Business Context and Reporting Period
Company: Canadian Pacific Railway Limited (CP)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Fourth Quarter and Full Year ended December 31, 2009
Filing Date: January 28, 2010
CP reported results for a year characterized by significant economic challenges. The company fully consolidated the results of the Dakota, Minnesota & Eastern Railroad (DM&E) for the full year 2009, whereas DM&E was reported on an equity income basis for the first ten months of 2008. To ensure comparability, 2008 figures are presented on a pro forma basis in the summary tables.
Key Financial Metrics
| Metric (CAD Millions) | Q4 2009 | Q4 2008 | Full Year 2009 | Full Year 2008 |
|---|---|---|---|---|
| Total Revenues | $1,121.9 | $1,299.7 | $4,303.2 | $4,931.6 |
| Operating Expenses | $852.9 | $1,012.5 | $3,403.1 | $3,889.9 |
| Operating Income | $269.0 | $287.2 | $900.1 | $1,041.7 |
| Net Income | $194.1 | $188.1 | $612.4 | $607.2 |
| Diluted EPS (GAAP) | $1.15 | $1.21 | $3.67 | $3.91 |
| Operating Ratio | 76.0% | 77.9% | 79.1% | 78.9% |
| Cash & Equivalents (End of Period) | $679.1 | $117.6 | $679.1 | $117.6 |
| Long-Term Debt | $4,102.7 | $4,685.8 | $4,102.7 | $4,685.8 |
Material Changes vs. Prior Period
- Revenue Decline: Full-year revenues decreased 12.7% to $4.3 billion, driven by an 18.3% drop in freight revenue. This was primarily due to lower volumes in coal, sulphur/fertilizers, and intermodal sectors.
- Expense Management: Operating expenses decreased 12.5% to $3.4 billion. Fuel costs dropped significantly (42.3% for the full year) due to lower fuel prices and consumption.
- Profitability: While GAAP Net Income increased slightly (0.9%) to $612.4 million, this was heavily influenced by non-recurring items. On a pro forma basis excluding specified items, adjusted diluted EPS fell 30.8% to $2.76.
- Liquidity: Cash and cash equivalents increased substantially to $679.1 million from $117.6 million, aided by a voluntary $500 million prepayment into pension plans and new debt issuances.
- Accounting Changes: The company adopted new accounting policies for pension prior service costs and locomotive overhaul costs (expensed rather than capitalized), resulting in restated 2008 figures.
Guidance, Outlook, and Risks
- 2010 Capital Program: CP plans to spend between $680 million and $730 million, with approximately $585 million allocated for track infrastructure renewal.
- Pension Obligations: Following a $500 million voluntary prepayment in late 2009, estimated 2010 pension contributions are $150–$200 million. Pension expenses are expected to rise by ~$50 million due to lower discount rates and the phasing in of 2008 equity losses.
- Tax Rate: Expected to be in the 25% to 27% range for 2010.
- Management Commentary: CEO Fred Green noted that while markets remain uncertain, the company has delivered sustainable improvements through productivity initiatives and is positioned to respond to customer demand changes.
- Risks: Key risks include North American economic conditions, agricultural production risks (weather/insects), energy commodity prices, labor disputes, and regulatory changes.
Investor Verification Checklist
- Non-GAAP Adjustments: Verify the impact of the $37.6 million after-tax charge for the shortline railway lease termination and the $74.2 million tax benefit on the reported earnings.
- Pro Forma Comparability: Confirm that year-over-year comparisons utilize the pro forma data which consolidates DM&E results for the full 2008 period, as GAAP figures are not directly comparable.
- Accounting Policy Shifts: Review the impact of the change in locomotive overhaul accounting (from capitalization to expensing) on future depreciation and operating expense trends.
- Pension Funding: Assess the long-term impact of the $500 million pension prepayment on future cash flow requirements and the projected increase in pension expense for 2010.
- Volume vs. Rate: Analyze the divergence between volume declines (e.g., -21.3% in coal RTMs) and revenue per carload trends to understand pricing power in specific commodity sectors.