CPKC: Investor Day Highlights; New CSX/G&W Agreement
Written by William C. Vantuono, Editor-in-Chief
CPKC photo
Canadian Pacific Kansas City (CPKC) on Investor Day, June 28, announced a new joint service agreement with CSX and involving Genesee & Wyoming that will create a direct CPKC-CSX interchange connection in Alabama and a corridor linking Mexico, Texas and the U.S. Southeast. At Investor Day, the transnational issued new multi-year guidance and “unveiled the next chapter in its long-term growth strategy as the only single-line railroad that connects a continent.”
At Investor Day, hosted at Union Station in Kansas City, members of CPKC’s senior executive team shared how CPKC “is primed to execute on the advantages of the new combined North American network to drive multi-year, long-term profitable growth, bring increased environmental benefits and deliver superior service and financial results.”
The railroad’s financial targets over the 2024-2028 period:
- Revenue compound annual growth rate (CAGR) of high-single digits.
- Core adjusted diluted earnings per share (EPS) CAGR of double-digits.
- Continued margin improvement through cost control and operating leverage.
- Capital expenditures of approximately $2.6 billion to $2.8 billion per year.
- Free cash conversion of Core adjusted income of approximately 90%.
- Return to double-digit Adjusted Return on Invested Capital (Adj. ROIC).
Key assumptions for these targets are an exchange rate of $1.35 CAD/USD, on-highway diesel price of $4.15 USD/US gallon, other components of net periodic benefit recovery of $330 million to $370 million, and an annualized adjusted effective tax rate of approximately 25.5%, excluding discrete items such as any effects of changes in tax rates.
CPKC also issued 2023 guidance. The company expects core adjusted diluted EPS to grow mid-single-digits vs. 2022 core adjusted diluted EPS of $3.77. CPKC’s reported diluted EPS was also $3.77 in 2022.
“This historic combination will transform the industry and has CPKC well-positioned to drive growth for the next half decade and beyond,” said CPKC President and CEO Keith Creel. “Our unrivaled single-line service connecting Canada, the U.S. and Mexico provides CPKC a unique advantage, allowing us to deliver a differentiated growth profile. Together, we expect to unlock more value for customers employees, and shareholders while benefitting the environment. Our success will continue to be driven by our deep bench of industry-leading railroaders, a disciplined approach to capital investment, and a focus on safety and sustainable growth, all further empowered by this new network. We remain committed to the foundations of Precision Scheduled Railroading across all aspects of CPKC with the rigor the operating model demands for long-term success.”
Download CPKC’s Investor Day Presentation:
CSX/G&W Agreement
CPKC’s new agreement with CSX and G&W involves each Class I acquiring or operating portions of G&W-owned Class III Meridian & Bigbee Railroad, L.L.C. (MNBR), which operates in Mississippi and Alabama, to establish a new freight corridor linking Mexico, Texas and the U.S. Southeast.
The MNBR runs between Meridian, Miss. and Montgomery, Ala., and currently is operated under a combination of ownership and operating agreements. Under the new agreements, CPKC would acquire and operate MNBR’s Meridian to Myrtlewood, Ala segment. CSX would operate the lines currently leased by MNBR east of Myrtlewood. CPKC and CSX would establish a direct CPKC-CSX interchange at or near Myrtlewood. In exchange, G&W would acquire certain Canadian properties owned by CPKC and other rights. MNBR would receive rights to continue to provide local service to existing customers on former MNBR-owned lines and connect with other railroads without interchange restrictions.
Terms of the transactions were not disclosed “and will be addressed in definitive agreements that the parties have agreed to negotiate,” the three companies said. “Certain portions of the transactions are subject to regulatory review and approval from, or exemption by, the U.S. Surface Transportation Board.”
“This strategic acquisition will bring more shipping options to intermodal, automotive and other customers by providing a new, efficient corridor connecting expanding markets in Mexico, Texas and the U.S. Southeast,” said Creel. “With this new east-west connection taking advantage of each railway’s routes and service, we can extend our reach converting more freight traffic to rail and off our highways.”
“CSX is excited to establish this new interchange connection with CPKC, which provides shippers with a compelling transportation option with access to markets in Texas and Mexico as well as into the heart of the thriving and dynamic U.S. Southeast,” said CSX President and CEO Joe Hinrichs. “This new service is a demonstration of our commitment to creating product offerings for shippers that help them leverage the efficiency and sustainability advantages of rail to drive growth.”
“We are pleased to have entered into agreements with CSX and CPKC that will enable MNBR to continue providing customers with outstanding short line service from Linden, Ala., to Meridian, while enabling our Class I partners to create a new connection into the Southeast U.S.,” said G&W CEO Jack Hellmann. “At the same time, we have enhanced several agreements related to other G&W short line railroads and are collaborating on the expansion of our service to Alberta and the Alberta Industrial Heartland in conjunction with CPKC.”
