Canadian Pacific will pay $1.5 billion in cash for the South Dakota-based DM&E and its subsidiaries. Another $1 billion will be added to the sale price if the long-planned expansion project into the coal fields of Wyoming is completed in the next 18 years.
DM&E wants to rebuild 600 miles of track across South Dakota and Minnesota and add 260 miles of track around the southern end of the Black Hills to the coal fields of Wyoming's Powder River basin.
The expansion plan, and resulting increase in rail traffic along the lines, has created friction with some communities in both states. A coalition of city and business officials in Rochester took legal action trying to block DM&E's plans.
DM&E has sought private financing for the Powder River Basin project since failing earlier this year to secure a $2.3 billion federal loan.
Kevin Schieffer, DM&E's president and CEO, says the buyout is the best way to get the extension built.
"That's first and foremost a driver of this deal, from my perspective," Schieffer says. "That's why we started out in this process."
Schieffer says the expansion is still a good project, and the merger with Canadian Pacific is a good fit for both railroads.
“What is your intent with this line? What do you plan to do with the line through Rochester -- how many trains?”Ken Brown, Olmsted County commissioner and DM&E opponent
"They understand exactly what we do -- not just the Powder River Basin project -- but as significantly about some of the opportunities in the area of ethanol, some of the growth opportunities we have on our system that we have. They know our system intimately and the intricacies of it, and we know theirs," sais Schieffer.
DM&E is the largest regional railroad in the United States, and it's the only carrier that connects with all seven of the nation's largest railroads.
Fred Green, Canadian Pacific's president and CEO, says DM&E revenue will hit about $100 million the first year for CP. He predicts there is potential for growth in the ethanol market as well as coal with the purchase of DM&E.
Green says the Powder River Basin expansion project is not a guaranteed expansion for CP.
"We're trying to treat this as a separate decision," Green says. "We get on and deal with what today is the regional railroad, and then there's a second set of decisions on what do you build in."
Green says any expansion program will need to meet his railroad's criteria and vision. He says the decision will be based strictly on whether it will bring in a profit.
Supporters of DM&E are excited about the deal with Canadian Pacific. Randy Rieke, secretary of the Minnesota Southern Grainbelt Shippers Association in New Ulm, says the combined rail system is an opportunity for agriculture and energy consumers throughout the Midwest.
"It really has been a growth for us, and we're looking forward to the future. I feel it's a big day for the communities along the DM&E corridor in southern Minnesota, because the future holds a lot of opportunities to come," says Rieke.
Concerns about DM&E hauling faster, longer trains across its line still remain.
Opposition to the DM&E's expansion plan has been strongest in Olmsted County, where Ken Brown is a county commissioner. Brown says his questions haven't changed -- no matter who owns the rail lines that bisect downtown Rochester.
"What is your intent with this line? What do you plan to do with the line through Rochester -- how many trains?"
Brown says members of the Rochester Coalition have made contact with Canadian Pacific and will outline their concerns. Under a best-case scenario in which construction on the expansion begins next year and lasts about three years, it would still be at least late 2010 before the rail line could begin pulling coal out of the basin, Schieffer said.
DM&E hopes to build up gradually to shipping 100 million tons of coal a year, but Schieffer said the growth potential in the region far exceeds DM&E's goal. The DM&E expansion would not cut into the market share of Union Pacific or BNSF, he said.
"If we're 100 percent successful and hit all of our targets, UP and BN will have to move more coal than they're moving today," he said. "It won't take an ounce of coal from their existing movements."
CP said it intends to spend an additional $300 million on regional railroad upgrades over the next several years.
The sale of the DM&E should be completed in about a month, and it'll take a year for federal approval for the deal.
(The Associated Press contributed to this report)