01—Abstract
Summary
Summary of the 6-K filed November 21, 2003. Cited figures are marked; the original filing is the authoritative source.
On November 21, 2003, Canadian Pacific Railway (CP) furnished a Form 6-K announcing a voluntary prepayment of approximately Cdn.$300 milliona into its Canadian defined benefit pension plan, to be made in December 2003 and funded from existing cash balances.
Management framed the move as a proactive step to manage funding obligations after three years of bear markets and low interest rates, noting the plan had roughly Cdn.$5 billionb in assets and a reported accounting deficit of about $721 million at December 31, 2002. The prepayment is in addition to 2003 current service costs of $55 million and is intended to reduce the plan's unfunded position and bring the funding requirement under greater company control. The release also provided 2004 guidance at the company's Analyst Workshop.
CP expects freight revenues to rise 4%c to 6% in 2004 versus 2003, driven mainly by a recovery in Canadian grain volumes, improved coal markets, and continued intermodal growth. The company targets basic EPS growth of roughly 20% in 2004 (excluding non-recurring items and foreign exchange gains or losses on long-term debt) and expects positive free cash flow in 2004.
For investors, the key takeaways are the cash outlay of roughly Cdn.$300 milliond from existing reserves, the stated intent to reduce future pension funding volatility, and the ambitious 2004 earnings and free cash flow targets. The filing is a press release; the non-GAAP earnings measures and forward-looking statements carry the usual caveats, and figures are in Canadian dollars.
02—Key points
Key Highlights
- Voluntary prepayment of approximately Cdn.$300 million into the Canadian defined benefit pension plan, to be made in December 2003 from existing cash balances
- Canadian pension plan holds about Cdn.$5 billion in assets and reported an accounting deficit of approximately $721 million at December 31, 2002
- Plan asset returns averaged about 6% for the first nine months of 2003, reflecting improved equity markets
- Current service costs of $55 million expected in 2003, in addition to the prepayment
- 2004 guidance: freight revenues expected to grow 4% to 6% over 2003, led by Canadian grain recovery, improved coal markets, and intermodal growth
- Targeted basic EPS growth of approximately 20% in 2004 (excluding non-recurring items and FX gains/losses on long-term debt)
- Company expects positive free cash flow in 2004
03—Questions
Frequently Asked Questions
Why is CP making a voluntary pension prepayment?
Management said three years of bear markets and extremely low long-term interest rates required adjustments to how the company manages its funding obligations. The prepayment is intended to put the medium-term funding requirement under CP's control and to demonstrate its commitment to maintaining a healthy pension plan. CP stated there is no obligation to make the prepayment.
How large is the prepayment and how will it be funded?
The prepayment is approximately Cdn.$300 million, to be made in December 2003. It will be funded from existing cash balances, so it does not require new borrowing as described in the release.
Does the prepayment risk creating a pension surplus?
According to management, the prepayment does not increase the risk of a significant surplus arising if plan performance or interest rates exceed the company's assumptions. The release notes that pension liabilities are highly sensitive to long-term interest rates used to discount future payments.
What growth and earnings targets did CP provide for 2004?
CP expects freight revenues to rise 4% to 6% in 2004 over 2003, driven by a recovery in Canadian grain volumes, improved coal markets, and continued intermodal growth. It targets basic EPS, excluding non-recurring items and foreign exchange gains or losses on long-term debt, to grow about 20%, and expects positive free cash flow in 2004.
Are the non-GAAP measures comparable to other companies?
CP states that its earnings measures excluding non-recurring items and FX gains or losses on long-term debt have no standardized meaning under Canadian GAAP and may not be comparable to similar measures reported by other companies. A reconciliation to net income is included in the Summary of Rail Data filed with its three- and nine-month 2003 financial statements.
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