better if the credit rating agencies and other analysts at arm's length, and therefore the market generally, didn't expect that. We must have that.

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Mr. Jordan: The only ones who'd be hurt if you lose your credit rating would be the taxpayers of Canada, right?

Mr. Lackenbauer: Lose it from what level?

Mr. Jordan: From B to whatever the next lower level is.

Mr. Lackenbauer: Do you mean after the offering?

Mr. Jordan: Yes.

Mr. Lackenbauer: After the offering it doesn't affect the taxpayers of Canada at all; it affects the holders of the debt.

Mr. Jordan: Those who have invested money in it would be there to take the hit.

Mr. Lackenbauer: Exactly, and to the extent that they are taxpayers, of course it affects them, but not from the position I think you were intending, as a government asset.

Mr. Jordan: That's right.

Mr. Gouk: I want to go back to your opening statements. You said the total asset value of the company right now is $3.1 billion to $3.4 billion. Is that before debt?

Mr. Wilson: That's right; it's the enterprise value before debt.

Mr. Gouk: So we have $3.4 billion, if we take the high figure. If we take $2.5-billion worth of debt off that, it leaves us with a current equity of $900 million.

Mr. Wilson: I think it's $1 billion.

Mr. Gouk: Yes. It depends. I'm taking your highest -

Mr. Wilson: It's $3.5 billion.

Mr. Gouk: Oh, okay, so we have $1 billion even. We'll give you the extra $100 million.

Mr. Wilson: Thank you.

Mr. Gouk: You said the real estate asset value of the non-rail assets is in the range of $400 million to $600 million. If we go in the middle and take $500 million off for that, we're left with an equity, after removing those assets, of $500 million.

We're going to reduce that debt in one way or another -

Mr. Wilson: The enterprise value number of $3.1 billion to $3.5 billion is for the rail business that will be taken public.

Mr. Gouk: So it's without the real estate?

Mr. Wilson: Yes.

Mr. Gouk: I just wanted to clarify that, because your figures weren't adding up. That's fine.

You gave us some reasons that this 15% limitation is not a big problem. Is it because you don't think there's anybody out there who's prepared to buy more than 15%? Is that basically right?

Mr. Lackenbauer: No; there may be. Certainly I wouldn't say that, personally. My colleagues may say that. There may well be somebody who would be prepared to buy more than 15%.

From an ownership point of view, i.e., the government at this stage, the question is when someone wants to buy more and you don't let them, will that affect the value that can be realized in the marketplace? The answer is no, because there will be sufficient demand. Any unwillingness or inability to accommodate the interest of that particular buyer in purchasing in excess of 15% will be made up by other investors who will be there anyway.

Mr. Gouk: Presumably.

Mr. Lackenbauer: That's our judgment.

Mr. Gouk: Do you think there's a problem with the fact that some company may want to be able to buy a controlling interest in order to effect changes to modernize and make the operation more efficient, using its own ideas and management styles?

Mr. Lackenbauer: In the short term I don't think there is. One could make that argument for the longer term, but it's not going to affect the IPO value at all.

Mr. Gouk: So it's not necessarily a plus to have that, but you feel it's not a big deterrent.

Mr. Lackenbauer: That's correct.

Mr. Wilson: There's no material negative impact at this stage.

Mr. Gouk: Would it be a problem if that 15% limitation weren't there?

Mr. Wilson: If there were no limitations whatsoever, there would be no problem.

Mr. Lackenbauer: Do you mean from a market perspective?

Mr. Gouk: Yes.

Mr. Lackenbauer: No.

Mr. Gouk: You mentioned you were involved in Conrail. It was a very successful issue, and it's been successful since. What limitations were placed on share ownership of Conrail when they were offered?

Mr. Tercek: There were no limitations.

Mr. Gouk: Thanks.

I want to clear up a couple of other areas. Before my colleague from the Bloc hoists the separatist banner, I'm going to ask you about the legislation dealing with the head office. Contrary to my colleague's thoughts sometimes, my point isn't that it's in Montreal, but rather that it is limited to one city. Is there any negative impact associated with that whatsoever?

Mr. Wilson: Do you mean on the share offering?

Mr. Gouk: On the share offering for someone who may wish, at some point in time, to have the office somewhere other than where it is required by legislation.

Mr. Wilson: Investors don't buy shares of companies based on where their head office is located. They buy them based on business prospects, cashflows, quality of assets and quality of management.

Mr. Gouk: What about the operation of the company afterwards?

Mr. Wilson: The quality of management is a very important factor for investors to assess.

Mr. Gouk: But what about that restriction? Could that be a problem for the company at some point in time?

Mr. Wilson: I can't envisage it.

Mr. Lackenbauer: I highly doubt it.

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Mr. Gouk: What about the language requirement? It has to maintain the government's official language policy, contrary to what other companies in the same sector do.

Mr. Lackenbauer: In and of itself, I don't think the market would have any negative reaction to that.

Mr. Gouk: Is there anything positive about either of those provisions?

Mr. Wilson: They don't impact on investors' assessment of value one way or the other.

Mr. Gouk: So there's nothing positive about it.

Mr. Wilson: It's not germane one way or the other to assessing value and prospects for a business.

Mr. Comuzzi (Thunder Bay - Nipigon): I want to carry on with what my colleague was talking about with respect to the value of the shares. I haven't heard anything in this discussion today.... Perhaps we will, but this comes under your jurisdiction.

We're all anxious to see CN prosper. Given the absence of a regulatory regime and its ability to concentrate its efforts on the transportation business, I think there is no question that CN can be a very successful, viable and profitable company in Canada, particularly now with its access to the United States through the Sarnia tunnel.

I haven't yet heard any of you folks project what CN is going to do. A little while ago, Chrysler was trading at about $39 a share. One of its major shareholders said it was trading much too low and it should be worth $55 or $60 a share, and as a result made an offer. That went nowhere, but it did two things. It got us another couple of bucks a share in dividends that the company was not going to give, and I think the shares are still trading around $44 a share. That move accomplished something.

I haven't heard you folks, who are experts in this business, tell us what's going to happen with CN to enhance the value of its shares when they're offered to the public. Do we need a timeframe on that?

There is no question in my mind CN's going to be a very profitable company. What are you folks doing to enhance its value? I think that's why you get paid.

Mr. Lackenbauer: With all due respect, I don't think that's why we get paid at all.

Mr. Comuzzi: Don't say ``with all due respect''. I used to be a lawyer.

Mr. Lackenbauer: Oh, you know what that means, do you?

Mr. Comuzzi: Yes, I do.

Some hon. members: Oh, oh!

Mr. Lackenbauer: Okay.

We're not there to tell them how to run the railroad - no pun intended. We are there to advise them on the ingredients that are needed to maximize value on the basis of an IPO and on accessing the market; that's for sure. But we're certainly not there to tell them how to run their operations, beyond having the basic ingredients they need to have. As well, as Mr. Tercek was saying, they need to be perceived by the market as being able to make a continuing improvement in profitability. That all gets impounded in the share value.

So I'm not sure what you're asking of us.

