Business Context and Reporting Period
Company: Canadian Pacific Railway Limited (CP)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter and First Half ended June 30, 2009
Context: CP operates as a Class I railway in North America. The reporting period reflects the ongoing impact of the global recession on freight volumes. Notably, results for the Dakota, Minnesota & Eastern Railroad (DM&E) are fully consolidated for 2009, whereas 2008 comparative figures are presented on a pro forma basis to reflect full consolidation for trend analysis.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 (Pro Forma) | YTD 2009 | YTD 2008 (Pro Forma) |
|---|---|---|---|---|
| Total Revenues | $1,022.4 million | $1,302.1 million | $2,093.1 million | $2,527.3 million |
| Net Income (GAAP) | $157.3 million | $154.7 million | $219.8 million | $245.4 million |
| Diluted EPS (GAAP) | $0.93 | $1.00 | $1.33 | $1.58 |
| Operating Income (Non-GAAP) | $225.8 million | $272.3 million | $365.2 million | $488.2 million |
| Operating Ratio (Non-GAAP) | 77.9% | 79.1% | 82.6% | 80.7% |
| Cash and Equivalents | $334.3 million | $117.6 million (Dec 31, 2008) | $334.3 million | $117.6 million (Dec 31, 2008) |
| Total Debt | $4,420.0 million | $4,510.2 million | $4,420.0 million | $4,510.2 million |
Note: Pro forma 2008 figures redistribute DM&E equity income to line-by-line consolidation to match 2009 presentation.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 21.5% in Q2 and 17.2% YTD on a pro forma basis, driven by significant drops in freight volumes across most commodity sectors (Coal, Sulphur, Forest Products, Automotive, Intermodal).
- Cost Management: Operating expenses decreased 22.6% in Q2 and 15.3% YTD (pro forma), outpacing revenue declines in the quarter, resulting in an improved operating ratio of 77.9% in Q2.
- Unusual Items Impacting Net Income:
- Gain on Sale: A $69 million after-tax gain on the sale of a portion of CP's interest in the Detroit River Tunnel Partnership offset volume declines, keeping GAAP Net Income relatively flat in Q2.
- Foreign Exchange: A $15 million after-tax loss on long-term debt in Q2 2009 compared to a $5 million gain in Q2 2008.
- Capital Program: The 2009 capital program outlook was increased to $800–$820 million (from $720–$740 million) due to the buy-out of operating leases.
Guidance, Outlook, and Risks
Management Commentary: CEO Fred Green stated that while freight volumes appear to have stabilized, a sustained recovery has not yet occurred. Management remains focused on cost reductions and strengthening the balance sheet.
Capital Outlook: CP expects the 2009 capital program to range between $800 million and $820 million. The cash impact of this increase is anticipated to be offset by proceeds from the sale of other equipment in the latter half of 2009.
Risks and Contingencies:
- Economic Conditions: Continued recession impacts traffic volumes and pricing power.
- Investment Uncertainty: Ongoing uncertainty regarding the value and timing of cash flows from long-term floating rate notes received in exchange for Asset Backed Commercial Paper (ABCP).
- Operational Risks: Weather conditions, labor disputes, and regulatory changes.
Investor Verification Checklist
- Non-GAAP Reconciliation: Verify the reconciliation of GAAP Net Income to "Income before foreign exchange gain/loss and other specified items" to understand the core operating performance excluding the $69 million partnership gain.
- ABCP Restructuring: Review Note 12 regarding the fair value of long-term floating rate notes replacing ABCP; assess the sensitivity of these assets to discount rate changes and credit loss assumptions.
- Debt Repurchase: Confirm the details of the $16.6 million net loss recognized on the repurchase of debt (Note 13) and the impact on future interest expense.
- Pro Forma Comparisons: Ensure all year-over-year comparisons utilize the pro forma 2008 data provided to account for the full consolidation of DM&E.
- Capital Commitments: Review Note 20 for multi-year capital commitments ($785.5 million) and operating lease obligations ($1,045.3 million).