Business context and reporting period
This is Canadian Pacific Railway Limited’s Form 10-K for the fiscal year ended December 31, 2019, filed February 20, 2020. The filing identifies the registrant as Canadian Pacific Railway Limited—not Canadian Pacific Kansas City Ltd., as stated in the request metadata. Unless stated otherwise, amounts are in Canadian dollars. CP operates an approximately 12,700-mile freight railway in Canada and the United States, transporting bulk commodities, merchandise and intermodal traffic.
Financial and operating highlights
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $7.792 billion | $7.316 billion | +7% |
| Operating income | $3.124 billion | $2.831 billion | +10% |
| Net income | $2.440 billion | $1.951 billion | +25% |
| Diluted EPS | $17.52 | $13.61 | +29% |
| Adjusted diluted EPS (non-GAAP) | $16.44 | $14.51 | +13% |
| Operating ratio | 59.9% | 61.3% | Improved 140 bps |
| Cash provided by operating activities | $2.990 billion | $2.712 billion | +10% |
| Cash used in investing activities | $1.803 billion | $1.458 billion | Higher use, including CMQ purchase |
Freight revenue rose 6% to $7.613 billion, mainly from higher freight revenue per revenue ton-mile and favorable currency translation; revenue ton-miles were nearly flat (+0.1%). Energy, chemicals and plastics revenue increased 23%, while metals, minerals and consumer products fell 6% and potash fell 5%. Fourth-quarter revenue was $2.069 billion, operating income $890 million and net income $664 million, versus $2.006 billion, $874 million and $545 million, respectively, in fourth-quarter 2018.
Operating cash flow increased, while cash capital investment was $1.647 billion. CP reported $1.357 billion of free cash, a non-GAAP measure that excludes the CMQ acquisition and includes specified adjustments. Capital additions accrued were $1.664 billion. Dividends declared were $3.14 per share, up from $2.5125.
Financial position and liquidity
At year-end, total assets were $22.367 billion, shareholders’ equity $7.069 billion and long-term debt including current maturities $8.757 billion. Cash was $133 million. The $1.3 billion U.S.-dollar revolving credit facility was undrawn; commercial paper borrowings were U.S.$397 million, and $220 million was available under letter-of-credit facilities. Adjusted net debt to adjusted EBITDA was 2.4x, compared with 2.6x in 2018; this is a non-GAAP measure. Credit ratings were BBB+ (S&P) and Baa1 (Moody’s), both with stable outlooks.
Material changes, outlook and unusual items
- CP acquired Central Maine & Quebec Railway for approximately $174 million on December 30, expanding access to the U.S. Northeast and Atlantic Canada. U.S. regulatory approval remained pending; CMQ U.S. shares were held in an independent voting trust.
- Severe winter conditions and more frequent and severe casualty incidents in the first half of 2019 increased costs and caused revenue losses or deferrals. Casualty costs rose $76 million year over year, excluding foreign exchange.
- Reported 2019 net income included a $94 million foreign-exchange gain on debt and lease liabilities and an $88 million Alberta tax-rate recovery, partly offset by a $24 million provision for a prior-period uncertain tax item. Adjusted income was $2.290 billion versus reported net income of $2.440 billion; adjusted results exclude specified items and are non-GAAP.
- For 2020, management forecast mid-single-digit RTM growth, high-single-digit to low-double-digit adjusted diluted EPS growth from $16.44, and approximately $1.6 billion of capital investment. The outlook assumed a 25% effective tax rate and approximately $40 million lower other components of net periodic benefit recovery. Management did not reconcile forward-looking adjusted EPS to GAAP without unreasonable effort.
- Lease accounting adoption in 2019 materially increased recognized balance-sheet lease assets and liabilities but had no significant income-statement effect; prior periods were not restated.
Risks and contingencies
Key exposures include derailments and hazardous-material incidents, severe weather, environmental obligations, regulation, fuel and foreign-exchange movements, labour relations, competition, pension assumptions, cyber disruption and access to capital. CP disclosed ongoing Lac-Mégantic-related proceedings, including a Quebec government claim reduced to $315 million, a class action seeking unquantified damages and other claims. CP denied liability; potential responsibility and loss could not be determined. Management said resolution of ordinary legal actions was not expected to materially harm the company overall, while acknowledging an adverse outcome could materially affect a particular period. Environmental remediation accruals were $77 million; costs beyond recorded estimates may change.
Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included capitalization of self-constructed asset costs and defined-benefit pension assumptions.
Most important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Canadian Pacific Railway Limited, not the company name in the request metadata.
- Compare reported growth with adjusted growth and review the tax and foreign-exchange items affecting 2019 earnings.
- Track STB approval and integration of CMQ U.S., and any resulting purchase-accounting changes.
- Monitor the Lac-Mégantic proceedings, including trial schedules and changes in the company’s assessment of exposure.
- Assess whether the 2020 growth and capital-spending outlook was achieved; it was forward-looking guidance based on stated assumptions.
- Review debt maturities, commercial-paper use, pension funding assumptions and operating performance after the severe-weather and casualty impacts.