Mr. Comuzzi: Carrying on with what Mr. Jordan said, you're the experts, and although you don't want to divulge what the fees are, I suspect they're substantial, or you wouldn't be here. Part of your responsibility is to make sure that once these shares are offered to the public, there is a prospectus as to what this company can produce in the way of profits to enhance the value of its shares. I'd like to know what you're doing on that.

Mr. Tercek: In our preparatory stage, where we focus collaboratively on what we think the company can accomplish over the period of time ahead of it, I think it's safe to say that process will result in setting internally very ambitious targets for the company. As the company talks to its investors about what it plans to accomplish, they will be establishing those broad targets beyond the company itself.

Thereafter the discipline of the marketplace will be an effective source of energy and rigour in ensuring management does everything within its control to realize the objectives it sets for itself.

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Although our job is to assist the shareholder in obtaining the highest value in the sale of the company and in ensuring that the company is properly structured for that sale, I think our experience in other privatizations allows us to say that process does bring a discipline and an energy that can fuel or motivate the company to do better than it would otherwise.

Mr. Comuzzi: Obviously, we're talking about CN at this stage because it has had a series of bad management decisions. There's no question about that.

I see some people across there smiling at me because they're from CN but, unfortunately, I have to say that.

What are you doing to assure prospective investors that we're going to have very good management in this company?

Mr. Tercek: First, I would observe that recent results at the company suggest the current management team has been very vigorous in running an efficient railroad. The rate of improvement has been very impressive by any standard, including that of the U.S. railroads.

Going forward, as part of our due diligence effort, we will spend a lot of time with various levels of management to assure ourselves that the management team in place is fully able to realize the objectives of the company.

Mr. Lackenbauer: Once we're satisfied in that regard - and all the signals so far are very positive - management itself will ensure that happens.

Part of the marketing process is that the senior management of the company meets with all the major institutional investors and does what we call ``road shows'' through the registration period, in the process of marketing the issue. So management is front and centre in selling the story of CN and selling itself. That certainly will be one of the critical judgments investors will make on CN through the process.

Mr. Comuzzi: But that's in the ongoing process during the offering, in order to enhance its value.

Mr. Lackenbauer: Yes.

Mr. Nault (Kenora - Rainy River): If we can use Conrail as an example, I want to get into the issue of labour relations and the importance of employee participation.

My understanding is that Conrail had a significant amount of employee participation when it was transferred from the public sector to the private sector. I'd like to know from my American colleague what effect that participation had on the marketplace, versus the limited amount of participation of the employees in CN's case. Or are you recommending to your client - the government - that it does everything in its power to make sure employees participate in a large way?

I'd like to get some understanding of that, because there are really two issues here. We're talking about this as if the shareholder is going to benefit, but there are also employees and shippers involved, who have to benefit from the commercialization. In order for that to happen, we have to have a railway that's vibrant.

I know Conrail's a good example to use, because it's been fairly successful after the privatization. Can you give us a bit of an analysis of the difference between what you're suggesting for the labour side in Canada versus what happened to Conrail?

Mr. Tercek: First, I would say we have not yet completed our own assessment of what the proper level of employee participation in the company should be or how it would be best structured. That work needs to be done, and it's important work.

Second, I would observe that in general the marketplace likes to see employees as shareholders, because it's thought that, all other things being equal, it should be good for morale and for aligning employee, management, and shareholder interests.

However, it would be my expectation in this case that potential shareholders will be most interested in seeing that senior management has incentives to grow shareholder value through a stock option plan or a share ownership plan, perhaps tied to operating targets for the company. That's been the case at a number of North American railroads - Southern Pacific, Conrail; the list is very long - where senior management has had very explicit incentives to hit specified targets.

Shareholders have taken very much comfort from that because they then anticipate management will do everything within its power to realize those objectives. Those are preliminary observations, though, and we have not yet done the work to assess what the right structure will be in this case.

Mr. Nault: Following that line of questioning, there have been suggestions from the press and some officials that the labour relations regime as it relates to the railway industry - and of course labour relations outside the railway industry that affect it, like with grain elevators and so on - is in dire straits and has to be straightened out and cleaned up.

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My understanding of labour relations in the railway industry in Canada, at least in the long term, is they've been very stable and in fact are as good as if not better than the labour relations in the railway industry in the United States.

Is that your sense? Are we overplaying the card in saying we have to get this labour issue straightened out or we can't sell CN? At least from my perspective, labour relations in the railway industry in Canada have run fairly smoothly, if you look at the long term.

Mr. Tercek: Our impression is that labour relations at the company are good. However, in part that may be true because the company has been somewhat tolerant of a larger labour force than was absolutely necessary. Costs at Canadian National are higher than those of its peer group in the United States. In order to have a successful offering and realize its financial targets, costs will need to be lowered going forward.

One big part of cost-cutting will be extracting greater productivity from the labour force. That may be what will test labour relations. In turn, that testing may be able to be supported or buttressed through some employee participation in the shares.

Mr. Nault: In the numbers I've seen comparing CN and CP, the number of white-collar workers, or management, in these companies - and CN is not much different from CP - is much larger than in a comparable company in the United States. So in fact CN and CP, not so much at the blue-collar level, but in the management structure, are way overstaffed compared with competition in the U.S. Is it part of your role to make recommendations to trim that fat as well?

When we hear from the union officials at CN, they say - and quite frankly the numbers bear it out - they're about 4,000 employees heavier on the white-collar side than is a comparable railway in the United States. That isn't labour relations at all. That's just too many layers of management for no reason at all, as far as I can tell.

Is it part of your job to give them that kind of advice?

Mr. Tercek: It is part of our job to understand the situation very carefully so that we can properly articulate it in the prospectus and in our discussions with investors.

I would also agree that it appears white-collar employment levels have been too high. But the company is now close to completing a very ambitious three-year plan for reductions in employment levels, which, as I understand it, has eliminated a great many white-collar positions and has gone a long way to enhancing the overall efficiency and cost position of the company.

There probably is scope for more along those lines. Again, we really haven't completed our work there yet. Over the next couple of months we'll be spending a lot of time trying to understand, with great specificity, where the opportunities for cost-cutting, service enhancement, and efficiency improvement will be, because that is the essence of the company's investment story.

Mr. Nault: There's been a significant amount of discussion about the importance of going from a publicly owned corporation that's a crown corporation, like CN.... A lot has been made of the mismanagement over the years, because it is a public corporation and it has a different sense of how to operate, versus when you're in the private sector. How do you gauge that particular scenario?

You say that when we get management in the private sector, they'll do things differently, they'll have more incentives, and they'll be more liable to make this company much more capable of being successful. But in fact if you compare CP's and CN's management structures, they're not much different.

Therefore, maybe it's not so much whether it's private or public, but rather the regulatory regime we have in this country that's caused it to be somewhat cushy in its operations.

From an outside perspective, when you look at the numbers on management in both of those corporations versus a comparable corporation in the United States, there's not a lot of difference between CN and CP. In fairness to the management of CN, they can't be the culprits everybody wants to make them out to be.

Do we have a regulatory problem that we're ten years behind the American regulatory regime?

