e40vf
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
|
o |
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
|
|
OR |
|
|
|
x |
|
ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the fiscal year ended December 31, 2006
CANADIAN PACIFIC RAILWAY LIMITED
(Commission File No. 1-01342)
CANADIAN PACIFIC RAILWAY COMPANY
(Commission File No. 1-15272)
(Exact name of Registrant as specified in its charter)
|
|
|
|
|
CANADA
|
|
4011
|
|
98-0355078 |
|
|
|
|
(Canadian Pacific Railway Limited) |
|
|
|
|
98-0001377 |
|
|
|
|
(Canadian Pacific Railway Company) |
|
|
|
|
|
(Province or other jurisdiction of
|
|
(Primary Standard Industrial Classification
|
|
(I.R.S. Employer Identification Number) |
incorporation or organization)
|
|
Code Number) |
|
|
Suite 500, Gulf Canada Square, 401-9th Avenue S.W., Calgary, Alberta, Canada T2P 4Z4
(403) 319-7000
(Address and telephone number of Registrants principal executive offices)
CT Corporation System, 111-8th Avenue, New York, New York 10011, (212) 894-8940
(Name, address (including zip code) and telephone number (including area code) of Agent for Service of Canadian Pacific Railway Limited in the
United States)
The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street
Wilmington, Delaware 19801, (302) 658-7581
(Name, address (including zip code) and telephone number (including area code) of Agent for Service of Canadian Pacific Railway Company in the
United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered |
|
|
|
Common Shares, without par value, of
|
|
New York Stock Exchange |
Canadian Pacific Railway Limited |
|
|
|
|
|
Common Share Purchase Rights of
|
|
New York Stock Exchange |
Canadian Pacific Railway Limited |
|
|
|
|
|
Perpetual 4% Consolidated Debenture Stock
|
|
New York Stock Exchange |
of Canadian Pacific Railway Company |
|
|
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
For annual reports, indicate by check mark the information filed with this form:
|
|
|
x Annual information form
|
|
x Audited annual financial statements |
Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report.
At December 31, 2006, 155,506,837 Common Shares of Canadian Pacific Railway Limited were issued and
outstanding. At December 31, 2006, 347,170,009 Ordinary Shares of Canadian Pacific Railway Company
were issued and outstanding.
Indicate by check mark whether the Registrant by filing the information contained in this Form is
also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934 (the Exchange Act). If Yes is marked, indicate the file number
assigned to the Registrant in connection with such Rule.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
2
PRIOR FILINGS MODIFIED AND SUPERSEDED
The Registrants Annual Report on Form 40-F for the year ended December 31, 2006, at the time
of filing with the Securities and Exchange Commission, modifies and supersedes all prior documents
filed pursuant to Sections 13 and 15(d) of the Exchange Act for purposes of any offers or sales of
any securities after the date of such filing pursuant to any Registration Statement under the
Securities Act of 1933 of either Registrant which incorporates by reference such Annual Report,
including without limitation the following: Form S-8 No. 333-13962 (Canadian Pacific Railway
Limited); Form S-8 No. 333-127943 (Canadian Pacific Railway
Limited); and Form S-8 No. 333-140955 (Canadian Pacific Railway Limited).
CONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS AND
MANAGEMENTS DISCUSSION AND ANALYSIS
A. Audited Annual Financial Statements
For consolidated audited financial statements, including the report of the auditors with
respect thereto, see pages 47 through 92 of the Registrants 2006 Annual Report incorporated by
reference and included herein. For a reconciliation of important differences between Canadian and
United States generally accepted accounting principles, see Note 26 Supplementary Data of the
Notes to Consolidated Financial Statements on pages 85 through 92 of such 2006 Annual Report.
B. Managements Discussion and Analysis
For managements discussion and analysis, see pages 8 through 46 of the Registrants 2006
Annual Report incorporated by reference and included herein.
For the purposes of this Annual Report on Form 40-F, only pages 8 through 92 of the
Registrants 2006 Annual Report referred to above shall be deemed filed, and the balance of such
2006 Annual Report, except as it may be otherwise specifically incorporated by reference in the
Registrants Annual Information Form, shall be deemed not filed with the Securities and Exchange
Commission as part of this Annual Report on Form 40-F under the Exchange Act.
DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2006, an evaluation was carried out under the supervision of and with the
participation of the Registrants management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Registrants disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective as of December 31, 2006, to ensure that information required
to be disclosed by the Registrants in reports that they file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commission rules and forms.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
For managements report on internal control over financial reporting, see page 47 of the
Registrants 2006 Annual Report, incorporated by reference and included herein.
3
Managements assessment of the effectiveness of the Registrants internal control over
financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an
independent public accounting firm, as stated in their report on pages 48 and 49 of the
Registrants 2006 Annual Report.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the period covered by this Annual Report on Form 40-F, the Registrants implemented a
new revenue reporting system. The new system automates several processes previously performed
manually and management expects that efficiencies will be achieved due to the implementation of
this new system. Other than the foregoing change, no change occurred in the Registrants internal
control over financial reporting that has materially affected, or is reasonably likely to
materially affect, the Registrants internal control over financial reporting.
CODE OF BUSINESS ETHICS
The Registrants Code of Business Ethics was last revised in late 2003 to ensure that it
was in compliance with the corporate governance standards of the New York Stock Exchange (NYSE
Standards) and specifically addresses, among other things, conflicts of interest, protection and
proper use of corporate assets and opportunities, confidentiality of corporate information, fair
dealing with third parties, compliance with laws, rules and regulations and reporting of illegal or
unethical behavior. The Code applies to all directors, officers and employees, both unionized and
non-unionized, of the Registrants and their subsidiaries in Canada, the U.S. and elsewhere, and
forms part of the terms and conditions of employment of all such individuals. All Directors have
signed acknowledgements that they have read, understood and agree to comply with the Code.
Commencing in 2006 the Corporation introduced mandatory annual on-line ethics training for all
officers and non-union employees. As part of the on-line ethics training officers and non-union
employees are annually required to acknowledge that they have read, understood and agree to comply
with the Code. Contractors engaged on behalf of the Registrants or their subsidiaries must
undertake, as a condition of their engagement, to adhere to principles and standards of business
conduct consistent with those set forth in the Code. The Code is available on the Registrants web
site at www.cpr.ca and in print to any shareholder who requests it. All amendments to the Code,
and all waivers of the Code with respect to any director or executive officer of the Registrants,
will be posted on the Registrants web site and provided in print to any shareholder who requests
them.
CODE OF ETHICS FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS
The Registrants adopted a Code of Ethics for Chief Executive Officer and Senior Financial
Officers in 2003. This code applies to the Registrants President and Chief Executive Officer, the
Executive Vice-President and Chief Financial Officer and the Vice-President and Comptroller. It is
available on the Registrants web site at www.cpr.ca and in print to any shareholder who requests
it. All amendments to the code, and all waivers of the code with respect to any of the officers
covered by it, will be posted on the Registrants web site and provided in print to any shareholder
who requests them.
4
CORPORATE GOVERNANCE PRINCIPLES AND GUIDELINES
The Registrants last amended their Corporate Governance Principles and Guidelines in February
2006. These principles and guidelines pertain to such matters as, but are not limited to: director
qualification standards and responsibilities; election of directors; access by directors to
management and independent advisors; director compensation; director orientation and continuing
education; management succession; and annual performance evaluations of the board, including its
committees and individual directors, and of the Chief Executive Officer. The Corporate Governance
Principles and Guidelines are available on the Registrants web site at www.cpr.ca and in print to
any shareholder who requests them.
COMMITTEE TERMS OF REFERENCE
The terms of reference of each of the following committees of the Registrants are available on
the Registrants web site at www.cpr.ca and in print to any shareholder who requests them: the
Audit, Finance and Risk Management Committee; the Corporate Governance and Nominating Committee;
the Management Resources and Compensation Committee; the Health, Safety, Security and Environment
Committee; and the Pension Committee.
DIRECTOR INDEPENDENCE
The boards of the Registrants have adopted the categorical standards for director
independence: (a) prescribed by Section 10A(m)(3) of the Exchange Act and Rule 10A-3(b)(1)
promulgated thereunder and Multilateral Instrument 52-110 for members of public company audit
committees; and (b) set forth in the NYSE Standards, the Canadian corporate governance standards
set forth in National Instrument 58-101 and Multilateral Instrument 52-110 in respect of public
company directors. The boards also conducted a comprehensive assessment of each of their members
as against these standards and determined that all current directors, except
F.J. Green, have no material relationship with the Registrants and are independent. Mr. Green
is not independent by virtue of the fact that he is the Chief Executive Officer of the Registrants.
EXECUTIVE SESSIONS OF NON-MANAGEMENT DIRECTORS
The Corporate Governance and Nominating Committees of the boards of the Registrants are
comprised of all the independent directors on the boards and are required by their terms of
reference to meet at least quarterly and at such other times as they deem appropriate. The
Corporate Governance and Nominating Committee met 5 times during 2006; these meetings occurred at
each meeting of the board. They are chaired by Mr. J.E. Cleghorn. Interested parties may
communicate directly with Mr. Cleghorn by writing to him at the following address, and all
communications received at this address will be forwarded to him:
Office of the Corporate Secretary
Canadian Pacific Railway
Suite 920, 401 9th Avenue, S.W.
Calgary, Alberta
Canada
T2P 4Z4
5
AUDIT COMMITTEE FINANCIAL EXPERTS
The following individuals comprise the current membership of the Registrants Audit, Finance
and Risk Management Committees (Audit Committees), which have been established in accordance with
Section 3(a)(58)(A) of the Exchange Act:
John P. Manley
Madeleine Paquin
Roger Phillips
Hartley T. Richardson
Michael W. Wright
Each of the aforementioned directors, except Ms. Paquin, has been determined by the boards of
the Registrants to meet the audit committee financial expert criteria prescribed by the Securities
and Exchange Commission and has been designated as an audit committee financial expert for the
Audit Committees of the boards of both Registrants. Each of the aforementioned directors has also
been determined by the boards of the Registrants to be independent within the criteria referred to
above under the subheading Director Independence.
Mr. Manley is designated as an audit committee financial expert based on his experience as a
lawyer advising on corporate, commercial and tax matters, his experience as a senior member of the
Canadian federal government, including serving as Minister of Finance and as Deputy Chairman of the
Treasury Board, and his current experience as a member of the audit committee of the Canadian
Imperial Bank of Commerce.
FINANCIAL LITERACY OF AUDIT COMMITTEE MEMBERS
The boards of the Registrants have determined that all members of the Audit Committees, except
Ms. Paquin, have accounting or related financial management expertise within the meaning of the
NYSE Standards. The boards have determined that all members of the Audit Committees are
financially literate within the definition contained in, and as required by, Multilateral
Instrument 52-110 and the NYSE Standards.
SERVICE ON OTHER PUBLIC COMPANY AUDIT COMMITTEES
Each Registrants board has determined that no director who serves on more than two public
company audit committees other than its own Audit Committee shall be eligible to serve as a member
of the Audit Committee of that Registrant, unless that Registrants board determines that such
simultaneous service would not impair the ability of such member to effectively serve on that
Registrants Audit Committee. No member of the Audit Committees of the Registrants serves on more
than two public company audit committees in addition to the Audit Committee of either Registrant.
6
PRINCIPAL ACCOUNTING FEES AND SERVICES INDEPENDENT AUDITORS
Fees payable to the Registrants independent auditor, PricewaterhouseCoopers, LLP for the
years ended December 31, 2006, and December 31, 2005, totaled $2,824,200 and $2,142,140,
respectively, as detailed in the following table:
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
Year ended December 31, 2005 |
Audit Fees |
|
$2,118,000 |
|
$1,086,000 |
Audit-Related Fees |
|
$ 438,900 |
|
$ 812,540 |
Tax Fees |
|
$ 267,300 |
|
$ 243,600 |
All Other Fees |
|
$ 0 |
|
$ 0 |
TOTAL |
|
$2,824,200 |
|
$2,142,140 |
The nature of the services provided by PricewaterhouseCoopers LLP under each of the categories
indicated in the table is described below.
Audit Fees
Audit fees were for professional services rendered for the audit of the Registrants annual
financial statements and services provided in connection with statutory and regulatory filings or
engagements, including the attestation engagement for the independent auditors report on
managements report on internal controls for financial reporting.
Audit-Related Fees
Audit-related fees were for attestation and related services reasonably related to the performance
of the audit or review of the annual financial statements, but which are not reported under Audit
Fees above. These services consisted of: the audit or review of financial statements of certain
subsidiaries and of various pension and benefits plans of the Registrants; special attest services
as may be required by various government entities; assistance with preparations for compliance with
Section 404 of the Sarbanes-Oxley Act of 2002; access fees for technical accounting database
resources; and general advice and assistance related to accounting and/or disclosure matters with
respect to new and proposed Canadian and U.S. Accounting Guidelines, securities regulations, and/or
laws.
Tax Fees
Tax fees were for professional services related to tax compliance, tax planning and tax advice.
These services consisted of: tax compliance including the review of tax returns; assistance with
questions regarding corporate tax audits; tax planning and advisory services relating to common
forms of domestic and international taxation (i.e. income tax, capital tax, goods and services tax,
and valued added tax); and access fees for taxation database resources.
All Other Fees
Fees disclosed under this category were for products and services other than those described under
Audit Fees, Audit-Related Fees and Tax Fees, above. In both 2006 and 2005, there were no
services in this category.
7
PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES PROVIDED BY
INDEPENDENT AUDITORS
The Audit Committees have adopted a written policy governing the pre-approval of audit and
non-audit services to be provided to the Registrants by their independent auditors. The policy is
reviewed and renewed annually and the audit and non-audit services to be provided to the
Registrants by their independent auditors, as well as the budgeted amounts for such services, are
pre-approved at that time. A report of all such services performed or to be performed by the
independent auditors pursuant to the policy must be submitted to the Audit Committees by the
Vice-President and Comptroller at least quarterly. Any additional audit or non-audit services to
be provided by the independent auditors either not included among the pre-approved services or
exceeding the budgeted amount for such pre-approved services by more than 10% must be individually
pre-approved by the Audit Committees or their Chairman, who must report all such additional
pre-approvals to the Audit Committees at their next meeting following the granting thereof. The
independent auditors annual audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committees. Non-audit services that the Registrants independent
auditors are prohibited from providing to the Registrants may not be pre-approved. In addition,
prior to the granting of any pre-approval, the Audit Committees or their Chairman, as the case may
be, must be satisfied that the performance of the services in question will not compromise the
independence of the independent auditors. Compliance with this policy is monitored by the
Registrants Chief Internal Auditor.
OFF-BALANCE SHEET ARRANGEMENTS
A description of the Registrants off-balance sheet arrangements is set forth on pages 34 and
35 of the Registrants 2006 Annual Report incorporated by reference and included herein.
TABLE OF CONTRACTUAL COMMITMENTS
The table setting forth the Registrants contractual commitments is set forth on page 35 of
the Registrants 2006 Annual Report incorporated by reference and included herein.
8
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A. Undertaking
Each Registrant undertakes to make available, in person or by telephone, representatives to
respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so
by the Commission staff, information relating to: the securities registered pursuant to Form 40-F;
the securities in relation to which the obligation to file an annual report on Form 40-F arises; or
transactions in said securities.
B. Consent to Service of Process
A Form F-X signed by Canadian Pacific Railway Limited and its agent for service of process was
filed with the Commission together with Canadian Pacific Railway Limiteds Annual Report on Form
40-F for the fiscal year ended December 31, 2000. A Form F-X signed by Canadian Pacific Railway
Company and its agent for service of process was filed with the Commission on April 21, 2004.
SIGNATURES
Pursuant to the requirements of the Exchange Act, each Registrant certifies that it meets all
of the requirements for filing on Form 40-F and has duly caused this Annual Report on Form 40-F to
be signed on its behalf by the undersigned, thereto duly authorized, in the City of Calgary,
Province of Alberta, Canada.
|
|
|
|
|
CANADIAN PACIFIC RAILWAY LIMITED
CANADIAN PACIFIC RAILWAY COMPANY
(Registrants)
|
|
|
Signed Donald F. Barnhardt
|
|
|
Name: |
Donald F. Barnhardt |
|
|
Title:
Date: |
Corporate Secretary
March 30, 2007 |
|
9
DOCUMENTS FILED AS PART OF THIS REPORT
1. |
|
Annual Information Form of the Registrants for the year ended December 31, 2006. |
|
2. |
|
Annual Report of the Registrants for the year ended December 31, 2006, including Managements
Discussion and Analysis, Managements Report on Internal Control over Financial Reporting and
the Audited Consolidated Financial Statements of the Registrants as of December 31, 2006 and
for each of the three years then ended1. |
EXHIBITS
A. |
|
Consent of PricewaterhouseCoopers, Independent Accountants. |
|
B. |
|
Certifications by the Chief Executive Officer and Chief Financial Officer of the Registrants
filed pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
C. |
|
Certifications by the Chief Executive Officer and Chief Financial Officer of the Registrants
furnished pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
1 For the purposes of this Annual Report on
Form 40-F, only pages 8 through 92 of the Registrants 2006 Annual Report
referred to above shall be deemed filed, and the balance of such 2006 Annual
Report, except as it may be otherwise specifically incorporated by reference in
the Registrants Annual Information Form, shall be deemed not filed with
the Securities and Exchange Commission as part of this Annual Report on Form
40-F under the Exchange Act.
