(The following story by Scott Deveau appeared on the Financial Post website on April 22.)
OTTAWA — The “worst winter weather in decades,” combined with high fuel prices and a looming U.S. recession, caused Canadian National Railway Co. to lower its earnings estimate for the remainder of the year yesterday.
The extreme cold, winds, and snow the railway experienced during the first part of the year not only led to system-wide delays, but even caused the railway to take the unprecedented move of shutting down almost all of its operations in the West for two full days in January, contributing to a roughly $15-million increase in weather-related expenses during the quarter.
“Thank God, it’s springtime,” Hunter Harrison, CN chief executive, said on a conference call yesterday discussing the railroad’s first-quarter results.
The weather-related issues were compounded by a 56% increase in fuel expenses and “significant weakness” in certain markets during the quarter, including the forestry sector, where the U.S. housing slump led to a $330-milllion, or 20%, decline in sales from the sector.
Mr. Harrison said he now believes the United States is in a “recession,” but he expects a gradual recovery during the second half of the year.
In the meantime, the railway lowered its earnings-growth forecast for 2008 to the “mid-single-digit” range from its previous estimate of the “mid-to high-single” digits. CN also said it expected free cash flows of $650 -million, down from its previous estimate of $750-million.
The reduced outlook comes on the heels of the railway reporting a net income of $311-million, or 64¢ a share, during the first quarter, down 4% year over year.
The earnings beat analysts’ expectations of 62¢ a share, according to Bloomberg figures, but sales were virtually flat year over year.
The railway’s vaunted operating ratio — an important measure of its profitability, defined as operating expenses as a percentage of revenue — declined 2.3 points to 72.9%.
However, the railroad maintained its revenue growth forecast in the 6% to 8% range on the back of increased volumes from its new terminal in Prince Rupert, B.C., increased resource demand, and shipments of commodities associated with oil and gas development in Western Canada.
In addition, Mr. Harrison said he expects the U.S. Surface Transportation Board to render a decision on its current environmental review of CN’s proposed US$300-million acquisition of Elgin, Joliet and Eastern Railway by the end of the first quarter of 2009. “I think that’s reasonable,” he said.
However, the deal has come up against stiff opposition from politicians and residents in the region who are concerned about the increased freight traffic the deal would bring to the communities in the surrounding Chicago area. Despite those concerns, Mr. Harrison contends the overall impact of the deal would be “positive” for the region, not only improving service, but also increasing capacity for CN and other railways in the region. “It’s a good thing,” he said. “But it seems certain people don’t want trains coming through their communities.”