Mr. Tercek: I think the regulatory regime has very much to do with it. Management at both Canadian railroads has had their hands tied in many respects in their decisions about how best to run a railroad, whether on asset allocation, labour issues, or whatever.

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It may also be, going forward, that a privatized CN will be a more vital competitor to CP and in turn require CP to enhance its own level of performance. That would be our expectation, from the U.S. perspective. If that is a result, it will be a very positive one for the overall Canadian economy, and certainly for the shipping community.

The competition among the rails and the trucking sector in the U.S. over the last five to ten years has been extremely vigorous. It's resulted in dramatically lower-cost, more efficient transportation alternatives for shippers. I think in large part that has been the marketplace at work, with the benefit of a more liberalized regulatory regime behind it.

It seems very much that should be the case in Canada. This transaction should be one important step forward on that plan.

The Chairman: Mr. Lackenbauer, Mr. Wilson, and Mr. Tercek, thank you very much for your submission to the committee today and for answering our questions. We appreciate the time you've taken to be here.

Mr. Wilson: It was our pleasure.

Mr. Lackenbauer: Thank you.

Mr. Tercek: Thank you.

The Chairman: We'll invite CP Rail to the table, but before we do, let's take a five-minute break. We'll be back at 11:05.

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PAUSE

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The Chairman: Colleagues, resuming our hearings, we're going to hear from Rob Ritchie, president and CEO of CP Rail. Joining him at the table is Katharine Braid, the executive VP.

Welcome to the committee. Thank you for coming. I understand you've distributed a brief to us in both official languages. Is it Mr. Ritchie or Ms Braid who will be giving us a summary of this document?

Mr. Rob Ritchie (President and Chief Executive Officer, CP Rail): Mr. Chairman, I'll start with the summary.

Katharine is the executive vice-president in charge of strategic development and government and industry affairs.

The Chairman: Terrific. Thank you very much.

Mr. Ritchie: We appreciate the opportunity to join you this morning.

As the chairman said, we have a formal brief. We won't read it out to you, as it's quite lengthy, but we would recommend it to you and your staff because there's a lot of detail in it that we believe is important. I will briefly summarize it, and then there will be time for some questions and answers.

The CN privatization is a significant event. The bottom line for us is that we have historically supported this action and we do so now, if it's done properly. The days when government needed to be in the railway business are long gone, if it was ever needed there. Its presence has been a distortion in surface transportation for many years. We commend the government for taking this step, which the general public appears to have accepted, at least conceptually.

Privatization is also important as part of a larger agenda of reform, which is necessary and also overdue. Railway policy has been reviewed, studied, analyzed, and reported on for decades. The problems have been identified and the needs broadly understood since the MacPherson Royal Commission some 35 years ago, yet policy reform has consistently fallen short.

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Regulations still treat railways as if they are immune from competition. Tax and other policies still assume a limitless ability to absorb imposed costs, and they continue to distort investment in infrastructure.

The government has set out to address some of these issues. The minister has said he wants to see a stable rail sector and healthy competition. We support those goals. This is a fresh opportunity to get it right.

CN privatization and how it's done is part of that. Done right, the reform of the National Transportation Act, the WGTA and the Railway Act can stimulate innovation and make possible a sounder rail industry. Both railways and shippers should welcome this prospect.

We want to encourage the government to press forward, but as our American friends like to say, ``We have a dog in this fight.'' So you can expect us to comment if the privatization begins to deviate from its path - in other words, from our point of view, if it's not done right.

For the government, CN privatization is a balancing act. This is no normal disposition, because the government is no ordinary owner and CN is no ordinary company. Divesting CN must make financial sense and it must also be in keeping with the government's role in defining policy, competition, and economic health.

The balancing act is among three things: getting the job done quickly, getting best value for the sale, and not damaging the marketplace where CN operates. As CN's principal competitor, CP has a unique interest in this project. Next to CN itself and the government, we are probably the most supportive party and have the greatest direct interest in seeing privatization happen. We are also the party that can be the most damaged if it's not done right.

We have devoted a considerable part of our brief to what we might call ``the boundaries of reasonableness'' in making CN privatization happen. Let me touch on a few of the key points.

The central question is CN's debt and how much it has to be reduced for the CN sale to gain acceptance in the market. A figure in the order of $1 billion has been mentioned. It could be more or it could be less, but to those I've talked to who make a living out of doing this sort of thing, it seems to sound about right.

We accept the likelihood that, as the minister proposes, some debt reduction will take place through the sale of various non-rail assets plus a credit for CN's real estate holdings. We are a little reluctant to accept this, and let me tell you why.

It stems from the fact that CN already has more and better assets than it could have acquired as a private sector operator, so it has a competitive edge from an asset point of view - a base that has built up over time through debt that has periodically been forgiven.

Even today, despite real aspirations to privatize over the past few years, this debt has been run up again to a level beyond what a private sector operator would or could have done. The debt is beyond what CN's cashflow as a business has justified, and this debt is once again to be partially relieved by its owner.

This dowry of high-quality assets not affordable by a normal business is what separates CN from a private divestiture. It means any debt reduction that doesn't result from CN's internal actions affects competition, and that naturally concerns us. Yet CP accepts, as a practical matter, that a degree of debt reduction must take place if the company is to be privatized.

Another large concern, and this time a risk to both CP and the public purse, is whether and by how much the government might have to sweeten the offer by further debt reduction beyond what can be done through asset sales. Further enrichment of CN solely to get a share issue on the market at this time would have an immediate impact on CP Rail's ability to raise capital. The competitive implications are obvious.

I have a final point about the larger rail renewal agenda. Privatization success this year and over time will be strongly influenced by other reforms, both those under way and those that still must be taken. Carried to the right conclusion, where railway viability remains a key criterion, the measures under way, together with tax reforms, can help ensure that the privatization is successful and the Canadian railway industry endures.

In both the NTA and the WGTA reforms, there are today strong pressures to dilute elements that encourage a more financially stable railway industry. Two examples are dealt with in our brief. No doubt they are well intentioned, but they are at odds with the goal of revitalizing the health of the railway industry.

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One is expanded running rights. The concept sounds all right, but the main-line carriers see the potential for a further slide in revenues and loss of traffic. In that case, we believe our willingness to progress rationalization to reduce costs could disappear.

Another issue is a proposal now before the House to indefinitely extend the cap on grain rates. This would largely defeat any impetus toward the efficiencies that major players in the grain industry need to implement if the system is to operate at lower cost.

In summary, CN privatization is an important initiative that we support. The government is retiring the WGTA and revising the NTA and the Railway Act. These, too, are important initiatives that we applaud. In each case it will be critical for the government to hold a clear, forward-looking vision of what it will take to ensure that rail transportation can meet Canada's internal and external trading needs at one of the most dynamic times in our history.

It will also be critical for the government to now take on the remaining infrastructure and financial issues hampering the ability of rail to provide the level of service it is capable of and will increasingly be expected to provide in the future.

Thank you very much for your attention. Ms Braid and I would be pleased to try to answer any questions.

The Chairman: Ms Braid, did you want to add anything to that?