10
ANNUAL INFORMATION FORM MARCH 2, 2007 SAFEST, MOST FLUID RAILWAY Canadian Pacifics vision is
to become the safest, most fluid railway in North America. We are achieving this through the
ingenuity of our people, and their relentless focus on Execution Excellence, Together, we are
transforming this railway continue to build shareholder value. |
TABLE OF CONTENTS
All dollar amounts in this Annual Information Form (AIF) are in Canadian dollars, unless
otherwise noted.
CORPORATE STRUCTURE
In this Annual Information Form (AIF), our, us, we, CP and the Company refer to
Canadian Pacific Railway Limited (CPRL), CPRL and its subsidiaries, CPRL and one or more of its
subsidiaries, or one or more of CPRLs subsidiaries, as the context may require.
Name, Address and Incorporation Information
Canadian Pacific Railway Limited was incorporated on June 22, 2001, as 3913732 Canada Inc. pursuant
to the Canada Business Corporations Act (the CBCA). On July 20, 2001, CP amended its Articles of
Incorporation to change its name to Canadian Pacific Railway Limited. On October 1, 2001, Canadian
Pacific Limited (CPL) completed an arrangement (the Arrangement) whereby it distributed to its
common shareholders all of the shares of newly formed corporations holding the assets of four of
CPLs five primary operating divisions. The Arrangement was effected as an arrangement pursuant to
section 192 of the CBCA. On September 26, 2001, the Arrangement was approved by the shareholders
of CPL, and Canadian Pacific Railway Company (CPRC), previously a wholly owned subsidiary of CPL,
was transferred to CPRL, effective October 1, 2001. The transfer was accomplished as part of a
series of steps, pursuant to the terms of the Arrangement, whereby CPL transferred all of its
outstanding shares of CPRC to a CPL subsidiary, 3921760 Canada Inc. (3921760). CPL then
transferred all of its outstanding shares of 3921760 to CPRL, and CPRL amalgamated with 3921760.
Our registered office, executive offices and principal place of business are located at Suite 500,
401 9th Avenue S.W., Calgary, Alberta T2P 4Z4.
2
INTERCORPORATE RELATIONSHIPS
Principal Subsidiaries
The table below sets out our principal subsidiaries, including the jurisdiction of incorporation
and the percentage of voting and non-voting securities we currently own directly or indirectly:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Non- |
|
|
|
|
|
|
Percentage of |
|
Voting Securities |
|
|
|
|
|
|
Voting Securities |
|
Beneficially Owned, or |
|
|
Incorporated |
|
Held Directly or |
|
over which Control or |
Principal Subsidiary |
|
under the Laws of |
|
Indirectly |
|
Direction is Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian Pacific Railway Company |
|
Canada |
|
|
100 |
% |
|
Not applicable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Soo Line Corporation (1) |
|
Minnesota |
|
|
100 |
% |
|
Not applicable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Soo Line Railroad Company (2) |
|
Minnesota |
|
|
100 |
% |
|
Not applicable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Delaware and Hudson Railway Company,
Inc. (2) |
|
Delaware |
|
|
100 |
% |
|
Not applicable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mount Stephen Properties Inc.(3) |
|
Canada |
|
|
100 |
% |
|
Not applicable |
|
|
|
(1) |
|
Indirect wholly owned subsidiary of Canadian Pacific Railway Company. |
|
(2) |
|
Wholly owned subsidiary of Soo Line Corporation. |
|
(3) |
|
Wholly owned subsidiary of Canadian Pacific Railway Company. |
3
GENERAL DEVELOPMENT OF THE BUSINESS
Recent Developments
We continually seek to grow the value and scale of our core business through infrastructure-sharing
and joint-service programs with other railways, strategic capital investment programs, and
operating plan strategies. Combined with the ongoing improvement of our locomotive fleet, these
strategies facilitate more predictable and fluid train operations between major terminals.
In May 2006, we completed the sale of our 92.3-mile Latta subdivision in Indiana between Bedford
and Fayette, near Terre Haute, to Indiana Rail Road Company. The sale, which closed in the second
quarter of 2006, included trackage rights over CSX Transportation, Inc. (CSX) rail lines from
Chicago, Illinois, to Terre Haute, Indiana, and from Bedford to New Albany in Indiana, and over the
Norfolk Southern Railway (NS) line from New Albany to Louisville, Kentucky.
In January 2006, CP and Canadian National Railway Company (CN) entered into an agreement, which
assists in the optimization of railway infrastructure in the lower mainland of British Columbia
(B.C.). Under the arrangement, CP will operate the trains of both railways using CP crews from
Boston Bar, B.C. to the terminals on the south shore of the Burrard Inlet in Vancouver, and return
to North Bend, B.C. CN will operate the trains of both railways using CN crews from Boston Bar to
the terminals on the north shore of the Burrard Inlet and return to North Bend. CP will provide
all switching on the south shore of the Burrard Inlet, with the exception of the Burlington
Northern Santa Fe Railway barge slip, and CN will provide all switching on the north shore of the
Burrard Inlet. In addition, CP will operate some CN trains to or from the Roberts Bank port at
Delta, B.C.
In 2005, a significant investment was made in the western portion of our rail network to improve
trade and capacity between the Port of Vancouver in B.C. and the Canadian prairies. Western
commodities, such as coal from the B.C. interior, and grain, sulphur and fertilizers from the
prairies, are being transported to the west coast of Canada in growing volumes. Similarly,
increased trade with China and other Asian countries generates additional volumes of containerized
freight in this region. We expanded train capacity on our western rail network by 12%, or
approximately four extra trains per day. The expansion work was completed on time and within
budget. It included:
|
|
|
10 projects between Moose Jaw, Saskatchewan and Calgary, Alberta to extend sidings and
lay sections of double track; |
|
|
|
three projects in Alberta, between Edmonton and Calgary, to extend sidings and build a new siding; |
|
|
|
12 projects between Calgary and the Port of Vancouver to extend sidings and lay sections of double track. |
A siding is a limited length of track parallel to the main line that enables trains running in
either direction to pass each other. Longer sidings permit the operation of longer trains,
resulting in more freight moved per train and fewer trains required to move the same volume of
freight traffic. Longer sidings also reduce the number of locomotives required to move the same
amount of freight in a given rail corridor. We have identified other corridor bottlenecks on our
network and a plan is in place to provide appropriate capacity in order to increase train density
and capacity on all of our major routes.
In 2004, we entered into an agreement with CN and NS to provide a significantly shorter, more
direct routing over our Delaware and Hudson Railway Company, Inc. (D&H) lines for NS-CN interline
traffic moving between eastern Canada and the eastern U.S. Under the agreement:
|
|
|
CN traffic destined for the eastern U.S. will move in our trains on the D&H line in New
York between Rouses Point and Saratoga Springs under our freight haulage arrangement with
NS; |
|
|
|
this CN traffic will then move in NS trains over the D&H line between Saratoga Springs
and the NS connection near Harrisburg, Pennsylvania, under our trackage rights agreements
with NS. |
The agreement with CN and NS generated approximately one train per day of new business in each
direction, seven days a week on the D&H. This arrangement is improving traffic density on the D&H
and generating additional revenue.
On June 30, 2004, we entered into a Memorandum of Understanding with NS in an effort to improve the
efficiency of railway operations and enhance rail service to customers of the D&H. Definitive
agreements were reached, pursuant to which:
|
|
|
NS provides yard services for CP at Buffalo, New York; |
|
|
|
NS hauls CP traffic between Buffalo and Binghamton in New York; |
|
|
|
CP grants trackage rights to NS between Binghamton and Saratoga Springs; |
|
|
|
CP hauls NS traffic between Rouses Point and Saratoga Springs; |
|
|
|
CP provides yard services for NS at Binghamton; |
|
|
|
NS grants CP trackage rights over certain NS lines in the vicinity of Buffalo; and |
|
|
|
NS grants CP trackage rights between Detroit, Michigan and Chicago, Illinois. |
4
GENERAL DEVELOPMENT OF THE BUSINESS
Operations under the agreements commenced in 2005, and the last of the associated regulatory
exemptions were obtained from the U.S. Surface Transportation Board (STB) in the second quarter
of 2005. We are now realizing the benefits and savings from these agreements.
5
DESCRIPTION OF THE BUSINESS
Our Background and Network
CPRC was incorporated by Letters Patent in 1881 pursuant to an Act of the Parliament of Canada.
CPRC is one of Canadas oldest corporations and was North Americas first transcontinental railway.
From our inception 126 years ago, we have developed into a fully integrated and technologically
advanced Class 1 railway (a railroad earning a minimum of US$319.3 million in revenues annually)
providing rail and intermodal freight transportation services over a 13,300-mile network serving
the principal business centres of Canada, from Montreal, Quebec, to Vancouver, B.C., and the U.S.
Midwest and Northeast regions.
We own approximately 9,100 miles of track. An additional 4,200 miles of track are owned jointly,
leased or operated under trackage rights. Of the total mileage operated, approximately 6,550 miles
are located in western Canada, 2,200 miles in eastern Canada, 3,250 miles in the U.S. Midwest and
1,300 miles in the U.S. Northeast. Our business is based on funnelling railway traffic from feeder
lines and connectors, including secondary and branch lines, onto our high-density mainline railway
network. We have extended our network reach by establishing alliances and connections with other
major Class 1 railways in North America, which allow us to provide competitive services and access
to markets across North America beyond our own rail network. We also provide service to markets in
Europe and the Pacific Rim through direct access to the Port of Montreal, Quebec, and the Port of
Vancouver, B.C., respectively.
Our network accesses the U.S. market directly through two wholly owned subsidiaries: Soo Line
Railroad Company (Soo Line), a Class 1 railway operating in the U.S. Midwest; and the D&H, which
operates between eastern Canada and major U.S. Northeast markets, including New York City, New
York; Philadelphia, Pennsylvania; and Washington, D.C.
Strategy
Our vision is to become the safest and most fluid railway in North America. Through the ingenuity
of our people, it is our objective to create long-term value for customers, shareholders and
employees by profitably growing within the reach of our rail franchise. We seek to accomplish this
objective through the following three-part strategy:
|
|
|
generating quality revenue growth by realizing the benefits of demand growth in our bulk,
intermodal and merchandise business lines with targeted infrastructure capacity investments
linked to global trade opportunities; |
|
|
|
improving productivity by leveraging strategic marketing and operating partnerships,
executing a scheduled railway through our Integrated Operating Plan (IOP) and driving more
value from existing assets and resources by improving fluidity; and |
|
|
|
continuing to develop a dedicated, professional and knowledgeable workforce that is
committed to safety and sustainable financial performance through steady improvement in
profitability, increased free cash flow and a competitive return on investment. |
Partnerships, Alliances and Network Efficiency
Some customers goods may have to travel on more than one railway to reach their final destination.
The transfer of goods between railways can cause delays and service interruptions. Our rail network
connects to other North American rail carriers and, through partnerships, we continue to co-develop
processes and products designed to provide seamless and efficient scheduled train service to these
customers.
We continue to increase the capacity and efficiency of our core franchise through
infrastructure-sharing and joint-service programs with other railways and third parties, strategic
capital investment programs, and operating plan strategies. Combined with the continued improvement
of our locomotive fleet, these strategies enable us to achieve more predictable and fluid train
operations between major terminals.
Recent Class 1 railway initiatives include:
|
|
|
a CP-CN directional running agreement over about 100 miles of parallel CP and CN track
in Ontario between Waterfall (near Sudbury) and Parry Sound. The trains of both railways
operate eastbound over CNs line and westbound over our line; |
|
|
|
a CP-CN haulage agreement under which we transport CN freight over about 300 miles of CP
track in Ontario between Thunder Bay and Franz; |
|
|
|
CP-CN initiatives in the Port of Vancouver Terminal and B.C. Lower Mainland; |
|
|
|
a CP-NS trackage rights agreement to handle NS traffic over our D&H lines in the U.S. Northeast; and |
|
|
|
a CP-NS track connection at Detroit, Michigan that provides service between eastern
Canada and the U.S. Midwest. |
6
DESCRIPTION OF THE BUSINESS
We also develop mutually beneficial arrangements with smaller railways, including shortline and
regional carriers.
In November 2005, CP and the Fraser River Port Authority (FRPA) entered into a cooperation
agreement to enhance service through the Fraser River Port, south of the Port of Vancouver, and to
capture growth opportunities in global trade. Under the agreement, CP and FRPA will consult on
market and trade outlooks and business development opportunities, coordinate investments, and
engage in multi-modal planning to build or expand port and rail infrastructure, such as terminals
and track. FRPA will also support efforts to enhance our access to Fraser River facilities to help
meet increased demand for rail service.
In April 2005, we signed a cooperation agreement with the Vancouver Port Authority (VPA) to work
on joint capacity developments to more fully capture expanding Asia-Pacific trade opportunities.
Joint initiatives include marketing programs and domestic public policy advocacy to increase
competitiveness, operational efficiencies and customer service at the Port of Vancouver. There is
also a commitment by both parties to ensure that the Port of Vancouver is the most secure port
system on the West Coast of the Americas. CP and VPA will also advocate a policy framework in
Canada that fosters private sector investment in an integrated transportation system, including
marine, rail, road and air, and encourages coordinated federal and provincial investment in
Canadas aging transportation network in local communities.
Network and Right-of-Way
Our 13,300-mile network extends from the Port of Vancouver on Canadas Pacific Coast to the Port of
Montreal in eastern Canada, and to the U.S. industrial centres of Chicago, Illinois; Newark, New
Jersey; Philadelphia, Pennsylvania; and New York City and Buffalo, New York.
Our network is composed of four primary corridors: Western, Southern, Central, and Eastern. These
corridors are comprised of main lines, totalling approximately 4,750 miles, supported by secondary
and branch rail lines (feeder lines) that carry traffic to and from the main lines.
The Western Corridor: Vancouver-Moose Jaw
Overview The Western Corridor links Vancouver with Moose Jaw, which is the western Canadian
terminus of our Southern and Central corridors. With service through Calgary, the Western Corridor
is an important part of our routes between Vancouver and the U.S. Midwest, and between Vancouver
and central and eastern Canada.
Products The Western Corridor is our primary route for bulk and resource products traffic from
western Canada to the Port of Vancouver for export. We also handle significant volumes of
international intermodal containers and domestic general merchandise traffic.
Feeder Lines We support our Western Corridor with three significant feeder lines: the Coal
Route, which links southeastern B.C. coal deposits to the Western Corridor and to the Roberts Bank
terminal at the Port of Vancouver; the Calgary-Edmonton-Scotford Route, which provides rail
access to central Albertas petrochemical industries and natural resources markets; and the
7
DESCRIPTION OF THE BUSINESS
Pacific CanAm Route, which connects Calgary and Medicine Hat, Alberta, with Union Pacific
Railroad Company (UP) at Kingsgate, B.C.
Connections Our Western Corridor connects with UP at Kingsgate and with Burlington Northern
Santa Fe Railway (BNSF) at Coutts, Alberta, and at New Westminster and Huntingdon in B.C. This
corridor also connects with CN at Red Deer, Alberta; Calgary; Edmonton; Kamloops, B.C.; and several
locations in the Vancouver Area.
Yards and Repair Facilities We support rail operations on the Western Corridor with main rail
yards at Vancouver, Calgary, Edmonton and Moose Jaw. We also have major intermodal terminals at
Vancouver, Calgary and Edmonton, and locomotive and rail car repair facilities at Golden, B.C.,
Vancouver, Calgary and Moose Jaw.
Other In 2005, we completed a series of capacity expansion projects in the Western Corridor,
which increased capacity in this corridor by approximately four trains per day. These projects are
discussed further in the section General Development of the Business in this AIF.
The Southern Corridor: Moose Jaw-Chicago
Overview The Southern Corridor connects with the Western Corridor at Moose Jaw. By running south
to Chicago through the twin cities of Minneapolis and St. Paul in Minnesota, and through Milwaukee,
Wisconsin, we provide a direct, single-carrier route between western Canada and the U.S. Midwest.
Products Primary traffic categories transported on the Southern Corridor include intermodal
containers from the Port of Vancouver, Canadian fertilizers, chemicals, grain, coal, and automotive
and U.S. agricultural products.
Feeder Lines We support the Southern Corridor with a major feeder line connecting Glenwood,
Minnesota, and Winnipeg, Manitoba. This line is both a gathering network for U.S. grain and a route
for Canadian fertilizers and merchandise traffic destined to the U.S.
We have operating rights over the BNSF line between Minneapolis and the twin ports of Duluth,
Minnesota, and Superior, Wisconsin. This line provides an outlet for grain from the U.S. Midwest to
the grain terminals at these ports.
Prior to the second half of 2006, we provided service on a route from Chicago to Louisville,
Kentucky, through a combination of operating rights and owned lines. General merchandise traffic
and a significant amount of coal traffic from mines in southern Indiana move over this route, which
was sold to Indiana Rail Road Company in the second quarter of 2006 (discussed further in the
section General Development of the Business).
Connections Our Southern Corridor connects with all major railways at Chicago. Outside of
Chicago, we have major connections with BNSF at Minneapolis and at Minot, North Dakota, and with UP
at St. Paul. We connect with CN at Minneapolis, Milwaukee and Chicago. Our Southern Corridor also
links to several shortline railways that primarily serve grain and coal producing areas in the U.S.
Yards and Repair Facilities We support rail operations on the Southern Corridor with main rail
yards in Chicago, St. Paul and Glenwood. We own 49% of the Indiana Harbor Belt Railroad Company, a
switching railway serving Greater Chicago and northwest Indiana, and have two major intermodal
terminals in Chicago and one in Minneapolis. In addition, we have a major locomotive repair
facility at St. Paul and car repair facilities at St. Paul and Chicago.
