What was CPR's underlying earnings growth in Q3 2004 once FX gains are excluded?

Income before FX on long-term debt and other specified items rose 9% to $104 million, or $0.65 per diluted share, compared with $95 million, or $0.60, in Q3 2003. This is the figure management emphasizes as a measure of operating performance, since reported net income was inflated by a $72.7 million after-tax FX gain on U.S. dollar-denominated debt.

Why did CPR's headline net income more than double?

Net income of $176.5 million compared with $91.3 million mainly reflected a $70.5 million pre-tax foreign exchange gain on long-term debt, caused by the Canadian dollar strengthening against the U.S. dollar. Operating income also rose 7.5% to $218.9 million, but the FX gain accounts for most of the reported increase.

What is the company's 2004 earnings outlook?

CPR expects diluted EPS, excluding FX on long-term debt and other specified items, to grow 5% to 10% in 2004 over an adjusted 2003 base of $2.07. The outlook assumes oil averaging US$50 per barrel and an exchange rate of $1.29 Canadian per U.S. dollar in Q4 2004. Actual results may differ materially.

How is CPR managing rising fuel costs and currency exposure?

CPR introduced a new fuel surcharge program tied more closely to current fuel prices, and with indexing and a favourable hedge position it recovered about three-quarters of its price-related fuel cost increase in Q3. It hedges part of its fuel purchases with crude oil swaps and collars, and about 23% of remaining 2004 fuel purchases were hedged. A stronger Canadian dollar reduces U.S. dollar revenues and operating income, but a large share of U.S.-dollar debt offsets this through lower interest costs.

What are the main risks flagged in the filing?

Key risks include ongoing labour negotiations, with collective agreements expiring for several unions including the CAW and IBEW at the end of 2004; an unresolved Minnesota soil contamination matter for which remediation costs cannot yet be estimated; a dispute with its largest coal customer, Elk Valley Coal, over rates; capacity constraints on the Pacific Coast corridor; and sensitivity to oil prices and currency movements.

CP 8-K SEC Disclosure — Oct 29, 2004

01—Abstract

Summary

Summary of the 6-K filed October 29, 2004. Cited figures are marked; the original filing is the authoritative source.

Canadian Pacific Railway (CPR) furnished a Form 6-K on October 29, 2004, containing its third-quarter 2004 earnings release, unaudited interim financial statements for the period ended September 30, 2004, MD&A, updated earnings coverage ratios, and an auditor review letter.

Reported third-quarter net income was $176.5 million^a ($1.11 per diluted share), versus $91.3 million ($0.57) a year earlier. However, the headline figure is inflated by a $72.7 million after-tax foreign exchange gain on U.S. dollar-denominated long-term debt, which is non-cash and volatile. Excluding that item, income rose 9% to $104 million ($0.65 per diluted share) from $95 million ($0.60), which is the more representative measure of underlying performance.

Operating fundamentals were solid. Revenue rose 9.6% in freight to $949.0 million^b, driven by volume growth in six of seven business lines, with intermodal up 10.7% and coal up 18.2%. Revenue ton-miles increased 9.8%, but the operating ratio widened to 77.9% from 77.5% due to higher fuel costs, incentive compensation normalization, and temporary crew-training expenses.

Fuel surcharge changes helped CPR recover roughly three-quarters of its price-related fuel cost increase in the quarter. Year-to-date, operating ratio improved to 80.7% excluding the 2003 special charge. For 2004, management guided to 5% to 10% growth in diluted EPS excluding FX on long-term debt and other specified items, over an adjusted 2003 base of $2.07^c, assuming oil at US$50 per barrel and an exchange rate of $1.29 per U.S. dollar.

Balance-sheet metrics improved, with the net debt to net debt plus equity ratio falling to 44.8% from 46.7%, and cash rising to $323.2 million^d. The filing also contains forward-looking statements and several labour-contract and capacity-related risks that investors should monitor.

02—Key points

Key Highlights

Reported Q3 2004 diluted EPS of $1.11 vs. $0.57, but this includes a $72.7M after-tax non-cash FX gain on U.S. dollar debt
Underlying Q3 diluted EPS (excluding FX on LTD) rose 8.3% to $0.65 from $0.60; income up 9% to $104M
Freight revenue up 9.6% to $949.0M on 6% carload growth and 8% RTM growth; intermodal revenue up 10.7%
Operating ratio (excluding special items) widened slightly to 77.9% from 77.5%, pressured by fuel and crew-training costs
2004 guidance: diluted EPS (ex-FX and special items) to grow 5% to 10% over restated 2003 base of $2.07
Net debt to net debt plus equity improved to 44.8% from 46.7%; cash increased to $323.2M from $134.7M at year-end 2003
Labour contract negotiations (TCRC, CAW, IBEW, BMWE) and an unresolved Minnesota environmental contamination matter remain key risks

03—Questions

Frequently Asked Questions

What was CPR's underlying earnings growth in Q3 2004 once FX gains are excluded?
Income before FX on long-term debt and other specified items rose 9% to $104 million, or $0.65 per diluted share, compared with $95 million, or $0.60, in Q3 2003. This is the figure management emphasizes as a measure of operating performance, since reported net income was inflated by a $72.7 million after-tax FX gain on U.S. dollar-denominated debt.
Why did CPR's headline net income more than double?
Net income of $176.5 million compared with $91.3 million mainly reflected a $70.5 million pre-tax foreign exchange gain on long-term debt, caused by the Canadian dollar strengthening against the U.S. dollar. Operating income also rose 7.5% to $218.9 million, but the FX gain accounts for most of the reported increase.
What is the company's 2004 earnings outlook?
CPR expects diluted EPS, excluding FX on long-term debt and other specified items, to grow 5% to 10% in 2004 over an adjusted 2003 base of $2.07. The outlook assumes oil averaging US$50 per barrel and an exchange rate of $1.29 Canadian per U.S. dollar in Q4 2004. Actual results may differ materially.
How is CPR managing rising fuel costs and currency exposure?
CPR introduced a new fuel surcharge program tied more closely to current fuel prices, and with indexing and a favourable hedge position it recovered about three-quarters of its price-related fuel cost increase in Q3. It hedges part of its fuel purchases with crude oil swaps and collars, and about 23% of remaining 2004 fuel purchases were hedged. A stronger Canadian dollar reduces U.S. dollar revenues and operating income, but a large share of U.S.-dollar debt offsets this through lower interest costs.
What are the main risks flagged in the filing?
Key risks include ongoing labour negotiations, with collective agreements expiring for several unions including the CAW and IBEW at the end of 2004; an unresolved Minnesota soil contamination matter for which remediation costs cannot yet be estimated; a dispute with its largest coal customer, Elk Valley Coal, over rates; capacity constraints on the Pacific Coast corridor; and sensitivity to oil prices and currency movements.

04—Continue

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