Ms Katharine Braid (Executive Vice-President, CP Rail): No.

The Chairman: Thanks very much, Mr. Ritchie, for your summary of your very thorough report.

Mr. Guimond, please.

[Translation]

Mr. Guimond: Thank you, Mr. Ritchie and Ms Braid. From the outset, I would like to congratulate you Ms Braid, because in a magazine - I think it was in the Canadian Law - you were considered as one of the ten best lawyers in Canada. I want to congratulate you on being in that hit parade. CP can be proud of it.

I will not ask you the question that I could have put to the three people responsible for the offering. I wouldn't have wanted to ask them whether they considered that bill was a good bill. As the saying goes, you do not bite the hand that feeds you. I did not expect the representatives of Nesbitt Burns Inc., Scotia McLeod Inc. and Goldman, Sachs & Co., to tell me that it was a rotten bill. I suppose they are on a fee and generally you are not supposed to be impolite with the people that pay you.

You represent a private business and I will ask you to forget that you may have some dealings with the federal government on the regulation side. I will not ask you to upset Transport Canada and minister Doug Young because he is not of a forgetful nature. I'd rather think that he would hold a grudge.

However, I ask you, in a detached and objective way, whether you consider that that bill... I am not asking you if it is a good bill. I am convinced that you will tell me that it is. If you were in my position, would you say there are a few things that might be improved upon in that bill?

[English]

Mr. Ritchie: You're right, Mr. Guimond. Overall, we believe it is a good bill. It is well intentioned. Our concern revolves around the balancing act. Our concern is not so much on what's written in the bill but how you, as members of the House, are going to implement it.

Our concern, as we said in our brief, is with the level of debt, the balance between the level of debt and the level of equity. If you make the debt too low, then the company has an ability to charge rates that are below what we would be able to charge to service our debt. Make the equity too low and it impacts on what the market perceives our company to be worth. So we are concerned with how the implementation goes forward.

Right now it is saying there is a degree of creativity that must be left with the bankers because they have to determine what the market thinks of the company.

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We have been told it has an enterprise value of anywhere from $3 billion to $3.5 billion. We would recommend that members of the House make sure that the owners - you, me, all Canadians - get their value for that company and that the company is assigned a reasonable amount of debt as we go forward.

[Translation]

Mr. Guimond: You said earlier that you would offer 1.4 billion dollars for the CN assets east of Winnipeg. Are you able to tell us if Canadian Pacific will want to buy up to maximum of 15% of the shares in the new company? Would you be interested in that? According to you, how much is the company worth?

[English]

Mr. Ritchie: The first one, I doubt we would be interested in buying up to 15% of CN. It doesn't do anything to us. It doesn't allow you to have any synergies with the company, so the benefits of our original acquisition proposal would not be there.

Again, as far as our concern about what was the original worth of the company is concerned, we don't know. We are not privy to the private books. We weren't privy to the private books when we looked at CN except to say that we thought the eastern part was worth $1.4 billion. We don't know what the western part is worth, and it would be rather presumptuous for us to say that we think we know.

I'm going to turn this one over to Katharine, too, because she was in charge of the acquisition and merger.

Katharine, why don't you take a shot?

Ms Braid: As Mr. Ritchie has said, we do not have information that would allow us to assess the enterprise value of Canadian National in total. The assessment that was done on the assets in the east was based on information we had and assumptions we made compared to our own information about our own enterprise.

It is certainly true to say that the assets, the enterprise value, and the revenue stream value of Canadian National's western operations are greatly in excess of those of their eastern operations. Both railroads have lost a good deal of money in the east, and the profitability of that part of the railroad is questionable.

Even going forward into the future upon all endeavours to do the business better, both railroads have a problem in the east, though the western part of Canadian National is, of course, much more subject to the effects of the WGTA changes that are being contemplated. But the western portion of Canadian National's business has certainly been profitable in the past five years.

[Translation]

Mr. Guimond: Do you think that the regulations proposed by Transport Canada will facilitate the transaction? Mrs. Moya Greene, the Assistant Deputy Minister, gave us a briefing on that. She told me that adjustments would be made to the regulations concerning the privatization of CN to provide for more flexibility, efficiency and also enhanced competitiveness with regard to trucking, etc. You are certainly aware of these adjustments. Do you believe that if Transport Canada were to bring us these new regulations, they would facilitate your operations as a company as well as the privatization of Canadian National?

[English]

Mr. Ritchie: The NTA work is characterized under the umbrella of rail revitalization. We find it very difficult to jump with joy and say this is wonderful. For example, it does not go as far as the suggestions made by Mr. Rivard in the review of the NTA in 1987.

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It is a modest improvement over where we are right now but, as we say in the brief, we have to go some more. I think what you see is the approach avoidance syndrome being exhibited by regulators in Canada who would like competition, low rates, viable railways, and lots of railways. That is really not going to happen. It hasn't happened in the past and it's not going to happen in the future. Since I have been working here, we have continuously told this committee you have to make choices, and the choices are going to be difficult. That is why the government is going to require a clear vision as they go forward.

If you want a private railway industry, you have to let that railway industry earn a rate of return on its capital employed, and we haven't at CP in the last 10 years.

Mr. Gouk: Mr. Ritchie, two weeks ago Mr. Tellier appeared before this committee and informed us that CP wrote a letter to Transport Canada supporting debt reduction for CN. Would you care to elaborate on that?

Mr. Ritchie: I did write a letter to the Minister of Transport and I sent a copy to Mr. Tellier. I'm sure that's the letter Mr. Tellier is referring to.

We support the privatization of CN. I think I made myself very clear, and that's historic on CP's part. If that's going to happen, we recognize that debt reduction must take place. Again, it's that balancing act I've referred to, and it's the implementation of the bill that I was commenting on to Mr. Guimond.

Mr. Gouk: He seemed to give the impression that you supported the reduction beyond the sale of assets.

Mr. Ritchie: I have made comments to that extent, but that is referring to the pragmatic nature of the transaction that will have to take place if the assets aren't worth enough to get the debt down to a level that is privatizeable. That's where we start walking on thin ice, because you ask what is that level. Again, we really don't know. We have not seen the financials of this transaction.

Mr. Gouk: As I understand it, CP's current bond rating is A minus. Is that correct?

Mr. Ritchie: Mr. Gouk, I believe that's correct.

Mr. Gouk: Do you agree that a debt reduction to a point of about $1.5 billion for CN would put them at a triple B bond rating?

Mr. Ritchie: Again, we don't know - and I'm not trying to dodge the questions. We just don't know, because we haven't seen the financials of the company. I am told that would put them at a debt equity ratio of around 45%, and that seems consistent with a triple B.

Mr. Gouk: I'm sure you'd be comfortable if they were a C minus. But would you be relatively comfortable, would you think it would be equitable if the debt reduction brings them to a triple B rating? Would they then be in a position in which they're marketable but not unreasonably competitive against you, not given an artificial edge to compete against you?

Mr. Ritchie: Given the level of the asset capitalization they have right now, a triple B - if that's what a debt equity ratio of around 45% means - we are not uncomfortable. Yes, we're reasonably comfortable at that level.

