Canadian Pacific Railway Limited — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The filing is by Canadian Pacific Railway Limited (CP); it is not a filing under the later Canadian Pacific Kansas City Ltd. name. Financial amounts are in Canadian dollars unless stated otherwise.
Financial performance
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $2,043 million | $1,767 million; up 16% |
| Operating income | $834 million | $543 million; up 54% |
| Operating ratio | 59.2% | 69.3%; improved 1,010 basis points |
| Net income | $409 million | $434 million; down 6% |
| Diluted EPS | $2.98 | $3.09; down 4% |
| Adjusted income and adjusted diluted EPS (non-GAAP) | $607 million; $4.42 | $392 million; $2.79 |
| Cash from operations | $489 million | $413 million |
| Capital additions; free cash (non-GAAP) | $355 million; $158 million | $224 million; $193 million |
| Cash and cash equivalents | $247 million at March 31 | $133 million at December 31, 2019 |
| Total debt, including current maturities | $10,070 million | $8,757 million at December 31, 2019 |
Revenue growth reflected higher volumes, freight rates and liquidated damages, including customer volume commitments. Freight revenue rose 16%; revenue ton-miles rose 9%. Energy, chemicals and plastics revenue increased 56%, led by crude, while grain rose 10% and intermodal 7%. Coal fell 5% and potash fell 2%.
Operating income benefited from stronger revenue, improved operating performance, lower casualty costs and easier comparisons with severe winter conditions in Q1 2019. Operating expenses declined 1% to $1,209 million, despite higher depreciation and amortization. Net income was reduced by a $215 million foreign-exchange translation loss on U.S.-dollar debt and lease liabilities, versus a $45 million gain in Q1 2019, and by higher income taxes. Adjusted figures exclude significant items, including this FX impact; they are non-GAAP and may not be comparable with similarly named measures from other companies.
Cash, debt and liquidity
Operating cash flow increased to $489 million, but higher property additions contributed to free cash declining to $158 million from $193 million. Financing included $959 million of long-term debt issuance, $553 million of net commercial-paper repayments, $501 million of share repurchases and $114 million of dividends paid. The company issued U.S. $500 million of 2.050% notes due 2030 and $300 million of 3.050% notes due 2050.
At quarter-end, CP had U.S. $100 million drawn on its U.S. $300 million revolving-credit tranche and U.S. $20 million of commercial paper outstanding. The company reported compliance with its credit-facility covenant. Its adjusted net debt to adjusted EBITDA ratio was 2.5 for the trailing twelve months, versus 2.6 a year earlier; management’s long-term target is 2.0–2.5. The declared dividend was $0.83 per share, up from $0.65.
Outlook, risks and unusual items
- COVID-19 had no material impact on Q1 results, but management said future effects were highly uncertain. The revised 2020 outlook anticipated revenue ton-miles down mid-single digits and adjusted diluted EPS roughly flat against 2019’s $16.44. Capital expenditures were expected to remain $1.6 billion.
- Outlook assumptions included a US$/C$ exchange rate of $1.40, an effective tax rate of 25%, and other components of net periodic benefit recovery decreasing by approximately $40 million versus 2019. The adjusted EPS outlook is non-GAAP; management said it could not reconcile it to GAAP without unreasonable effort.
- COVID-19 risks include weaker demand, commodity and supply-chain disruption, operational or workforce interruptions, and effects on pension costs and funding. CP described its service as essential and outlined measures to protect employees and maintain operations.
- Material litigation remains unresolved over the 2013 Lac-Mégantic derailment. The Quebec government’s amended claim is $315 million; other claims include an unquantified class action and separate insurer and U.S. proceedings. CP denies liability, is defending the claims, and said potential responsibility and losses could not be determined.
- Environmental remediation provisions were $83 million at March 31, 2020, with payments expected through 2029; additional costs may arise but were not quantifiable. Total contractual commitments were $25.6 billion, including long-dated interest and debt obligations.
- CP repurchased approximately 1.46 million shares for $468 million during the quarter. The quarter also included a $4 million gain on land sales and lower casualty-related costs compared with the prior-year period.
Key facts for investors to verify
- Whether actual 2020 volumes, adjusted EPS, capital spending and FX assumptions tracked the revised outlook as pandemic effects developed.
- How much reported earnings and cash generation depended on non-GAAP adjustments, working-capital movements, liquidated damages and customer volume commitments.
- Debt growth, refinancing needs, covenant headroom and the sustainability of buybacks and dividends alongside the capital program.
- Developments and potential financial exposure in Lac-Mégantic litigation and environmental remediation.
- Underlying demand by commodity and the durability of the operating-ratio improvement, especially as the comparison with Q1 2019’s severe winter conditions normalizes.