Business Context and Reporting Period
Company: Canadian Pacific Railway Limited (CP)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2011 (Year-to-Date also provided)
Business Overview: CP operates a North American transcontinental railway providing freight transportation, logistics, and supply chain services. The company focuses on safety, service reliability, and operational efficiency.
Key Financial Metrics
| Metric (CAD Millions) | Q3 2011 | Q3 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Total Revenues | $1,341.6 | $1,286.2 | $3,769.5 | $3,687.2 |
| Operating Expenses | $1,017.0 | $948.5 | $3,105.2 | $2,868.8 |
| Operating Income | $324.6 | $337.7 | $664.3 | $818.4 |
| Net Income | $186.8 | $197.3 | $348.5 | $464.9 |
| Diluted EPS | $1.10 | $1.17 | $2.04 | $2.75 |
| Operating Ratio | 75.8% | 73.7% | 82.4% | 77.8% |
| Cash & Equivalents | $97.0 | $267.8 | $97.0 | $267.8 |
| Long-Term Debt | $4,042.5 | $4,033.2 | $4,042.5 | $4,033.2 |
Key Operational Data:
- Fuel Price: Average price increased 47% to $3.44 U.S. per gallon (Q3 2011).
- Revenue Ton-Miles (RTM): Decreased 6.2% in Q3 2011 compared to Q3 2010.
- Carloads: Decreased 7.1% in Q3 2011 compared to Q3 2010.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased $55.4 million (4.3%) in Q3 2011, driven by higher freight revenues despite lower volume in certain sectors.
- Expense Pressure: Operating expenses rose $68.5 million (7.2%) in Q3 2011. The primary driver was a $71.7 million increase in fuel costs due to higher average fuel prices.
- Profitability Decline: Operating income decreased $13.1 million (3.9%) and Net Income decreased $10.5 million (5.3%) compared to Q3 2010. The Operating Ratio worsened by 210 basis points to 75.8%.
- Unusual Items: Net income included a $0.04 per share expense related to the early redemption of 2013 Notes. Excluding this, diluted EPS would have declined by only $0.03.
- Commodity Mix: Coal revenues increased 8.8% and Sulphur/Fertilizers increased 21.2% in Q3 2011. Conversely, Grain revenues fell 3.2% and Intermodal revenues fell 3.7%.
Guidance, Outlook, and Risks
Management Commentary: CEO Fred Green noted strength in the bulk franchise but emphasized vigilance regarding economic signals from Asia. The company remains focused on sustaining service and productivity through investments in locomotives, infrastructure, and technology.
Forward-Looking Risks:
- Economic Conditions: Sensitivity to North American and global economic conditions, particularly in Asia.
- Commodity Prices: Volatility in energy commodities (fuel) and agricultural production risks (weather, insects).
- Operational Risks: Potential for derailments, transportation of dangerous goods, and severe weather disruptions.
- Regulatory & Legal: Changes in laws, tax rates, and potential litigation outcomes.
Subsequent Events (Post-Sept 30, 2011):
- Redeemed US$245.8 million of 6.25% Notes due October 2011, recognizing a net loss of approximately $1.1 million.
- Issued US$92.0 million of 3.88% Senior Secured Notes in October 2011.
Investor Verification Checklist
- Fuel Hedging Effectiveness: Verify the extent of residual fuel price exposure given the 47% increase in average fuel prices and the company's reliance on fuel cost recovery programs.
- Debt Redemption Costs: Confirm the impact of the $8.8 million loss on the redemption of 2013 Notes and the subsequent $1.1 million loss on October 2011 Note redemptions on future liquidity.
- Volume Trends: Monitor the decline in Grain and Intermodal volumes (down 6.2% and 7.9% in RTMs respectively) to assess demand elasticity in key markets.
- Contingent Liabilities: Review the $1.19 billion in contingent payments related to the Dakota, Minnesota & Eastern Railroad (DME) acquisition, which are tied to the Powder River Basin expansion project milestones.
- Environmental Accruals: Assess the $105.0 million provision for environmental remediation and the potential for future adjustments based on new site information or regulatory changes.