The Central Corridor: Moose Jaw-Toronto
Overview The Central Corridor extends from Moose Jaw through Winnipeg to its eastern terminus at
Toronto. We complement the Central Corridor with a secondary route in Ontario that is leased and
operated by Ottawa Valley Railway. This secondary route connects Sudbury and Smiths Falls, Ontario,
and expedites the movement of our traffic between Montreal and western Canada. Our Central Corridor
provides shippers direct rail service from Toronto and Montreal to Calgary and Vancouver via our
Western Corridor. This is a key element of our transcontinental intermodal and other services. The
Central Corridor also provides access to the Port of Thunder Bay, Ontario, Canadas primary Great
Lakes bulk terminal.
Products Major traffic categories transported in the Central Corridor include Canadian grain,
coal, forest and industrial and consumer products, intermodal containers, automotive products and
general merchandise.
Feeder Lines We support the Central Corridor with a main feeder line connecting Edmonton with
Winnipeg, through Saskatoon and Regina in Saskatchewan. This line is an important collector of
Canadian grain and fertilizer.
8
DESCRIPTION OF THE BUSINESS
Connections The Central Corridor connects with BNSF at Emerson, Manitoba, and with a number of
shortline railways. This corridor also connects with CN at Regina, Saskatoon, Winnipeg, Thunder
Bay and Sudbury.
Yards and Repair Facilities We support our rail operations in the Central Corridor with major
rail yards at Saskatoon, Winnipeg, Toronto and Thunder Bay. Our largest intermodal facility is
located in the northern Toronto suburb of Vaughan and
serves the Greater Toronto and southwestern Ontario areas. We also operate intermodal terminals at Thunder Bay, Winnipeg, Saskatoon and Regina.
We have major locomotive repair facilities at Winnipeg and Toronto and car repair facilities at
Winnipeg, Thunder Bay and Toronto.
The Eastern Corridor
Overview The Eastern Corridor provides an important link between the major population centres of
eastern Canada, the U.S. Midwest and the U.S. Northeast. The corridor supports our market position
at the Port of Montreal by providing one of the shortest rail routes for European cargo destined to
the U.S. Midwest. The Eastern Corridor consists of a route between Montreal and Detroit, which we
own and maintain, coupled with a trackage rights arrangement on NS track between Detroit and
Chicago and a long-term rail car haulage contract with CSX that links Detroit with our lines in
Chicago.
Products Major traffic categories transported in the Eastern Corridor include intermodal
containers, automotive, and forest and industrial and consumer products, as well as truck trailers
moving in drive-on/drive-off Expressway service between Montreal and Toronto.
Feeder Lines The Eastern Corridor connects with important feeder lines. Our route between
Montreal and Sunbury, Pennsylvania, in combination with trackage rights over other railways,
provides us with direct access to New York City and Albany, New York; Philadelphia; Newark, New
Jersey; and Washington, D.C. The line between Guelph Junction, Ontario and Binghamton, including
haulage rights over NS lines, links industrial southern Ontario with key U.S. connecting rail
carriers at Buffalo and with the Montreal-to-Sunbury line at Binghamton.
Connections The Eastern Corridor connects with all major railways at Chicago. We also have major
connections with NS at Detroit, Buffalo, and at Harrisburg and Allentown in Pennsylvania, and with
CSX at Detroit, Buffalo, Albany, Philadelphia, and Washington D.C. In addition, our eastern
corridor connects with CN at Montreal and at Toronto, Windsor and London in Ontario.
Yards and Repair Facilities We support our Eastern Corridor with major rail yards and terminals
in Chicago, Toronto, Montreal and Binghamton. There are also intermodal facilities in Montreal and
Detroit, as well as a second intermodal facility in Toronto dedicated to serving the Eastern
Corridor. Terminals for our Expressway service are located in Montreal and at Milton and Agincourt
in the Greater Toronto area. We have locomotive and car repair facilities in Montreal and
Binghamton, in addition to car repair facilities in Chicago and locomotive and car repair
facilities in Toronto,
Other On June 30, 2004, we announced a restructuring of the D&H whereby D&H and NS provide yard
and haulage services for each other (discussed further in the section General Development of the
Business in this AIF). This restructuring has reduced costs and provided new income for the D&H.
The STB in the second quarter of 2005 approved the final changes stemming from the agreement.
Right-of-Way
Our rail network is standard gauge, which is used by all major railways in Canada, the U.S. and
Mexico. Continuous welded rail is used on almost all of our mainline. Virtually all of the network
and primary feeder trackage is 100-pound or heavier rail, suitable for the movement of
high-capacity 286,000-pound freight cars.
We use different train control systems on portions of our owned track, depending on the volume of
rail traffic. Remotely controlled centralized traffic control signals are used to authorize the
movement of trains where traffic is heaviest.
Where rail traffic is lightest, train movements are directed by written instructions transmitted
electronically and by radio from rail traffic controllers to train crews. In areas of intermediate
traffic density, we use an automatic block signalling system in conjunction with written
instructions from rail traffic controllers.
9
DESCRIPTION OF THE BUSINESS
Business Categories
The following table compares the percentage of our total freight revenue derived from each of our
major business lines in 2006 compared with 2005:
|
|
|
|
|
|
|
|
|
|
Business Category |
|
|
2006 |
|
2005 |
Bulk |
|
|
|
44 |
% |
|
|
45 |
% |
Merchandise |
|
|
|
28 |
% |
|
|
28 |
% |
Intermodal |
|
|
|
28 |
% |
|
|
27 |
% |
Freight Revenues
The following table summarizes our annual freight revenues since 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight Revenues |
|
|
|
|
|
Fiscal 2006 |
|
|
|
|
|
Fiscal 2005 |
|
|
(in $ millions, except for percentages) |
|
|
|
|
|
Growth |
|
|
|
|
|
Growth |
|
|
|
|
|
|
|
|
Rate as |
|
|
|
|
|
Rate as |
|
|
|
|
|
|
|
|
Compared |
|
|
|
|
|
Compared |
|
|
|
|
Fiscal |
|
to Fiscal |
|
Fiscal |
|
to Fiscal |
|
Fiscal |
Business Category |
|
2006 |
|
2005 |
|
2005 |
|
2004 |
|
2004 |
|
Bulk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
905 |
|
|
|
20.0 |
% |
|
|
754 |
|
|
|
12.9 |
% |
|
|
668 |
|
Coal |
|
|
592 |
|
|
|
(18.8 |
)% |
|
|
729 |
|
|
|
37.5 |
% |
|
|
530 |
|
Sulphur and fertilizers |
|
|
439 |
|
|
|
(1.8 |
)% |
|
|
447 |
|
|
|
(2.8 |
)% |
|
|
460 |
|
|
Total bulk |
|
|
1,936 |
|
|
|
0.3 |
% |
|
|
1,930 |
|
|
|
16.4 |
% |
|
|
1,658 |
|
|
Merchandise |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forest products |
|
|
316 |
|
|
|
(5.4 |
)% |
|
|
334 |
|
|
|
3.7 |
% |
|
|
322 |
|
Industrial and consumer products |
|
|
604 |
|
|
|
11.2 |
% |
|
|
543 |
|
|
|
12.9 |
% |
|
|
481 |
|
Automotive |
|
|
314 |
|
|
|
5.4 |
% |
|
|
298 |
|
|
|
3.1 |
% |
|
|
289 |
|
|
Total merchandise |
|
|
1,234 |
|
|
|
5.0 |
% |
|
|
1,175 |
|
|
|
7.6 |
% |
|
|
1,092 |
|
|
Intermodal |
|
|
1,257 |
|
|
|
8.3 |
% |
|
|
1,161 |
|
|
|
12.2 |
% |
|
|
1,035 |
|
|
Total freight revenues |
|
|
4,427 |
|
|
|
3.8 |
% |
|
|
4,266 |
|
|
|
12.7 |
% |
|
|
3,785 |
|
|
Bulk
Our bulk business represented approximately 44% of total freight revenues in 2006.
Grain
Our grain business accounted for approximately 20% of total freight revenues in 2006.
Grain transported by CP consists of both whole grains, including wheat, corn, soybeans and canola,
and processed products, such as canola meal, vegetable oil and flour.
Our grain business is centred in two key agricultural areas: the Canadian prairies (Alberta,
Saskatchewan and Manitoba) and the Northern Plains states of North Dakota and Minnesota. Western
Canadian grain is shipped primarily west to the Port of Vancouver and east to the Port of Thunder
Bay for export. Grain is also shipped to the U.S. Midwest and to eastern Canada for domestic
consumption. U.S.-originated export grain traffic is shipped to ports at Duluth and Superior. In
partnership with other railways, we also move grain to export terminals in the U.S. Pacific
Northwest and the Gulf of Mexico. Grain destined for domestic consumption moves east via Chicago to
the U.S. Northeast or is interchanged with other carriers to the U.S. Southeast, Pacific Northwest
and California markets.
Railway rates for the movement of export grain in western Canada are subject to legislative
provisions. These provisions apply to defined commodities and origin/destination pairings set out
in the Canada Transportation Act (CTA). The revenue formula
10
DESCRIPTION OF THE BUSINESS
included in the CTA is indexed annually to reflect changes in the input costs associated with
transporting grain destined for export markets. For additional information, refer to the section
Regulation and Other Issues.
Coal
Our coal business represented approximately 14% of total freight revenues in 2006.
We handle mostly metallurgical coal destined for export through the Port of Vancouver for use in
the steel-making process in the Pacific Rim, Europe and South America.
Our Canadian coal traffic originates mainly from mines in southeastern B.C. They are considered to
be among the most productive, highest-quality metallurgical coal mines in the world. We move coal
west from these mines to port terminals for export to world markets, and east for consumption in
steel-making mills along the Great Lakes.
In the U.S., we move primarily thermal coal from the Powder River and Illinois Basins for use in
power-generating plants. Our U.S. coal business also includes petroleum coke shipments to
power-generating facilities.
Sulphur and Fertilizers
Sulphur and fertilizers business represented approximately 10% of total freight revenues in 2006.
Most sulphur produced in Alberta is a by-product of processing sour natural gas, refining crude oil
and upgrading bitumen produced in the Alberta oil sands. Sulphur is a raw material used primarily
in the manufacture of sulphuric acid, the most common industrial chemical in the world. Sulphuric
acid is used most extensively in the production of phosphate fertilizers, and demand for elemental
sulphur rises with demand for fertilizers. Sulphuric acid is also a key ingredient in industrial
processes ranging from smelting and nickel leaching to paper production.
Albertas oil and gas industry produces more than eight million tonnes of sulphur annually. We
transport approximately half of the sulphur that enters international markets from Canada and we
are the leading transporter of formed sulphur shipped from gas plants in southern Alberta to the
Port of Vancouver. The two largest shipping points in southern Alberta are Shantz and Waterton and
both are located on our rail lines. Currently, our export traffic is destined mainly to China,
Australia and the U.S. In addition, we transport liquid sulphur from Scotford, Alberta, site of one
of the largest refineries in the Edmonton area, and from other origins to the southeastern and
northwestern U.S. for use in the fertilizer industry.
Fertilizers traffic consists primarily of potash and chemical fertilizers. Our potash traffic moves
mainly from Saskatchewan to markets in the U.S. and to offshore markets through the ports of
Vancouver, Thunder Bay and Portland, Oregon. Chemical fertilizers are transported to markets in
Canada and the northwestern U.S. from key production areas in the Canadian prairies. Phosphate
fertilizer is also transported from U.S. and Canadian producers to markets in Canada and the
northern U.S.
We provide transportation services from major potash and nitrogen production facilities in western
Canada and have efficient routes to the major U.S. markets. We also have direct service to key
fertilizer distribution terminals, such as the barge facilities on the Mississippi River system at
Minneapolis-St. Paul, as well as access to Great Lakes vessels at Thunder Bay.
Merchandise
Our merchandise business represented approximately 28% of total freight revenues in 2006.
Merchandise products move in trains of mixed freight and in a variety of car types and service
involves delivering products to many different customers and destinations.
In addition to traditional rail service, we move merchandise traffic through a network of
truck-rail transload facilities and provide logistics services through our Canadian Pacific
Logistics Solutions (CPLS) division, which develops simplified logistics solutions to resolve
complex supply chain issues.
11
DESCRIPTION OF THE BUSINESS
Forest Products
Our forest products business represented approximately 7% of total freight revenues in 2006.
Forest products traffic includes wood pulp, paper, paperboard, newsprint, lumber, panel and
Oriented Strand Board shipped from key producing areas in B.C., northern Alberta, northern
Saskatchewan, Ontario and Quebec to destinations throughout North America.
Industrial and Consumer Products
Our industrial and consumer products business represented approximately 14% of total freight
revenues in 2006.
Industrial and consumer products traffic includes an array of commodities grouped as plastics,
aggregates, minerals, metals, steel, chemicals and energy-related products.
Our industrial and consumer products traffic is widely dispersed throughout North America, with
large bases in Alberta, Ontario, Quebec and the U.S. Midwest. The location of mines, steel mills
and aggregate facilities adjacent to our rail lines provides for the convenient shipment of a
diverse group of industrial products for a wide range of customers. We transport products to
destinations throughout North America, including to and from ports. We also participate in the
movement of products from the U.S. to Canadian destinations, including chemicals originating in and
around the Gulf Coast and destined to points in eastern Canada.
Automotive
Our automotive business represented approximately 7% of total freight revenues in 2006.
Automotive traffic includes domestic, import and pre-owned vehicles as well as automotive parts.
We transport finished vehicles from U.S. and Canadian assembly plants to the Canadian marketplace,
and to other markets throughout North America via major interchanges at Detroit, Chicago and
Buffalo. We also move imported vehicles from tidewater ports to retail markets in Canada and the
U.S. Midwest. A comprehensive network of automotive compounds is utilized to facilitate final
delivery of vehicles to dealers throughout Canada, in Minnesota and in the U.S. northeast.
Intermodal
Our intermodal business accounted for approximately 28% of total freight revenues in 2006.
Domestic intermodal freight consists primarily of manufactured consumer products moving in
containers.
International intermodal freight moves in marine containers between ports and North American inland
markets.
Domestic Intermodal
Our domestic intermodal segment consists primarily of long-haul intra-Canada and cross-border
business. Key service factors in domestic intermodal include consistent on-time delivery, the
ability to provide door-to-door service and the availability of value-added services. The majority
of our domestic intermodal business originates in Canada where we market our services directly to
retailers, providing complete door-to-door service and maintaining direct relationships with our
customers. In the U.S., our service is delivered mainly through wholesalers.
International Intermodal
Our international intermodal business consists primarily of containerized traffic moving between
the ports of Vancouver, Montreal, New York and Philadelphia and inland points across Canada and the
U.S.
We are a major carrier of containers moving via the ports of Montreal and Vancouver. Import traffic
from the Port of Vancouver is mainly long-haul business destined for eastern Canada and the U.S.
Midwest and Northeast, and our trans-Pacific service offers the shortest route between the Port of
Vancouver and Chicago. We work closely with the Port of Montreal, a major year-round East Coast
gateway to Europe, to serve markets primarily in Canada and the U.S. Midwest. Our U.S. Northeast
service connects eastern Canada with the ports of Philadelphia and New York, offering a competitive
alternative to trucks.
Recent investments in terminals and track infrastructure as well as operating and service
initiatives have enhanced our strategic position for future growth.
12
DESCRIPTION OF THE BUSINESS
Other Business
We earn additional revenues through the sale and lease of assets. Other arrangements include
infrastructure and operating agreements with government-sponsored commuter rail authorities and
contracts with passenger service operators.
Significant Customers
At December 31, 2006, one customer comprised 11.5% of total revenues and 5.6% of total accounts
receivable. At December 31, 2005 and 2004, the same customer comprised 14.5% and 11.7% of total
revenues and 8.0% and 12.4% of total accounts receivable, respectively.
13
DESCRIPTION OF THE BUSINESS
Railway Performance
We focus on franchise investment, increasing network efficiency and improving asset utilization,
train operations productivity and labour productivity. The following table summarizes the effect
of these strategies based on industry-recognized performance indicators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
Performance Indicators(1) |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross ton-miles (GTM) (millions)(2) |
|
|
236,405 |
|
|
|
242,100 |
|
|
|
236,451 |
|
|
|
221,884 |
|
|
|
209,596 |
|
Revenue ton-miles (RTM) (millions)(3) |
|
|
122,874 |
|
|
|
125,303 |
|
|
|
123,627 |
|
|
|
114,599 |
|
|
|
107,689 |
|
Number of active employees end of period(4) |
|
|
15,327 |
|
|
|
16,295 |
|
|
|
15,637 |
|
|
|
15,645 |
|
|
|
15,860 |
|
Employee productivity
(GTMs per average active employee (thousands)) |
|
|
14,824 |
|
|
|
14,719 |
|
|
|
14,727 |
|
|
|
13,759 |
|
|
|
13,005 |
|
Traffic density
(GTMs per mile of road operated, excluding track on which
CP has haulage rights (thousands))(5) |
|
|
17,828 |
|
|
|
17,681 |
|
|
|
17,113 |
|
|
|
16,023 |
|
|
|
15,107 |
|
Fuel efficiency
(U.S. gallons of locomotive fuel per 1,000 GTMs
freight and yard) |
|
|
1.20 |
|
|
|
1.18 |
|
|
|
1.20 |
|
|
|
1.24 |
|
|
|
1.24 |
|
|
|
|
(1) |
|
Train-miles and average train weights are no longer reported as we no longer
consider these to be the main drivers for managing our operating costs. |
|
(2) |
|
Gross ton-miles of freight measure the movement of total train weight over a
distance of one mile. (Total train weight is comprised of the weight of the freight cars,
their contents and any inactive locomotives.) |
|
(3) |
|
Revenue ton-miles of freight measure the distance traveled by the head locomotive
on each train operating over our track. |
|
(4) |
|
The number of actively employed workers during the last month of the period. This
includes employees who are taking vacation and statutory holidays and other forms of
short-term paid leave, and excludes individuals who have a continuing employment relationship
with us but are not currently working. |
|
(5) |
|
Certain prior period figures have been revised to conform with current presentation
or have been updated to reflect new information. |
Franchise Investment
Franchise investment is an integral part of our multi-year capital program and supports our growth
initiatives. Our annual capital program typically includes investments in track and facilities
(including rail yards and intermodal terminals), locomotives, information technology, and freight
cars and other equipment.
