What You Need to Know About CN Rail’s $25 Million Deal

On Friday, the government of New Brunswick announced that it would step in and give $25 million to CN Rail (TSX:CNR)(NYSE:CNI) for railroad upgrades. The upgrades are earmarked to maintain freight service in an area of the northern part of the province that was slated for closure.

In return, CN Rail has committed to spend the same amount of money to maintain and operate the line and its freight services for the next 15 years. CN announced back in 2012 that it would need $50 million from the government and other partners to upgrade the line or it would discontinue the Newcastle Subdivision services in March 2014. The work is expected to begin later this spring.

The improvements are slated to happen along the 224km-long Newcastle Subdivision, which is located from Catamount, NB (just west of Moncton), to Irvco NB (about 32 km west of Bathurst).

CN originally marked this area to be discontinued because it was running annual losses due to a lack of traffic volumes and mounting infrastructure costs. CN acquired this line when it acquired the Quebec Rail Corporation in 2008.

Pressure to maintain services mounted from shippers and residents and even included a Facebook page.

However not all of the Newcastle line will be saved by this deal. A 70km section of the track was not part of the deal with CN and NB. A significant infrastructure investment and lack of rail traffic kept this portion of the track from being salvaged.

This will lead to a gap of freight service between Bathurst and Moncton, unless a private interest or another level of government steps up when the track is offered up in early February.

Foolish bottom line

With this government hand-out, CN will continue to be able to provide freight services to northern New Brunswick, an area that relies heavily on CN to move their goods.

While this might seem like a drop in the bucket for a company that moves $250 billion worth of cargo a year, these fringe services play an important role in maintaining CN as a nationwide rail powerhouse.

With all the bad press relating to recent derailments, any improvements to CN’s infrastructure should begin to settle the nerves of jittery investors.