CN, CP Rail profits could leave sour taste for farmers

Solarina Ho
April 22, 2014
File photo of rail cars loaded with Canadian wheat in the Rocky Mountains on the Canadian Pacific railway line near Banff, Alberta
Rail cars loaded with Canadian wheat travel through the Rocky Mountains on the Canadian Pacific railway line near Banff, Alberta, in an October 6, 2011 file photo. The Canadian government introduced legislation on Wednesday that will allow it to set minimum levels of grain that railways must ship each year to avoid the huge backlogs of grain that have hurt farmers this winter. The Conservative government earlier this month ordered the country's two dominant railroads, Canadian National Railway Co and Canadian Pacific Railway Ltd to double their weekly grain volumes to 1 million tonnes combined over a four-week period to clear the massive crop logjam. REUTERS/Todd Korol/files (CANADA - Tags: AGRICULTURE FOOD BUSINESS COMMODITIES TRANSPORT POLITICS)

By Solarina Ho

(Reuters) - Canada's two largest railroads reported stronger-than-expected profits on Tuesday, results that could prompt fresh criticism from farmers already unhappy with the handling of a massive crop backlog during one of the harshest winters in decades.

Canadian Pacific Railway Ltd and Canadian National Railway Co have come under enormous pressure to clear the backlog, which resulted from a record harvest last year and subsequent disruptions of service caused by a frigid winter.

The problem prompted the Canadian government to impose minimum weekly grain delivery volumes on the railways for a limited period. In addition, legislation is moving through Parliament that would give the government authority to set minimum targets for grain movement.

CP's record first-quarter profit did not sit well with Jim Wickett a Rosetown, Saskatchewan, farmer who served as chairman of the Western Canadian Wheat Growers Association. It "rubs me a little bit," he said

"Western Canada had a bumper crop and we didn't really get to reap the benefits of that," he said. Railways "only ran trains when they could gain the maximum amount of profit. And as farmers we just have to sit and take it."

CN Rail, Canada's largest railway, said net earnings rose to C$623 million ($564.44 million), or 75 Canadian cents per share, from C$555 million, or 65 Canadian cents, a year earlier. Adjusted earnings per share were 66 Canadian cents, topping the 62.5 Canadian cents expected by analysts, according to Thomson Reuters I/B/E/S.

Earlier on Tuesday, CP, the country's No. 2 operator, reported a record first-quarter profit of C$254 million, or C$1.44 a share, up from C$217 million, or C$1.24, a year earlier.

Analysts had trimmed expectations throughout the quarter and were, on average, expecting earnings of C$1.41 a share.

CP, whose shares closed 5.3 percent higher at C$172.62 after the results, said the winter held back the results by 30 to 35 Canadian cents a share.


Canadian rail executives have been highly critical of the proposed legislation to set targets for grain movement, calling it "knee-jerk."

"What they have done is given super priority to the grain business. I think other commodity shippers are going to have to step back and ask themselves was that a good thing?" said CN Chief Executive Claude Mongeau on Tuesday.

Both railways have staunchly defended their service performance, stressing the challenges of what CP CEO Hunter Harrison said was "the worst operating condition I have ever been through."

"With due respect, I am not sure (Canadian regulators) understand really what they are dealing with," Harrison told analysts in a conference call on Tuesday.

Harrison also criticized a component of the legislation involving interswitching, the transfer of cars from one railway's line to the line of another railway.

"Will it be less efficient? Yes. Do the regulators understand that? No. But once again, we had very little if any, dialogue or feedback or interplay," said Harrison. He said the railways were getting a black eye and that the industry needed to communicate better with the public and regulators.


CP said it transported record grain volumes last fall, and that it moved 15 percent more Western grain in February despite the weather and 20 percent more in March than the previous year.

The company said it was exceeding the weekly minimum 5,500 carloads of grain imposed by the government. It expected to ship in the second quarter as much as it had during last year's peak fall period.

Mongeau told analysts that CN was moving just above 5,000 cars of grain, in line with what grain elevator companies are able to unload.

CP revenue rose about 1 percent to C$1.51 billion, in line with estimates. CN's rose about 9 percent to C$2.69 billion.

CP's operating ratio improved 380 basis points to 72 percent in the first quarter, while CN's slipped 120 basis points to 69.6 percent. Operating ratio is the percentage of revenue needed to maintain operations and is a key measure of railroad efficiency. The lower the number the better.

(Additional reporting by Rod Nickel in Winnepeg and Ashutosh Pandey in Bangalore; Editing by Maju Samuel, Peter Galloway and Cynthia Osterman)