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Rail News: Financials

Severe winter storms, strong Canadian dollar a double whammy on CN's first-quarter financial fortunes


The worst winter weather Canadian National Railway Co. had faced in decades, a strong Canadian dollar and weak housing market added up to a trying first quarter for the Class I — both operationally and financially.

Although revenue inched up 1 percent to $1.9 billion and diluted earnings per share increased 2 percent to 64 cents compared with first-quarter 2007 totals, net income declined 4 percent to $311 million, operating income dropped 7 percent to $523 million and CN's operating ratio rose 2.3 points to 72.9. In addition, operating expenses increased 4 percent to $1.4 billion primarily because of higher fuel and purchased services/material costs.

CN attributes the small revenue gain to freight rate increases, which partly offset the impact of the stronger Canadian dollar on U.S.-denominated revenue and lower housing-related volumes, primarily forest products. Five CN commodity groups posted revenue gains: intermodal (12 percent), coal (11 percent), grain and fertilizers (10 percent), petroleum and chemicals (5 percent), and metals and minerals (4 percent). However, forest products revenue dropped 20 percent and automotive revenue fell 12 percent.

The stronger Canadian dollar vs. the U.S. dollar reduced quarterly net income by about $30 million. Income also was negatively affected by a deferred income tax recovery of $11 million resulting from net capital losses arising from the reorganization of a subsidiary and impact of a first-quarter 2007 conductor strike in Canada. Throw in extreme weather issues, and the first quarter was a "tough way to start the year," said CN President and Chief Executive Officer E. Hunter Harrison in a prepared statement.

"Extreme cold and snow affected us system-wide — particularly in western Canada — delaying trains and putting crews, cars and locomotives out of cycle," he said. "In January, we took the unprecedented step of suspending most operations in the West for almost two days to ensure the safety of our employees. All these factors depressed traffic volumes and increased costs."

Despite the rough quarter, CN is making steady progress in improving network fluidity and workload, and an economic boost is around the corner, said Harrison.

"While we believe the U.S. economy may currently be in a recession, we expect a gradual recovery during the second half of the year, and that the global economy will grow at a moderate pace throughout the year," he said. "CN sees growth opportunities in the container trade over the Port of Prince Rupert, increased resource demand, and increased shipments of commodities associated with oil and gas development in western Canada, including pipes, machinery and equipment, and condensate."