We invested approximately $2.4 billion in our core assets from 2004 to 2006, with annual capital
spending over this period averaging approximately 19% of revenues. This included approximately
$1.7 billion invested in track and facilities, $0.3 billion in locomotives, $0.1 billion in
information technology and $0.3 billion in freight cars and other equipment.
Locomotive Fleet
We continue to upgrade our locomotive fleet by acquiring high-adhesion alternating current (AC)
locomotives, which are more fuel efficient and reliable and have superior hauling capacity compared
with standard direct current (DC) locomotives. Our locomotive fleet now includes 677 AC
locomotives. While AC locomotives represent approximately 61% of our road-freight locomotive fleet,
they handle about 82% of our workload. Our investment in AC locomotives has helped to improve
service reliability and generate cost savings in fuel, equipment rents and maintenance. It has also
allowed us to remove from service 887 older less-efficient locomotives and to more efficiently
utilize our repair and maintenance facilities.
14
DESCRIPTION OF THE BUSINESS
Following is a synopsis of our owned and leased locomotive fleet:
Number of Locomotives
(owned and leased)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Road Freight |
|
Road |
|
Yard |
|
|
Age in Years |
|
AC |
|
DC |
|
Switcher |
|
Switcher |
|
Total |
0-5 |
|
|
347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347 |
|
6-10 |
|
|
247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
247 |
|
11-15 |
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83 |
|
16-20 |
|
|
|
|
|
|
67 |
|
|
|
2 |
|
|
|
|
|
|
|
69 |
|
Over 20 |
|
|
|
|
|
|
370 |
|
|
|
267 |
|
|
|
252 |
|
|
|
889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
677 |
|
|
|
437 |
|
|
|
269 |
|
|
|
252 |
|
|
|
1,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Railcar Fleet
We own or lease approximately 47,800 freight cars. Approximately 20,800 are owned by CP, 7,300 are
hopper cars owned by Canadian federal and provincial government agencies, and 19,700 are leased.
Long-term leases on approximately 3,900 cars are scheduled to expire during 2007, and the leases on
approximately 10,500 additional cars are scheduled to expire before the end of 2011.
Our covered hopper car fleet, used for transporting regulated grain, consists of owned and leased
cars. A portion of the fleet used to transport export grain is leased from the Government of
Canada, with whom we are currently negotiating a new operating agreement.
Integrated Operating Plan
Our IOP is the foundation for our scheduled railway operations, through which we strive to provide
quality service for customers and improve asset utilization to achieve high levels of efficiency.
The key principles upon which our IOP is built include moving freight cars across the network with
as few handlings as possible, creating balance in directional flow of trains in our corridors by
day of week, and minimizing the time that locomotives and freight cars are idle.
Under our IOP, trains are scheduled to run consistently at times agreed upon with our customers. To
accomplish this, we establish a plan for each rail car that covers its entire trip from point of
origin to final destination. Cars with similar destinations are consolidated into blocks. This
reduces delays at intermediate locations by simplifying processes for employees, eliminating the
duplication of work and helping to ensure traffic moves fluidly through rail yards and terminals.
These measures improve transit times for shipments throughout our network and increase car
availability for customers. Our IOP also increases efficiency by more effectively scheduling
employee shifts, locomotive maintenance, track repair and material supply.
We have capitalized on the new capabilities of our network, our upgraded locomotive fleet and the
IOP to operate longer and heavier trains. This has reduced associated expenses, simplified the
departure of shipments from points of origin and provided lower-cost capacity for growth.
We are committed to continuously improve scheduled railway operations as a means to achieve
additional efficiencies that will enable further growth without the need to incur significant
capital expenditures to accommodate the growth.
Information Technology
As a 24-hour-a-day, seven-day-a-week business, we rely heavily on our computer systems to schedule
all components of our operations. Computer applications map out complex interconnections of
freight cars, locomotives, facilities, track and train crews to meet more than 10,000 individual
customer service commitments every day. We use an intricate automated traffic forecasting system
that determines optimal freight car routings and the workload in our yards by using sophisticated,
industry-specific software and generating time-distance diagrams to examine track capacity.
During 2005, we completed the implementation of TYES, a new yard inventory management system. Using
waybill information, TYES triggers classification instructions from CPs trip planning system so
that individual shipments are matched to freight car blocks, which in turn are matched to trains. The result is optimized routing and improved fluidity in CP freight yards. A trip plan is
15
DESCRIPTION OF THE BUSINESS
created for each customers shipment and integrated with train planning and yard applications to
ensure that the instructions issued for the customers shipment are consistent with the information
given to the customer. With TYES now fully implemented, we have completed our Service Excellence
suite of operating systems. These operating systems manage the overall movement of our customers
shipments and provide railway managers with highly reliable data on shipment performance, transit
times, connections with other trains, train and yard capacities, and locomotive requirements. This
data is used to make adjustments to the IOP to achieve specific service and productivity targets
and ensure all design objectives are achieved.
We have begun the implementation of the TRIEX system to further improve our intermodal service
offering. TRIEX will provide a customer self-service offering, including reservations, proof of
delivery and full shipment tracking. TRIEX will also give us the means to have more sophisticated
pricing options and simplify our billing processes. TRIEX was implemented at two intermodal
terminals in 2006 and we are planning on completing implementation of TRIEX at all our remaining
intermodal terminals by the end of 2007, along with the customer and accounting functionality.
During 2005, we signed a license agreement with SAP Canada to leverage use of its software to
functions beyond managing assets and expenditures , such as revenue management, supplier management
and pricing.
In addition, with the outsourcing of a substantial amount of our information technology
infrastructure to world-class service providers, our information technology focus is on leveraging
information and applications to improve railway productivity and obtaining more value from our
existing assets and resources.
Labour Productivity and Efficiency
We continually take steps to improve the effectiveness of our organizational structure in order to
increase productivity and efficiency. Since 1996, we have improved communication and
decision-making, simplified the organizations management structure, and increased the
responsibility given to management personnel. We regularly review our organizational processes,
workforce needs and related organizational costs with a focus on improving the productivity and
efficiency of our workforce while reducing expenses.
In 2003, we began a program to eliminate 820 positions by consolidating administrative functions,
applying new information technology to increase productivity in administrative areas and yard
operations, and to increase car and locomotive maintenance efficiency.
In 2005, we began a restructuring initiative to further improve efficiency in our administrative
areas. The restructuring was intended to eliminate more than 400 management and administration
positions. As part of this initiative, we introduced a voluntary incentive retirement program for
long-service employees in Canada.
The targeted reductions for these initiatives were successfully achieved by 2006.
In order to stimulate and reward employee participation in our efficiency initiatives, we have
implemented a number of incentive-based compensation programs designed to allow eligible unionized
and non-unionized employees to share in the profits they help generate.
Risk Factors
Competition
The freight transportation industry is highly competitive. We face intense competition for freight
transportation in Canada and the U.S., including competition from other railways and trucking
companies. We are subject to competition for freight traffic from other Class 1 railways,
particularly BNSF, CN, CSX, NS and UP. Competition is based mainly on price, quality of service and
access to markets. Competition with the trucking industry is generally based on freight rates,
flexibility of service and transit time performance. Any improvement in the cost structure or
service of our competitors could increase competition and have a materially adverse impact on our
business or operating results.
There was significant consolidation of the railway industry in North America during the 1990s,
which led to larger railway companies. These companies offer services in large market areas and
compete with us in these markets. Increased competition from current and future competitors in the
railway industry could adversely affect our competitive position, financial condition and operating
results.
Economic and Other Conditions
Our freight volumes and revenues are largely dependent upon the health of the North American and
global economies and other factors affecting the volumes and patterns of international trade. We
are also sensitive to factors such as weather, security
16
DESCRIPTION OF THE BUSINESS
threats, commodity pricing and global supply and demand, as well as developments affecting North
Americas agricultural, mining, forest products, consumer products, import/export and automotive
sectors. These factors and developments are beyond the influence or control of the railway
industry generally and CP specifically and may have a material adverse effect on our business or
operating results.
Fuel Prices
Fuel expense constitutes a significant portion of CPs operating costs. Fuel price volatility can
therefore have a material effect on operating results. Fuel prices can be influenced by local and
international supply disruptions stemming from the loss of crude oil production or refining
capacity. These disruptions can be caused by weather, unplanned infrastructure failures or
geopolitical events. To manage this exposure to fluctuations in fuel prices, CP utilizes a fuel
surcharge program to partially offset fuel cost increases. In addition to the fuel surcharge, we
may from time to time sell or purchase crude-related derivative instruments. To the extent that
fuel costs decline below the levels specified in any such derivative instrument, we will not
receive the full benefit of the reduction.
Foreign Exchange Risk
Although we conduct our business and receive revenues primarily in Canadian dollars, a significant
portion of our revenues, expenses, assets and liabilities including debt are denominated in U.S.
dollars. Consequently, our results are affected by fluctuations in the exchange rate between these
currencies. In addition, changes in the exchange rate between the Canadian dollar and other
currencies (including the U.S. dollar) make the goods transported by us more or less competitive in
the world marketplace and, in turn, positively or negatively affect our revenues and expenses. To
manage this exposure to fluctuations in exchange rates between Canadian and U.S. dollars, we sell
or purchase forward U.S. dollars at fixed rates in future periods. To the extent that exchange
rates decline below the rate fixed by such futures contracts, we will not receive the full benefit
of these contracts.
Interest Rate Risk
In order to finance our capital purchases, we may enter into long-term debt agreements These debt
agreements expose us to increased interest costs on future fixed debt instruments and existing
variable rate debt instruments should market rates increase. In addition, the present value of our
assets and liabilities will also vary with interest rate changes. To manage our interest rate
exposure, we may enter into forward rate agreements (Treasury Locks) that lock in rates for a
future date, thereby protecting ourselves against interest rate increases. We may also enter into
swap agreements whereby one party agrees to pay a fixed rate of interest while the other party pays
a floating rate. Contingent on the direction of interest rates, we may incur higher costs,
depending on our contracted rate.
Regulatory Authorities
Our railway operations in Canada are subject to regulations under the CTA, the Railway Safety Act
and certain other statutes administered by the Canadian Transportation Agency and the federal
Minister of Transport. Our U.S. railway operations are subject to regulation by the STB and the
Federal Railroad Administration (FRA). We are also subject to federal, provincial, state and
local laws and regulations dealing with health, security, safety, labour, environmental, rate and
other matters, all of which may affect our business or operating results.
In addition, we are subject to statutory and regulatory directives in the U.S. that address
homeland security concerns. Future decisions by the U.S. government on homeland security matters
or decisions by the industry in response to security threats to the North American rail network
could have a materially adverse effect on our business or operating results.
Environmental Laws and Regulations
Our operations and real estate assets are subject to extensive federal, provincial, state and local
environmental laws and regulations governing emissions to the air, discharges to waters and the
handling, storage, transportation and disposal of waste and other materials. We transport
hazardous materials and periodically use hazardous materials in our operations. Any findings that
we have violated such laws or regulations could have a materially adverse effect on our business or
operating results.
In certain locations, we operate on properties that have been used by railways for over a century.
As a result, historical releases of hazardous waste or materials may be discovered, requiring
remediation of our properties or subjecting us to liability for damages, the cost of which could
have a materially adverse impact on our business or operating results. Changing regulations and
remedial approaches in Canada and the U.S. will ultimately affect the costs of remediation and
overall environmental liability. The regulatory trend towards increased protection of human health
from specific chemicals may mean sites that were previously remediated, or that did not require
action, could be subject to further scrutiny. There is a possibility that an accidental release of
17
DESCRIPTION OF THE BUSINESS
hazardous waste or materials on our properties could occur and the costs of remediation of
properties affected by such accidental release could materially affect our business or operating
results.
In operating a railway, it is possible that derailments or other accidents may occur that could
cause harm to human health or to the environment. As a result, we may incur costs in the future to
address any such harm, including costs relating to the performance of remediation, natural resource
damages and compensatory or punitive damages relating to harm to individuals or property. These
costs could have an adverse material affect on our business or operating results.
Labour Relations
Relations with our employees could deteriorate due to disputes related to, among other things, wage
or benefit levels or our response to changes in government regulation of workers and the workplace.
Our operations rely heavily on our employees. Any labour shortage or stoppage caused by poor
relations with employees, including those represented by unions, could adversely affect our ability
to provide services and the costs of providing such services, which could materially harm our
business or operating results and may materially harm relationships with our customers.
Certain of our union agreements are currently under renegotiation, as discussed in the section
Labour Relations. We cannot guarantee these negotiations will be resolved in a timely manner or
on favourable terms.
Pension Plans
We maintain defined benefit and defined contribution pension plans. With current low interest
rates, the defined benefit plans presently have unfunded liabilities. Pension funding
requirements are dependent upon various factors, including interest rate levels, asset returns,
regulatory requirements for funding purposes and changes to pension plan benefits. In the absence
of favourable changes to these factors, we will have to satisfy the under-funded amounts of our
plans through cash contributions from time to time.
Indemnifications
Pursuant to a trust and custodial services agreement with the trustee of the Canadian Pacific
Railway Company Pension Trust Fund, we have undertaken to indemnify and save harmless the trustee,
to the extent not paid by the Fund, from any and all taxes, claims, liabilities, damages, costs and
expenses arising out of the performance of the trustees obligations under the agreement, except as
a result of misconduct by the trustee. The indemnity includes liabilities, costs or expenses
relating to any legal reporting or notification obligations of the trustee with respect to the
defined contribution option of the pension plans or otherwise with respect to the assets of the
pension plans that are not part of the Fund. The indemnity survives the termination or expiry of
the agreement with respect to claims and liabilities arising prior to the termination or expiry.
At December 31, 2006, we had not recorded a liability associated with this indemnification, as we
do not expect to make any payments pertaining to it.
Pursuant to our by-laws, we indemnify all our current and former directors and officers. In
addition to the indemnity provided for in our by-laws, we also indemnify our directors and officers
pursuant to indemnity agreements. We carry a liability insurance policy for directors and
officers, subject to a maximum coverage limit and certain deductibles in cases where a director or
officer is reimbursed for any loss covered by the policy.
Safety
Safety is a key priority for our management and Board of Directors. Our two main safety indicators
personal injuries and train accidents follow strict U.S. FRA reporting requirements used by
all Class 1 railways in Canada and the U.S.
In 2006, our rate of FRA personal injuries per 200,000 employee hours was 2.0, down 17% from 2005
and down 26% from 2004.
The rate of FRA reportable train accidents per million train miles was 1.4 in 2006, down 39% from
2.3 in 2005, and down 33% from 2.1 in 2004. CP led the North American railway industry in safe
train operations in 2006.
Our Health, Safety, Security and Environment Committee provides ongoing focus, leadership,
commitment and support for efforts to improve the safety of our operations as well as the safety
and health of our employees. The committee is comprised of all of the most senior representatives
from our different operations departments and is a key component of safety governance at CP. Our
Safety Framework governs the safety management process, which involves more than 1,000 employees in
planning and implementing safety-related activities. This management process, combined with
planning that encompasses all operational functions, ensures a continuous and consistent focus on
safety.
18
DESCRIPTION OF THE BUSINESS
Border Security
CP was the first railway in North America to be approved under a new Canada Border Services Agency
(CBSA) program to streamline clearance at the border for imports from the U.S. Under the Customs
Self-Assessment (CSA) program, goods and shippers approved as low risk have a virtual fast lane
into Canada on our railway. Eligible goods include finished vehicles, parts for vehicles, food
products and other common items frequently imported from the U.S.
The CSA program reduces the cost of compliance with Canadas import regulations, as approved
importers can file monthly summary customs reports on their shipments instead of a report on each
shipment. Approved importers also benefit from improved efficiencies, as their goods can be
delivered directly to their facilities without stopping for inspection at the border or waiting for
customs clearance. We benefit from improved freight car velocity, as shipments for customers
approved under CSA move more easily across the border.
We are also a certified carrier with the U.S. Customs and Border Protections (CBP) Customs Trade
Partnership Against Terrorism program and the CBSAs Partners in Protection program. C-TPAT and PIP
are partnership programs that seek to strengthen overall supply chain and border security.
Under a joint Declaration of Principles signed in April 2003, we made a commitment to work with the
CBSA and CBP to install a new Vehicle and Cargo Inspection System (VACIS) at five of our border
crossings. Rail VACIS uses non-intrusive gamma ray technology to scan U.S.-bound rail shipments.
