CP Rail profits dip as costs from KCS purchase outweigh revenue gains

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Canadian Pacific Railway Ltd. reported a dip in profits despite a boost in revenue in the second quarter.

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Calgary-based CP, the country’s second-largest railroad, increased quarterly revenue by seven per cent year over year, to $2 billion, helped by increased sales from potash shipments, according to an update on July 28.

Still, CP’s net income dropped to $765 million in the quarter ended June 30, from $1.25 billion in the same period last year. Earnings per share (EPS) were 82 cents, down 56 per cent. But CP also reported that its core adjusted EPS was 95 cents, down eight per cent. That metric excludes the impact from a $845-million termination fee CP received in the second quarter of 2021 as part of its battle to acquire Kansas City Southern. Analysts were expecting EPS of 92 cents, according to the Wall Street Journal.

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EPS growth in the quarter was also impacted by the fact that CP issued about 262.6 million new common shares as part of the deal to buy KCS. So this quarter’s profits were diluted across more shares than last year.

A U.S. regulator is still reviewing the deal, which would make CP the first railroad to run from Canada through the United States to Mexico. On July 22, the U.S. Surface Transportation Board announced it will hold a three-day public hearing on the transaction in late September. CP still expects a decision from the board by early next year, chief executive Keith Creel said on a call with financial analysts on July 28.

“We’re on the cusp of getting approved, we hope,” Creel said.

The railroad said its sales of grain shipments in the quarter dropped $74 million, or 17 per cent, compared with last year. CP and its main rival, Canadian National Railway Co., have been suffering through a drop in Canadian shipments this year after an extreme drought across the Prairies last summer shrank the grain harvest.

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“We will continue to see the headwinds from the 40-per-cent smaller grain crop until this year’s harvest starts to come off the fields,” CP’s chief marketing officer, John Brooks, said on the call, adding that the new crop is expected to be more than 70 million metric tonnes, “in line, if not a little better” than historical averages.

But a wet spring that delayed planting in some regions means the crop may come off later than usual, pushing the expected revenue boost from grain shipments to CP’s fourth quarter, if not 2023, Brooks said.

CP’s freight revenue from potash rose by $37 million in the second quarter, up about 28 per cent over last year. Major fertilizer producers, including Saskatchewan’s Nutrien Ltd., have ramped up production at their Canadian potash mines due to price spikes in the fallout of Russia’s invasion of Ukraine.

Revenue from intermodal freight — containers that can travel by sea, rail and road — rose by 128 million, or 29 per cent, the company said.

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