Business Context and Reporting Period
Company: Canadian Pacific Railway Limited (CPR)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter and Six Months ended June 30, 2003
Filing Date: August 1, 2003
CPR is a transcontinental carrier operating in Canada and the U.S. The second quarter results were significantly impacted by a special charge for restructuring and asset impairment, high fuel prices, and a stronger Canadian dollar. Despite these headwinds, business volumes grew, particularly in the intermodal sector.
Key Financial Metrics
| Metric (in millions CAD) | Q2 2003 | Q2 2002 | YTD 2003 | YTD 2002 |
|---|---|---|---|---|
| Revenues | $914.1 | $922.5 | $1,792.9 | $1,797.9 |
| Freight Revenues | $874.8 | $873.0 | $1,709.7 | $1,712.8 |
| Operating Income (excl. special charge) | $190.7 | $219.0 | $308.9 | $394.9 |
| Net Income | $28.9 | $168.7 | $131.2 | $305.1 |
| Diluted EPS | $0.18 | $1.06 | $0.82 | $1.91 |
| Operating Ratio (excl. special charge) | 79.1% | 76.3% | 82.8% | 78.0% |
| Cash from Operations | $106.4 | $173.6 | $162.6 | $206.0 |
| Net Debt to Net Debt + Equity | 46.8% | 48.9% | 46.8% | 48.9% |
Material Changes vs. Prior Period
- Net Income Decline: Net income dropped 83% in Q2 and 57% YTD compared to 2002. The primary driver was a $228.5 million special charge (pre-tax) related to restructuring and asset impairment.
- Revenue Stability: Total revenues remained relatively flat despite volume growth. A stronger Canadian dollar reduced U.S. dollar-denominated revenues by approximately $40 million in Q2.
- Expense Increases: Operating expenses (excluding the special charge) rose due to high fuel prices (up 16% in Q2) and increased materials costs. Fuel expenses increased $15 million in Q2 and $37 million YTD.
- Volume Growth: Revenue ton-miles (RTM) increased 3.8% YTD. Intermodal volumes surged 13.0% YTD, and Sulphur/Fertilizer volumes rose 15.5% in Q2. Conversely, Grain and Coal volumes declined.
- Foreign Exchange Gains: Significant non-operating gains on long-term debt ($98.3 million in Q2, $169.1 million YTD) helped offset operating losses, resulting in a net income recovery despite the special charge.
Guidance, Outlook, and Risks
- Outlook: Management anticipates a rebound in bulk commodities later in the year. They expect results for the balance of 2003 to be in line with the second half of 2002, assuming stable fuel prices and exchange rates.
- Restructuring Plan: The special charge funds a program to eliminate 820 job positions by the end of 2005 and restructure the Northeastern U.S. network (Delaware & Hudson Railway). Cash payments for this plan are expected to continue through 2009.
- Operational Initiatives: CPR is investing in track maintenance and upgrading its intermodal fleet to double-stack cars to improve productivity and handle expected volume growth.
- Key Risks:
- Labour Disputes: A legal strike by the Rail Canada Traffic Controllers (RCTC) union began on June 18, 2003. CPR has locked out the union and is operating with management staff.
- Trade Tariffs: U.S. tariffs on Canadian grain and ongoing WTO disputes regarding the Canadian Wheat Board impact grain revenues.
- Commodity Prices: Sustained high fuel prices and volatility in the Canadian dollar remain significant risks.
Investor Verification Checklist
- Special Charge Details: Verify the breakdown of the $228.5 million charge ($105M for labour, $116M for D&H asset write-down, $7M for other write-offs) and the timeline for cash outflows.
- Labour Strike Impact: Monitor the duration and resolution of the RCTC strike and its effect on service levels and costs.
- Foreign Exchange Sensitivity: Assess the impact of the strong Canadian dollar on future U.S. revenue recognition and debt servicing costs.
- Intermodal Growth Sustainability: Confirm if the 11% Q2 growth in intermodal revenues is sustainable given new contracts at the Port of Vancouver.
- Debt Maturity Profile: Review the $350 million Medium-Term Notes issued in July 2003 and the associated interest rate swap agreements.