Canadian Pacific ‘ready to roll’ on Kansas City Southern merger

Canadian Pacific officials are upbeat about what 2023 might bring for the railway, with U.S. regulators poised to move soon on CP’s request to merge with Kansas City Southern.

“We are poised and ready to roll. It’s going to be a very special year for two storied companies. We can’t wait to get to work on combining these two great companies and creating value for our customers, our employees in the North American economy,” CP President and CEO Keith Creel told investors during CP’s fourth-quarter 2022 earnings call Tuesday afternoon. “We are focused on executing the plan and I am very pleased with the start that we have had to this year to what I expect will be a historic year.”

The Surface Transportation Board’s Office of Environmental Analysis last Friday released a final environmental impact statement analyzing the merger’s potential environmental impacts. The release of that review is considered to be one of the last items that needed to be completed before STB can render its decision on whether to approve the merger between CP and KCS.

As CP waits for STB’s decision, the railway and KCS have continued test runs of running trains to and from the Midwest and Mexico on an interline basis. CP recently completed a southbound test shipment of temperature-controlled products from the Midwest markets to Laredo, Texas, in about three days, “which is competitive with a single-driver truck,” said CP Chief Marketing Officer John Brooks.

CP has also been testing northbound lanes for service-sensitive products to markets in the Upper Midwest and into Canada, Brooks said.

“These markets are 100% served by trucks today and present a tremendous conversion opportunity for the combined CPKC to provide truck-competitive single-line service pending the STB … approval of our merger,” Brooks said, referring to the name for the merged company.

These test movements aim to function like a proof of concept to show how CP’s and KCS’ single-line service can compete against trucks, and they can also show potential customers what greenhouse gas emissions savings might occur if they choose to use the merged company’s rail service instead of truck, Brooks said.

Besides the potential merger, this year could also see favorable markets for CP’s bulk segment, which constitutes about 40% of the railway’s book and is more hardy against macroeconomic uncertainties.

Grain volumes in October set an all-time monthly tonnage record, making the fourth quarter the second highest quarter for grain volumes, Brooks said, adding that investments by both CP and Canadian grain producers should continue to facilitate higher volumes, while U.S. grain will also be “an area of strength” for the company in 2023.

The long-term outlook for potash “remains strong and unchanged” despite weather challenges putting pressure on export volumes in the fourth quarter, while coal volumes are poised to benefit from favorable year-over-year volume comparisons in 2023, Brooks continued.

“When I look at our bulk franchise, which makes up 40% of our book, it is extremely well-positioned in 2023, whether it’s through strong demand fundamentals, favorable [comparables] or both — we have a setup to deliver double-digit growth in this less macro-sensitive portion of our book of business,” Brooks said.

Despite the potential tailwinds in 2023, officials declined to provide any revenue guidance for the year because the merger has yet to be approved and macroeconomic uncertainties loom.

Creel said, “Obviously, we don’t know what the economy is going to do, but we do know our story is unique. And we know we’re going to control what we can control, and I do see a path to our improvement.”

In addition to discussing fourth-quarter results, Creel also talked about the impact that new labor agreements might have on the railway.

CP had reached a tentative agreement with Unifor for a new contract for mechanical employees in Canada, according to a Jan. 13 announcement.

The railway also has new hourly agreements for locomotive engineers and train conductors, which should facilitate scheduling time off and enable more predictability, Creel said. CP’s agreement with the Brotherhood of Locomotive Engineers and Trainmen (BLET) pertains to CP’s operations in consolidated territories, which Creel said is contingent upon STB approval. An agreement with the transportation division of the International Association of Sheet Metal, Air, Railroad and Transportation Workers (SMART-TD) is for KCS conductors in Kansas and Missouri.

The agreements with BLET and SMART-TD “are both progressively hourly agreements, which will improve our operational flexibility as well as predictability in our employees’ quality of life. It’s an agreement that gives us flexibility and in turn enables our employees to realize higher pay, scheduled jobs and a better quality of life compared to a traditional labor agreement in U.S. rail space,” Creel said.

“Parts of these agreements, of course, remain subject to the STB’s approval of the merger, but we certainly see additional opportunities down the road pending and assuming — depending upon an approval — to create a framework for the benefit of all employees when you combine CPKC,” he continued.

4th-quarter financial results

Despite challenging winter weather conditions in the fourth quarter that impacted operations and put pressure on volumes, CP’s (NYSE: CP) revenue grew 21% to nearly CA$2.5 billion (US$1.81 billion) year over year. (All financial figures are in Canadian dollars.)

Meanwhile, net income was $1.27 billion, or $1.36 per diluted share, in the fourth quarter of 2022, compared with net income of $532 million, or 74 cents per diluted share, in the fourth quarter of 2021.

Operating expenses rose 22% to $1.47 billion on higher costs for fuel, materials and equipment rents, while operating income grew 19% to $989 million.