Canadian Pacific Railway Limited — 2018 Form 10-K
Entity and period: The filing is for Canadian Pacific Railway Limited (CPRL), for the fiscal year ended December 31, 2018, with comparative results for 2017 and 2016. The filing does not identify the registrant as Canadian Pacific Kansas City Limited; it describes CPRL as a Canada- and U.S.-operating freight railway. Unless stated otherwise, amounts are in Canadian dollars.
Business and financial performance
CP operated an approximately 12,500-mile freight rail network and reported one operating segment: rail transportation. Its freight businesses include bulk commodities, merchandise and intermodal. Revenue growth in 2018 was led particularly by Energy, Chemicals and Plastics, Potash and Intermodal.
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Total revenue | $7,316 million | $6,554 million | Up 12%; freight revenue rose 12% to $7,152 million. |
| Operating income | $2,831 million | $2,519 million | Up 12%. |
| Net income | $1,951 million | $2,405 million | Down 19%. |
| Diluted EPS | $13.61 | $16.44 | Down 17%; 2017 included substantial tax-rate-change recoveries. |
| Adjusted diluted EPS (non-GAAP) | $14.51 | $11.39 | Up 27%. |
| Operating ratio | 61.3% | 61.6% | Improved 30 basis points; lower is generally better. |
| Adjusted operating ratio (non-GAAP) | 61.3% | 62.4% | Improved 110 basis points. |
| Cash from operating activities | $2,712 million | $2,182 million | Up $530 million. |
| Free cash (non-GAAP) | $1,289 million | $874 million | Up $415 million. |
| Capital additions | $1,551 million cash | $1,340 million cash | Invested mainly in track, roadway and rolling stock. |
Operating expenses increased 11% to $4,485 million. Fuel expense rose 36% to $918 million, reflecting higher fuel prices and workload; fuel efficiency improved 3%. Average train weight increased 3% to 9,100 tons, while average train speed fell 5% to 21.5 mph and terminal dwell rose 3% to 6.8 hours, with disruptions and weather cited as factors.
Fourth-quarter information
For the quarter ended December 31, 2018, revenue was $2,006 million, operating income was $874 million, net income was $545 million, and diluted EPS was $3.83. In the fourth quarter of 2017, the corresponding figures were $1,713 million, $682 million, $984 million and $6.77. The filing attributes much of the annual net-income comparison to tax recoveries in 2017 and foreign-exchange effects on U.S.-dollar debt; quarterly figures should be considered in that context.
Financial position, debt and liquidity
At December 31, 2018, total assets were $21,254 million, total shareholders’ equity was $6,636 million, and total long-term debt including current maturities was $8,696 million, compared with $8,159 million a year earlier. Cash and cash equivalents were $61 million, down from $338 million. CPRL reported $1.0 billion of undrawn revolving-credit availability and $540 million available under letter-of-credit facilities; it was in compliance with the revolving-credit covenant. Adjusted net debt to Adjusted EBITDA was 2.6x, unchanged from 2017; management’s long-term target range was 2.0x–2.5x.
The company repurchased 4.7 million shares for $1,127 million during 2018 and declared dividends of $2.5125 per share, versus $2.1875 in 2017. The board-authorized 2018 normal-course issuer bid permitted purchases of up to 5.68 million shares through October 23, 2019.
Changes, outlook and notable matters
- Management forecast 2019 revenue ton-mile growth in the mid-single digits and Adjusted diluted EPS growth in the double digits, based on 2018 Adjusted diluted EPS of $14.51. Planned 2019 capital investment was approximately $1.6 billion. Assumptions included a C$/US$ exchange rate of about 1.30 and an effective tax rate of 25.5%–26.0%. These are forward-looking, non-GAAP-based expectations.
- 2018 revenue growth was 12%, exceeding the initial mid-single-digit outlook; Adjusted diluted EPS growth was 27%, above the initially stated low-double-digit outlook and later revised target. Capital spending was $1.55 billion.
- Net income fell despite higher operating income, principally because 2017 included a $541 million tax recovery associated mainly with U.S. tax reform, while 2018 recorded a $168 million foreign-exchange loss on U.S.-dollar debt. 2018 also included a $21 million deferred-tax recovery from state tax-rate reductions.
- Labour negotiations caused strike notices and a work stoppage in the second quarter. New multi-year agreements were reached and ratified; the operational wind-down and recovery disrupted service, reduced potential revenue and increased costs.
- CP recorded a $20 million loss-contingency charge in 2018 operating expenses and a $35 million gain on the Bass Lake railway-line sale. The filing identifies multiple ongoing Lac-Mégantic-related proceedings, including a Québec claim reduced to $315 million and other claims. CP denies liability; the company stated potential responsibility and losses could not then be determined.
- Key risks include hazardous-material accidents and related liability, regulation, environmental obligations, economic and commodity-volume changes, labour disruption, severe weather, fuel and foreign-exchange volatility, cybersecurity and capital-market access. The filing says insurance might not cover all losses from a catastrophic incident.
- The company adopted revenue-recognition guidance in 2018 with no material net-income impact. It expected adoption of lease accounting in 2019 to increase reported assets and liabilities by approximately $400 million, with no income-statement impact expected.
Investor verification priorities
- Confirm the intended issuer: this filing names Canadian Pacific Railway Limited, not Canadian Pacific Kansas City Limited.
- Review the 2017 tax recovery and 2018 foreign-exchange debt loss when comparing reported earnings; distinguish GAAP results from management’s non-GAAP adjusted measures.
- Assess cash availability and debt maturity obligations alongside the $61 million year-end cash balance, capital program and share repurchases.
- Track delivery against 2019 volume, Adjusted diluted EPS and capital-spending outlook, including the exchange-rate and tax assumptions.
- Follow the Lac-Mégantic litigation and other claims, labour relations, safety performance and exposure to fuel, weather and regulatory changes.
Audit: Deloitte LLP issued an unqualified opinion on the financial statements and internal control over financial reporting as of December 31, 2018.