What is the Minnesota environmental charge and how large could it become?

CP recorded a $91 million pre-tax charge in Q4 2004 for investigation and cleanup of a Minnesota property, including areas previously leased to third parties. Management says it can now reasonably estimate costs for the entire property, but the estimate may change as fieldwork continues. CP expects to file a response action plan in Q1 2005 and has sued two former lessees it believes are responsible for much of the contamination.

What is driving the 2005 outlook and what are the key assumptions?

CP expects revenue growth of 6% to 8% and EPS growth of 14% to 16% (excluding FX and special items). The guidance assumes oil averaging US$48 per barrel and an exchange rate of C$1.25 per US dollar. It also reflects conservative revenue recognition on western export coal contracts starting April 1, 2005, due to uncertainty around Elk Valley Coal Corporation legal and regulatory proceedings.

How is CP managing rising fuel costs?

Fuel expense rose 11.8% to $440 million in 2004, driven by higher prices (average price up about 25% in Q4). CP responded with an improved fuel surcharge mechanism, its hedging program, and fuel efficiency measures, recovering roughly two-thirds of the price-related cost increase. Fuel efficiency improved, with US gallons per 1,000 gross ton-miles down 3.2% in Q4.

Are the non-GAAP earnings figures reliable for comparing performance?

CP's earnings excluding FX gains/losses on long-term debt and other specified items are non-GAAP measures with no standardized definition, so they may not be comparable to other companies. They are reconciled to GAAP net income in the Summary of Rail Data. Investors should review both GAAP and adjusted figures, since the FX gains and special charges in 2004 materially affected reported results.

CP 8-K SEC Disclosure — Jan 27, 2005

Q: Why did reported net income grow only modestly in 2004 despite strong operating performance?

Reported net income rose 2.9% to $413 million, but it was affected by two items: a $94 million FX gain on long-term debt, down from $210 million in 2003, and a net $72 million special charge in Q4 2004 for environmental remediation, partly offset by a labour liability reversal. Excluding these, income rose 10% to $361 million.

01—Abstract

Summary

Summary of the 6-K filed January 27, 2005. Cited figures are marked; the original filing is the authoritative source.

Canadian Pacific Railway (CP) reported full-year 2004 net income of $413 million^a, or $2.60 per diluted share, up from $401 million or $2.52 in 2003.

Results were flattered by a $94 million^b foreign exchange gain on long-term debt (down from $210 million in 2003) and a net $72 million special charge in Q4 2004, comprising a $91 million environmental remediation charge for a Minnesota property offset by a $19 million labour restructuring reversal. Excluding these items, income rose 10% to $361 million, or $2.27 per diluted share. Operating income before special items rose 8% to $789 million, revenue grew 7.2% in freight to $3.73 billion, and the operating ratio improved to 79.8% from 80.1%, driven by strong bulk, industrial and intermodal volume growth and productivity gains.

Fourth-quarter 2004 results were weaker on a reported basis: net income fell to $129 million^c ($0.81 per diluted share) from $174 million, largely because of the environmental charge and a smaller foreign exchange gain. Excluding FX and special items, Q4 income rose modestly to $116 million ($0.73 per share) from $114 million. Fuel costs were a major headwind, with average fuel prices up about 25% in the quarter, though CP recovered roughly two-thirds of the price-related increase through an improved fuel surcharge and hedging.

For 2005, management guides to 6% to 8% revenue growth and 14% to 16% growth in EPS excluding FX and special items, assuming US$48^d oil and a C$1.25 per US dollar exchange rate. The outlook is conservative on western export coal revenue recognition given legal and regulatory uncertainty involving Elk Valley Coal Corporation. Investors should monitor the open-ended Minnesota environmental liability, the fuel cost trajectory, and the sustainability of the productivity gains that underpin the margin improvement.

02—Key points

Key Highlights

FY2004 diluted EPS of $2.60 (vs. $2.52 in 2003); excluding FX gains on long-term debt and special items, EPS rose 9.7% to $2.27
Full-year operating income before special items rose 8% to $789 million; operating ratio improved to 79.8% from 80.1%
Freight revenue grew 7.2% to $3.73 billion, with strong gains in grain, coal, intermodal and industrial products; total revenue ton-miles up 7.9% in Q4
Q4 2004 net income fell to $129 million ($0.81/share) from $174 million, due to a $91 million Minnesota environmental charge and a smaller FX gain
Fuel expense rose 11.8% for the year to $440 million; CP recovered about two-thirds of the price-related increase through its fuel surcharge and hedging
2005 guidance: revenue growth of 6% to 8% and EPS (ex-FX and special items) growth of 14% to 16%, assuming US$48/bbl oil and C$1.25 per US dollar
Operating cash flow rose to $786 million in 2004 from $306 million in 2003, while capital spending was $674 million

03—Questions

Frequently Asked Questions

Why did reported net income grow only modestly in 2004 despite strong operating performance?
Reported net income rose 2.9% to $413 million, but it was affected by two items: a $94 million FX gain on long-term debt, down from $210 million in 2003, and a net $72 million special charge in Q4 2004 for environmental remediation, partly offset by a labour liability reversal. Excluding these, income rose 10% to $361 million.
What is the Minnesota environmental charge and how large could it become?
CP recorded a $91 million pre-tax charge in Q4 2004 for investigation and cleanup of a Minnesota property, including areas previously leased to third parties. Management says it can now reasonably estimate costs for the entire property, but the estimate may change as fieldwork continues. CP expects to file a response action plan in Q1 2005 and has sued two former lessees it believes are responsible for much of the contamination.
What is driving the 2005 outlook and what are the key assumptions?
CP expects revenue growth of 6% to 8% and EPS growth of 14% to 16% (excluding FX and special items). The guidance assumes oil averaging US$48 per barrel and an exchange rate of C$1.25 per US dollar. It also reflects conservative revenue recognition on western export coal contracts starting April 1, 2005, due to uncertainty around Elk Valley Coal Corporation legal and regulatory proceedings.
How is CP managing rising fuel costs?
Fuel expense rose 11.8% to $440 million in 2004, driven by higher prices (average price up about 25% in Q4). CP responded with an improved fuel surcharge mechanism, its hedging program, and fuel efficiency measures, recovering roughly two-thirds of the price-related cost increase. Fuel efficiency improved, with US gallons per 1,000 gross ton-miles down 3.2% in Q4.
Are the non-GAAP earnings figures reliable for comparing performance?
CP's earnings excluding FX gains/losses on long-term debt and other specified items are non-GAAP measures with no standardized definition, so they may not be comparable to other companies. They are reconciled to GAAP net income in the Summary of Rail Data. Investors should review both GAAP and adjusted figures, since the FX gains and special charges in 2004 materially affected reported results.

04—Continue

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