Business Context and Reporting Period
Company: Canadian Pacific Railway Limited (CP)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Fourth Quarter and Full Year ended December 31, 2012
Filing Date: January 29, 2013
CP is a transcontinental railway operating in Canada and the United States. The filing reports Q4 2012 results, highlighting a "transformational journey" under new management to improve efficiency. The quarter was significantly impacted by one-time charges related to labor restructuring and asset impairments.
Key Financial Metrics
| Metric (CAD Millions) | Q4 2012 | Q4 2011 | Full Year 2012 | Full Year 2011 |
|---|---|---|---|---|
| Total Revenues | $1,502 | $1,408 | $5,695 | $5,177 |
| Operating Income | $60 | $303 | $949 | $967 |
| Net Income | $15 | $221 | $484 | $570 |
| Diluted EPS (Reported) | $0.08 | $1.30 | $2.79 | $3.34 |
| Diluted EPS (Excl. Significant Items) | $1.28 | $1.11 | $4.34 | $3.15 |
| Operating Ratio (Reported) | 96.0% | 78.5% | 83.3% | 81.3% |
| Operating Ratio (Excl. Significant Items) | 74.8% | 78.5% | 74.4% | 76.0% |
| Cash and Equivalents (End of Period) | $333 | $47 | $333 | $47 |
| Long-Term Debt | $4,636 | $4,695 | $4,636 | $4,695 |
Material Changes vs. Prior Period
- Significant One-Time Charges (Q4 2012): Reported earnings were heavily depressed by $318 million in pre-tax charges, including:
- $185 million impairment of the Powder River Basin (PRB) investment and other assets due to deferred rail extension plans.
- $80 million impairment of certain locomotives.
- $53 million labor restructuring charge.
- Underlying Performance: Excluding significant items, Q4 2012 diluted EPS was $1.28, a 15% increase over Q4 2011 ($1.11). The adjusted operating ratio improved to 74.8% from 78.5% in the prior year.
- Revenue Growth: Full-year 2012 revenues increased 10% to $5,695 million, driven by a 10% increase in freight revenues. Industrial and consumer products saw a 25% revenue increase in Q4.
- Liquidity: Cash and cash equivalents increased significantly from $47 million at year-end 2011 to $333 million at year-end 2012, supported by operating cash flows of $1,328 million for the full year.
Guidance, Outlook, and Risks
2013 Financial Expectations
- Revenue: High single-digit growth.
- Operating Ratio: Low 70s (excluding significant items).
- Diluted EPS: Increase of over 40% versus 2012 adjusted EPS of $4.34.
Key Assumptions
- Average fuel cost: US$3.45 per gallon.
- Tax rate: 25% to 27%.
- Exchange rate: Canadian to U.S. dollar at par.
- Pension expense: $50–$60 million for 2013–2014; rising to $90–$110 million for 2015–2016.
Risks and Contingencies
- Forward-Looking Statements: Actual results may differ due to economic conditions, weather, commodity prices, and regulatory changes.
- Operational Risks: Includes labor disputes, derailments, transportation of dangerous goods, and severe weather events.
- Market Risks: Fluctuations in currency, interest rates, and fuel prices.
Investor Verification Checklist
- Significant Items Impact: Verify the sustainability of earnings by excluding the $318 million in Q4 2012 one-time charges (PRB impairment, locomotive impairment, labor restructuring).
- PRB Strategy: Confirm the indefinite deferral of the Powder River Basin rail extension and its long-term impact on coal revenue potential.
- 2013 Guidance Feasibility: Assess the achievability of the "low 70s" operating ratio and >40% EPS growth given the assumptions on fuel prices and exchange rates.
- Pension Obligations: Monitor the projected increase in defined benefit pension expenses starting in 2015.
- Liquidity Position: Note the strong cash position ($333 million) despite the large impairment charges, indicating robust operating cash flow generation.