Katharine, would you have anything to say to that?

Ms Braid: We want it privatized. We support privatization. We think it's unlikely to be saleable with worse than a triple B rating. So it's a question of two bad alternatives.

Mr. Gouk: What it takes to get there.

Mr. Ritchie: Yes.

Mr. Gouk: The people we had in earlier who are going to market the shares pointed out that at this time CN has $2.5 billion worth of debt. They suggested there's something in the range of $300 million to $400 million of cash on hand, or immediately convertible assets, and something in the range of $400 million to $600 million in real estate asset values that are non rail required that would be acquired by the government for a credit value. That brings us into the range of the $1 billion they need to reduce. Personally, I don't have a problem with the honest sale of CN assets to bring their debt down. I think any company is perfectly entitled to do that.

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The concern then becomes any shortfall between that and the amount necessary to lower it to $1.5 billion. My concern is that I did not get any comfort from the notion that we may look at dropping it below $1.5 billion. Do you have a concern in terms of the specific dollars by which they would lower it, or is it simply that bond rating they would ultimately acquire?

Mr. Ritchie: The concern is mainly with the dollars by which it would be lowered. The requirement to service the debt has to be there, because they have selected a collection of assets that is represented by that debt. Those assets will earn money. Those assets have to pay down that debt consistent with the ability to privatize, as Katharine says.

What concerns us is getting from the value up to $1 billion to reduce that debt to $1.5 billion. How do you get from $600 million to $1 billion? You need cash to operate. You can't just say we'll take our short-term cash and receivables and dump them, because you need to finance your operations. You're operating a $4 billion outfit and the cash is probably a number out of $200 million. So you have to close that gap between $600 million to $1 billion. How do you do that? That's what we're concerned about and think everyone should be concerned about.

What other assets are saleable? There is the CN Tower. There is AMF. Are they worth the $400 million? If you can't chin the bar at a $1 billion to pay it down, together with the actions that CN is taking today to pay it down with its regular railway operations, what else would happen? Again, that's our concern.

Mr. Gouk: I have just one other area I'm interested in, and that is dealing with this 15% restriction. From the point of view of an obvious rail expert running the other national rail line, do you see that as an impediment to some group that may want to bring in new management styles? You were looking at buying 100% of the eastern operation. You said you're not interested in simply being a shareholder for 15% or less, because you would not be able to do the kinds of things you envision doing with the eastern assets. Whether it be now or at some point in the new company's future, do you see this as a potential problem, to have it restricted in such a way that no one group with a management plan can ever implement that plan on their own?

Mr. Ritchie: Katharine, I'm going to turn that over to you.

Ms Braid: I wouldn't see it as a problem for the initial offering. It's a fairly large chunk, 15%. Unless you're talking about a sale to Canadian Pacific or to a U.S. railroad, the potential buyers of more than 15% are pretty scarce. In the longer term, whether it might restrict investment capital is another question. No one owns more than 15% of Canadian Pacific - or even more than 10% - so it hasn't restricted investment in our company.

Mr. Gouk: That's all I have right now.

Mr. Fontana: Thank you, Mr. Ritchie and Ms Braid, for attending and thank you for your submission. We'll take the time to look at in some detail, but I think your summary highlighted your particular questions and concerns.

Obviously, CP wants a privatized CN because you want a level playing field. Do I understand then that you don't believe you have a level playing field with a government-owned railroad competing with you each and every day as the status quo, or as it is today?

Mr. Ritchie: That's correct. Again, that's an historic position that CP has held.

Mr. Fontana: I think you've mentioned before that with a debt of $2.5 billion that CN had before, they had a double A minus with a pretty high debt - obviously because of the government's involvement. It carries that comfort level for Moody's and others to essentially have the government's backing. So at the end of the day, when we reduce this debt to $1.5 billion, as a private company it's going to have a triple B, which essentially means it may not be on a level playing field. In fact, it might be lower by a notch than where you sit today.

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Mr. Ritchie: No, this is where we don't accept that, because of the level of assets it has.

CN has historically subsidized itself through recapitalizations. It builds assets, runs them down, recapitalizes, builds assets, runs them down, recapitalizes. It does that in 10-year cycles, effectively.

Mr. Fontana: Then, Mr. Ritchie, let me get to the nub of the issue. Let's deal with the assumptions. Not only as a competitor of CN as a public company but a competitor of CN as privatized, and also being a taxpayer both personally and as a corporation of this country, do you agree with the investment bankers?

Obviously - let's face it - you made a bid for CN's eastern assets. You must know pretty darned well what the value of the whole network is. No responsible company would have made an offer without knowing the value, give or take a little bit. Am I then to suggest that you have a problem with the assumptions of what the company is worth at the outset?

Do you believe the investment bankers when they say it has a gross value of anywhere from $3.1 billion to $3.4 billion?

Mr. Ritchie: No, I don't accept that is a fair question. We do not know the numbers -

Mr. Fontana: Well, you questioned the value of the company based on subsidization by the Canadian taxpayer -

Mr. Ritchie: That's right.

Mr. Fontana: With all due respect too, Mr. Ritchie, CP has had the benefit of Canadian taxpayer subsidies over its hundred years of existence, too.

Mr. Ritchie: Over the 114 years, yes, but certainly nowhere near the values we're talking about here.

Mr. Fontana: I'm not talking about the same value, but we need to deal with this so we should be up front.

You are for privatization; you want to make sure the Government of Canada doesn't give CN a benefit that you otherwise don't see. So let's get to the nub of the issue. One, in your estimation, what do you think the value of the company is?

Mr. Ritchie: We just can't answer that question. It's -

Mr. Fontana: Well, you expect us to answer it.

Mr. Ritchie: That's right. You have access to the books, sir, and you are the owner of the company.

Mr. Fontana: Okay.

Mr. Ritchie: We can't get that. For us to sit here and presume what the value is is not helpful to this exercise.

Mr. Fontana: Let me deal with this assumption then. The value according to the investment bankers...probably the same people you use to do your share offerings too, so obviously there's a certain credibility that you have with the government's investment bankers. No question there, right? If they said the value is anywhere from $3.1 billion to $3.4 billion and that they can't have a debt worse than $1.5 billion, leaving an equity value of $1.6 billion to $2 billion - that's what they need - so that in fact the Canadian taxpayer wins, CN wins, the clients win, and the railroad industry wins...do you disagree with those assumptions right off the bat? You need to have a bottom line before you can deal with -

The Chairman: Let him answer the question.

Mr. Ritchie: Sir, I don't agree and I don't disagree because of the lack of my ability to do so. But I'm obviously not helping you. Let me try.

Katharine, do you have a way we might be able to help Mr. Fontana?

Ms Braid: There's always the question of value to whom. Canadian Pacific offered $1.4 billion for the eastern assets of Canadian National because that's what they were worth to us, and that's what they were worth upon achieving a level of synergies with our own operations.

What you're talking about, which I understand was given out by Mr. Woods last night, although I wasn't here -

Mr. Fontana: Today.

