Business Context and Reporting Period
This Form 6-K filing by Canadian Pacific Railway Limited (CPRL) and Canadian Pacific Railway Company (CPRC) covers the period ending March 15, 2003, and incorporates the 2002 Annual Report. The filing includes the Notice of Annual Meeting of Shareholders, Management Proxy Circular, and audited financial statements for the year ended December 31, 2002. 2002 marked the company's first full year as an independent public entity following its spin-off from Canadian Pacific Limited in October 2001.
Key Financial Metrics (Year Ended December 31, 2002)
- Revenue: Total revenues were $3,666 million, a 1% decrease from 2001. Freight revenues were $3,472 million.
- Operating Income: Record operating income of $857 million (excluding non-recurring items), a 2% increase from 2001.
- Net Income: GAAP net income was $496 million. Excluding non-recurring items and foreign exchange gains/losses on long-term debt, income was $407 million.
- Earnings Per Share: Diluted EPS was $3.11 (GAAP) and $2.56 (excluding non-recurring items and FX).
- Operating Ratio: Improved to a record 76.6% (excluding non-recurring items), down from 77.3% in 2001.
- Cash Flow: Cash provided by operating activities was $784 million. Free cash flow after dividends was a record $132 million.
- Debt and Liquidity: Net debt to net-debt-plus-equity ratio improved to 47.3%. Total assets were $9,661 million. The company maintains credit facilities of up to $666 million.
- Dividends: Common share dividends totaled $80.8 million.
Material Changes Versus Prior Period
- Revenue Mix: While total revenue declined slightly, the company offset a 16% drop in grain revenue (due to a severe drought on the Canadian prairies) and a 7% decline in coal revenue with growth in other sectors. Intermodal revenue increased 10% and automotive revenue rose 9%.
- Expense Management: Operating expenses decreased by $49 million (2%) to $2,809 million, driven by productivity improvements and workforce reductions.
- Interest Expense: Increased by $33 million to $242 million, reflecting the full-year impact of the new capital structure post-spin-off, partially mitigated by the early redemption of 8.85% Debentures in June 2002.
- Non-Recurring Items: 2002 included a $72 million favorable income tax recovery. 2001 included $24.5 million in spin-off related charges and $17.2 million in bridge financing fees.
Guidance, Outlook, and Risks
- Management Targets: Management has set medium-term targets of a 73% operating ratio, a 10% return on capital employed after tax, and $200 million in cash flow before dividends.
- Outlook: The company anticipates continued gains in domestic intermodal and import-export sectors, assuming North American economic growth. New initiatives like "Expressway" (truck-trailer rail service) and "Connetix" are expected to drive top-line growth.
- Risks:
- Weather/Commodities: Persistent drought conditions could negatively impact grain transportation revenues in 2003.
- Fuel Prices: Escalating oil prices due to geopolitical unrest in the Middle East remain a key uncertainty, though the company utilizes hedging programs.
- Regulatory/Security: Ongoing reviews of the Canada Transportation Act and border security measures (post-9/11) could impact cross-border trade flows.
- Market Conditions: Dependence on the health of the North American and global economies.
- Unusual Items: The company reported one fatal work accident and a serious train derailment in Minot, North Dakota, in 2002.
Investor Verification Checklist
- Verify the impact of the Canadian prairie drought on 2003 grain volume forecasts versus 2002 actuals.
- Confirm the effectiveness of fuel hedging strategies given rising crude oil prices in early 2003.
- Review the progress toward the 73% operating ratio target, noting the 2002 result of 76.6%.
- Assess the status of the $197 million in committed capital expenditures for 2003.
- Monitor the resolution of border security issues and their effect on intermodal volumes.
- Check the status of the $115 million environmental remediation accrual and any new site liabilities.