04/22/2014 03:34 EDT | Updated 06/22/2014 01:59 EDT

Canadian Pacific first-quarter profits rise, despite tough conditions

CALGARY - Canadian Pacific Railway Ltd. posted higher profits for the first three months of the year and beat market expectations, but CEO Hunter Harrison says he's happy to put the quarter behind him.

"I'm glad it's over," he told analysts on a conference call Tuesday to discuss his company's quarterly results.

Frigid and snowy winter conditions across North America caused major headaches for Canadian Pacific and its railway peers — and has been cited as one reason why Western Canadian farmers have been unable to get their record grain crop to market.

Chief operating officer Keith Creel said it was "absolutely one of the worst, not even close to a normal winter."

Nonetheless, the railway posted net income for the first quarter of $254 million, up 17 per cent from $217 million in the same 2013 quarter.

On a per-share basis, the profits amounted to $1.44 — topping the average analyst estimate of $1.41 and last year's earnings per share of $1.24.

The Calgary-based railway figures the nasty winter shaved 30 to 35 cents off its earnings per share compared with normal conditions.

Despite the challenges, Canadian Pacific said its 2014 targets are still achievable: revenue growth of between six and seven per cent, 30 per cent growth in earnings per share and an operating ratio below 65.

The operating ratio — operating expenses as a percentage of revenues — is a closely watched metric in the industry. The lower it is, the better. During the first quarter, Canadian Pacific had an operating ratio of 72.

Shares in Canadian Pacific rose more than five per cent Tuesday to $172.62 on the Toronto Stock Exchange.

Canada's two biggest railways — Canadian Pacific and Montreal-based Canadian National Railway (TSX:CNR) — were under pressure during the quarter to deal with a backlog of grain shipments caused by a combination of factors, including an unusually large harvest and the weather-related difficulties.

The federal government ordered the rail companies to increase the amount of grain they moved to a minimum of one million tonnes per week or face fines of up to $100,000 per day and introduced proposed changes to the Canada Grain Act and Canada Transportation Act in an effort to clear a transportation bottleneck.

On the conference call, Harrison delivered a lengthy rebuke of the legislative changes.

"We probably had a very knee-jerk reaction from Ottawa, with due respect to the regulators," he said.

"With due respect, I'm not sure they understand really what they're dealing with."

He took issue with changes related to inter-switching — the ability for customers captive to one railway to move shipments from one network to another at federally-regulated rates.

To improve service to Prairie grain elevators that, for the most part, have access to only one railway, Ottawa has increased the radius for inter-switching from 30 kilometres to 160 kilometres in Alberta, Saskatchewan and Manitoba.

"It has political syrup all over it," said Harrison, who says he doesn't have an issue with inter-switching in theory, but that the rates must be fair.

"I just think in the long run it's not going to fly."

Canadian Pacific is also concerned about alleviating chronic rail congestion around Chicago. Harrison said he's had some "encouraging dialogue" with other carriers about routing traffic through other, less busy interchange points. The company has also been warning customers about sending their cargoes through Chicago.

Creel recounted the experiences of two energy industry customers — one that heeded Canadian Pacific's advice, and one that didn't. The one that did was able to move roughly the same volumes it did last year and the other had to curtail production.

"I'd make the case that one made the right decision and one didn't make the right decision," he said.

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