October 28, 2008 / 12:06 PM / in 10 years

UPDATE 2-CP Rail profit falls as fuel costs drag

(Updates with comments from conference call)

By Allan Dowd

VANCOUVER, British Columbia, Oct 28 (Reuters) - Fuel prices took a bite out of Canadian Pacific Railway’s (CP.TO) profit in the third quarter, but the company said on Tuesday that efforts to pass those costs along to customers are improving.

Chief Executive Fred Green acknowledged CP did not enjoy the same revenue from its fuel surcharges in the quarter as some other major railroads, but he said it continues to renegotiate shipper contracts that have left it vulnerable to spikes in diesel costs.

“The good news is that with the coverage improving, and as we get even better in Q4 and even better through Q1 this whole fuel issue ought to be a nonissue by the time we get to April of next year,” Green told analysts.

The higher fuel bills masked some of the company’s other efforts to reduce costs during the quarter, including laying off operating crews in some areas where traffic was down, Green said.

Canadian Pacific recorded a net profit of C$173 million ($134 million), or C$1.11 a diluted share, in the quarter. That compared with a profit of C$219 million, or C$1.41 a diluted share, in the same quarter a year earlier.

Operating expenses jumped by 11 percent from the year before to C$962 million, with about half of that due to the cost of fueling its diesel locomotives. That pushed its operating ratio up to 76 percent from 72.9 percent a year earlier.

Rail operations were also hampered at the start of the quarter by flooding in the U.S. Midwest, but had returned to normal by the end of the quarter, officials said.

Canadian Pacific, which has operations in both Canada and the northern United States, said it had revenues of C$1.26 billion in the quarter, up from C$1.19 billion a year earlier as higher prices offset some volume drops.

CP’s results this quarter also reflected a foreign exchange loss of C$3 million (C$6 million after tax) on long-term debt, compared with a gain of C$64 million (C$43 million after tax) a year earlier.

The company’s profit excluding extra items was C$1.20 a share, down from C$1.23 a year ago.

Analysts, on average, had expected earnings without extras of C$1.12 a diluted share, on revenue of C$1.26 billion, according to data compiled by Reuters Estimates.

The railway said shipments of potash were hit by a strike at Potash Corp, which CP is expects to last through fourth quarter, and equipment problems at Elk Valley Coal, which were repaired last week.

CP received regulatory approval at the end of the quarter to buy the Dakota, Minnesota & Eastern Railway, and officials said two appeals of that ruling will not stop it from assuming operational control of the line at the end of October. ($1=$1.29 Canadian) (Editing by Peter Galloway)

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