Canadian Pacific Railway Limited — Q2 2022 Form 10-Q
Business context and period: The filing is for the quarter and six months ended June 30, 2022, with amounts in Canadian dollars unless noted. Although the request identifies Canadian Pacific Kansas City Ltd, the registrant named in this filing is Canadian Pacific Railway Limited. CP held an equity-method investment in Kansas City Southern (KCS) while awaiting regulatory approval to control it.
Financial performance
| Metric | Q2 2022 | Change vs. Q2 2021 | Six months 2022 | Change vs. 2021 |
|---|---|---|---|---|
| Revenue | $2.202 billion | +7% | $4.040 billion | +1% |
| Operating income | $868 million | +6% | $1.403 billion | -12% |
| Net income | $765 million | -39% | $1.355 billion | -27% |
| Diluted EPS | $0.82 | -56% | $1.45 | -47% |
| Operating ratio | 60.6% | Up 0.5 percentage points | 65.3% | Up 5.2 percentage points |
| Cash from operations | $707 million | -64% | $1.320 billion | -48% |
| Free cash (non-GAAP) | $369 million | -51% | $793 million | -24% |
Q2 Core adjusted diluted EPS, a non-GAAP measure, was $0.95, down 8%; Core adjusted income was $882 million, up 28%. Adjusted operating ratio was 59.7%, compared with 55.3%. For the six months, Core adjusted diluted EPS was $1.62, down 16%, and adjusted operating ratio was 64.3%, compared with 56.8%. Management’s non-GAAP measures exclude specified items and are not directly comparable across companies.
Revenue growth in Q2 reflected higher freight revenue per revenue ton-mile, partly offset by lower volumes. Fuel surcharges, rates and foreign exchange lifted yield; intermodal, potash, metals and automotive contributed growth, while grain and energy, chemicals and plastics were weaker. For the six months, revenue was nearly flat as higher yield was offset by lower volumes.
Financial position and liquidity
- At June 30, 2022, cash was $154 million; total long-term debt, including current maturities, was $20.070 billion, versus $20.127 billion at December 31, 2021. Shareholders’ equity was $35.414 billion.
- Commercial paper outstanding was US$540 million (about C$696 million); a US$400 million term-facility balance (about C$515 million) was outstanding and due September 15, 2022. The US$1.3 billion revolving facility was undrawn. CP reported compliance with its credit-facility covenant.
- Adjusted net debt to adjusted EBITDA was 4.6x; the pro forma measure including KCS was 4.2x. Management stated a long-term target of 2.0x–2.5x for adjusted net debt to adjusted EBITDA.
- Capital additions were $596 million for the first six months. Operating cash flow and free cash fell substantially year over year, reflecting the absence of the prior-year KCS termination fee and an unfavorable working-capital comparison. CP said available liquidity and operating cash generation were adequate for expected requirements.
Material changes, outlook and risks
- Comparability: Q2 2021 included an $845 million KCS merger termination fee and a $52 million foreign-exchange gain on debt and lease liabilities. Their absence in 2022 was a major reason reported net income and EPS declined. The 2022 results also included KCS equity earnings of $208 million in Q2 and $406 million for the six months; acquisition-related costs and purchase-accounting amortization affected results.
- Costs and operations: Higher fuel prices, inflation, lower volumes and the completion of customer contracts that had generated crude liquidated damages weighed on operating performance. Q2 freight volumes measured by revenue ton-miles declined 2%; first-half volumes declined 8%. Average terminal dwell rose 12% in Q2, while the train-accident rate increased to 1.11 from 0.47 per million train-miles.
- KCS transaction: The STB review of CP’s proposed control of KCS was expected to conclude in Q1 2023; final approval remained uncertain. The filing notes the combination was subject to STB approval by December 31, 2023. KCS and its Mexican affiliate also announced an extension of concession exclusivity to 2037, subject to an infrastructure investment arrangement.
- Outlook: CP expected a 2022 annualized effective income-tax rate of 24%–24.5%, excluding the impact of changes in the KCS equity investment and related outside-basis deferred tax. The filing does not provide a clear broader earnings or revenue forecast.
- Contingencies: CP continued to contest litigation arising from the 2013 Lac-Mégantic derailment. Certain Quebec claims include a $315 million government action and an unquantified class action; other proceedings remain pending. Management said outcomes and potential losses could not be determined, denied liability and was defending the claims. Environmental remediation provisions were $81 million, with payments expected through 2031.
- Other risks identified include fuel and currency fluctuations, inflation, labor disputes, weather and operating disruptions, derailments and dangerous-goods exposure, litigation, and uncertainty around regulatory approval and integration of KCS.
Important facts for investors to verify
- Confirm the reporting entity and the timing and conditions of STB approval for CP’s proposed control of KCS.
- Assess underlying earnings against reported results, including the 2021 termination fee, KCS equity income, purchase-accounting amortization and acquisition-related costs.
- Track leverage, near-term debt maturities, commercial-paper funding and progress toward management’s stated long-term leverage target.
- Monitor operating trends: volumes, fuel-cost recovery, inflation, terminal dwell and train-accident rates.
- Follow developments in Lac-Mégantic litigation and environmental obligations; the filing does not quantify the potential ultimate loss from the litigation.