Business Context and Reporting Period
Company: Canadian Pacific Railway Limited (CP)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: First Quarter ended March 31, 2014
Filing Date: April 22, 2014
CP is a transcontinental railway operating in Canada and the United States. The company reported record first-quarter financial results, achieving the best Q1 performance in its history despite severe winter weather conditions that impacted operations.
Key Financial Metrics
| Metric (CAD Millions) | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total Revenues | $1,509 | $1,495 | +1% |
| Operating Income | $423 | $362 | +17% |
| Net Income | $254 | $217 | +17% |
| Diluted EPS | $1.44 | $1.24 | +16% |
| Operating Ratio | 72.0% | 75.8% | -380 bps |
| Cash from Operations | $287 | $267 | +7% |
| Free Cash Flow | $15 | ($7) | Positive |
| Total Debt (Long-term + Current) | $4,869 | $4,876 | Flat |
| Cash and Equivalents | $279 | $347 | -19% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 1% year-over-year, driven by higher freight rates and favorable foreign exchange impacts, partially offset by lower volumes due to harsh winter conditions.
- Expense Reduction: Operating expenses decreased 4% to $1,086 million. This was primarily due to efficiency savings, lower pension expenses, and insourcing of IT activities, despite higher costs from winter weather and wage inflation.
- Operational Efficiency: The operating ratio improved by 380 basis points to 72.0%, reflecting better asset utilization and cost control.
- Volume Trends: Revenue ton-miles (RTMs) decreased 5% to 34,375 million. Significant volume declines were seen in Fertilizers and Sulphur (-12%), Automotive (-15%), and Forest Products (-25%), while Industrial and Consumer Products revenue grew 11%.
- Shareholder Returns: The company repurchased 567,750 common shares for $87 million under a new normal course issuer bid. Dividends remained stable at $0.35 per share.
Guidance, Outlook, and Risks
Management Commentary and Outlook
CEO E. Hunter Harrison expressed confidence in achieving 2014 financial targets despite a slow start caused by weather. Management maintains the following full-year 2014 expectations:
- Revenue Growth: 6-7%
- Operating Ratio: 65% or lower
- Diluted EPS Growth: 30% or greater (excluding significant items)
- Capital Expenditures: $1.2 to $1.3 billion
Risks and Contingencies
- Lac-Megantic Litigation: CP is a named defendant in a class action lawsuit and administrative action regarding the July 2013 Lac-Megantic derailment involving Montreal Maine and Atlantic Railway (MM&A). CP denies liability and states that potential losses cannot be determined at this stage.
- Regulatory Changes: The Canadian government introduced Bill C-30 ("Fair Rail Act for Farmers"), which may impact grain movement requirements and inter-switching provisions. The impact on financial condition is currently undetermined.
- Weather and Operations: Severe winter conditions significantly impacted terminal dwell times (increased 56%) and train speeds (decreased 12%) in Q1 2014.
- Positive Train Control (PTC): CP estimates total implementation costs in the U.S. to be up to US$328 million, with approximately $159 million spent as of March 31, 2014.
Investor Verification Checklist
- Verify the sustainability of the 380 basis point improvement in the operating ratio given the seasonal impact of winter weather.
- Monitor the status of the Lac-Megantic litigation and any potential accruals for environmental remediation or liability.
- Assess the impact of Bill C-30 on grain transportation volumes and revenue entitlements.
- Review the execution of the $1.2-$1.3 billion capital program, specifically the allocation for PTC implementation and network capacity expansion.
- Track foreign exchange fluctuations, as a $0.01 change in the CAD/USD rate impacts EPS by approximately $0.05.