Chicago and North Western Holdings Corporation

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Chicago and North Western Holdings Corporation

One North Western Center
Chicago, Illinois 60606
(312) 559-7000
Fax: (312) 559-7072

Public Company
Incorporated: 1989 as holding company for Chicago and North Western Transportation Company, originally chartered in 1836 as Galena and Chicago Union Railroad
Employees: 5,910
Revenues: $979 million
Stock Exchanges: New York

Chicago and North Western Holdings Corporation is the holding company for the Chicago and North Western Transportation Company, the eighth largest railroad in the United States. Chicago and North Western (CNW) operates about 5,800 miles of track, serving nine midwestern and western states. The company is a leader in the transportation of many materials, including coal, motor vehicles, grain, iron, steel, chemicals, and lumber. In 1991, CNW hauled approximately 40 billion ton-miles of freight. CNWs east-west main line between Chicago and Omaha, Nebraska, is a primary part of the transcontinental freight path across the center of the country, connecting the Union Pacific Railroad lines to those of major eastern railroads. CNWs five major business groups correspond to the classes of freight they haul: Energy; Agricultural Commodities; Consumer Products; Global; and Automotive, Steel, and Chemicals. Western Railroad Properties, Inc. (WRPI), a wholly owned subsidiary, is part of the Energy group. WRPI transports low-sulphur coal from the southern Powder River Basin in Wyoming, the nations largest low-sulphur coal reserve, primarily providing for electric generating plants in the Midwest and the South. CNW also operates a commuter rail service in the Chicago area under a contract with the Regional Transportation Authority.

The system that was to become the Chicago and North Western Railway came to life in January of 1836, when the charter for the Galena and Chicago Union Railroad (GCU) was granted. The goal of the GCU, according to its charter, was to reach from Chicago to the Mississippi River, with its nearby lead mines at Dubuque, Iowa, and Galena, Illinois. No work was done, however, until 1847, when the project was bought out by a group of Chicago businessmen led by William Butler Ogden, Chicagos first mayor. By the end of 1848, the first ten miles of the railroad were complete and the GCUs first locomotive, the Pioneer, was in action.

The railroad grew quickly in its early years, partly because the main wagon roads were so unreliable. By 1850, the railroad was 42 miles long, reaching the Fox River at Elgin, Illinois. That year, over 37,000 passengers rode the line. In the next three years, its length nearly tripled, terminating at Freeport, Illinois, 120 miles from Chicago. In 1854, GCU started building a more direct line to the Mississippi. This line, from West Chicago to Fulton on the Mississippi, became part of what is now the main double-track Chicago-to-Omaha line. Several firsts were achieved over the next few years, including being the first western railroad to operate by telegraph in 1856 and the first to use Pulman Hotel Cars west of Chicago in 1877. In 1864, GCU merged with the Wisconsin-based Chicago and North Western Railway Company (of which GCU President Ogden was a part owner), and though the Galena was the larger of the two railroads, the combined company adopted the name Chicago and North Western Railway, since it better reflected the planned direction of expansion.

By 1867, the CNW stretched to Council Bluffs, Iowa, on the Missouri River. Here it became an important supply line from the East for the Union Pacific, which was about to cross the Rocky Mountains. The first transcontinental line was finished in 1869 and included the CNW as a vital piece of the famous Overland Route.

The CNW continued to expand quickly through the remainder of the nineteenth century. In addition to its westward growth, the railroad was transporting huge amounts of iron ore and lumber from northern Wisconsin and Michigans Upper Peninsula. By 1880, the Chicago and North Western may have been the largest single railroad in the United States in miles of road. Two years later, CNW gained controlling interest in the 1,147-mile Chicago, St. Paul, Minneapolis, and Omaha Railway Companyor Omaha Road. This acquisition gave the CNW a connection with lines into Canada, and by 1885 the CNW systems gross revenues were third highest among the nations railroads, trailing only the Pennsylvania and the Philadelphia & Reading. The systems tracks totaled 5,820 miles that year, and 8,308 miles by the turn of the century.

In the first decade of the twentieth century, CNW became one of the first railroads to strongly emphasize safety. R. C. Richards, the companys general claim agent at the time, wrote a book in 1906 called Railroad Accidents, Their Cause and Prevention. This led to the creation of the first railroad department specifically geared toward safety and accident prevention. CNWs Safety First campaign, begun in 1910, became a national slogan, and in 1912 Richards contributed to the founding of the National Safety Council.

The pattern of unhindered growth for railroads began to change in the 1920s. As competition from automobiles and trucks increased, the railroad system began to shrink. CNWs mileage peaked in 1925, after which secondary branches were closed because of highway and waterway competition and increasing regulation. The onset of the Depression made matters worse, and CNW foundered in the 1930s. Company revenues dropped from $154 million in 1929 to $72 million in 1932. In 1935 the company went bankrupt and petitioned for reorganization.

