Canadian Pacific Railway Limited — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Amounts are in Canadian dollars unless noted. The filing is by Canadian Pacific Railway Limited (CP), which held its Kansas City Southern (KCS) investment in a voting trust pending regulatory approval; CP accounted for KCS using the equity method and did not yet control it.
Financial and operating performance
| Metric | Q1 2022 | Comparable period | Change |
|---|---|---|---|
| Total revenue | $1.838 billion | $1.959 billion | Down 6% |
| Operating expenses | $1.303 billion | $1.179 billion | Up 11% |
| Operating income | $535 million | $780 million | Down 31% |
| Net income | $590 million | $602 million | Down 2% |
| Diluted EPS | $0.63 | $0.90 | Down 30% |
| Operating ratio | 70.9% | 60.2% | Up 1,070 basis points |
| Cash from operations | $613 million | $582 million | Up 5% |
| Free cash, company-defined non-GAAP measure | $424 million | $296 million | Up 43% |
Freight revenue fell 6% as revenue ton-miles declined 14% and carloads fell 10%; higher freight revenue per ton-mile, up 9%, partly offset lower volumes. Intermodal revenue rose 13%, while grain and energy, chemicals and plastics each declined 20%. Management attributed volume weakness in part to Canadian grain drought impacts, weaker shipments in several commodities, harsh winter conditions and a work stoppage. Fuel surcharge revenue increased to $189 million from $85 million, reflecting higher fuel prices and carbon-tax recoveries.
Operating expenses included a $96 million adverse impact from higher fuel prices, inflation, winter-related costs and higher stock-based compensation. The prior-year period included a $50 million gain on exchange of Chicago property and easements. Management reported adjusted diluted EPS of $0.63, down 30%, and core adjusted diluted EPS of $0.67, down 26%; these are non-GAAP measures. KCS contributed $198 million of equity earnings, including $40 million of purchase-accounting amortization. CP also received a $334 million KCS dividend.
Financial position and liquidity
- At March 31, cash and cash equivalents were $85 million; total assets were $67.592 billion and shareholders’ equity was $33.985 billion.
- Total debt, including current maturities, was $19.663 billion, down from $20.127 billion at year-end 2021. Debt maturing within one year was $1.746 billion.
- Commercial paper borrowings were US$520 million. The US$1.3 billion revolving credit facility was undrawn; the US$500 million term facility was fully drawn and extended to September 15, 2022. CP reported compliance with its credit-facility covenant.
- Operating cash flow included the $334 million KCS dividend. Cash used in investing activities was $206 million, including $226 million of property additions; financing activities used $391 million, including debt repayments and dividends.
- The trailing-twelve-month adjusted net debt to adjusted EBITDA ratio was 4.7, compared with 2.4 a year earlier; the pro forma ratio including KCS was 4.1. Management’s long-term target for adjusted net debt to adjusted EBITDA was 2.0 to 2.5.
Material changes, outlook and risks
- Weighted-average shares increased to 929.7 million from 666.5 million, largely reflecting shares issued for the KCS acquisition; this contributed to lower EPS despite KCS equity earnings.
- Net interest expense rose 45% to $160 million, mainly from debt issued to fund the KCS acquisition. CP recorded a 12.67% effective tax rate including KCS and discrete items; management expected a 2022 effective tax rate of 24% to 24.5%, excluding specified KCS outside-basis tax effects. The filing does not provide a clear broader full-year earnings or revenue forecast.
- CP and the Teamsters Canada Rail Conference agreed to binding arbitration on March 22, 2022, and employees returned to work. The stoppage reduced quarterly volumes; CP said service was quickly re-established.
- STB review of CP’s proposed control of KCS was expected to conclude in Q1 2023. Completion remained subject to final STB approval, with no assurance of timing or successful integration; the filing cited a required approval deadline of December 31, 2023.
- Material contingencies include litigation arising from the 2013 Lac-Mégantic derailment. CP denied liability and was vigorously defending the proceedings; potential responsibility and losses could not be determined. Environmental remediation provisions were $79 million, with payments expected through 2031.
- Management cited exposure to fuel and currency fluctuations, inflation, weather, labour disputes, commodity demand, litigation and derailment liabilities, regulatory approval and integration risks, and COVID-19 and supply-chain effects. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Progress and timing of STB approval for control of KCS, and the effects of the voting-trust structure and eventual integration.
- Whether shipment volumes and service metrics recover after the labour disruption and severe winter, and whether fuel, inflation and other cost pressures persist.
- Debt maturities, refinancing and deleveraging progress, including the September 2022 term-facility maturity and the gap between current leverage and management’s long-term target.
- Developments in Lac-Mégantic litigation and environmental obligations, whose ultimate costs may differ from recorded provisions.
- Reconciliation and sustainability of non-GAAP adjusted results, particularly the effects of KCS purchase accounting, acquisition costs and discrete tax items.