US railroad operator Genesee & Wyoming, Inc. (GWR) said that it will cease its rail operations in southern Mexico - nearly 20 months after a hurricane swept away a third of its business.
Delayed reconstruction of government-owned lines damaged when Hurricane Stan hit southern Mexico in October 2005 is the main reason behind the decision to cease operations and sell its Mexican assets within the next month, the company said.
Before the storm, Genesee & Wyoming transported goods such as oil, corn and cement along a now-damaged portion of railway lines from the city of Tonala in the southern state of Chiapas to the Guatemalan border. Other parts of the railway are in still use.
The company, which has a 30-year concession to operate the lines, also found it difficult to acquire insurance against future hurricane damage, said Jeanette Rosado, a spokeswoman for Genesee & Wyoming’s local unit Compania de Ferrocarriles Chiapas-Mayab, or FCCM.
“We were talking with them to insure the lines against hurricanes. Every year there is a problem. They never said exactly no, but they haven’t said anything about it,” Rosado said.
The Greenwich, Conn.-based company’s shares fell 2.2% to $29.72.
In July 2006, Genesee & Wyoming said FCCM had received a letter from Mexico’s Communications and Transport Ministry, or SCT, indicating the ministry’s intentions to rebuild the damaged rail line.
But Rosado said “the entire agreement is not really that clear. We are not sure that they are going to start.”
The ministry had no immediate comment on Monday’s announcement by the US company.
In addition to the hurricane damage, Rosado said that FCCM was set to lose another third of its business after Mexico’s state-run electricity company, Comision Federal de Electridad, or CFE, said it would reduce its use of the railroad from 6,000 cars annually to only 1,000. The reduction is linked to a decline in regional demand for fuel oil, which CFE transported along FCCM-operated lines.
“Financially, the company was not sustainable,” Rosado said.
With its decision, Genesee & Wyoming expects to record charges in 2007 of approximately $12 million, or $0.30 per share, the majority of which will be incurred in the second quarter.
The company must first negotiate with the government over the sale of its assets, worth $17.5 million as of March 31 including trains, receivables and inventory. Under an agreement signed in 1999, the SCT has 30 days to respond. If the government doesn’t take over the assets, Genesee & Wyoming has the right to sell them to another party, the company said in a press release.
“The company is of course very worried about how to deal in a right way with the employees and clients,” Rosado said. It has 407 employees in Mexico. For now, it plans to operate for the next month and then close down.
Genesee & Wyoming also operates short-line and regional freight railroads in the US, Canada, Australia and Bolivia.
When asked whether the company would consider other investments in Mexico, Genesee & Wyoming spokesman Michael Williams said, “We would naturally be pretty cautious in Latin America now.”
The Mexican government privatized most of the country’s railways in the late 1990s. (Dow Jones & Company, Inc.)