Business Context and Reporting Period
This Form 6-K filing by Canadian Pacific Railway Limited (CP) and Canadian Pacific Railway Company, dated November 16, 2006, announces the company's 2007 strategy and financial outlook presented at an annual Investor Workshop. The filing focuses on forward-looking guidance for the upcoming fiscal year rather than reporting historical results for a specific period.
Key Financial Metrics and Guidance
- 2007 Diluted Earnings Per Share (EPS): Expected to range from $4.30 to $4.45 (non-GAAP, excluding foreign exchange gains/losses on long-term debt and specified items).
- Revenue Growth: Total revenue expected to grow by 4% to 6% in 2007, driven by volume growth and higher service prices.
- Operating Costs: Total operating costs expected to increase by 3% to 5%.
- Capital Investment: Projected to be between $885 million and $895 million in 2007, an increase from the 2006 anticipated range of $840 million to $845 million.
- Free Cash Flow: Free cash after dividends is expected to exceed $200 million in 2007.
- 2006 Prior Guidance: The top end of the recently revised 2006 earnings guidance was $3.95 per share (non-GAAP).
Material Changes and Assumptions
The 2007 earnings guidance represents a 9% to 13% increase over the top end of the 2006 guidance. This outlook is based on the following key assumptions:
- Crude oil prices averaging US $65 per barrel.
- An average currency exchange rate of $1.11 CAD per US dollar (US $0.90).
- North American economic growth of 2.7%.
Management notes that execution of the integrated operating plan is driving increased network fluidity and improving the operating ratio.
Management Commentary and Risks
CEO Fred Green stated that CPR is poised to deliver improved results in 2007, aiming to become the safest and most fluid railway in North America. The company emphasizes that productivity improvements and execution excellence are key drivers.
Non-GAAP Measures: The filing presents non-GAAP earnings to evaluate underlying trends, excluding volatile foreign currency translation effects on long-term debt and other specified items. In 2006 to date, the only specified item was a $176 million income tax benefit ($1.09 per share) due to tax rate reductions.
Risks: The release contains forward-looking information. Actual results may differ materially due to risks described in the company's annual report and interim financial statements. The company undertakes no obligation to update this forward-looking information.
Investor Verification Checklist
- Verify the reconciliation of non-GAAP earnings to GAAP results in the company's interim financial statements.
- Monitor actual crude oil prices and currency exchange rates against the $65/barrel and $1.11 CAD/USD assumptions.
- Track capital spending execution to ensure it remains within the $885 million to $895 million range.
- Review the impact of the 2006 income tax benefit on year-over-year comparisons.
- Confirm the definition of "free cash after dividends" used in the filing against standard cash flow statements.