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Despite a slight increase in revenue and volume increases in most commodity groups, Canadian Pacific Railway didn't have a second quarter to write home about. The strong Canadian dollar, higher fuel prices and a special charge did most of the damage.

Announced in June, the one-time, $106.2 million (U.S. dollars) charge was "largely responsible" for CPR's second-quarter net income declining to $20.5 million, compared with $119.7 million in the same 2002 period, according to a prepared statement. The charge — $161.4 million before tax — reflects the cost of productivity measures and a write-down to fair value of under-performing assets.

The charge also provides for a program eliminating 820 jobs by year-end 2005, and restructuring the railway's northeastern U.S. network. The initiatives are designed to help CPR align costs with "the new reality of high fuel prices and a stronger Canadian dollar," CPR said.

"We're pleased with the progress CPR is making on its growth strategy with freight revenues up 5 percent prior to the effects of foreign exchange," CPR President and Chief Executive Officer Rob Ritchie said. "Volumes were up in five of CPR's seven commodity groups, including a big surge in our intermodal business."

For the quarter, CPR freight revenue increased slightly to $619.6 million, compared with $618.1 million in the same 2002 period. Intermodal freight generated revenue growth of $17 million, or an 11 percent increase, mainly due to new business with major ocean container shipping companies through the Port of Vancouver. CPR also posted domestic container volume growth. Sulfur and fertilizer revenue were up $4.2 million, or a 6 percent increase, reflecting an increase in CPR's market share of export potash and a stronger sulfur market. Declines in automotive, forest products and industrial products revenue mostly was attributable to the foreign exchange impact on revenue earned in U.S. dollars, CPR said.

"We anticipate a rebound in bulk commodities later this year," Ritchie said.

To prepare for the potential rebound, CPR has been "aggressively working" to complete track maintenance programs, Ritchie said, adding that the railway also is "moving quickly" to improve train productivity by changing out a large part of its intermodal car fleet for more productive, standardized double-stack cars, and expanding CPR's high-capacity locomotive fleet to run longer trains.

Excluding foreign exchange gains on long-term debt and non-recurring items — which include the special charge — CPR recorded second-quarter income of $61.6 million, compared with $78.6 million in the same period a year earlier. Excluding the special charge, CPR posted second-quarter operating income of $135.2 million, compared with $155.1 million in the same period last year; "persistently high fuel prices, a reduction in other revenues and the net result of the stronger Canadian dollar" were responsible for the decline, CPR said.

The foreign exchange rate change had a $21.95 million favorable impact on expenses incurred in U.S. dollars, but reduced U.S. dollar-denominated revenue by $28.3 million. Excluding the special charge, CPR's second-quarter operating ratio was 79.1, compared with 76.3 for the same 2002 period.

Excluding the special charge, the Class I recorded $511.9 million in second-quarter operating expenses, compared with $498.5 million in the same 2002 period. CPR's fuel expense increased $10.6 million, or 16 percent, reflecting high crude prices and refining margins, CPR said.

Other expense notes: For the quarter, depreciation and amortization expense increased $5.7 million, or 10 percent, reflecting CPR's investments in new assets. Materials expense rose $4.2 million, or 16 percent, due to higher locomotive service and maintenance costs as freight volumes increased. Equipment rents expense declined $4.96 million, or 10 percent, primarily due to foreign exchange rates. Compensation and benefits expense remained flat as lower variable incentive compensation costs and the positive impact of foreign exchange offset higher costs associated with inflation, pensions, fringe benefits and additional work stemming from intermodal growth, CPR said.