Railways expect to be derailed
Source: SCOTT DEVEAU, CanWest News Service
Published: December 13th 2007

Canada's largest railways are headed for a stormy end of the year with their earnings growth expected to be flattened in the fourth quarter.

Both Canadian National Railway Co. and its smaller domestic rival, Canadian Pacific Railway Ltd., have forecast a difficult quarter ahead.

The strong loonie cut the value of U.S. revenue, and volume weakness in key industries, such as the forestry sector, persist.

CP warned that an unexpected early blast of winter weather in the West and a sharp spike in oil prices will drop its earnings to the low end, or even below its guidance for 2007 of $4.30 to $4.45 per share. It was the second earnings warning issued by the railway in the past six weeks.

The average price for fuel charged to the railways' customers often lags behind the actual cost by about two months. CP is estimated to be paying about $73 U.S. a barrel, while oil prices are hovering around $83 during the current quarter, according to National Bank Financial analyst David Newman.

While fuel prices hurt margins now, they probably will boost them in the new year, he added.

Meanwhile, Environment Canada is predicting a harsh winter ahead that once again threatens to affect earnings at both railways, as it did in their first-quarter results this year.

Last week, heavy rain and snow slowed rail traffic between Golden, B.C., and Vancouver, and landslides wiped out highways, making it difficult to get maintenance crews to get to the tracks.

"We're past that," said Leslie Pidcock, CP spokeswoman. "But it was definitely something we weren't expecting that early in the season."

CN, likewise, has had some slide activity that is affecting its operations as well, according to Mark Hallman, a spokesman for the railway.

Unlike many other industries, railroads tend not to buy weather derivatives to offset the impact of poor conditions because they are costly, opting instead to increase traffic when conditions are better to make up for the backlog.

The reason these weather issues have become more pronounced recently, however, is because they are occurring where business is booming - in the West.

Railway contracts often include so-called "force majeure" clauses, which reduce the liability for late shipments resulting from poor weather conditions.

While most of the volumes can be recovered when the weather improves, some revenue is lost when shippers opt to ship to other ports without the backlog.