Declining volumes mute CP Rail's projections
Scott Deveau
Canwest News Service

TORONTO – Softer volumes are expected to drag on whatever boost a weaker dollar and lower fuel prices might have given Canadian Pacific Railway Ltd. in the fourth quarter, management said yesterday.

Shipments are expected to be down in the final three months of the year due to the downturn in the North American economy, and in particular, due to an ongoing strike at Potash Corp. of Saskatchewan.

Those declining volumes are expected to offset much of the boost its fuel surcharge — the price of which is almost always based on a two-month lag — might have given it now that diesel prices have subsided.

"We're not going to ride that tailwind the way some others might for the fourth quarter," said Fred Green, CP chief executive. "By the time we get through the end of the year, we're back on a level playing field."

The news comes as Canada's No. 2 railway reported a 21-per-cent decrease in its third-quarter profit after a $28-million writedown on its asset-backed commercial-paper investment. That dragged its earnings down to $173 million, or $1.11 a share, compared with $1.41 a share last year.

While the railway beat the Street's estimates, CP became the only top-tier North American railway to report an earnings slip in the third quarter. Its larger domestic rival, Canadian National Railway Co., by contrast, reported last week its third-quarter earnings increased 14 per cent.

CP did, however, reiterate its earnings outlook for the year of between $4 and $4.20 a share — or down two per cent to eight per cent year-over-year — due in a large part to its continued pricing power, which helped increase freight revenue by eight per cent during the quarter, despite lower volumes. Every sector made gains except grain, which fell due to a late harvest. Management said they expect revenue growth of four per cent to six per cent this year, down slightly from its previous estimate of six per cent and eight per cent.

In addition, a recently implemented efficiency drive appears to have not taken hold yet, with the railway's operating ratio — an important gauge of its profitability, measuring operating costs as a percentage of revenue — slipping 3.1 percentage points during the quarter to 76 per cent.

The railway's operations were also hampered by flooding in the U.S. Midwest.

© The Ottawa Citizen 2008