The reorganization of CNW took nine years to complete, the result being a much more streamlined operation. During this period, R. L. Williams, who became chief executive officer in 1939, sold or abandoned over a thousand miles of unproductive track, as well as 259 unnecessary depots, 777 other station buildings, 1,467 miles of right-of-way fencing, and a couple thousand other superfluous structures. CNW also began to rapidly switch from steam locomotives to diesel power. Its diesel-electric force grew from eight engines in 1940 to 146 in 1947. In that same span, the number of steam locomotives owned by the company fell from 1,252 to 890. Also during the reorganization period, CNW became a pioneer in streamliner passenger service. The first of its fleet of 400 streamliners was the Twin Cities 400, which first ran in 1935. By 1947 CNW was running daily transcontinental streamliners in conjunction with Union Pacific. As the railroads first century of operation drew to a close, it ranked sixteenth among the nations railroads in total operating revenues and eighth in passenger revenues. Farm products accounted for 27 percent of CNWs freight revenues, confirming its reputation as a granger railroad.

In spite of the reorganization and streamlining efforts, CNW struggled financially through the first half of the 1950s. At the end of the first quarter of 1956, the company showed an $8 million deficit. Poor management, high terminal costs, short hauls, and light traffic had led to a situation so severe that millions of dollars worth of track and scrap were being sold just to meet payroll costs.

A startling turnaround began when Ben W. Heineman was named chairman of the company in April of 1956. Heineman, a lawyer, was only 42 years old at the time and relatively new to the railroad business. He began making bold moves immediately. Many older executives were retired or demoted in favor of younger, more open-minded managers. He decentralized the departmental structure of the company to resemble the divisional organization used by other major railroads. Realizing that CNW already owned enough diesel engines to run the line, he abandoned the entire fleet of 287 steam locomotives without acquiring additional dieseis. And he infuriated shippers by eliminating free pickup and delivery of less-than-carload shipments, saving the railroad about $1.5 million a year in trucking costs alone. Forty-five hundred people were cut from the payroll in a year and a half, as bookkeeping and accounting methods were mechanized and watchmen replaced by automated equipment at crossings.

CNWs financial situation steadily improved under Heinemans leadership through the next few years. The company showed a profit of $8.5 million in 1963 even though total revenues were lower than they were prior to Heinemans arrival. During this period CNW acquired some smaller railroads, including the Litchfield & Madison, the Minneapolis & St. Louis, and the Chicago Great Western.

In the later part of the 1960s, CNW began to actively take part in the trend among railroads to diversify their business in order to survive. First, two chemical companies were acquired in 1965; next, the company attached an old conglomerate, the Philadelphia and Reading Corp., which included Lone Star Steel and Union Underwear. In 1968, Northwest Industries was formed as a holding company for the whole collection of companies, with Heineman in charge. The railroad itself, however, was losing money. In 1969 alone CNW lost $14.8 million. By 1970, it was clear that the CNW was the biggest drag on the growth of Northwest Industries. Once again, a program of massive track abandonment was undertaken in order to cut costs and streamline the system. In spite of these efforts, Heineman decided that Northwest Industries should sell the railroad, and he began looking for buyers.

After failing to sell CNW or merge it with other railroads in the region, the idea of an employee buyout arose. The idea first belonged to Larry Provo, who had joined the company as an accountant at age 29 and would go on to succeed Heineman as president. After two years of negotiations, the employee buyout deal was completed in early 1972. Under the terms of the agreement, employee purchasers had to commit to buy at least $1 million worth of stock. In May, $3.6 million worth of shares were bought when the stock was offered, making the company the largest employee-owned corporation in the United States. One thousand of the 14,000 employees of CNW took part in the purchase, ranging from Provo himself, who invested $100,000, the maximum allowed, to secretaries who bought the minimum ten shares for $500. The official name of the company was then changed to the Chicago and North Western Transportation Company. CNW reported profits of $4.76 million for its first four months under employee ownership, compared to $4.4 million for its last full year as part of Northwest Industries. With assets in 1972 of $436 million, CNW was at that time the twelfth biggest railroad in the country.

The streamlining of CNWs operations continued throughout the 1970s. Twenty-four hundred miles of underused track were abandoned between 1970 and 1977, leaving just under 10,000 miles in use. During the recession of 1974 and 1975, eight percent of the companys work force was laid off, and hundreds of the companys obsolete 40-foot grain cars were disassembled at the Clinton, Iowa, repair shop and sold for scrap. Most of CNWs gains in earnings were generated by its 500-mile stretch of double track roadbed between Chicago and Omaha. Traffic along this stretch, which included the hauling of produce, coal, and piggyback trailers, more than doubled during the 1970s, reaching 350,000 cars in 1977. In spite of these factors, CNW lost $8.3 million in 1975.

