Canadian National profit falls, outlook trimmed

Canadian National Railway Co.'s second-quarter profit fell 29 percent without last year's big gain from lower tax rates, and the company cut its full-year earnings expectations after a tough first half.

Canada's biggest railway, which has major operations in the United States, said on Monday that the quarter was marred by trying weather conditions, native blockades of its Ontario mainline and the surging Canadian dollar.

Still, CN Rail launched a new year-long share buyback, under which the company could repurchase up to 6.6 percent of its stock, worth as much as C$2 billion ($1.9 billion) at the current level.

In the quarter, it earned C$516 million, or C$1.01 a share, down from year-earlier C$729 million, or C$1.35 a share.

The latest period included a C$30 million gain from a lower Canadian tax rate. That compared with a C$250 million tax-rate reduction gain in the second quarter of 2006.

Excluding those items, income was C$486 million, or 95 Canadian cents a share, up from C$479 million, or 89 Canadian cents a share. That beat the average estimate among analysts polled by Reuters Estimates by 3 Canadian cents a share.

Revenue rose 1 percent to C$2 billion.

The Montreal-based company's operating ratio, a measure of efficiency, was 60 percent, virtually flat with a year earlier.

CN Rail said it performed well in the face of such problems as the week-long shutdown in June of its line to Prince Rupert, British Columbia, due to flooding, weakness in forest products shipments and native blockades of its Toronto-Montreal line.

The railroad now expects an increase in full-year earnings of about 5 percent, down from the previous forecast of 10 percent or more, it said.

The lowered outlook is a reflection of the weak first-half -- which also included a lengthy labor dispute in the first quarter -- not pessimism about the second part of the year, Vice-President James Foote told analysts.

In the quarter, forest products revenue fell 7 percent and intermodal was off 3 percent. CN reaped revenue gains from petroleum and chemicals, where sales rose 7 percent and automotive shipments, which climbed 17 percent, it said.

Last week, CN's main competitor, Canadian Pacific Railway, revealed it had received a takeover approach from a private equity group led by Brookfield Asset Management.

One option discussed for a CP Rail bid was the split-up of the railway into separate operating and infrastructure units.

CN Chief Financial Officer Claude Mongeau said his company had considered such a restructuring but had ruled it out.

"When you review it in detail, you realize there is a lot of leakage from an economic standpoint -- tax recapture, transfer taxes for the actual splitting of the assets," Mongeau said.

"Quite frankly, our analysis, unless we're missing something, would show that even at very rich valuations for the real estate, there is just no compelling case."

CN Rail shares rose 37 Canadian cents to C$60.35 on the Toronto Stock Exchange, representing a gain of nearly 20 percent this year.