Canadian Pacific grows, but winter weather clobbers quarterly results

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Canadian Pacific CEO Keith Creel
Canadian Pacific
CALGARY, Alberta — Canadian Pacific’s first-quarter profit tumbled under the weight of harsh winter weather and rising costs that outpaced growth in revenue and traffic, the railroad reported on Wednesday.

CP’s quarterly net income declined 19 percent, while earnings per share sank 18 percent.

But when adjusted for one-time items from a year ago, CP reported net income of $390 million, up 6 percent, on revenue of $1.6 billion, a 4-percent increase. Adjusted earnings per share were $2.70, up 8 percent from a year ago and above analyst estimates of $2.69, according to an I/B/E/S survey.

CP’s operating ratio rose to 67.5 percent from 65.6 percent a year ago, adjusted for an accounting-rules change that took effect this year and has a disproportionate impact on Canadian railways.

"This was a challenging quarter, as we battled extreme weather and unprecedented demand, specifically in the northern reaches of our network," CEO Keith Creel said. "Despite these challenges, we delivered 6 percent more freight than last year, demonstrating once again the resiliency of our operating model and the commitment from our family of professional railroaders.”

The departure of winter weather allowed CP to gain momentum in March, which Creel says was one of the railroad’s best months in three years.

“Our demand environment remains very robust,” Creel says, with several traffic segments at or near record levels.

Creel expressed hope that the railway could avert a strike by engineers, conductors, and signal maintainers, which could begin as soon as Saturday morning. CP is committed to negotiating a “fair and balanced” deal with the Teamsters Canada Rail Conference and the International Brotherhood of Electrical Workers, he says.

All but two of CP’s traffic categories were up during the quarter. Potash; fertilizer and sulphur; energy, chemicals, and plastics; metals, minerals, and consumer products; and intermodal all were up by double-digit percentages based on revenue ton-miles. Only grain (down 7 percent) and automotive (down 10 percent) declined.

CP’s key operating metrics were a mixed bag during the quarter. Terminal dwell was up 11 percent and average train speed fell 8 percent, partly due to the impact of extreme cold, heavy snowfall, and even avalanches that shut down Fraser River Canyon in British Columbia.

But train length was up 1 percent and average train weight grew 4 percent, helping fuel efficiency improve by 3 percent.

Operating costs rose 12 percent, driven by a 25-percent increase in labor costs and a 28-percent spike in the average price of diesel fuel. The impact of winter weather added a point to CP’s operating ratio, as did the rising fuel prices.

Executives expected CP’s operating ratio to improve this year as weather moderates and revenue picks up amid strong demand, particularly in potash, intermodal, and energy-related commodities such as frac sand and crude oil.

Potash production at the new K+S mine in Saskatchewan — which opened last year, reached by a new 19-mile branch off the CP main — is ramping up toward an annual total of 1.3 million metric tons, Chief Marketing Officer John Brooks says.

CP began hauling the potash in 135-car trains. It’s now moving in 155-car trains, heading toward a goal of 177-car trains by this summer, Brooks says.

CP is hiring 700 conductors and is remanufacturing 100 stored GE AC4400s and returning them to service in anticipation of additional traffic growth in the second half of the year.

Canadian pipeline capacity is tight, forcing oil producers to seek new deals with CP and CN to move their product. After the oil boom went bust in 2014, railroads are cautious about adding locomotives and crews for traffic that is likely to head to pipelines if and when more are built or expanded.

CP is working on reaching long-term contracts with several oil producers, Brooks says. But it’s too soon to tell if they will pan out, he says.

NEWSWIRETrains News Wire

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