The joint government-industry initiative to enhance the security of U.S.-bound rail shipments
ensures trade continues to flow efficiently between Canada and the U.S. All five systems are now
fully operational. Additional work is also being undertaken at Windsor, Ontario, to secure the
rail corridor between the Windsor VACIS facility and the U.S. border.
These measures were part of the larger process of implementing the Smart Border Declaration adopted
by Canada and the U.S. in December 2001.
Labour Relations
At December 31, 2006, approximately 79% of our workforce was unionized, with approximately 81% of
our workforce located in Canada. Unionized employees are represented by a total of 35 bargaining
units. Seven bargaining units represent our employees in Canada and the remaining 28 represent
employees in our U.S. operations.
Labour Relations Canada
Agreements are currently in place with five of the seven bargaining units in Canada.
|
|
|
A three-year collective agreement with the Canadian Auto Workers, representing employees
who maintain and repair locomotives and freight cars, extends to the end of 2007. |
|
|
|
A five-year collective agreement with the International Brotherhood of Electrical
Workers, representing signal maintainers, extends to the end of 2009. |
|
|
|
A four-year collective agreement with the Canadian Pacific Police Association,
representing CP Police sergeants and constables, extends to the end of 2009. |
|
|
|
A three-year collective agreement, with the Teamsters Canada Rail Conference, Rail
Canada Traffic Controllers, representing employees who control train traffic. The
agreement, which extends to the end of 2008, was ratified on March 7, 2006. |
|
|
|
A three-year agreement with Steelworkers Union, representing intermodal operation and
clerical employees extends to the end of 2009. |
|
|
|
A three-year collective agreement with the Teamsters Canada Rail Conference (TCRC-MWED),
which represents maintenance of way employees and was certified as bargaining agent by
track maintenance employees in July 2004. The agreement, which extended to the end of
2006, was ratified on March 18, 2005. Our collective agreement with the former bargaining
agent expired on December 31, 2003. Negotiations for a new agreement commenced in the
second half of 2006. On January 23, 2007, both CP and TCRC-MWED applied jointly for
conciliation, which commenced in February of 2007. |
|
|
|
A four-year collective agreement with the Teamsters Canada Rail Conference (TCRC-RTE),
which represents running trade employees and was elected as bargaining agent by train crew
employees in June 2004. The agreement, which extended to the end of 2006, was ratified on
January 17, 2005. Our collective agreement with the previous bargaining
|
19
DESCRIPTION OF THE BUSINESS
|
|
|
agent expired on December 31, 2002. Negotiations for a new agreement, which commenced in
the second half of 2006, continue in 2007. |
Labour Relations U.S.
Most U.S. Class 1 railroads negotiate labour agreements collectively on a national basis. At the
end of 2004, a new round of bargaining commenced with all 13 national unions. There have been no
settlements to date. Several difficult issues present significant challenges for the parties,
including health care cost containment and more flexible use of employees and contractors.
Soo Line and D&H have elected to negotiate independently of the national bargaining process.
We are party to collective agreements with 28 bargaining units: 15 on the Soo Line and 13 on the
D&H.
Agreements with 14 of the 15 bargaining units on the Soo Line are currently open for renegotiation.
Our agreement with yard supervisors extends to the end of 2009. Negotiations have commenced with
track maintainers, conductors, clerks, car repair employees, mechanical labourers, machinists,
electricians, train dispatchers, signal repair employees, police, blacksmiths and boilermakers,
sheetmetal workers, locomotive engineers and mechanical supervisors. Negotiations with the
Teamsters, representing locomotive engineers, resulted in both parties agreeing to binding
arbitration, which was held in November 2005. An arbitration decision issued January 26, 2006
satisfactorily finalized an agreement which extended through December of 2004.
D&H has agreements in place with nine unions representing freight car repair employees, clerks,
signal repair employees, mechanical supervisors, mechanical labourers, yard supervisors,
engineering supervisors, machinists, and police. Negotiations are under way with the remaining
four bargaining units, which represent locomotive engineers, electricians, track maintainers and
conductors.
Environmental Protection
We have implemented a comprehensive Environmental Management System (EMS), which uses the five
elements of the ISO 14001 standard policy, planning, implementation and operation, checking and
corrective action, and management review as described below.
Policy
We have adopted an Environmental Protection Policy and continue to develop and implement policies
and procedures to address specific environmental issues and reduce environmental risk. Each policy
is implemented with training for employees and a clear identification of roles and
responsibilities.
Our partnership in Responsible CareÒ is a key part of our commitment as we strive to be a
leader in railway and public safety. Responsible CareÒ, an initiative of the Canadian
Chemical Producers Association, is an ethic for the safe and environmentally sound management of
chemicals throughout their life cycle. Partnership in Responsible CareÒ involves a public
commitment to continually improve the industrys environmental, health and safety performance. We
successfully completed our first Responsible CareÒ external verification in June 2002 and
were granted Responsible CareÒ practice-in-place status. We were successfully re-verified
in 2005.
We have also been a partner of the American Chemistry Council (ACC) since 1999 and are currently
working with the ACC and its Transportation Partner Group to develop verification protocols and
processes for our U.S. facilities.
Planning
We prepare an annual Corporate Environmental Plan, which includes details of our environmental
goals and objectives as well as high-level strategies and tactics. The plan is used by various
departments to integrate key corporate environmental strategies into their business plans.
Implementation and Operation
We have developed specific environmental programs to address areas such as air emissions,
wastewater, management of vegetation, chemicals and waste, storage tanks and fuelling facilities,
and environmental impact assessment. Our environmental specialists and consultants lead these
programs.
Our focus is on preventing spills and other incidents that have a negative impact on the
environment. As a precaution, we have established a Strategic Emergency Response Contractor
network and located spill equipment kits across Canada and the U.S. to ensure a rapid and efficient
response in the event of an environmental incident. In addition, we regularly update and test
emergency preparedness and response plans.
20
DESCRIPTION OF THE BUSINESS
We have taken a proactive position on the remediation of historically impacted sites and have an
accounting accrual for environmental costs that extends to 2016.
Environmental Contamination
In the fourth quarter of 2004, we recorded a $90.9-million charge for costs associated with
investigation, characterization, remediation and other applicable actions related to environmental
contamination at a CP-owned property in the U.S., which includes areas previously leased to third
parties.
In the third quarter of 2005, we reached a binding settlement in relation to a lawsuit with a
potentially responsible party involving portions of past environmental contamination at the
above-mentioned property in the U.S. The lawsuit against this other party has been dismissed and
the party has accepted responsibility for designated portions of the property and paid us a
settlement sum in partial payment of the response costs we have incurred.
As a result of the settlement, we were able to reverse accrued liabilities related to the property
and recognize a total reduction of $33.9 million to the special charges accrued in prior years.
Under applicable accounting rules, this reduction could not be recognized until the outcome of the
lawsuit or any binding settlement with the other responsible party became known.
We continue to be responsible for remediation work on portions of the property in the State of
Minnesota and continue to retain liability accruals for remaining future anticipated costs. The
costs are expected to be incurred over approximately 10 years. The states voluntary investigation
and remediation program will oversee the work to ensure it is completed in accordance with
applicable standards. We currently estimate the remaining liability associated with these areas to
be $37.9 million.
Checking and Corrective Action
Our environmental audit comprehensively, systematically and regularly assesses our facilities for
compliance with legal requirements and conformance to our policies, which are based on legal
requirements and accepted industry standards. Audits are scheduled based on risk assessment for
each facility and are led by third-party environmental audit specialists supported by our
environmental staff.
Audits are followed by a formal Corrective Action Planning (CAP) process that ensures findings
are addressed in a timely manner. Progress is monitored against completion targets and reported
quarterly to senior management. Completion targets have been substantially met every year since
the CAP process was created in 1999.
Management Review
Our Board of Directors Health, Safety, Security and Environment Committee conducts a semi-annual
comprehensive review of environmental issues. An Environmental Lead Team, which is comprised of
senior leaders of our Real Estate, Legal Services, Marketing and Sales, Finance, Operations, Supply
Services, and Environmental Services departments, meets quarterly to review environmental matters.
Expenditures
We spent $36.0 million in 2006 for environmental management, including amounts spent for ongoing
operations, capital upgrades and remediation.
Regulation and Other Issues
Our rail operations in Canada are subject to regulation of service, rate setting, network
rationalization and safety by the CTA, the Railway Safety Act and certain other statutes. Our U.S.
rail operations are subject to regulations administered by the STB and the FRA.
Canadian Regulation
Our economic activities, including matters relating to rates, level of service obligations and line
discontinuance, are subject to the provisions of the CTA.
The CTA contains shipper rate and service protections, including final-offer arbitration,
competitive line rates, and compulsory interswitching, which allows a shipper to request a railway
to move its traffic to the nearest competitive interchange point with another railway within a
30-kilometre radius for a regulated fee. However, to gain recourse to certain of these
protections, shippers must establish that they would suffer substantial commercial harm if the
relief sought were not granted. These shipper protections also extend to western Canadian grain
transportation.
In Canada, Bill C-11, legislation amending the CTA, was introduced in Parliament in spring 2006.
Bill C-11 contains some of the amendments that had been included in Bill C-44, which was introduced
in 2005 but was terminated when Parliament was
21
DESCRIPTION OF THE BUSINESS
dissolved on November 29, 2005. Bill C-11 includes, among other things, amendments concerning the
grain revenue cap, commuter and passenger access, and railway noise. Amendments concerning Final
Offer Arbitration (FOA) and other shipper remedies are not included in Bill C-11. Bill C-11
passed Second Reading in the House of Commons (the House) and was sent
to the Standing Committee on Transport and Infrastructure (the Committee). It was reported by the Committee with some
amendments on issues including noise in December, 2006. It is anticipated that, unless Parliament
is dismissed, Bill C-11 will be passed in the House in the first half of 2007 and will then be sent
to the Senate. There may be additional changes to the CTA in respect of FOA and other matters that
had been dealt with in Bill C-44. No assurance can be given as to the effect on CP of the
provisions of Bill C-11 or as to the content, timing or effect on CP of any anticipated additional
legislation.
Canadas federally regulated railways are also subject to the Railway Safety Act, which governs
safety and operational aspects of the industry, and to the Canadian Transportation Accident
Investigation and Safety Board Act. They are also subject to legislation relating to the
environment and the transportation of hazardous materials.
U.S. Regulation
There have been efforts in recent years to re-regulate certain aspects of the U.S. rail industry
previously deregulated under the Staggers Rail Act of 1980. The rail industry opposes
re-regulation.
The STB regulates a variety of railway matters, including: service levels; certain freight car
rental payments; certain rail traffic rates; the terms under which railways may gain access to each
others facilities and traffic; mergers and acquisitions of railways; and the abandonment, sale and
discontinuance of operations on rail lines.
We believe STB regulations governing mergers and consolidation of Class 1 railways require
applicants to demonstrate that a proposed transaction would be in the public interest and would
enhance competition where necessary to offset any negative effects.
The FRA governs all safety-related aspects of railway operations and, therefore, has jurisdiction
over our operations in the U.S. State and local regulatory agencies may also exercise jurisdiction
over certain safety and operational matters of local significance.
Insurance
We maintain insurance policies to protect our assets and to protect against liabilities. Our
insurance policies include, but are not limited to, liability insurance, director and officer
liability insurance, automobile insurance and property insurance. The property insurance program
includes business interruption coverage, which would respond in the event of catastrophic damage to
our infrastructure. We believe our insurance is adequate to protect us from known and unknown
liabilities. However, in certain circumstances, certain losses may not be covered or completely
covered by insurance and we may suffer losses, which could be material.
Related-party Transactions
No rail services were provided to related parties in 2006.
22
DIVIDENDS
Declared Dividends and Dividend Policy
Dividends declared by the Board of Directors in the last three years are as follows:
|
|
|
|
|
|
|
|
|
|
|
Dividend |
|
|
|
|
|
|
|
|
Amount |
|
|
Record Date |
|
|
Payment Date |
|
|
$0.1275
$0.1275
$0.1325
$0.1325
$0.1325
$0.1500
$0.1500
$0.1500
$0.1875
$0.1875
$0.1875
$0.1875
$0.2250
|
|
|
March 26, 2004
June 25, 2004
September 24, 2004
December 31, 2004
March 25, 2005
June 24, 2005
September 30, 2005
December 30, 2005
March 31, 2006
June 30, 2006
September 29, 2006
December 29, 2006
March 30, 2007
|
|
|
April 26, 2004
July 26, 2004
October 25, 2004
January 31, 2005
April 25, 2005
July 25, 2005
October 31, 2005
January 30, 2006
April 24, 2006
July 31, 2006
October 30,2006
January 29, 2007
April 30, 2007 |
|
|
Our Board of Directors will give consideration on a quarterly basis to the payment of future
dividends. The amount of any future quarterly dividends will be determined based on a number of
factors that may include the results of operations, financial condition, cash requirements and
future prospects of the Company. We are, however, under no obligation to declare dividends and the
declaration of dividends is wholly within the Board of Directors discretion. Further, our Board
of Directors may cease declaring dividends or may declare dividends in amounts that are different
from those previously declared. Restrictions in the credit or financing agreements entered into by
the Company or the provisions of applicable law may preclude the payment of dividends in certain
circumstances.
23
CAPITAL STRUCTURE
Description of Capital Structure
The Company is authorized to issue an unlimited number of Common Shares, an unlimited number of
First Preferred Shares and an unlimited number of Second Preferred Shares. At December 31, 2006,
no Preferred Shares had been issued.
|
1). |
|
The rights, privileges, restrictions and conditions attaching to the Common Shares are as follows: |
|
a). |
|
Payment of Dividends: The holders of the Common Shares will be entitled to
receive dividends if, as and when declared by CPs Board of Directors out of the assets
of the Company properly applicable to the payment of dividends in such amounts and
payable in such manner as the Board may from time to time determine. Subject to the
rights of the holders of any other class of shares of the Company entitled to receive
dividends in priority to or rateably with the holders of the Common Shares, the Board
may in its sole discretion declare dividends on the Common Shares to the exclusion of
any other class of shares of the Company. |
|
|
b). |
|
Participation upon Liquidation, Dissolution or Winding Up: In the event of the
liquidation, dissolution or winding up of the Company or other distribution of assets
of the Company among its shareholders for the purpose of winding up its affairs, the
holders of the Common Shares will, subject to the rights of the holders of any other
class of shares of the Company entitled to receive the assets of the Company upon such
a distribution in priority to or rateably with the holders of the Common Shares, be
entitled to participate rateably in any distribution of the assets of the Company. |
|
|
c). |
|
Voting Rights: The holders of the Common Shares will be entitled to receive
notice of and to attend all annual and special meetings of the shareholders of the
Company and to one (1) vote in respect of each Common Share held at all such meetings,
except at separate meetings of or on separate votes by the holders of another class or
series of shares of the Company. |
|
2). |
|
The rights, privileges, restrictions and conditions attaching to the First Preferred Shares are as follows: |
|
a). |
|
Authority to Issue in One or More Series: The First Preferred Shares may at
any time or from time to time be issued in one (1) or more series. Subject to the
following provisions, the Board may by resolution fix from time to time before the
issue thereof the number of shares in, and determine the designation, rights,
privileges, restrictions and conditions attaching to the shares of each series of First
Preferred Shares. |
|
|
b). |
|
Voting Rights: The holders of the First Preferred Shares will not be entitled
to receive notice of or to attend any meeting of the shareholders of the Company and
will not be entitled to vote at any such meeting, except as may be required by law. |
|
|
c). |
|
Limitation on Issue: The Board may not issue any First Preferred Shares if by
so doing the aggregate amount payable to holders of First Preferred Shares as a return
of capital in the event of the liquidation, dissolution or winding up of the Company or
any other distribution of the assets of the Company among its shareholders for the
purpose of winding up its affairs would exceed $500,000,000. |
|
|
d). |
|
Ranking of First Preferred Shares: The First Preferred Shares will be entitled
to priority over the Second Preferred Shares and the Common Shares of the Company and
over any other shares ranking junior to the First Preferred Shares with respect to the
payment of dividends and the distribution of assets of the Company in the event of any
liquidation, dissolution or winding up of the Company or other distribution of the
assets of the Company among its shareholders for the purpose of winding up its affairs. |
|
|
e). |
|
Dividends Preferential: Except with the consent in writing of the holders of
all outstanding First Preferred Shares, no dividend can be declared and paid on or set
apart for payment on the Second Preferred Shares or the Common Shares or on any other
shares ranking junior to the First Preferred Shares unless and until all dividends (if
any) up to and including any dividend payable for the last completed period for which
such dividend is payable on each series of First Preferred Shares outstanding has been
declared and paid or set apart for payment. |
24
|
3). |
|
The rights, privileges, restrictions and conditions attaching to the Second Preferred Shares are as follows: |
|
a). |
|
Authority to Issue in One or More Series: The Second Preferred Shares may at
any time or from time to time be issued in one (1) or more series. Subject to the
following provisions, the Board may by resolution fix from time to time before the
issue thereof the number of shares in, and determine the designation, rights,
privileges, restrictions and conditions attaching to the shares of each series of
Second Preferred Shares. |
|
|
b). |
|
Voting Rights: The holders of the Second Preferred Shares will not be entitled to
receive notice of or to attend any meetings of the shareholders of the Company and will
not be entitled to vote at any such meeting, except as may be required by law. |
|
|
c). |
|
Limitation on Issue: The Board may not issue any Second Preferred Shares if by
so doing the aggregate amount payable to holders of Second Preferred Shares as a return
of capital in the event of the liquidation, dissolution or winding up of the Company or
any other distribution of the assets of the Company among its shareholders for the
purpose of winding up its affairs would exceed $500,000,000. |
|
|
d). |
|
Ranking of Second Preferred Shares: The Second Preferred Shares will be
entitled to priority over the Common Shares of the Company and over any other shares
ranking junior to the Second Preferred Shares with respect to the payment of dividends
and the distribution of assets of the Company in the event of the liquidation,
dissolution or winding up of the Company or any other distribution of the assets of the
Company among its shareholders for the purpose of winding up of its affairs. |
|
|
e). |
|
Dividends Preferential: Except with the consent in writing of the holders of
all outstanding Second Preferred Shares, no dividend can be declared and paid on or set
apart for payment on the Common Shares or on any other shares ranking junior to the
Second Preferred Shares unless and until all dividends (if any) up to and including any
dividend payable for the last completed period for which such dividend is payable on
each series of Second Preferred Shares outstanding has been declared and paid or set
apart for payment. |
25
CAPITAL STRUCTURE
Security Ratings
The Companys debt securities are rated annually by three approved rating organizations Moodys
Investors Service, Inc., Standard & Poors Corporation and Dominion Bond Rating Service Limited.
