CN Rail faces challenges in second quarter

MONTREAL, Que. — Canadian National Railway’s second-quarter financial and operating results showed a mixture of gains and loses when compared to the same period last year.

Diluted earnings per share declined 6% to $0.95, net income declined 11% to $459 million, and operating income declined 13% to $707 million, with the CN’s operating ratio rising by 6.3 points to 66.3%.

However, the company’s revenues surged 4% to $2,098 million compared to the same period in 2007.

“I am pleased with our second-quarter results given the challenges we faced during the period,” said E. Hunter Harrison, CN president and CEO. “Operations performed very well, and we saw revenue gains across most of our commodity groups, although the gains only partly helped to offset spiralling fuel costs that rose 60% year over year to almost C$400 million.

“Despite the headwinds, we saw double-digit growth in intermodal revenues as a result of new container traffic over the Port of Prince Rupert and continued import strength at the Port of Vancouver, as well as higher volumes of commodities to support oil sands development in Alberta.

“CN continues to face economic uncertainties in the current environment, but we are still targeting diluted earnings per share growth in the mid-single-digit range for full-year 2008.”

The 4% increase in second-quarter 2008 revenues was largely attributable to freight rate increases, of which approximately two-thirds were due to a higher fuel surcharge, and increased volumes in specific commodity groups, including intermodal and metals and minerals. Partly offsetting these gains were the negative translation impact of the stronger Canadian dollar on US dollar-denominated revenues and weakness in specific markets, particularly forest products and automotive.

Five of CN’s seven commodity groups registered revenues gains in the quarter, led by intermodal (14%), coal (8%), petroleum and chemicals (7%), metals and minerals (6%), and grain and fertilizers (4%). Forest products revenues declined 14%, and automotive revenues declined 13%.

Revenue tonne-miles, which measure the relative weight and distance of rail freight transported by the company, declined by 2% during the second quarter versus the same period in 2007.

Second-quarter 2008 total rail freight revenue per revenue tonne-mile, a measurement of yield defined as revenue earned on the movement of a tonne of freight over one mile, increased 4%, mainly due to freight rate increases that were partially offset by the translation impact of the stronger Canadian dollar, the company said.

Operating expenses for the quarter increased by 14% to C$1,391 million, largely as a result of increases in fuel costs, purchased services and material, and casualty and other expenses, which were partly offset by the favourable translation impact of the stronger Canadian dollar on US dollar-denominated expenses, and lower labour and fringe benefits expense.