Canadian Pacific Railway Limited announced its second-quarter results today. Net income in the second quarter was $155 million, a decrease of 40% from $257 million in 2007, and diluted earnings per share was $1.00, a decrease from $1.64 in the second quarter of 2007.

SECOND-QUARTER 2008 vs. 2007

  • Total revenues were essentially flat at $1.22 billion
  • Income before foreign exchange gains and losses on long-term debt and other specified items decreased to $150 million from $175 million
  • Adjusted diluted earnings per share decreased to $0.97 from $1.12
  • Operating ratio was 79.4% compared with 74.7%

“This was a tough quarter with the unprecedented rise in fuel prices, the North American economic downturn, and prolonged flooding on our US mainline,” said Fred Green, President and CEO. “Combined, these had a significant impact on CP’s earnings.”

“We see the current economic conditions continuing, and CP is taking aggressive steps which should position us well for 2009,” continued Mr. Green. “I have accelerated a rigorous process to improve our productivity, efficiency, and yield.”

Freight revenues increased almost two percent despite a decrease in traffic. This was mainly due to pricing, inclusive of fuel recoveries. CP experienced strong growth in industrial and consumer products of 17%, intermodal of nine percent and coal of six percent. This was offset by decreases in forest products of 21%, grain of nine percent, sulphur and fertilizers of five percent, and automotive of two percent.

Operating expenses increased seven percent with fuel up 34% and purchased services and other, depreciation and amortization and materials up from two to nine%. This was offset by a decrease in equipment rents of 20% and compensation and benefits of four percent.

FIRST-HALF 2008 vs. 2007
Net income for the first half of 2008 was $246 million compared with $385 million in 2007, a decrease of 36%. Diluted earnings per share were $1.59 down from $2.46.

Freight revenues increased two percent to $2.3 billion and operating expenses were up seven% to $1.9 billion.

“We continue to focus on driving positive pricing gains and strengthening our fuel recovery and cost management programs,” said Mike Lambert, Chief Financial Officer. “However, these will not be enough to offset the challenges we are facing with the higher price of fuel and the slowing North American economy. We are updating our guidance to reflect our substantially higher fuel assumptions and the deteriorating economic conditions. We now expect our full-year adjusted diluted earnings per share to be in the range of $4.00 to $4.20, down from our previous guidance of $4.40 to $4.60.”

The 2008 estimate assumes an average currency exchange rate of the US dollar at par with the Canadian dollar. Crude oil prices are expected to average US $121 per barrel for the year (versus the previous assumption of US $98 per barrel) with the second half averaging roughly US $140 per barrel. Crack spreads are expected to average US $23 per barrel for the year (versus the previous assumption of US $20 per barrel) with the second half averaging US $27 per barrel. The estimated average all-in fuel price is expected to be between US $3.80 and $3.90 per US gallon for the year.

CP strives to mitigate the impact of any changes in WTI and crack margins through fuel recovery programs. However, these programs do not completely offset the changes in expense caused by changes in WTI and crack margins.

The approximate net annual impact on EPS of changes in WTI and crack margins given CP’s current portfolio of freight contracts is as follows:

  • A change in WTI of US $2 per barrel impacts EPS by $0.01
  • A change in crack margins of US $1 per barrel impacts EPS by $0.02

These sensitivities do not consider the impact of the lagged implementation of changes in fuel surcharges from the timing of actual expenses incurred. This lag is due to regulatory notice require