Currently, our securities are rated as Investment Grade, shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
Long-Term |
|
|
Approved Rating |
|
|
Debt |
|
|
Organization |
|
|
Rating |
|
|
Moodys Investors Service |
|
|
Baa2 |
|
|
Standard & Poors
|
|
|
BBB |
|
|
Dominion Bond Rating Service
|
|
|
BBB(high) |
|
|
Credit ratings are intended to provide investors with an independent measure of the credit quality
of an issue of securities and are indicators of the likelihood of payment and of the capacity and
willingness of a company to meet its financial commitment on an obligation in accordance with the
terms of the obligation. A description of the rating categories of each of the rating agencies in
the table above is set out below.
Credit ratings are not recommendations to purchase, hold or sell securities and do not address the
market price or suitability of a specific security for a particular investor and may be subject to
revision or withdrawal at any time by the rating agencies. Credit ratings may not reflect the
potential impact of all risks on the value of securities. In addition, real or anticipated changes
in the rating assigned to a security will generally affect the market value of that security.
There can be no assurance that a rating will remain in effect for any given period of time or that
a rating will not be revised or withdrawn entirely by a rating agency in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moodys Investors Service |
|
|
Standard & Poors |
|
|
Dominion Bond Rating Service |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa |
|
|
AAA |
|
|
AAA |
|
|
|
|
High Investment Grade |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aa1 |
|
|
AA+ |
|
|
AA(high) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aa2 |
|
|
AA |
|
|
AA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aa3 |
|
|
AA- |
|
|
AA(low) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A1 |
|
|
A+ |
|
|
A(high) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A2 |
|
|
A |
|
|
A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A3 |
|
|
A- |
|
|
A(low) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Grade |
|
Baa1 |
|
|
BBB+ |
|
|
BBB(high) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baa2 |
|
|
BBB |
|
|
BBB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baa3 |
|
|
BBB- |
|
|
BBB(low) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ba1 |
|
|
BB+ |
|
|
BB(high) |
|
|
|
|
Below Investment Grade |
|
|
|
|
|
|
|
|
|
|
|
|
Ba2 |
|
|
BB |
|
|
BB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ba3 |
|
|
BB- |
|
|
BB(low) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B1 |
|
|
B+ |
|
|
B(high) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B2 |
|
|
B |
|
|
B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B3 |
|
|
B- |
|
|
B(low) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caa |
|
|
CCC |
|
|
CCC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ca |
|
|
CC |
|
|
CC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C |
|
|
C |
|
|
C |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
MARKET FOR SECURITIES
Stock Exchange Listings
The Common Shares of CP are listed on the Toronto Stock Exchange and the New York Stock Exchange
under the symbol CP.
Trading Price and Volume
The following table provides the monthly trading information for our Common Shares on the Toronto
Stock Exchange during 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
High |
|
|
Low |
|
|
Closing |
|
|
Number of |
|
|
Volume of |
|
|
|
|
|
Price per |
|
|
Price per |
|
|
Price per |
|
|
Price per |
|
|
Trades |
|
|
Shares |
|
|
Month |
|
|
Share ($) |
|
|
Share ($) |
|
|
Share ($) |
|
|
Share ($) |
|
|
Performed |
|
|
Traded |
|
|
January
February
March
April
May
June
July
August
September
October
November
December
|
|
|
48.44
54.50
58.15
58.53
60.15
57.00
57.90
54.42
54.56
55.50
62.80
63.89
|
|
|
56.16
60.85
59.99
65.17
63.43
57.90
57.97
55.44
55.81
64.15
65.29
64.46
|
|
|
45.55
53.70
55.88
58.52
55.07
52.55
51.05
51.86
51.91
54.95
60.86
60.43
|
|
|
54.71
58.20
58.26
59.43
56.60
56.91
54.00
54.30
55.56
63.40
63.51
61.40
|
|
|
65,551
47,409
45,476
44,142
38,597
42,444
39,772
48,407
33,482
50,664
42,720
29,770
|
|
|
27,331,083
15,144,307
16,157,785
12,160,447
12,373,511
15,724,333
11,720,333
13,896,160
10,896,140
15,710,416
10,110,242
7,725,259 |
|
|
The following table provides the monthly trading information for our Common Shares on the New York
Stock Exchange during 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
High |
|
|
Low |
|
|
Closing |
|
|
Number of |
|
|
Volume of |
|
|
|
|
|
Price per |
|
|
Price per |
|
|
Price per |
|
|
Price per |
|
|
Trades |
|
|
Shares |
|
|
Month |
|
|
Share ($) |
|
|
Share ($) |
|
|
Share ($) |
|
|
Share ($) |
|
|
Performed |
|
|
Traded |
|
|
January
February
March
April
May
June
July
August
September
October
November
December
|
|
|
41.00
47.85
51.19
50.00
53.80
51.30
51.20
47.83
49.48
49.71
54.70
55.70
|
|
|
49.12
52.89
53.00
57.12
57.73
52.59
52.17
49.39
49.91
57.32
57.31
56.49
|
|
|
39.10
46.71
47.64
50.00
49.00
47.10
44.85
46.19
46.36
48.75
54.65
52.34
|
|
|
48.24
51.19
49.97
53.14
52.30
51.14
47.87
49.09
49.74
56.49
55.73
52.76
|
|
|
27,672
20,597
22,882
21,467
22,918
25,492
24,296
22,347
18,685
29,270
19,587
14,342
|
|
|
8,272,200
5,359,400
6,604,200
5,832,600
6,244,500
7,016,600
6,679,100
5,758,600
4,471,000
7,405,000
4,224,600
3,205,400 |
|
|
27
DIRECTORS AND OFFICERS
Following are the names and municipalities of residence of the directors and officers of the
Company, their positions and principal occupations within the past five years, the period during
which each director has served as director of the Company, and the date on which each directors
term of office expires.
Directors
|
|
|
|
|
|
|
|
|
Year of Annual Meeting |
|
|
Position Held and Principal Occupation within |
|
at which Term of Office |
Name and Municipality of Residence |
|
the Preceding Five Years (1) |
|
Expires (Director Since) |
S.E. Bachand (3)(5)(6)
Ponte Vedra Beach, Florida, U.S.A.
|
|
Retired President and Chief Executive Officer,
Canadian Tire Corporation, Limited (hard goods
retailer specializing in automotive, sports and
leisure and home products)
|
|
2007
(2001) |
|
|
|
|
|
J.E. Cleghorn, O.C., F.C.A. (3)
Toronto, Ontario, Canada
|
|
Chairman, Canadian Pacific Railway Limited
and, Chairman, SNC-Lavalin Group Inc.,
(international engineering and construction
firm)
|
|
2007
(2001) |
|
|
|
|
|
T.W. Faithfull (3)(4)(5)
Oxford, England
|
|
Retired President and Chief Executive Officer
Shell Canada Limited (oil and gas company)
|
|
2007
(2003) |
|
|
|
|
|
F.J. Green
Calgary, Alberta, Canada
|
|
President and Chief Executive Officer, Canadian
Pacific Railway Company and Canadian Pacific
Railway Limited
|
|
2007
(2006) |
|
|
|
|
|
The Hon. J.P. Manley (2)(3)(6)
Ottawa, Ontario, Canada
|
|
Senior Counsel, McCarthy Tétrault LLP (law firm)
|
|
2007
(2006) |
|
|
|
|
|
L.J. Morgan (3)(4)(5)
Bethesda, Maryland, U.S.A.
|
|
Chair of the Transportation Practice and
Partner, Covington & Burling LLP (law firm)
|
|
2007
(2006) |
|
|
|
|
|
Dr. J.R. Nininger (3)(4)(5)
Ottawa, Ontario, Canada
|
|
Retired President and Chief Executive Officer,
The Conference Board of Canada (private
not-for-profit research group)
|
|
2007
(2001) |
|
|
|
|
|
M. Paquin (2)(3)(4)
Montreal, Quebec, Canada
|
|
President and Chief Executive Officer, Logistec
Corporation (international cargo-handling
company)
|
|
2007
(2001) |
|
|
|
|
|
M.E.J. Phelps, O.C. (3)(5)(6)
West Vancouver, B.C., Canada
|
|
Chairman, Dornoch Capital Inc. (private
investment company)
|
|
2007
(2001) |
|
|
|
|
|
R. Phillips, O.C. (2)(3)(6)
Regina, Saskatchewan, Canada
|
|
Retired President and Chief Executive Officer,
IPSCO Inc. (steel manufacturing company)
|
|
2007
(2001) |
|
|
|
|
|
H.T. Richardson
Winnipeg, Manitoba, Canada
|
|
President and Chief Executive Officer, James
Richardson & Sons Limited (privately owned
corporation)
|
|
2007
(2006) |
|
|
|
|
|
M.W. Wright (2)(3)(4)
Longboat Key, Florida, U.S.A.
|
|
Retired Chairman of the Board and Chief
Executive Officer, SUPERVALU INC. (food
distributor and grocery retailer)
|
|
2007
(2001) |
28
Notes:
|
|
|
(1) |
|
T.W. Faithfull was President and Chief Executive Officer of Shell Canada Limited
from April 1999 until July 2003. F.J. Green was President and Chief Operating Officer,
Canadian Pacific Railway Company and Canadian Pacific Railway Limited from November 2005 until
May 2006, Executive Vice-President and Chief Operating Officer, Canadian Pacific Railway
Company and Canadian Pacific Railway Limited from October 2004 until November 2005; Executive
Vice-President, Operations and Marketing, Canadian Pacific Railway Company from January 2004
until October 2004 and Senior Vice-President, Marketing and Sales, Canadian Pacific Railway
Company from April 2002 until January 2004. The Hon. J.P. Manley was the Member of Parliament
for Ottawa South from November 1988 until June 2004 and Chairman of the Ontario Power
Generation Review Committee from December 2003 until March 2004. L.J. Morgan was Chairman of
the United States Surface Transportation Board and its predecessor the Interstate Commerce
Commission from March 1995 until December 2002. M.E.J. Phelps was Chairman and Chief Executive
Officer of Westcoast Energy Inc. from June 1988 until March 2002. M.W. Wright was Chairman
and Chief Executive Officer of SUPERVALU INC. from June 1981 until June 2001 and Chairman
until June 2002. |
|
(2) |
|
Member of the Audit, Finance and Risk Management Committee. |
|
(3) |
|
Member of the Corporate Governance and Nominating Committee. |
|
(4) |
|
Member of the Environmental and Safety Committee. |
|
(5) |
|
Member of the Management Resources and Compensation Committee. |
|
(6) |
|
Member of the Pension Trust Fund Committee. |
Cease Trade Orders
S.E. Bachand was a director of Krystal Bond Inc. when it was subject to a cease trade order on
April 12, 2002 for failure to file financial statements. It has since ceased to operate as a going
concern.
As a result of the announcement in May 2004 by Nortel Networks Corporation and Nortel Networks
Limited (collectively, the Nortel Companies) of the need to restate certain of their previously
reported financial results and the resulting delays in filing interim and annual financial
statements for certain periods by the required filing dates under Ontario securities laws, the
Ontario Securities Commission made a final order on May 31, 2004 prohibiting all trading by
directors, officers and certain current and former employees including J.E. Cleghorn, a former
director, and J.P. Manley, a current director. The Quebec and Alberta Securities commissions issued
similar orders. The cease trade order issued by the Ontario Securities Commission was revoked on
June 21, 2005. The Quebec and Alberta orders were revoked shortly thereafter. Mr. Cleghorn and
Mr. Manley were not subject to the Quebec and Alberta orders. Following the March 10, 2006
announcement by the Nortel Companies of the need to restate certain of their previously reported
financial results and the resulting delay in the filing of certain 2005 financial statements by the
required filing dates, the Ontario Securities Commission issued a final management cease trade
order on April 10, 2006 prohibiting all of the directors, officers and certain current and former
employees including Mr. Cleghorn and Mr. Manley from trading in the securities of the Nortel
Companies. The British Columbia and Quebec Securities commissions issued similar orders. The
Ontario Securities Commission lifted the cease trade order effective June 8, 2006 and the British
Columbia and the Quebec Securities commissions also lifted their cease trade orders shortly
thereafter. Mr. Cleghorn and Mr. Manley were not subject to the British Columbia and Quebec
orders.
29
DIRECTORS AND OFFICERS
Senior Officers
As at March 2, 2007, the following were executive officers of CPRL:
|
|
|
|
|
|
|
|
|
Principal occupation within the |
Name and municipality of residence |
|
Position held |
|
preceding five years |
|
|
|
|
|
J.E. Cleghorn, O.C., F.C.A.
Toronto, Ontario, Canada
|
|
Chairman
|
|
Chairman, SNC-Lavalin Group
Inc., (international
engineering and construction
firm) |
|
|
|
|
|
F.J. Green
Calgary, Alberta, Canada
|
|
President and Chief
Executive Officer
|
|
President and Chief Executive
Officer, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited;
President and Chief Operating
Officer, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited;
Executive Vice-President and
Chief Operating Officer,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited; Executive
Vice-President, Operations and
Marketing, Canadian Pacific
Railway Company; Senior
Vice-President, Marketing,
Canadian Pacific Railway
Company; Vice-President,
Marketing, Canadian Pacific
Railway Company |
|
|
|
|
|
M.R. Lambert
Calgary, Alberta, Canada
|
|
Executive Vice-
President and Chief
Financial Officer
|
|
Executive Vice-President and
Chief Financial Officer,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited; Executive
Vice-President, Canadian Tire
Corporation (retail goods);
President, Marks Work
Warehouse (retail goods);
Chief Financial Officer,
Marks Work Warehouse (retail
goods) |
|
|
|
|
|
P. Clark
Calgary, Alberta, Canada
|
|
Vice-President,
Communications and
Public Affairs
|
|
Vice-President, Communications
and Public Affairs, Canadian
Pacific Railway Company and
Canadian Pacific Railway
Limited |
|
|
|
|
|
B. Grassby
Calgary, Alberta, Canada
|
|
Vice-President and
Comptroller
|
|
Vice-President and
Comptroller, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited |
|
|
|
|
|
P.A. Guthrie, Q.C.
Municipal District of Rockyview,
Alberta, Canada
|
|
Vice-President, Law
|
|
Vice-President, Law, Canadian
Pacific Railway Company and
Canadian Pacific Railway
Limited; Assistant
Vice-President Legal Services,
Canadian Pacific Railway
Company; Chief Regulatory
Counsel, Canadian Pacific
Railway Company |
|
|
|
|
|
T. A. Robinson
Calgary, Alberta, Canada
|
|
Vice-President and
Treasurer
|
|
Vice-President and Treasurer,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited; Assistant
Treasurer, Canadian Pacific
Railway Company and Canadian
Pacific Railway Limited;
Assistant Comptroller,
Canadian Pacific Railway
Company; Assistant
Vice-President, Customer
Service, Canadian Pacific
Railway Company |
|
|
|
|
|
D. F. Barnhardt
Calgary, Alberta, Canada
|
|
Corporate Secretary
|
|
Corporate Secretary, Canadian
Pacific Railway Company and
Canadian Pacific Railway
Limited; Lawyer/Commercial
Coordinator, Canadian Pacific
Railway Company |
|
|
|
|
|
G.A. Feigel
Calgary, Alberta, Canada
|
|
Assistant Corporate
Secretary
|
|
Assistant Corporate Secretary,
Canadian Pacific Railway
Company and Canadian Pacific
Railway Limited |
30
DIRECTORS AND OFFICERS
Shareholdings of Directors and Officers
As at December 31, 2006, the directors and senior officers, as a group, beneficially owned, either
directly or indirectly, or exercised control or direction over a total of 68,736 Common Shares of
CP, representing 0.04% of the outstanding Common Shares as of that date.
Announcements
Dr. J.R. Nininger will retire on May 11, 2007, having attained the retirement age of 70 years for
directors under our by-laws.
31
LEGAL PROCEEDINGS
We are involved in various claims and litigation arising in the normal course of business.
Following are the only significant legal proceedings currently in progress.
Stoney Tribal Council v. Canada, EnCana and CP
On February 26, 1999, a Statement of Claim was issued in the Court of Queens Bench of
Alberta, Judicial Centre of Calgary. The Stoney Tribal Council filed an action against CP and
others in the amount of $150 million for alleged trespass and unlawful removal of oil and gas from
reserve lands.
