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, 2008
Key Event: CP assumed control of the Dakota, Minnesota & Eastern Railroad (DM&E) on October 30, 2008, following US Surface Transportation Board approval. DM&E results were consolidated for the final two months of 2008.
Key Financial Metrics
| Metric (CAD Millions) | Q4 2008 | Q4 2007 | Full Year 2008 | Full Year 2007 |
|---|---|---|---|---|
| Total Revenues | $1,299.7 | $1,188.3 | $4,931.6 | $4,707.6 |
| Operating Expenses | $994.8 | $882.8 | $3,874.2 | $3,543.4 |
| Operating Income (Non-GAAP) | $304.9 | $305.5 | $1,057.4 | $1,164.2 |
| Net Income | $200.6 | $342.3 | $619.0 | $946.2 |
| Diluted EPS | $1.29 | $2.21 | $3.98 | $6.08 |
| Free Cash Flow (Full Year) | $231.0 | |||
| Operating Ratio (Q4) | 76.5% | 74.3% | N/A |
Note: Operating Income is defined as Revenues less Operating Expenses. Full Year Operating Ratio was 78.6% in 2008 vs 75.3% in 2007.
Material Changes vs. Prior Period
- Revenue Growth: Q4 revenues increased 9% (driven by 10% freight revenue growth) due to foreign exchange effects, pricing strength, and DM&E consolidation. Full-year revenues rose 5%.
- Profit Decline: Net income dropped 41% in Q4 and 35% for the full year. This is primarily attributed to the absence of a $146 million future tax benefit recorded in Q4 2007 and a $170 million foreign exchange gain on long-term debt in 2007.
- Adjusted Performance: Excluding foreign exchange and specified items, Q4 diluted EPS was $1.15 (down 4% from $1.20). Full-year adjusted diluted EPS was $4.06 (down 6% from $4.32).
- Expense Pressure: Operating expenses rose 13% in Q4, driven by foreign exchange translation, DM&E consolidation, and higher fuel costs, partially offset by cost management actions.
- Commodity Mix: Industrial and consumer products revenue surged 37% in Q4. Grain revenue increased 19%, while forest products and sulphur/fertilizers declined.
Outlook, Risks, and Unusual Items
2009 Outlook
- Capital Investment: Expected to range between $800 million and $820 million, a reduction of ~$200 million compared to 2008 combined CP/DM&E investment.
- Pension Contributions: Expected to increase from C$95 million in 2008 to a range of C$150 million to C$195 million in 2009. Minimum required contributions for 2010 are estimated at C$295 million to C$345 million.
- Currency Assumption: Outlook assumes an average exchange rate of C$1.25 per US$1.
Risks and Contingencies
- ABCP Investments: CP holds ~$144 million in Canadian Non-Bank Asset Backed Commercial Paper. A further charge of $49 million was taken in 2008. Continued uncertainty regarding the restructuring process could materially impact near-term earnings.
- Grain Revenue Entitlement: A federal court decision required a retroactive adjustment to grain revenue entitlement for the 2007/2008 crop year, resulting in a $23 million charge in Q4 2008 and a liability of ~$39 million payable by January 30, 2009.
- DM&E Contingent Payments: Future contingent payments of up to US$1.05 billion may be payable through 2025 upon achievement of certain milestones.
Investor Verification Checklist
- Adjusted EPS vs. GAAP: Verify the reconciliation of the $1.15 adjusted Q4 EPS to the $1.29 GAAP EPS to understand the impact of FX and tax items.
- ABCP Valuation: Monitor updates on the $144 million ABCP investment and potential for further impairment charges.
- DM&E Integration: Assess the operational and financial impact of the full consolidation of DM&E starting November 2008.
- Pension Funding: Confirm the final 2009 pension contribution amount based on the January 1, 2009 valuation filing.
- Grain Liability Payment: Confirm the settlement of the ~$39 million grain revenue entitlement liability by the January 30, 2009 deadline.