Business Context and Reporting Period
Company: Canadian Pacific Railway Limited (CP)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Fourth Quarter and Full Year ended December 31, 2013
Filing Date: January 29, 2014
CP reported record financial results for both the fourth quarter and the full year of 2013, citing significant progress in its corporate and operational turnaround. The company operates as a transcontinental railway in Canada and the United States.
Key Financial Metrics
| Metric (CAD Millions) | Q4 2013 | Q4 2012 | Full Year 2013 | Full Year 2012 |
|---|---|---|---|---|
| Total Revenues | $1,607 | $1,502 | $6,133 | $5,695 |
| Operating Income (Reported) | $114 | $60 | $1,420 | $949 |
| Operating Income (Adjusted) | $547 | $378 | $1,844 | $1,309 |
| Net Income (Reported) | $82 | $15 | $875 | $484 |
| Net Income (Adjusted) | $338 | $224 | $1,132 | $753 |
| Diluted EPS (Reported) | $0.47 | $0.08 | $4.96 | $2.79 |
| Diluted EPS (Adjusted) | $1.91 | $1.28 | $6.42 | $4.34 |
| Operating Ratio (Adjusted) | 65.9% | 74.8% | 69.9% | 77.0% |
| Free Cash Flow | $212 | $72 | $530 | $93 |
Liquidity and Balance Sheet (Year-End 2013):
- Cash and cash equivalents: $476 million
- Total Assets: $17.06 billion
- Total Liabilities: $9.96 billion
- Long-term debt: $4.69 billion
Material Changes vs. Prior Period
- Revenue Growth: Full-year revenues increased 8% to a record $6.1 billion, driven by volume growth in industrial/consumer products and grain.
- Profitability: Reported operating income surged 50% for the full year. Adjusted operating income increased 41%.
- Efficiency: The adjusted operating ratio improved by 710 basis points to a record 69.9% for the year, reflecting significant cost control and productivity gains.
- Operational Metrics: Total Revenue Ton-Miles (RTMs) increased 7% for the year. Average train weight increased 13% and locomotive productivity improved 20%.
- Workforce Reduction: Total employees decreased by approximately 12% year-over-year, contributing to lower compensation costs.
Guidance, Outlook, and Significant Items
2014 Full-Year Guidance
- Revenue Growth: 6% to 7%
- Operating Ratio: 65% or lower
- Diluted EPS: 30% or greater increase versus 2013 adjusted EPS ($6.42)
Key Assumptions
- Fuel cost: $3.50 per U.S. gallon
- Exchange rate: 1.05 CAD/USD
- Capital expenditures: $1.2 to $1.3 billion
Significant Items (Non-GAAP Adjustments)
Reported results were impacted by several non-recurring items:
- Asset Impairment (Q4 2013): A $435 million charge (after-tax $257 million) related to the sale of the DM&E West line to Genesee & Wyoming Inc. This reduced reported Q4 EPS by $1.45.
- Labour Restructuring: $7 million gain in 2013 (vs. $53 million charge in 2012) related to the 2012 labour restructuring initiative.
- Pension Asset: A $1,028 million pension asset was recognized in 2013 due to higher discount rates and favorable equity returns, significantly impacting comprehensive income.
Investor Verification Checklist
- DM&E West Sale: Verify the regulatory approval status and final closing proceeds of the Dakota, Minnesota & Eastern West line sale, which generated a significant impairment charge.
- Pension Assumptions: Review the sensitivity of the $1,028 million pension asset to changes in discount rates and equity market performance.
- 2014 Fuel Costs: Monitor actual fuel prices against the $3.50/gallon assumption used in guidance.
- Operational Sustainability: Assess whether the 13% increase in average train weight and 20% productivity gain are sustainable without impacting safety metrics (FRA personal injuries improved to 1.69).
- Capital Expenditures: Confirm adherence to the $1.2–$1.3 billion CapEx guidance to maintain infrastructure while managing cash flow.