Canadian Pacific Railway Limited — FY2016 Form 10-K
Entity and period: The filing is for Canadian Pacific Railway Limited, not an entity named Canadian Pacific Kansas City Ltd. It covers the fiscal year ended December 31, 2016; financial amounts are Canadian dollars unless stated otherwise. The company operated an integrated freight railway network of approximately 12,400 miles across Canada and the U.S.
Financial results
Amounts below are in millions of Canadian dollars, except per-share data and ratios.
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenue | 6,232 | 6,712 | (7%) |
| Operating income | 2,578 | 2,688 | (4%) |
| Net income | 1,599 | 1,352 | 18% |
| Diluted EPS | $10.63 | $8.40 | 27% |
| Adjusted diluted EPS | $10.29 | $10.10 | 2% |
| Operating ratio | 58.6% | 60.0% | Improved 140 bps |
| Operating cash flow | 2,089 | 2,459 | (15%) |
| Free cash flow | 1,007 | 1,381 | (27%) |
Freight revenue was $6,060 million, down 8%; non-freight revenue was $172 million. Freight volumes weakened: revenue ton-miles fell 6% and carloads fell 4%. Crude revenue fell 65% to $138 million, Canadian grain fell 10% to $962 million, and metals, minerals and consumer products fell 12% to $564 million. Forest products revenue rose 10%, while chemicals and plastics increased 1%. Lower fuel prices reduced fuel-surcharge revenue.
Operating expenses declined 9% to $3,654 million, reflecting productivity, lower workload and fuel costs, and a $122 million year-over-year swing in defined-benefit pension results. Depreciation and amortization increased 8% to $640 million. Net interest expense rose 20% to $471 million. Reported net income benefited from favorable foreign-exchange translation on U.S.-dollar debt and a lower effective tax rate; share repurchases also reduced the share count and supported EPS. Adjusted results are non-GAAP measures.
Financial position and liquidity
- Cash and cash equivalents were $164 million at year-end, versus $650 million a year earlier. Long-term debt, including current maturities, was $8,684 million; shareholders’ equity was $4,626 million.
- The U.S.-dollar $2.0 billion revolving credit facility was undrawn, and the company reported compliance with its debt covenant. It had $320 million of letters of credit drawn against $600 million of facilities.
- Adjusted net debt to adjusted EBITDA was 2.9x, versus 2.8x in 2015. Interest coverage was 5.6x, down from 6.0x. Cash capital additions were $1,182 million, down from $1,522 million.
- CP repurchased 6.9 million shares for $1,210 million during 2016 and paid $255 million in dividends. The annual dividend declared per share rose to $1.85 from $1.40.
Changes, outlook and notable matters
- Despite a 7% revenue decline, the company reported a record 58.6% operating ratio. Network train speed improved 10% to 23.5 mph, terminal dwell improved 7% to 6.7 hours, and fuel efficiency improved 2%. FRA-reported personal-injury frequency improved 11% and train-accident frequency improved 27%.
- For 2017, management expected adjusted diluted EPS growth in the high single digits from the 2016 base of $10.29, excluding share repurchases and CEO-transition cost recoveries. Assumptions included CAD/USD of $1.30–$1.35, WTI at US$45–US$55 per barrel, and a normalized tax rate of approximately 26.5%. Planned capital programs were approximately $1.25 billion, including about $48 million for Positive Train Control.
- CEO Keith Creel succeeded E. Hunter Harrison effective January 31, 2017. The separation agreement led to a reported $51 million compensation recovery in Q1 2017, not FY2016. The proposed Norfolk Southern combination was abandoned in April 2016.
- CP faces significant unresolved litigation related to the 2013 Lac-Mégantic derailment, which occurred on another railway after interchange from CP. Québec claimed $409 million in damages; a separate cleanup claim was nearly $95 million. Other claims and proceedings remain pending. CP disputed liability, stated potential losses could not then be determined, and intended to defend the claims.
- Other principal risks include rail accidents and hazardous-material exposure, environmental obligations, economic and commodity-volume weakness, regulation, fuel and currency movements, pension assumptions, labor disruption, severe weather, cybersecurity, and dependence on connecting carriers. Management reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.
Investor verification checklist
- Confirm the filer and historical reporting scope: this is Canadian Pacific Railway Limited’s 2016 10-K, not a filing under the name Canadian Pacific Kansas City Ltd.
- Review the drivers and sustainability of adjusted EPS and the operating-ratio improvement, including pension credits, asset-sale gains, FX effects, and the impact of buybacks.
- Track the 2017 guidance assumptions, capital plan, and subsequent CEO-transition recovery against reported results.
- Assess the status, insurance and potential exposure of Lac-Mégantic claims; the filing does not provide a clear estimate of ultimate losses.
- Monitor leverage, debt maturities, ratings outlooks, pension funding and liquidity, particularly given lower year-end cash and reduced operating cash flow.