In October of 1976, Provo died and James R. Wolfe became president of CNW. The company that Wolfe inherited was struggling, largely due to railroad wars in which too many carriers were competing for too few customers. Wolfes solution was to adopt a strategy contrary to that of the other regional carriers. The Milwaukee Road and the Rock Island, CNWs primary competitors, both began to seek transcontinental business. Wolfe and CNW did the opposite, selling off rights-of-way and scrapping another 2,000 miles of track. These moves amounted to discarding 40 percent of the system that had accounted for a mere four percent of profits. Thanks to these measures, CNW earned $16.2 million in 1977 compared to a $389 million loss for the Milwaukee Road and liquidation for the Rock Island. These gains were partly due to increased interchange business from Union Pacific on its main east-west line as well as a rich new auto-carrying contract from Toyota and the companys first mail contract. By 1980, CNW had the preeminent routes through the Midwest going both east-west and north-south, having bought out the best lines of those two foundering competitors. The companys profits were up to $39 million that year.

CNW and its subsidiary, Western Railroad Properties, Inc., began serving the gigantic Powder River Basin coal mines in 1984. The low-sulphur coal, needed to meet clean-air regulations in some industrial regions, was hauled along 210 miles of track from the Basin in eastern Wyoming to Joyce, Nebraska, where it connected with the Union Pacific. In 1987, this run produced a $59 million profit, for which CNW hauled about one-fifth of the areas coal output that year.

Nevertheless, the 1980s were a difficult decade for railroads in general. The deregulation of the trucking industry in 1980 eliminated some business, and railroads were also hard hit by the farm depression. In order to create an easier mechanism for diversifying, a new holding company, CNW Corporation, was formed in 1985. Subsidiaries formed or purchased soon thereafter included 400 Freight Services, Inc., and the snowplow manufacturer Douglas Dynamics, both of which were sold off in 1988.

In 1986, work was completed on Global One, a highly automated double-stack facility located near downtown Chicago. Double-stack container service, which had first been tested two years earlier by CNW and Union Pacific, had grown so popular that the company saw fit to invest $36 million in the facility, the first in the United States geared completely for double-stack service. Global One is capable of loading and unloading three double-stack trains at the same time, each 200 units in size. A second double-stack facility, Global Two, was opened in 1989 to meet growing demand. Global Two is located just west of Chicago, near CNWs Proviso Yard.

Robert Schmiege became Chief Executive Officer of CNW in August of 1988 after Wolfes death. In 1989, CNW Corporation was purchased in a leveraged buyout by a group of investors that was led by Blackstone Capital Partners L.P. The group also included the securities firm Donaldson, Lufkin, and Jenrette, the Union Pacific Railroad, and CNW senior mangement. The buyout was engineered in order to avert a hostile takeover attempt by Japonica Partners, a New York-based investment group. Valued at $950 million, the buyout exceeded Japonicas bid of $747 million. A new holding company, Chicago and North Western Holdings Corporation, was thus formed to take the place of CNW Corporation, which continued to exist on paper as a subsidiary to Holdings and parent company to the Chicago and North Western Transportation Company.

Company strategy after the acquisition centered on controlling costs by, among other things, reducing personnel. This was made possible largely due to increased automation, facility consolidation, and reduction of train crew size. The average size of a CNW train crew fell from 3.7 persons in 1988 to 2.2 at the end of 1991, the lowest in the industry. The total number of company employees was reduced by almost 28 percentfrom 8,194 to 5,910during that period.

As part of a $1.2 million recapitalization of CNW, the company went public once again in 1992 with a $200 million stock offering. The largest stockholders were Blackstone, Union Pacific, the Management Investors, and Donaldson, Lufkin, and Jenrette.

Transportation of both freight and passengers is by nature a volatile industry. Chicago and North Western, like other railroads, is at the mercy of the economy, since the amount of freight to be hauled is dictated by the nations level of production. Railroads also frequently contend with the possibility of labor disputes, a problem that worsens as more jobs are lost to automation. And because railroads interchange freight with each other, a strike or lockout at one company can have a domino effect. Throughout its history, however, CNW has shown remarkable resiliency and has adapted to every crisis the industry has faced. For well over a century, the Chicago and North Western has been the only left-handed railroad in the United States, operating on the left track in two-track territory. Perhaps this willingness to go against the current will enable the company to continue finding ways to thrive and areas to pioneer.

Principal Subsidiaries

Chicago and North Western Transportation Company; Western Railroad Properties, Inc.

Further Reading

Casey, Robert J., Pioneer Railroad: The Story of the Chicago and North Western System, New York, McGraw-Hill, 1948; Hundred-Year Veteran of Railroading, Business Week, May 1, 1948; High Spots in the North Westerns History, Railway Age, October 30, 1948; Rieser, Carl, Ben Heinemans Very Special Situation, Fortune, September, 1957; Ben Heinemans Shrewd Poker Game, Forbes, September 1, 1964; Employee Ownership Refuels a Railroad, Business Week, December 9, 1972; Orphans Try Harder, Forbes, June 15, 1977; Gross, Lisa, To the Victors Belong the Spoils, Forbes, August 31, 1981; A Winning Rail Deal for Blackstone, Business Week, June 9, 1989; Form 10-K, Prospectus: March 31, 1992, and other background materials, Chicago and Northwestern Holdings Corp., 1992.

Robert R. Jacobson

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Chicago and North Western Holdings Corporation

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