What drove the strong earnings growth in the second quarter of 2005?

Earnings growth was driven mainly by revenue growth of 10%, with revenue per carload up 14% through a shift toward higher-yield traffic, strong pricing and contract renewals. Operating expenses rose less than 2% excluding fuel, and the operating ratio improved to 75.5%.

How significant were fuel costs to CP's results, and how were they managed?

Fuel expense rose 35% to $145.2M in Q2 2005 because of high fuel prices, and it was the main source of cost growth. More than three-quarters of the increase was offset through the revenue fuel surcharge, hedging and fuel efficiency initiatives. Fuel remains a key sensitivity, since the 2005 guidance assumes oil at US$55 per barrel.

Are the reported earnings figures affected by one-time items or non-GAAP adjustments?

Reported net income includes foreign exchange losses on long-term debt of $17.0M in Q2 2005 ($20.0M in Q2 2004). CP also presents EPS excluding these FX effects, which is a non-GAAP measure that is not standardized and may not be comparable with other companies. Year-to-date revenue includes a $23.4M favorable change in estimate tied to a 2004 contract settlement.

What is the outlook for the remainder of 2005?

CP expects 2005 revenue growth of 12–14% and diluted EPS, excluding FX on long-term debt and specified items, of $3.15–$3.25. The guidance assumes an average oil price of US$55 per barrel and an exchange rate of C$1.23 per US dollar. The $160M capacity expansion between the Prairies and Vancouver is on schedule for completion in Q4 2005.

How is CP managing its balance sheet and shareholder returns?

Net debt to net debt plus equity fell to 42.1% from 47.0%. Cash and short-term investments declined to $131.7M, and $256.6M of long-term debt was repaid in the quarter. CP has a normal course issuer bid for up to 2.5 million shares, of which 432,000 were repurchased in Q2 2005 at an average price of $43.58, and quarterly dividends of $21.0M were paid.

CP 8-K SEC Disclosure — Jul 26, 2005

01—Abstract

Summary

Summary of the 6-K filed July 26, 2005. Cited figures are marked; the original filing is the authoritative source.

Canadian Pacific Railway (CP) reported strong second-quarter 2005 results, with net income rising to $123.2 million^a from $83.7 million a year earlier and diluted EPS up 45% to $0.77.

Excluding foreign exchange losses on long-term debt, diluted EPS rose 34% to $0.87^b. Revenue grew 10% to $1,105.9 million, driven by a 14% increase in revenue per carload and a 10.2% rise in freight revenue, while the operating ratio improved 2.5 percentage points to 75.5%. Growth came despite a 35% jump in fuel expense, of which more than three-quarters was recovered through fuel surcharges, hedging and efficiency measures.

For the first half of 2005, net income reached $203.9 million^c and diluted EPS was $1.27, up 90%. The operating ratio improved 3.4 points to 78.8%. The company reaffirmed its 2005 outlook for 12–14% revenue growth and diluted EPS (excluding FX on long-term debt and specified items) of $3.15–$3.25, assuming oil at US$55 per barrel and an exchange rate of C$1.23 per US dollar.

Investors should note that the earnings improvement partly reflects a $23.4 million^d year-to-date revenue adjustment tied to a 2004 contract settlement, and that the non-GAAP measures excluding FX effects are not standardized. Operationally, the company handled record quarterly workload while completing a $160 million capacity expansion between the Prairies and Vancouver, which is scheduled for completion in Q4 2005. Leverage improved, with net debt to total capitalization falling to 42.1% from 47.0%.

02—Key points

Key Highlights

Q2 2005 net income of $123.2M vs. $83.7M in Q2 2004; diluted EPS of $0.77 (+45%), or $0.87 excluding FX losses on long-term debt (+34%)
Operating ratio improved 2.5 points to 75.5% in Q2 and 3.4 points to 78.8% in the first half of 2005
Revenue rose 10% to $1,105.9M in Q2, with revenue per carload up 14% and coal revenue up 48%
Fuel expense rose 35% in Q2, but more than three-quarters of the increase was recovered through surcharges, hedging and efficiency gains
First-half diluted EPS of $1.27 (+90%); $1.40 excluding FX on long-term debt (+57%)
2005 guidance reaffirmed: revenue growth of 12–14% and EPS (ex-FX and specified items) of $3.15–$3.25, assuming WTI at US$55/bbl and C$1.23/US$
Net debt to net debt plus equity improved to 42.1% from 47.0%; a normal course issuer bid allows repurchase of up to 2.5M shares through June 2006 (432,000 bought in Q2 at $43.58)

03—Questions

Frequently Asked Questions

What drove the strong earnings growth in the second quarter of 2005?
Earnings growth was driven mainly by revenue growth of 10%, with revenue per carload up 14% through a shift toward higher-yield traffic, strong pricing and contract renewals. Operating expenses rose less than 2% excluding fuel, and the operating ratio improved to 75.5%.
How significant were fuel costs to CP's results, and how were they managed?
Fuel expense rose 35% to $145.2M in Q2 2005 because of high fuel prices, and it was the main source of cost growth. More than three-quarters of the increase was offset through the revenue fuel surcharge, hedging and fuel efficiency initiatives. Fuel remains a key sensitivity, since the 2005 guidance assumes oil at US$55 per barrel.
Are the reported earnings figures affected by one-time items or non-GAAP adjustments?
Reported net income includes foreign exchange losses on long-term debt of $17.0M in Q2 2005 ($20.0M in Q2 2004). CP also presents EPS excluding these FX effects, which is a non-GAAP measure that is not standardized and may not be comparable with other companies. Year-to-date revenue includes a $23.4M favorable change in estimate tied to a 2004 contract settlement.
What is the outlook for the remainder of 2005?
CP expects 2005 revenue growth of 12–14% and diluted EPS, excluding FX on long-term debt and specified items, of $3.15–$3.25. The guidance assumes an average oil price of US$55 per barrel and an exchange rate of C$1.23 per US dollar. The $160M capacity expansion between the Prairies and Vancouver is on schedule for completion in Q4 2005.
How is CP managing its balance sheet and shareholder returns?
Net debt to net debt plus equity fell to 42.1% from 47.0%. Cash and short-term investments declined to $131.7M, and $256.6M of long-term debt was repaid in the quarter. CP has a normal course issuer bid for up to 2.5 million shares, of which 432,000 were repurchased in Q2 2005 at an average price of $43.58, and quarterly dividends of $21.0M were paid.

04—Continue

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