Ms Braid: - is an enterprise value for the whole of Canadian National of $3.2 billion to $3.8 billion. Is that what he said?

Mr. Comuzzi: It was $3.1 billion to $3.4 billion.

Ms Braid: He is talking about a value on a public offering, which is different from a value to a particular purchaser, and that value is based on an earnings potential. We are not privy and have never seen any projections of the earnings of the Canadian National and so we cannot do the multiples of earnings calculations that it's necessary to do to confirm or refute that value.

If I were just guessing, it's not way off. The value to us of the entire Canadian National system would be higher than that.

Mr. Fontana: You said the value of the whole CN. If CP had made an offer when you did, not only on the eastern part but on the total part, what would you have said you would possibly offer then?

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Ms Braid: I don't know.

Mr. Fontana: Higher than that. You said higher than -

Ms Braid: I think it probably would be higher than the enterprise value you have given, but I certainly wouldn't be recommending any specific price without more information than I have today. I wouldn't go to the CP board on the basis of the information I have.

Mr. Fontana: I'm assuming then, and let's use what you said, that they're not that far off - between $3.1 billion and $3.4 billion - considering even CP think that's a pretty good deal. Now let me deal with -

Ms Braid: That's not what I said, Mr. Fontana.

Mr. Fontana: Okay, let me deal with the debt thing. You believe $1.5 billion for a CN private corporation is absolutely the bare maximum in terms of debt in order to ensure a minimal of a triple B, which is required.

Ms Braid: No, I am not qualified to express any opinion as to the debt ratio that is required for any specific bond rating. You would need to be a financial consultant or an expert in that area to express that opinion, and I have no such qualifications.

Mr. Fontana: Well, CP's debt rating is A minus -

Ms Braid: That is correct.

Mr. Fontana: - and you carry a long-term debt of $1,071 billion.

Mr. Ritchie: The A minus, Mr. Fontana, is based on the overall enterprise, not on CP Rail. It's based on industries that have completely different futures than the rail industry. We're a very strong energy company and an ocean shipping company, both of which in the eyes of the investment community are better investments than the rail industry.

Mr. Fontana: I'll summarize, because I still don't know where CP is coming from then.

In order for us as the Canadian government to ensure in the public interest that the Canadian taxpayer gets fair value for a public corporation, based on the assumptions we were given, based on the fact that we were told that internal cash surpluses and the disposal of certain non-rail assets could achieve close to the $1 billion mark, hence reducing CN's debt from $2.5 billion to $1.5 billion, is that satisfactory to you, or are you saying that beyond $1.5 billion you don't want the taxpayer to have to contribute any more?

Mr. Ritchie: We have said that we can accept the decline in the debt by the selling of assets. We've said that in our brief, and we're not going to add all the adjectives to it that you continue to attribute to our feelings in this area, but that's a pragmatic approach to getting this privatization done.

Mr. Fontana: So if they can achieve a sale of close... and be able to use cash and sale of assets to the tune of $1 billion, even though the investment banker says it's too hard to tell now what may happen - and of course that comes later on in the process - you have in principle no problem.

Mr. Ritchie: If the investment banker can't tell now, I think it's a little presumptuous for us to say we have no problem.

We are very concerned about what happens when the investment banker says, ``What would happen if I can't sell it?'' And that's where we are. Historically, this is what happens. We're told that the equity value is high and we bring down the debt, and then at the eleventh hour when the issue is ready to go to market and the investment banker says, ``Oh my gosh, we can't sell it, what happens?'' the value of the -

Mr. Fontana: The investment bankers this morning -

Mr. Ritchie: - investment goes down.

Mr. Fontana: - said there was between $300 million and $400 million in cash, being internal cash, surplus cash and surplus cash from operating, disposal of certain assets that has been achieved thus far, and another $400 million to $600 million, based on market value of some of those non-core rail assets. There's the $1 billion.

To be truthful, the investment bankers indicated that potentially, or something thereabouts, it could be a $200 million shortfall - who knows - because you can't set the value of those things right here and now.

Do you have any objections to those assumptions?

Mr. Ritchie: That's what we've said. Sell the assets for what they're worth and reduce the debt accordingly. But assets have a strange way of not being worth what they are when you put them on the market.

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Mr. Fontana: Who's to determine...how would you then?

Mr. Ritchie: The market would determine it. You have to do it. That's what happens in a privatization. What's it worth?

Mr. Fontana: I think the minister has already indicated that. I don't they have said anything different.

The Chairman: Thanks, Mr. Fontana. The minister has indicated, of course, that those non-core real estate assets would be looked at in the framework of market value. So that has already been established.

Mr. Guimond: Mr. Ritchie, where is the head office of CP Rail?

Mr. Ritchie: It's in Montreal.

Mr. Guimond: Are you working in a bilingual environment?

Mr. Ritchie: Effectively, yes.

Mr. Guimond: How do you feel?

Mr. Ritchie: I like Montreal, Mr. Guimond.

Mr. Guimond: I have another question along the same line, but Mr. Gouk will probably ask you the same question for the sixth or seventh time and I don't want to fight against my colleague from the Reform Party, because when the Liberals see the opposition fighting together it's like the Roman empire when Julius Caesar said diviser pour régner. Canada, stand together on this stand together ``ha, ha''. We can see how the westerners from the Reform Party consider Quebec bashing.

The Chairman: Is there a question here?

Mr. Guimond: Mr. Ritchie, you wrote in the conclusion of your brief on page 15:

Industry structural problems in Eastern Canada will not be corrected by CN privatization and will have to be addressed soon.

What is the meaning of this sentence?

Mr. Ritchie: It means the other problems of the railways operating in the private sector in Canada. It is the problems with line rationalization, the problem of taxation, and the other aspects of regulation under NTA reform, or NTA. Those are the major issues.

In eastern Canada there is that very large problem that will not go away with privatization. That is the lack of density on lines in eastern Canada. That was a problem three years ago, two years ago, last year, and is a problem now. That hasn't gone away with privatization.

Mr. Guimond: I missed the point.

Mr. Ritchie: The over-capacity of railway lines in eastern Canada was a problem we tried to address through merger and acquisition and it is still out there; it has to be addressed. Simply making CN private does not address that issue.

Mr. Guimond: Do you still consider you're not in the same ballpark as the trucking industry? Do you still maintain that the rail industry is at a disadvantage in Canada?

Mr. Ritchie: Absolutely, particularly when you compare Canada with the United States. Trucks are much heavier here and much longer overall than they are in the United States. Yes, trucks pay fuel tax, as do railways, but railways pay property tax and trucks do not. We just do not think there is a clear policy guideline on trucks, Mr. Guimond, so thank you for pointing that out to me.

Mr. Guimond: I will ask the same question tomorrow afternoon to the trucking industry.

Mr. Gouk: You offered $1.4 billion for the eastern operations of CN. Had it taken your offer and taken the $1.4 billion off its debt, it would have been left with $1.1 billion. We've heard today that the real estate assets averaged out are worth about $500 million, and its surplus cash on hand and a variety of things are worth $300 million, which would have left it with a $300 million debt and the entire western operation.

