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 (Q3) and Nine Months ended September 30, 2015
Release Date: October 20, 2015
CP is a transcontinental railway operating in Canada and the United States. The company reported its highest-ever quarterly revenue and a record-low operating ratio for the period, driven by strong execution despite a soft economic environment and low commodity prices.
Key Financial Metrics
| Metric (CAD Millions) | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total Revenues | $1,709 | $1,670 | $5,025 | $4,860 |
| Operating Income | $753 | $621 | $2,011 | $1,631 |
| Net Income (GAAP) | $323 | $400 | $1,033 | $1,025 |
| Diluted EPS (GAAP) | $2.04 | $2.31 | $6.32 | $5.84 |
| Adjusted Diluted EPS | $2.69 | $2.31 | $7.39 | $5.82 |
| Operating Ratio (GAAP) | 55.9% | 62.8% | 60.0% | 66.4% |
| Adjusted Operating Ratio | 59.9% | 62.8% | 61.3% | 66.6% |
| Cash from Operations (9M) | $1,836 | |||
| Free Cash Flow (9M) | $979 | |||
| Long-Term Debt | $8,648 (Sep 30, 2015) | $5,625 (Dec 31, 2014) | ||
| Cash & Equivalents | $661 (Sep 30, 2015) | $226 (Dec 31, 2014) |
Material Changes vs. Prior Period
- Revenue Growth: Q3 revenue increased 2% to $1.71 billion. Year-to-date (YTD) revenue grew 3% to $5.03 billion. Growth was driven by higher freight revenue per carload and revenue ton-mile (RTM) pricing, offsetting a 2% decline in total RTMs.
- Cost Efficiency: Fuel expenses dropped significantly due to lower commodity prices (down 35% in Q3). Total operating expenses decreased 9% in Q3 and 7% YTD.
- Operating Ratio: The GAAP operating ratio improved to 55.9% in Q3 (down 690 basis points) and 60.0% YTD (down 640 basis points). The Adjusted Operating Ratio reached a record low of 59.9% for the quarter.
- Debt Structure: Long-term debt increased substantially from $5.6 billion to $8.6 billion due to new issuances totaling approximately $2.7 billion in Q3 (including 100-year notes) and the repayment of commercial paper.
- Share Count: Weighted-average diluted shares decreased by 9% in Q3 and 7% YTD due to aggressive share repurchases ($1.56 billion in Q3 alone).
Guidance, Outlook, and Risks
Management Commentary: CEO E. Hunter Harrison highlighted the company's ability to generate double-digit adjusted earnings growth despite economic softness. The focus remains on service, cost control, and incremental investment.
Unusual Items Impacting Earnings (Q3 2015):
- Foreign Exchange (FX) Loss: A $128 million loss (after-tax $111 million) on U.S. dollar-denominated debt reduced GAAP EPS by $0.69.
- Asset Sale Gain: A $68 million gain (after-tax $42 million) from the sale of the Delaware & Hudson South line increased GAAP EPS by $0.26.
- Debt Redemption: A $47 million charge (after-tax $35 million) for early redemption premiums on notes reduced GAAP EPS by $0.22.
Risks and Contingencies:
- Lac-Mégantic Litigation: CP is involved in ongoing legal proceedings regarding the 2013 derailment. The Province of Quebec has filed a lawsuit claiming $409 million. CP denies liability and intends to defend vigorously. The company notes that potential liability cannot be determined at this stage.
- Canadian National Railway (CN) Claim: CN filed a claim alleging CP obtained confidential customer data. CP plans to defend the claim; damages are not estimable.
- Forward-Looking Statements: The filing includes standard warnings regarding economic conditions, commodity prices, weather, and regulatory changes that could cause actual results to differ from expectations.
Investor Verification Checklist
- Adjusted vs. GAAP Earnings: Verify the reconciliation of Adjusted EPS ($2.69) to GAAP EPS ($2.04), noting the significant impact of FX translation losses on debt.
- Debt Issuance Costs: Confirm the impact of the new accounting standard (ASU 2015-03) adopted in Q2 2015, which reclassified debt issuance costs as a direct deduction from debt carrying value.
- Share Repurchase Program: Review the remaining capacity under the Normal Course Issuer Bid (NCIB), as the company has repurchased significant shares ($2.64 billion YTD).
- Lac-Mégantic Exposure: Monitor updates on the Quebec lawsuit and the bankruptcy proceedings of the Montreal Maine and Atlantic Railway (MMA) to assess potential liability exposure.
- Freight Volume Trends: Analyze the divergence between rising revenue per unit and declining total volume (RTMs down 2% YTD) to assess pricing power versus demand weakness.