It is too early to make an assessment of the amount in question in this action, an assessment of
the merits of the claim, the likelihood that the Plaintiffs will succeed against any or all of the
Defendants or the degree to which we may be entitled to indemnity from other parties. We believe
adequate provision has been made in our financial statements for this lawsuit.
Derailment Minot, North Dakota
On January 18, 2002, one of our trains derailed outside of Minot, North Dakota. The site of
the derailment was immediately west of the city and adjacent to a residential neighbourhood.
Thirty-one cars of the 112 cars on the train derailed. Five cars containing anhydrous ammonia
catastrophically ruptured and a vapour plume covered the derailment site and surrounding area.
Immediately following the derailment, we began a process of environmental remediation and
monitoring at a cost in excess of US$8 million. In addition, in the months following the
derailment, we settled in excess of 20,000 claims from residents of the Minot area for damages.
Following the derailment, a class action and several individual lawsuits were filed against CP in
North Dakota. The Chief Judge of the federal court in North Dakota has dismissed all of these
claims on the basis that the Plaintiffs have no private cause of action. That decision has been
appealed to the federal court of appeals for the 8th Circuit. The Chief Judge of the federal court
in Minnesota has also dismissed several cases brought by individuals in Minnesota. That decision
too is under appeal to the federal court of appeals 8th circuit. There are several hundred other
cases which had been filed in the state court in Minnesota which have been removed to the federal
court in Minnesota. The Chief Judge of the federal court of Minnesota will soon determine whether
those cases should be heard in state court or whether they should be heard in federal court and
dismissed.
CP is working closely with its insurers to settle cases on an individual basis. Many cases,
including the claim of the estate of a man who died as a result of the derailment have been
settled.
We believe adequate provision has been made in our financial statements for this lawsuit.
32
TRANSFER AGENTS AND REGISTRARS
Transfer Agent
Computershare Investor Services Inc., with transfer facilities in Montreal, Toronto, Calgary and
Vancouver, serves as transfer agent and registrar for CPs Common Shares in Canada.
Computershare Trust Company NA, Denver Colorado, serves as co-transfer agent and co-registrar for
CPs Common Shares in the United States.
Requests for information should be directed to:
Computershare Trust Company of Canada
100 University Avenue, 9th Floor
Toronto, Ontario Canada
M5J 2Y1
33
INTERESTS OF EXPERTS
The Companys auditors are PricewaterhouseCoopers LLP, Chartered Accountants.
PricewaterhouseCoopers LLP has prepared an independent auditors report dated March 2, 2007, in
respect of our consolidated financial statements, with accompanying notes as at December 31, 2006
and 2005 and for each of the years in the three year period ended December 31, 2006. They have
also prepared an audit report on managements assessment of the effectiveness of internal control
over financial reporting, and on the effectiveness of internal control over financial reporting, at
December 31, 2006. PricewaterhouseCoopers LLP has advised that it is independent with respect to
CP within the meaning of the Rules of Professional Conduct of the Institute of Chartered
Accountants of Alberta and the rules of the U.S. Securities and Exchange Commission.
34
AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
Composition of the Audit, Finance and Risk Management Committee and Relevant Education and Experience
The following individuals comprise the entire membership of the Audit, Finance and Risk Management
Committee (the Committee).
John P. Manley - Mr. Manley is Senior Counsel at the law firm of McCarthy Tétrault LLP. He has
held that position since May 2004. He is a director of Nortel Networks Corporation and Nortel
Networks Limited, Canadian Imperial Bank of Commerce and a director and Board Chair of Optosecurity
Inc. (a private company). In addition Mr. Manley serves on the boards of the University of
Waterloo, MARS (not-for-profit corporation founded by leaders from the business and public sectors
to improve commercial outcomes from Canadas foundation of science and technology innovation),
National Arts Center Foundation and CARE Canada. Mr. Manley was previously the Member of
Parliament for Ottawa South from November 1988 to June 2004 and Chairman of the Ontario Power
Generation Review Committee, which was responsible for reviewing the state of the energy system of
Ontario, from December 2003 to March 2004. As a Member of Parliament, Mr. Manley also held various
positions in the Canadian Federal Government, including Deputy Prime Minister of Canada from
January 2002 to December 2003, Minister of Finance from June 2002 to December 2003, Chair of the
Cabinet Committee on Public Security and Anti-Terrorism from October 2001 to December 2003,
Minister of Foreign Affairs from October 2000 to January 2002 and Minister of Industry prior
thereto. He graduated from Carleton University with a B.A. and from the University of Ottawa with
an LL.B. He was granted the designation C.Dir (Chartered Director) by McMaster University in
February 2006.
Madeleine Paquin - Ms. Paquin is the President and Chief Executive Officer and a director of
Logistec Corporation, an international cargo-handling company. She has held that position since
January 1996. She is also a director of Aéroports de Montréal. She graduated from École des
Hautes Études Commerciales, Université de Montréal with a G.D.A.S. and from the Richard Ivey School
of Business, University of Western Ontario with an H.B.A.
Roger Phillips (Chair) - Mr. Phillips is the Retired President and Chief Executive Officer of IPSCO
Inc., a steel manufacturing company. He held that position from February 1982 until his retirement
in December 2001. He is a director of Toronto Dominion Bank, Imperial Oil Limited and
Cleveland-Cliffs Inc. Mr. Phillips is a Fellow of the Institute of Physics and a Member of the
Canadian Association of Physicists. He is also President of La Sauciere Investments Inc., a
private company. He was appointed an Officer of the Order of Canada in 1999 and was presented with
the Saskatchewan Order of Merit in 2002. He graduated from McGill University in Montreal with a
B.Sc. in Physics and Mathematics.
Hartley T. Richardson - Mr. Richardson is President and Chief Executive Officer of James Richardson
& Sons, Limited, a privately owned corporation involved in the international grain trade, real
estate, oil and gas development, family wealth management services, and private equity investments.
He has held that position since April 1998. He is a director of Angiotech Pharmaceuticals, Inc.,
Railpower Technologies Corp. and SemBiosys Genetics Inc.. He is the Chairman of the Business
Council of Manitoba and Vice-Chairman of the Canadian Council of Chief Executives. Mr.
Richardsons other affiliations include The Trilateral Commission and the World Economic Forum
Global Leaders of Tomorrow. He is involved in a number of charitable endeavours and community
organizations, including serving as Chairman of Winnipegs United Way 2004 Campaign. He graduated
from the University of Manitoba in Winnipeg with a B.Com. (Hons.). The University of Manitoba
conferred upon Mr. Richardson the honorary degree of Doctor of Laws in 2004.
Michael W. Wright - Mr. Wright is the Retired Chairman of the Board and Chief Executive Officer of
SUPERVALU INC., a food distributor and grocery retailer. He was Chairman and Chief Executive
Officer from June 1981 to June 2001 and Chairman until June 2002. He is a Past Chairman of Food
Distributors International and the Food Marketing Institute, and is a director of Wells Fargo &
Company, Honeywell International, Inc., S.C. Johnson & Son, Inc., and Cargill Inc. He is a Trustee
Emeritus of the University of Minnesota Foundation, and is a member of the University of Minnesota
Law School Board of Visitors and the Board of Trustees of St. Thomas Academy. He graduated from
the University of Minnesota with a B.A. and from the University of Minnesota Law School with a J.D.
(Honours).
Each of the aforementioned committee members has been determined by the board to be independent and
financially literate within the meaning of Multilateral Instrument 52-110.
Pre-Approval of Policies and Procedures
The Committee has adopted a written policy governing the pre-approval of audit and non-audit
services to be provided to CP by our independent auditors. The policy is reviewed annually and the
audit and non-audit services to be provided by our independent auditors, as well as the budgeted
amounts for such services, are pre-approved at that time. Our Vice-President and Comptroller must
submit to the Committee at least quarterly a report of all services performed or to be performed by
our
35
AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
independent
auditors pursuant to the policy. Any additional audit or non-audit services to be
provided by our independent auditors either not included among the pre-approved services or
exceeding the budgeted amount for such pre-approved services by more than 10% must be individually
pre-approved by the Committee or its Chairman, who must report all such additional pre-approvals to
the Committee at its next meeting following the granting thereof. Our independent auditors annual
audit services engagement terms and fees are subject to the specific pre-approval of the Committee.
In addition, prior to the granting of any pre-approval, the Committee or its Chairman, as the case
may be, must be satisfied that the performance of the services in question will not compromise the
independence of our independent auditors. Our Director, Internal Audit monitors compliance with
this policy.
Audit, Finance and Risk Management Committee Charter
The term Corporation herein shall refer to each of Canadian Pacific Railway Limited (CPRL) and
Canadian Pacific Railway Company (CPRC), and the terms Board, Directors, Board of Directors
and Committee shall refer to the Board, Directors, Board of Directors, or Committee of CPRL or
CPRC, as applicable.
A. Committee and Procedures
1. |
|
Purposes
The purposes of the Audit, Finance and Risk Management Committee (the Committee) of the Board
of Directors of the Corporation are to fulfill applicable public company audit committee legal
obligations and to assist the Board of Directors in fulfilling its oversight responsibilities
in relation to the disclosure of financial statements and information derived from financial
statements, and in relation to risk management matters including: |
|
|
|
the review of the annual and interim financial statements of the
Corporation; |
|
|
|
the integrity and quality of the Corporations financial reporting and
systems of internal control, and risk management; |
|
|
|
the Corporations compliance with legal and regulatory requirements; |
|
|
|
the qualifications, independence, engagement, compensation and
performance of the Corporations external auditors; and |
|
|
|
the performance of the Corporations internal audit function; |
|
|
and to prepare, if required, an audit committee report for inclusion in the Corporations
annual management proxy circular, in accordance with applicable rules and regulations. |
|
|
|
The Corporations external auditors shall report directly to the Committee. |
|
2. |
|
Composition of Committee
The members of the Committee of each of CPRL and CPRC shall be identical and shall be Directors
of CPRL and CPRC, respectively. The Committee shall consist of not less than three and not
more than six Directors, none of whom is either an officer or employee of the Corporation or
any of its subsidiaries. Members of the Committee shall meet applicable requirements and
guidelines for audit committee service, including requirements and guidelines with respect to
being independent and unrelated to the Corporation and to having accounting or related
financial management expertise and financial literacy, set forth in applicable securities laws
or the rules of any stock exchange on which the Corporations securities are listed for
trading. No director who serves on the audit committee of more than two public companies other
than the Corporation shall be eligible to serve as a member of the Committee, unless the Board
of Directors has determined that such simultaneous service would not impair the ability of such
member to effectively serve on the Committee. Determinations as to whether a particular
Director satisfies the requirements for membership on the Committee shall be affirmatively made
by the full Board. |
|
3. |
|
Appointment of Committee Members
Members of the Committee shall be appointed from time to time by the Board and shall hold
office at the pleasure of the Board. Where a vacancy occurs at any time in the membership of
the Committee, it may be filled by the Board. The Board shall fill a vacancy whenever
necessary to maintain a Committee membership of at least three Directors. |
|
4. |
|
Committee Chair
The Board shall appoint a Chair for the Committee from among the Committee members. |
|
5. |
|
Absence of Committee Chair
|
36
AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
|
|
If the Chair of the Committee is not present at any meeting of the Committee, one of the
other members of the Committee who is present at the meeting shall be chosen by the Committee
to preside at the meeting. |
|
6. |
|
Secretary of Committee
The Committee shall appoint a Secretary who need not be a director of the Company. |
|
7. |
|
Meetings
The Committee shall meet at regularly scheduled meetings at least once every quarter and
shall meet at such other times during each year as it deems appropriate. In addition, the
Chair of the Committee may call a special meeting of the Committee at any time. |
|
8. |
|
Quorum
Three members of the Committee shall constitute a quorum. |
|
9. |
|
Notice of Meetings
Notice of the time and place of every meeting shall be given in writing by any means of
transmitted or recorded communication, including facsimile, telex, telegram or other
electronic means that produces a written copy, to each member of the Committee at least 24
hours prior to the time fixed for such meeting; provided however, that a member may in any
manner waive a notice of a meeting. Attendance of a member at a meeting constitutes a waiver
of notice of the meeting, except where a member attends a meeting for the express purpose of
objecting to the transaction of any business on the grounds that the meeting is not lawfully
called. |
|
10. |
|
Attendance of Others at Meetings
At the invitation of the Chair of the Committee, other individuals who are not members
of the Committee may attend any meeting of the Committee. |
|
11. |
|
Procedure, Records and Reporting
Subject to any statute or the articles and by-laws of the Corporation, the Committee
shall fix its own procedures at meetings, keep records of its proceedings and report to the
Board when the Committee may deem appropriate (but not later than the next meeting of the
Board). The minutes of its meetings shall be tabled at the next meeting of the Board. |
|
12. |
|
Delegation
The Committee may delegate from time to time to any person or committee of persons any
of the Committees responsibilities that lawfully may be delegated. |
|
13. |
|
Report to Shareholders
The Committee shall prepare a report to shareholders or others concerning the
Committees activities in the discharge of its responsibilities, when and as required by
applicable laws or regulations. |
|
14. |
|
Guidelines to Exercise of Responsibilities
The Board recognizes that meeting the responsibilities of the Committee in a dynamic
business environment requires a degree of flexibility. Accordingly, the procedures outlined
in these Terms of Reference are meant to serve as guidelines rather than inflexible rules, and
the Committee may adopt such different or additional procedures as it deems necessary from
time to time. |
|
15. |
|
Use of Outside Legal, Accounting or Other Advisors; Appropriate Funding
The Committee may retain, at its discretion, outside legal, accounting or other
advisors, at the expense of the Corporation, to obtain advice and assistance in respect of any
matters relating to its duties, responsibilities and powers as provided for or imposed by
these Terms of Reference or otherwise by law. |
|
|
|
The Committee shall be provided by the Corporation with appropriate funding, as determined by
the Committee, for payment of: |
|
(i) |
|
compensation of any outside advisors, as contemplated by the immediately
preceding paragraph; |
|
|
(ii) |
|
compensation of any independent auditor engaged for the purpose of preparing or
issuing an audit report or performing other audit, review or attest services for the
Corporation; or |
37
AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
|
(iii) |
|
ordinary administrative expenses that are necessary or appropriate in carrying
out the Committees duties. |
|
|
All outside legal, accounting or other advisors retained to assist the Committee shall be
accountable ultimately to the Committee. |
16. |
|
Remuneration of Committee Members
No member of the Committee shall receive from the Corporation or any of its affiliates any
compensation other than the fees to which he or she is entitled as a Director of the
Corporation or a member of a committee of the Board. Such fees may be paid in cash and/or
shares, options or other in-kind consideration ordinarily available to Directors. |
|
B. |
|
Mandate |
|
17. |
|
The Committees role is one of oversight. Management is responsible for preparing the
interim and annual financial statements of the Corporation and for maintaining a system of
risk assessment and internal controls to provide reasonable assurance that assets are
safeguarded and that transactions are authorized, recorded and reported properly, for
maintaining disclosure controls and procedures to ensure that it is informed on a timely basis
of material developments and the Corporation complies with its public disclosure obligations,
and for ensuring compliance by the Corporation with legal and regulatory requirements. The
external auditors are responsible for auditing the Corporations financial statements. In
carrying out its oversight responsibilities, the Committee does not provide any professional
certification or special assurance as to the Corporations financial statements or the
external auditors work. |
|
|
|
The Committee shall: |
|
|
|
Audit Matters |
|
|
|
External Auditors Report on Annual Audit |
|
a) |
|
obtain and review annually prior to the completion of the external auditors annual
audit of the year-end financial statements a report from the external auditors describing: |
|
(i) |
|
all critical accounting policies and practices to be used; |
|
|
(ii) |
|
all alternative treatments of financial information within generally
accepted accounting principles that have been discussed with management, the
ramifications of the use of such alternative disclosures and treatments, and the
treatment preferred by the external auditors; and |
|
|
(iii) |
|
other material written communications between the external auditors and
management, such as any management letter or schedule of unadjusted differences; |
Managements and Internal Auditors Reports on External Audit Issues
|
b) |
|
review any reports on the above or similar topics prepared by management or the
internal auditors and discuss with the external auditors any material issues raised in
such reports; |
Annual Financial Reporting Documents and External Auditors Report
|
c) |
|
meet to review with management and the external auditors the Corporations annual
financial statements, the report of the external auditors thereon, the related
Managements Discussion and Analysis, and the information derived from the financial
statements, as contained in the Annual Information Form and the Annual Report. Such
review will include obtaining assurance from the external auditors that the audit was
conducted in a manner consistent with applicable law and will include a review of: |
|
(i) |
|
all major issues regarding accounting principles and financial statement
presentations, including any significant changes in the Corporations selection or
application of accounting policies or principles; |
|
|
(ii) |
|
all significant financial reporting issues and judgments made in
connection with the preparation of the financial statements, including the effect on
the financial statements of alternative methods within generally accepted accounting
principles; |
|
|
(iii) |
|
the effect of regulatory and accounting issues, as well as off-balance
sheet structures, on the financial statements; |
|
|
(iv) |
|
all major issues as to the adequacy of the Corporations internal
controls and any special steps adopted in light of material control deficiencies;
and |
38
AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
|
(v) |
|
the external auditors judgment about the quality, and not just the
acceptability, of the accounting principles applied in the Corporations financial
reporting; |
|
d) |
|
following such review with management and the external auditors, recommend to the
Board of Directors whether to approve the audited annual financial statements of the
Corporation and the related Managements Discussion and Analysis, and report to the Board
on the review by the Committee of the information derived from the financial statements
contained in the Annual Information Form and Annual Report; |
Interim Financial Statements and MD&A
|
e) |
|
review with management and the external auditors the Corporations interim financial
statements and its interim Managements Discussion and Analysis, and if thought fit,
approve the interim financial statements and interim Managements Discussion and Analysis
and the public release thereof by management; |
Earnings Releases and Earnings Guidance
|
f) |
|
review and discuss earnings press releases, including the use of pro forma or
adjusted information determined other than in accordance with generally accepted
accounting principles, and the disclosure by the Corporation of earnings guidance and
other financial information to the public including analysts and rating agencies, it being
understood that such discussions may, in the discretion of the Committee, be done
generally (i.e., by discussing the types of information to be disclosed and the type of
presentation to be made) and that the Committee need not discuss in advance each earnings
release or each instance in which the Corporation discloses earnings guidance or other
financial information; and be satisfied that adequate procedures are in place for the
review of such public disclosures and periodically assess the adequacy of those
procedures; |
Material Litigation, Tax Assessments, Etc.