Would that, in your opinion, be a viable rail operation?

Mr. Ritchie: Definitely. But I'm going to let Katharine answer that because she's the one who put together what we considered to be a balanced offer for the east that would have protected the viability of the CN west. I think she deserves to explain it.

The Chairman: Before you do that, I have to interject for a moment, Mr. Guimond, because what our last witness said wasn't as clear as that.

Mr. Gouk: It was pretty clear.

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The Chairman: He was saying, and they made it very clear, that the figures were all ballpark; they weren't sure. They weren't as solid as you gave them because they said the non-core surplus assets were between $300 million and $400 million. Between $400 million and $600 million for -

Mr. Gouk: With all due respect, I asked a hypothetical question.

The Chairman: Mr. Gouk, I have the floor here for a moment. I'll give you the extra time; don't worry about your time.

He gave you a ballpark, and then there was the sale of non-core real estate assets between $400 million and $600 million, and the smaller component of the remaining $200 million to $300 million. So as long as your question is framed in the context of the larger generalities as stated by the previous witness, that's fine. But you can't just nail numbers down as you did in your original question because that's just not -

Mr. Gouk: I believe the way I posed the question was to say this is what the witness said. I gave the parameters the witness had given. CP hasn't bought the eastern operations in any case. I'm just trying to get a sense of the value. Should such a scenario have occurred, would it have been viable in western Canada?

The Chairman: As long as the witnesses understand that the parameters were much larger than the direct numbers given by the Reform Party.

Ms Braid: I wasn't here during all of this morning's presentation so I won't comment on any of that. I should point out that Canadian Pacific's offer to purchase the eastern operations of Canadian National did not include any non-rail assets. So all the excess real estate, the CN Tower and all of those things, could have been sold in any event.

Mr. Hoeppner (Lisgar - Marquette): I have two short questions on running rights. We know you're going to compete against CN or whomever buys CN. The short lines have told us at a number of subcommittee meetings that they can reduce costs by gathering grain in certain areas and that they have to work together with you. We also know that to make grain movement efficient you will probably have to share some running rights with whomever the opposition is when CN is sold. Do you object to that? I see some potential, especially on the short lines, for grain handling and also tourism, because we've seen some very successful short lines. I would like to ask you to comment on that.

As well, I'm one of the farmers who is only about 12 miles from a U.S. line. You will also have to compete with some of the U.S. railways because grain movement will probably go in more of a south-north direction in the near future. I see that the railways in Canada are paying something like $560 million more in property taxes, fuel taxes, and sales taxes. Don't you have to have some kind of reduction in that to be competitive as far as the North American continent is concerned?

Mr. Ritchie: Those questions are inter-related and I think you meant them to be because it's very difficult to try to separate different parts of the system into short lines and class one lines. Short lines and class one lines are symbiotic; they work together. You cannot then create an artificial system that allows the short line to run on the assets of the class one through regulation and expect the class one to exercise a healthy symbiotic relationship with the short line. You have a different competitor that's created by artificial regulations and you ask yourself why the class one would put money into its line to allow the short line to do it. We wouldn't do it. I couldn't convince our investors, who have not made a rate of return, that this would be a good idea for them. They just wouldn't do it.

With respect to the U.S. rail carriers, this is a question we've been presenting to the Government of Canada and the provincial governments for a minimum of 10 years. They all understand the issue, but we have yet to see any meaningful action. We've had some in Manitoba. We hope we'll see a little in British Columbia and a bit in Quebec, but it's generally been the other way.

Mr. Hoeppner: So it is a problem.

Mr. Ritchie: It's a very huge problem, not only on tax but on the level of capital cost allowance for investment. I was listening to Mr. Nault's comments on productivity. A lot of our productivity is related to capital investment, and we are not encouraged in Canada to make capital investments. Not only do we not have the money, but once you do invest it takes about double the time it takes an American company to write it off. So what do we get? The locomotives in our fleet are the oldest in North America - 24 years. CN is not much better. Union Pacific is at 10. So you're competing with people who have a lot tighter equipment and whose maintenance is a lot lower. The fuel consumption is 20% better in a new locomotive versus an old, and those were the structural issues I was referring to Mr. Guimond that we have to address. We can't have it all.

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Mr. Nault: Mr. Ritchie, I guess the most obvious question anyone should ask around this table is, do you believe there's room for two national railways in Canada?

Mr. Ritchie: A lot of it is going to depend on what type of regulation we get in the long term. A lot of people look at the railway situation in Canada and ask why we can't have what the American people have. I answer that by saying there are more railway companies in Canada than there are in the United States. If you look at it on the ten-to-one factor, there are only six class ones in the United States. There is only one in the eastern United States.

Eastern Canada has a problem. It does not have any coal movements, as eastern U.S. railways have. We are fighting to try to keep the companies alive because of the fact that we haven't been able to reduce the railway lines.

Is there room for two? Time will tell. For me to speculate on that, I think, doesn't help you and doesn't help my company.

Mr. Nault: Would you then be prepared to accept that the interest of CP in buying and merging with CN on the eastern lines would be a very obvious indicator that you don't believe there's room for two major railways in eastern Canada and in fact in Canada as a whole? Would that be a fair assessment to make, based on the offer CP made to purchase the eastern line?

Mr. Ritchie: It would be a fair assessment that we believed that was the quickest way to arrive at railway viability in eastern Canada. Western Canada, Mr. Nault, is a different situation. We believe that situation is more stable than the east.

Mr. Nault: I understand the discussion of density and that matter. I won't get too heavily into that because I'm under the assumption, Mr. Chairman, that we will be getting CP back as witnesses when we deal with the regulatory changes, which of course you've alluded to in your presentation. I think those are very important matters.

One I wanted to touch on is on page 7. You put it at 3.6, the second-last paragraph:

The best way to attract investment to a privatized CN will be through measures that improve the prospects of the whole railway industry, including a climate that enables railway consolidation where economic conditions indicate.

By that statement, would it be fair to suggest that you're telling us you'll have a better chance of merging with CN when it's privatized than you would under a public corporation?

Mr. Ritchie: I don't believe that's what we were referring to in that sentence. What we were referring to are the changes that are now contemplated in the NTA where we could work with CN.

If we can facilitate the elimination of one line of railway, for example, and allow the other company to run on it voluntarily, that's what we would see in that. It doesn't make any sense to have one railway operate on the other and you keep the other line going, which has been the historic situation to date.

Mr. Nault: Maybe we can clarify this, because there's a perception when we talk about the eastern lines that it means Atlantic Canada. Those of us who have been out to Atlantic Canada know that CP's not there; that's one issue. But the other is that Atlantic Canada itself has had rail rationalization dealt with in an extreme manner for a number of years now. So when we talk about eastern Canada, are we not in fact talking about Quebec and Ontario where the majority of rail rationalization has to take place?

Mr. Ritchie: We've historically used Thunder Bay, which has been the mirror split with the U.S., which is the Mississippi River. I would remind you, Mr. Nault, that we still have 12 miles of railway line in Edmonston, New Brunswick.

