Watch Now

Canadian Pacific eyes early 2023 federal approval of KCS acquisition

Harsh winter weather, lower grain volumes and work stoppage dent Q1 earnings

A Canadian Pacific train. (Photo: Shutterstock/Mumemories)

Canadian Pacific still expects federal approval of its planned acquisition of Kansas City Southern to occur sometime within the next 12 months, despite a recent pause in the proceeding.

CP (NYSE: CP) anticipates that a ruling from the Surface Transportation Board will come by early 2023 at the latest, President and CEO Keith Creel told investors during CP’s first-quarter 2022 earnings call.

“We’re certainly optimistic things will be restarted soon,” Creel told investors Wednesday afternoon. STB had asked CP to clarify some of the data it provided during the merger proceeding, and the board issued a decision on which data to use on Wednesday. “There’s room in the overall schedule for the board to take the time it needs to consider all the facts and the data.”

Creel said CP is still willing to work with other Class I railroads regarding their concerns over the merger, provided that the other railroads’ arguments are “reasonable.” CP still opposes CN’s (NYSE: CNI) offer to acquire a Kansas City Southern line between Kansas City, Missouri, and Springfield and East St. Louis, Illinois: “We intend to grow that railroad, but we’re certainly not going to divest that railroad,” Creel said.

He also said CP would honor a 2006 joint venture between Norfolk Southern (NYSE: NSC) and KCS over the Meridian Speedway, but CP’s merger application isn’t the venue for NS to gain something that wasn’t in the initial contract. 

Infrastructure in the Houston area can support the traffic of CP-KCS, Union Pacific (NYSE: UNP) and BNSF (NYSE: BRK.B), but there is room for potential investments.

“We believe that the infrastructure — if used properly, in the Houston area specifically — is more than adequate for the level of business that we believe our synergies will bring,” Creel said. “That said, should we exceed our synergies, should investment need to be made in cooperation and in partnership with BNSF and UP, there are mechanisms within those agreements now, those trackage rights agreements that allow for those investments.”

Despite lower revenue in the first quarter (see below), CP is maintaining its sales outlook for the year, saying it expects to deliver double-digit revenue ton miles growth in the back half of 2022.

Creel defended precision scheduled railroading (PSR), an approach the Class I railroads have adopted to streamline operations, although he noted that companies must regularly reassess their plans to ensure they have the infrastructure to handle the plans.

PSR is “a formula that has to be managed. It’s not going to manage itself. It has to be done in a disciplined fashion, and you have to ensure that you’ve got your assets in lockstep with what your demand is,” Creel said. “You’ve got to understand what you’re putting on your railroad. You can’t oversubscribe your railroad. … The physical assets can only do so much. You’ve got to plan and build the service design around what your physical plant is capable of handling, and it requires investment and it requires measuring and it requires the discipline to execute that.” 

Company executives also praised plans by ocean liner Hapag-Lloyd to add another weekly call at the Port Saint John in New Brunswick. The service will drive significant new volumes from Northern Europe through the port, and it will exclusively use CP service to access markets across Canada and the U.S., CP Chief Marketing Officer John Brooks told investors. 

The service will utilize the Central Maine & Quebec Railway, which CP acquired in June 2020. 

“That business alone is going to double the size of our train pair that moves between Saint John and Montreal,” Brooks said on the call. “And the neat thing about that is if you begin to think about the power of that density on that line — and what it does to the average cost per unit, what it does to the margin — that lane becomes quite powerful and frankly, only makes us more competitive on a route that we already have a 200-mile advantage against our competitor in that lane.”

Canadian Pacific’s Q1 2022 financial results

A 6% decrease in revenues put pressure on CP’s bottom line for the first quarter of 2022.

The railway reported net income of CA$590 million (US$461 million), or 63 cents per diluted share, in the first quarter of 2022, compared with $602 million, or 90 cents per diluted share, in the first quarter of 2021. All figures are in Canadian dollars. 

Revenues fell to $1.84 billion amid harsh winter weather, a temporary work stoppage related to negotiations with union members over a new labor agreement and the impact of last year’s drought on Canadian grain volumes. 

Expenses were $1.3 billion, an over-10% increase year-over-year.

Operating ratio (OR) grew to 70.9% from 60.2% a year ago. Investors sometimes use OR to gauge the financial health of a company, with a lower ratio implying improved financial health. 

“The first quarter certainly had its challenges. It was tough in the quarter to really build any momentum in rhythm despite what I would consider a very strong demand environment,” Brooks said on the call. “However, the CP team and the sales folks and the operating folks are experienced. I can tell you we stayed focused on the task at hand, selling to the value of our franchise. And as now we come out of the work stoppage that happened at the end of March, we are seeing definite momentum building as we move through April.”

Subscribe to FreightWaves’ e-newsletters and get the latest insights on freight right in your inbox.

Click here for more FreightWaves articles by Joanna Marsh.

Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.