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* Q2 EPS excluding items C$0.59 vs C$0.97 yr ago
* Analyst EPS expectation C$0.38
* Shares climb more than 10 percent (Adds details from conference call, analyst comments)
By Susan Taylor
OTTAWA, July 30 (Reuters) - Canadian Pacific Railway Ltd (CP.TO) reported quarterly results on Thursday that easily topped analyst estimates thanks to lower costs, an asset sale gain and increased demand for grain transport, sending its shares more than 10 percent higher.
The railroad, which operates both in Canada and the northern United States, said markets remain uncertain but it continued work to increase efficiency and lower expenses.
CP Rail is working on a range of measures to boost efficiency, from consolidation of train repair to temporary layoffs for 2,200 employees. Operating expenses were 10 percent lower in the second quarter, at C$225.8 million, compared with the same period last year.
Desjardins Securities analyst Benoit Poirer said operating expenses were below his forecast, resulting in an operating ratio of 77.9 percent, which exceeded his expectation.
"The big story here, what surprised us, was particularly on the grain side," said RBC Capital Markets analyst Walter Spracklin. Grain volumes increased by about 30 percent over the same period last year, partly reflecting a big crop for Canadian farmers.
Despite some encouraging signs, CP Rail executives said it is impossible to predict recovery because several markets remain weak, including coal.
An arbitrator ruled this month that Teck Resources Ltd TCKb.TO would pay lower shipping costs for coking coal for the next year, beginning April 8.
The railway would not specify the financial impact of the change.
"We'll have to leave it to others to judge the impact of that on a go-forward basis," said Chief Executive Fred Green on a conference call. "We can't predict what will happen on volume -- clearly Teck has been quite robust in their expectations in the last couple of weeks."
Green said it was "unrealistic" to expect the traditional improvement in third quarter results over the second quarter. Revenue ton-miles, which measures the relative weight and distance of freight the carrier transports, is down 18 percent to 20 percent to date this month, he said.
"We are starting to, situationally, see some of our bulk commodities that were so difficult for us, particularly in Q2, make some level of rebound," he said."
The recession continues to have a "significant" impact, the company said. While freight volumes appear to have stabilized there has not been a sustained recovery in traffic.
Net profit rose to C$157.3 million, or 93 Canadian cents a share, for the three months ended June 30, versus C$154.7 million, or C$1, in the same period a year earlier, when it had fewer shares outstanding.
Excluding items, earnings dropped to 59 Canadian cents a share from 97 Canadian cents a share a year earlier.
According to Reuters Estimates, analysts expected earnings per share of 38 Canadian cents, before exceptions, and revenue of C$1.01 billion, on average.
Revenue, which comes mainly from freight but also includes the lease and sale of assets, for example, fell 21 percent to C$1.02 billion.
UBS analysts Fadi Chamoun and Rick Paterson said stronger-than-expected revenue pushed profit above their estimate of 34 Canadian cents a share.
"Freight revenue was C$973 million versus the UBS estimate of C$900 million and explains the bulk of the variance in their earnings per share versus our forecast," they wrote. "Cost performance was good and in line with our expectations."
The results include a C$69 million gain from the sale of part of CP Rail's stake in the Detroit River Tunnel Partnership.
Shares rose 10.8 percent to C$48 on the Toronto Stock Exchange and added 11.3 percent at $44.33 on New York. ($1= $1.08 Canadian) (Reporting by Susan Taylor, with additional reporting by Euan Rocha in Toronto; editing by Frank McGurty)