Both of Canada's major railway companies are reporting record profits on increased freight traffic by rail, just as they face scrutiny over rail safety.

Canadian National Railway's net profit climbed 6.1 per cent to $705 million in the three months as Canada's largest railway easily beat expectations on both earnings and revenue.

The earnings translated into $1.67 per share for the period ended Sept. 30, up from $1.52 per share, or $664 million, in the same prior-year period.

Excluding one-time changes for deferred taxes, CN's adjusted profits grew 13 per cent to $1.72 per share or $724 million. Revenues reached a quarterly record of nearly $2.7 billion, up from $2.5 billion in the prior year.

CN stock is up $6.34 or 5.7 per cent at $116.09 on Wednesday, after starting the day sharply higher.

CN is embroiled in the fire and derailment near Gainford, Alta, that drove 126 people from their homes.

It said Tuesday it is working to restore full service to its train operations after a weekend derailment, while it looks for other ways to improve its safety record.

Chief operating officer Jim Vena told analysts on a third-quarter financial results conference call that the railway has dealt with the accident and has moved on.

"We're going to learn what we can, we're going to make sure we understand what happened there and do everything we can to improve our safety record even further than what we've done over the last few years."

Calgary-based Canadian Pacific Railway Ltd had net income of $324 million or $1.84 per diluted share in the third quarter. beating analyst estimates of $1.72 per share. The profit was up from $224 million or $1.30 per share in the third quarter of 2012.

CP has record earnings

Canadian Pacific's revenue rose by six per cent to $1.5 billion, up from $1.45 billion in the third quarter of 2012.

The higher revenue combined with lower expenses resulted in a record low operating ratio for CP, which had lagged its peers by this measure. Earnings and revenue were a record levels.

CP stock rose by $11.98, or almost nine per cent, to $146.72 in Wednesday trading. 

Both rail companies exceeded analyst expectations. The increase in revenues was mainly attributable to higher freight volumes due to strong energy markets, market share gains and the growth in the North American economy. Crude oil accounted for about four per cent of CN's volume in the first half of the year but could double over the next year.

New safety rules are expected in the wake of the derailment, involving Montreal, Maine & Atlantic Railway, that destroyed the Quebec town of Lac-Mégantic and killed 47 people.

The meantime, CN Rail is defending its safety record.

Defending safety record

Mongeau said the railway had a very solid safety record during the quarter with an accident ratio that was 43 per cent better than last year. It reported just 1.3 accidents per one million train miles of goods moved across the country.

The results preceded the derailment of a CN train near Gainford, Alta., where a tanker car with thousands of litres of propane burned for a fourth day.

It was the third notable CN derailment since September and followed high-profile accidents during the summer at lines operated by Canadian Pacific and MM&A.

Chief executive Claude Mongeau said the stronger results in all key operating metrics, including record revenues, demonstrate that the railway is progressing as it hopes to finish the year on a high note.

CN said it expects the railway's business will outpace the overall economy allowing the company to meet its full-year 2013 financial outlook. It expects earnings will increase by high single digits over the adjusted EPS of $5.61 earned last year, while delivering $800 million to $900 million of free cash.

The railway's board approved a two-for-one common stock split in which shareholders of record Nov. 15 will receive one additional CN share, payable Nov. 29.

It also endorsed a new share repurchase program which allows the company to repurchase up to 15 million shares before adjusting for the stock split over the next year. CN has earmarked up to $1.4 billion for those purchases.