Mr. Nault: I bring that up because there is a perception by Atlantic Canadians that they'll be left out in the cold and there's going to be more rail rationalization in Atlantic Canada. But I can't see where you're going to rationalize any more. I've been through there. I looked at all the track. There's not a whole lot left. So I think we need to clarify that for the record, that the rail rationalization that has to be dealt with is in Quebec and Ontario.

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Mr. Ritchie: I think in Atlantic Canada there's still the question of the Gaspé line.

Mr. Nault: It is my understanding there's only about 400 miles left.

Mr. Ritchie: It's important to those people, but don't forget there's still the New Brunswick south railway and the CN North American railway that's operating as a short line, which is what we're trying to encourage. So there's still a rail presence out of St. John's that's not CP.

No, there's a rail rationalization that has to take place from Vancouver Island right on through.

Mr. Nault: My last question, Mr. Chairman. I think it's important to get this on the record.

CP has talked about expanded running rights and a cap on grain rates. Of course, they didn't talk about the level of service provisions, but we'll get into that some other time.

I wanted to ask you about the effects of a cap on grain rates and what that really means to the whole process of the ability for CN and CP to be competitive in the long run. I would like to know what that means to the railways because of course farmers out west in most cases are asking through the Minister of Agriculture to put that cap on grain rates. I think we should get a clarification of what that really means as far as regulatory change.

Mr. Ritchie: We believe the intention of the government, which we encourage, is to have the grain collection and delivery system develop so that the efficiencies develop. That means capital investment has to be put in place. That means those who do not pay that capital investment have to pay a higher variable cost. To do that, you need the rate base to be flexible. If you want to ship one car out of one line a year, you should not pay the same price as a person would pay who's willing to put a high through-put elevator on that can load a 110-unit train of grain.

To make that differential add up, you need the railway variable cost, plus the capital cost of the elevator system in this case, and that would exceed the total cost to the shipper. The total cost to the shipper would exceed what the present cap rate would be.

Mrs. Cowling (Dauphin - Swan River): My question relates somewhat to what Bob has just asked.

For the record, what volumes of grain moved through the rail system, and how vital is the grains industry to the railway industry?

Mr. Ritchie: It is 25% of our revenue base right now and the volume - I get mixed up in metric tonnes - of crop is about 42 million.... I would say it is around 16 million metric tonnes for CP Rail, but I can get that number confirmed.

Mrs. Cowling: Thank you.

To follow up on the cap on the maximum rates, do you believe the impact it might have on the grains industry is that it will not allow for deregulation of a number of branch lines right across the country? Will it have an impact on that?

Mr. Ritchie: We believe it would really stifle the innovation that would take place. We don't believe it's in the long-term best interests of the grain farmer.

We can understand there's a lot of distrust in the grain industry right now. We don't know how to overcome it. We've been trying to do that over the years but it exists. We have to allow it to evolve, and that means some rates are going to be higher and some are going to be lower. The competitive advantage is going to be, therefore, with the Canadian grain industry as a whole.

Regulating it, capping and putting $10,000 for branch-line abandonment is a form of regulation that never allows systems to find their most economic level.

We can understand a transition, but what we're talking about is caps ongoing, and there would be no motivation for the then ministers of agriculture or transport to change. It would be too politically charged. We recommend that we allow the transition to go, and at the end of the transition period allow it to go to the NTA.

Mr. Comuzzi: Mr. Chairman, let me get back to Mr. Nault's question for a moment. Let me be specific about the province of Ontario.

Would the situation you described with respect to the amount of unused line or infrequently used line apply fundamentally in the province of Ontario?

Mr. Ritchie: Katharine, you're a student of the lines in Ontario. Do you want to answer this?

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Ms Braid: I think there are under-utilized lines in the province of Ontario. The average density on all lines is very, very low. It's well below half the average density of U.S. railroads.

Mr. Comuzzi: Would those lines be best used through the short-line system? Is that a possibility?

Ms Braid: To answer that question you'd have to look specifically at each individual line. There are good candidates for short lines if there is sufficient on-line traffic so that a short line operator with lower costs can provide a good service. It's often a very good alternative. So you have to look at each line segment. Often you have to take a line and break it up. It'll have pieces that'll be good short lines and some pieces that won't.

Mr. Comuzzi: I wouldn't want to delve into your corporate planning, but would some of that information be available to us, those lines that would perhaps be best served by short lines?

Ms Braid: Canadian Pacific offers for sale anything it feels is a good candidate for short lines. It has been our policy to -

Mr. Comuzzi: But has a decision been made yet on any of those?

Ms Braid: No, not specifically. We go through a process of reviewing lines.

Mr. Comuzzi: Would you be prepared to make your projections for those you feel are not adequate density lines available to us so we can get a sort of picture of where we're going? To be parochial, I'm thinking particularly of the province of Ontario. Is that asking too much?

Ms Braid: I think it would be asking more than we could usefully do for you right now.

Mr. Comuzzi: Okay.

Mr. Ritchie: But you might be asking what we will be required to do if the new NTA goes through, because we will then have to produce a three- to five-year plan.

Ms Braid: We're trying to get ourselves into position to meet those requirements, if they come into place. For instance, in the U.S. you file a map showing potential abandonments or short lines. If something like that happens, when it does happen, I expect to be in a position to meet that requirement.

Mr. Comuzzi: I was on Highway 401 yesterday coming from Detroit to Toronto and at one particular time I was surrounded by 22 trucks. Mine was the only car. It's getting horrendous. We've got to figure out a better way of moving our stuff.

It seems we've basically got two offers on the table. There's the CP offer with respect to part of the CN assets, and an offer that is a privatization mode. In the best interests of the eventual decision that has to be made, I would very much like to see the benefits of the CP offer.

The Chairman: Is this a question for the witnesses, or are you surmising? Can we hear the question? Time is running.

Mr. Comuzzi: It's a good comparison for making the final decision as to what is the best thing to do with respect to the privatization of CN, to maximize the investment for the shareholders. Would you agree with that?

Mr. Ritchie: Yes.

Mr. Comuzzi: I'm talking about the comparison of the two offers.

The Chairman: We have one question left from Elsie Wayne.

Mrs. Wayne (Saint John): Rob, I want to ask you a question. Are most of your efforts with CP focused on doing business with the Port of New York and the ports in the U.S., rather than promoting the ports in Canada? How much of your time and effort is focused on the New York and U.S. ports, and how much is focused on Canadian ports?

Mr. Ritchie: I'm always aware that I serve many ports, so I try not to have any favourites.

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I would look at the success CP has had out of the Port of Montreal and its historic success in New Brunswick. We have moved more containers per year out of New Brunswick than we are doing now out of New York. We are not a huge success, because of the barriers the U.S. ports have. The Port of Montreal is very competitive for us. We're trying to make it competitive with Norfolk, which is the other big through-put port for the U.S. midwest. That's where the competition lies.

The Chairman: Thank you, Elsie.

Thank you, Mr. Ritchie and Ms Braid, for coming before the committee, for your submission and the summary and for answering our questions.

We'll reconvene in this room at 3:30 p.m. The meeting is adjourned.