|
g) |
|
review with management, the external auditors and, if necessary, legal counsel all
legal and regulatory matters and litigation, claims or contingencies, including tax
assessments, that could have a material effect upon the financial position of the
Corporation, and the manner in which these matters may be, or have been, disclosed in the
financial statements; and obtain reports from management and review with the Corporations
chief legal officer, or appropriate delegates, the Corporations compliance with legal and
regulatory requirements; |
Oversight of External Auditors
|
h) |
|
subject to applicable law relating to the appointment and removal of the external
auditors, be directly responsible for the appointment, retention, termination,
compensation and oversight of the external auditors; and be responsible for the resolution
of disagreements between management and the external auditors regarding financial
reporting; |
Rotation of External Auditors Audit Partners
|
i) |
|
review and evaluate the lead audit partner of the external auditors and assure the
regular rotation of the lead audit partner and the audit partner responsible for reviewing
the audit and other audit partners, as required by applicable law; and consider whether
there should be a regular rotation of the external audit firm itself; |
External Auditors Internal Quality Control
|
j) |
|
obtain and review, at least annually, and discuss with the external auditors a report
by the external auditors describing the external auditors internal quality-control
procedures, any material issues raised by the most recent internal quality-control review,
or peer review, of the external auditors, or by any inquiry or investigation by
governmental or professional authorities, within the preceding five years, respecting one
or more independent audits carried out by the external auditors, and any steps taken to
deal with any such issues; |
External Auditors Independence
|
k) |
|
review and discuss at least annually with the external auditors all relationships
that the external auditors and their affiliates have with the Corporation and its
affiliates in order to assess the external auditors independence, including, without
limitation: |
|
(i) |
|
obtaining and reviewing, at least annually, a formal written statement
from the external auditors delineating all relationships that in the external
auditors professional judgment may reasonably be thought to bear on the
independence of the external auditors with respect to the Corporation, |
39
AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
|
(ii) |
|
discussing with the external auditors any disclosed relationships or
services that may affect the objectivity and independence of the external auditors,
and |
|
|
(iii) |
|
recommending that the Board take appropriate action in response to the
external auditors report to satisfy itself as to the external auditors
independence; |
Policies Regarding Hiring of External Auditors Employees and Former Employees
|
l) |
|
set clear policies for the hiring by the Corporation of partners, employees and
former partners and employees of the external auditors; |
Pre-Approval of Audit and Non-Audit Services Provided by External Auditors
|
m) |
|
be solely responsible for the pre-approval of all audit and non-audit services to be
provided to the Corporation and its subsidiary entities by the external auditors (subject
to any prohibitions provided in applicable law), and of the fees paid for these services;
provided however, that the Committee may delegate to an independent member or members of
the Committee authority to pre-approve such non-audit services, and such member(s) shall
report to the Committee at its next meeting following the granting of any pre-approvals
pursuant to such delegated authority; |
|
|
n) |
|
review the external auditors annual audit plan (including scope, staffing, reliance
on internal controls and audit approach); |
|
|
o) |
|
review the external auditors engagement letter; |
Oversight of Internal Audit
|
p) |
|
oversee the internal audit function by reviewing senior management action with
respect to the appointment or dismissal of the Chief Internal Auditor; afford the Chief
Internal Auditor unrestricted access to the Committee; review the charter, activities,
organizational structure, and the skills and experience of the Internal Audit Department;
discuss with management and the external auditors the competence, performance and
cooperation of the internal auditors; and discuss with management the compensation of the
internal auditors; |
|
|
q) |
|
review and consider, as appropriate, any significant reports and recommendations
issued by the Corporation or by any external party relating to internal audit issues,
together with managements response thereto; |
Internal Controls and Financial Reporting Processes
|
r) |
|
review with management, the internal auditors and the external auditors, the
Corporations financial reporting processes and its internal controls; |
|
|
s) |
|
review with the internal auditors the adequacy of internal controls and procedures
related to any corporate transactions in which directors or officers of the Corporation
have a personal interest, including the expense accounts of officers of the Corporation at
the level of Vice-President and above and officers use of corporate assets, and consider
the results of any reviews thereof by the internal or external auditors; |
Complaints Processes
|
t) |
|
establish procedures for: |
|
(i) |
|
the receipt, retention and treatment of complaints received by the
Corporation regarding accounting, internal accounting controls or auditing matters,
and |
|
|
(ii) |
|
the confidential, anonymous submission by employees of the Corporation of
concerns regarding questionable accounting or auditing matters, |
|
|
|
and review periodically with management and the internal auditors these procedures and any
significant complaints received; |
Separate Meetings with External Auditors, Internal Audit, Management
|
u) |
|
meet separately and periodically with management, the external auditors and the
internal auditors periodically to discuss matters of mutual interest, including any audit
problems or difficulties and managements response thereto, the responsibilities, budget
and staffing of the Internal Audit Department and any matter they recommend bringing to
the attention of the full Board; |
40
AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
Finance
|
v) |
|
review all major financings, including financial statement information contained in
related prospectuses, information circulars, etc., of the Company and its subsidiaries and
annually review the Companys financing plans and strategies; |
|
|
w) |
|
review managements plans with respect to Treasury operations, including such items
as financial derivatives and hedging activities; |
Risk Management
|
x) |
|
discuss risk assessment and risk management policies and processes to be implemented
for the Corporation, review with management and the Corporations internal auditors the
effectiveness and efficiency of such policies and processes and their compliance with
other relevant policies of the Corporation, and make recommendations to the Board with
respect to any outcomes, findings and issues arising in connection therewith; |
|
y) |
|
review managements program to obtain appropriate insurance to mitigate risks; |
Terms of Reference and Performance Evaluation of Committee
|
z) |
|
review and reassess the adequacy of these Terms of Reference at least annually, and
otherwise as it deems appropriate, and recommend changes to the Board. The Committee
shall also undertake an annual evaluation of the Committees performance. |
Other
|
aa) |
|
perform such other activities, consistent with these Terms of Reference, the
Corporations articles and by-laws and governing law, as the Committee or the Board deems
appropriate. |
|
|
bb) |
|
report regularly to the Board of Directors on the activities of the Committee. |
Audit and Non-Audit Fees and Services
Fees payable to PricewaterhouseCoopers LLP for the years ended December 31, 2006, and December 31,
2005, totalled $2,824,200 and $2,142,140, respectively, as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Year ended |
|
|
December 31, 2006 |
|
December 31, 2005 |
|
Audit Fees |
|
$ |
2,118,000 |
|
|
$ |
1,086,000 |
|
Audit-Related Fees |
|
$ |
438,900 |
|
|
$ |
812,540 |
|
Tax Fees |
|
$ |
267,300 |
|
|
$ |
243,600 |
|
All Other Fees |
|
$ |
|
|
|
$ |
|
|
|
|
|
TOTAL |
|
$ |
2,824,200 |
|
|
$ |
2,142,140 |
|
|
|
|
The nature of the services provided by PricewaterhouseCoopers LLP under each of the categories
indicated in the table is described below.
Audit Fees
Audit fees were for professional services rendered for the audit of CPs annual financial
statements and services provided in connection with statutory and regulatory filings or
engagements, including the attestation engagement for the independent auditors report on
managements report on internal controls for financial reporting.
Audit-Related Fees
Audit-related fees were for attestation and related services reasonably related to the performance
of the audit or review of the annual financial statements, but which are not reported under Audit
Fees above. These services consisted of: the audit or review of financial statements of certain
subsidiaries and of various pension and benefits plans of CP; special attest services as may be
required by various government entities; assistance with preparations for compliance with Section
404 of the Sarbanes-Oxley Act of 2002; access fees for technical accounting database resources; and
general advice and assistance related to accounting and/or disclosure matters with respect to new
and proposed Canadian and U.S. Accounting Guidelines, securities regulations, and/or laws.
Tax Fees
41
AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
Tax fees were for professional services related to tax compliance, tax planning and tax advice.
These services consisted of: tax compliance including the review of tax returns; assistance with
questions regarding corporate tax audits; tax planning and advisory services relating to common
forms of domestic and international taxation (i.e. income tax, capital tax, goods and services tax,
and valued added tax); and access fees for taxation database resources.
All Other Fees
Fees disclosed under this category were for products and services other than those described under
Audit Fees, Audit-Related Fees and Tax Fees above. In both 2006 and 2005, there were no
services in the category.
42
ADDITIONAL INFORMATION
Additional Company Information
Additional information about CP is available on our website at www.cpr.ca and on SEDAR
(System for Electronic Document Analysis and Retrieval) at www.sedar.com in Canada, and on
the U.S. Securities and Exchange Commissions website (EDGAR) at www.sec.gov. The
aforementioned documents are issued and made available in accordance with legal requirements and
are not incorporated by reference into this AIF.
Additional information, including directors and officers remuneration and indebtedness, principal
holders of our securities and securities authorized for issuance under equity compensation plans,
where applicable, is contained in the information circular for our most recent annual meeting of
shareholders at which directors were elected.
Additional financial information is provided in our Consolidated Financial Statements and
Managements Discussion and Analysis for the most recently completed financial year.
43
Suite 500 Gulf Canada Square 401 9th Avenue SW Calgary Alberta T2P 4Z4 www.cpr.ca TSX/NYSE:CP
Canadian Pacific Responsible Care Beyond whats required. Printed in Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
4,583.2 |
|
|
|
4,391.6 |
|
|
|
3,902.9 |
|
Adjusted operating expenses (1) |
|
|
3,154.6 |
|
|
|
3,390.1 |
|
|
|
3,114.4 |
|
|
Adjusted operating income (1) |
|
|
1,128.6 |
|
|
|
1,001.5 |
|
|
|
786.6 |
|
|
Net Income |
|
|
796.3 |
|
|
|
543.0 |
|
|
|
411.1 |
|
|
|
(1) Certain of these earnings measures have been adjusted to exclude foreign currency
translation effects on long-term debt, and other specified items, which are not among CPs normal
ongoing revenues and operating expenses. These measures have no standardized meanings prescribed by
Canadian GAAP and, therefore, are unlikely to be comparable to similar measures of other companies.
These earnings measures and other specified items are described in Managements Discussion and
Analysis in the section Non-GAAP Earnings.
(2) Unadjusted (GAAP) diluted earnings per share was $5.02.
Revenues
increased 4.4 %
Adjusted diluted
earnings per share (1) (2)
$3.95 up 20 %
Operating ratio
improved to 75.4 %
Adjusted return
on capital employed (1)
10.2 % up from 9.4 %
Free cash (1)
$245 million
2006 Annual Report
1
CPs mix of business is global in reach and the diversity of our customer portfolio provides
natural protection against market downturns. Approximately 40 % of our business is with global
markets, moving to or from one of the ports we serve, one-third of our business is domestic and
flows exclusively within Canada or the United States and 28 % moves cross-border.
CPs
lines of business
Bulk
CPs bulk business is made up of grain, coal, sulphur and fertilizers. This comprises 44 % of our
business. The largest component is grain, where revenue grew by 17 % in 2006, driven by strong
domestic and global demand as well as an excellent supply, with a good crop of high quality. The
bulk business is very closely tied to global trade and commodity prices. In 2006, we experienced a
delay in our export potash program as world price negotiations were completed. Although coal
shipments were off in 2006, the world-wide demand for quality metallurgical coal continues to be
strong. CP has developed long-term relationships with key industry leaders, and is well positioned
with our recent capacity expansions to respond to upswings in customer demand.
2
2006 Annual Report
Intermodal
Our intermodal business moves goods in containers that can be transported by train, truck or ship.
CPs international intermodal business moves marine containers to and from the ports of Vancouver,
Montreal, Philadelphia and New Jersey and North American markets. Our domestic intermodal business
moves containers from shippers to their customers through our major intermodal terminals in key
markets in North America, including Mexico. CPs intermodal business grew in 2006 as offshore
sourcing of consumer goods by North American retailers continued to drive the business. This trend
is expected to continue in 2007, and with our recent capacity expansion in western Canada, and the
implementation of co-production agreements with other railways, CP is well equipped to handle the
increased demand.
Merchandise
Industrial and consumer products, automotive, and forest products make up CPs merchandise
business. A product centric strategy underpinned by the Integrated Operating Plan positions CP as
the manufacturers pipeline. This means the customers product moves from plant to market
consistently and efficiently. Excellent service and market strength resulted in strong price
performance within this business segment and this drove revenue growth of 5 % in 2006. Much of this
was due to growth in the Alberta economy where oilsands development continues to create demand in
the industrial products area. CP has developed long-term partnerships with key automotive
manufacturers who are expanding plant capacity within North America which has led to growth in this
segment.
2006 Annual Report
3
SAFETY RESULTS
FRA personal injuries
(per 200,000 employee-hours)
down 17 % to 2.0
FRA train accidents
per million train-miles
down 39 % to 1.4
Creating shareholder value within
the reach of our franchise
CP has successfully built its strategy on the three pillars of quality revenue growth, improved
productivity and its people. With an unrelenting focus on safety and fluidity, we are transforming
CP into a highly efficient business which will continue to create shareholder value.
Quality Revenue
Growth
This is the guiding principle for pricing, product development, capacity and expansion. It is
defined by an improved and standardized product that is providing consistency of service to our
customers. Improving on-time performance, reducing service problems, and creating an operational
plan that runs like a conveyor belt is allowing us to improve our pricing environment. Robust
economic growth in 2006 in both domestic and global markets has driven demand, and provided a
market environment that supports improved yield.
Improved Productivity
With the implementation of the balanced Integrated Operating Plan, CP has moved from a highly
customized and complex freight services product to a highly standardized product that balances
customer needs with operational efficiency. As well, CP has engaged in a number of cooperative
co-production agreements with other railways that have increased operating efficiencies without
the need for capital investment. Improved productivity initiatives delivered more than $35 million
in savings in 2006.
People
Our people are the key to delivering innovative transportation solutions to our customers and to
ensuring the safe operation of our trains through the more than 900 communities where we operate.
We believe that skilled, aligned and motivated employees, sharing a strong commitment to safety,
will create long-term value for our shareholders, and our customers. It is through the ingenuity of
our employees that we will achieve our vision of being the safest, and most fluid railway in North
America.
4
2006 Annual Report
It is indeed an honour to have been appointed Chairman of Canadian Pacific Railway. CPR is one of
North Americas great business icons and today the railway is at the centre of economic action. CPR
is playing an increasingly pivotal role in driving the growth and efficiency of our continents
economies and connecting them to trading partners around the world.
|
|
|
CHAIRMANS |
|
|
2006 LETTER TO SHAREHOLDERS
|
|
|
Canadian Pacific Railway knows there is more it can contribute and this is where the Companys
vision to be the safest, most fluid railway in North America comes into play. CPRs strategy
to accomplish this vision puts the spotlight on people employees, customers, the hundreds of
communities in Canada and the United States the railway serves, and shareholders and everyone
stands to benefit when the franchise is operating to the optimum levels of efficiency and safety. I
am proud to be associated with a company that places such a high priority on safety.
The Board of Directors has formally broadened the oversight mandate of its Environmental and Safety
Committee to include security an issue that is of increasing concern and gaining greater
attention across North America. The Board will work with management to ensure programs are in place
that elevate security in all the Companys operations and that employees are familiar with all
aspects of government security requirements in Canada and the United States.
CPRs Board takes its corporate governance responsibilities very seriously and we seek to maintain
the highest standards through continuous improvement. By way of example, the Board has now
formalized its Directors education program. This program includes regular presentations to the
Board on various aspects of CPRs business, and in the past year has included frequent visits to
railway facilities. The depth of knowledge of CPRs business that we obtain as a result greatly
assists the Board in the fulfillment of its duties.
CPR is making its first management report on the effectiveness of internal controls in accordance
with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (SOX 404) this year, and I am
pleased that management was able to report that these controls are operating effectively.
Your Board is actively engaged in advising management on the development of the Companys strategy.
An annual strategy session is held with management where the Board and management engage in a
detailed review of the Companys strategic directions. The Board monitors the implementation of the
strategy by management and approves major transactions and tracks the outcomes of these
transactions on an ongoing basis.
In closing I would like to extend sincere thanks to my predecessor Ted Newall, who retired from the
Board last year after serving so effectively as chairman since CPRs spin-off from Canadian Pacific
Limited in 2001. I also want to thank Jim Nininger who will be retiring from the Board in May for
his many years of excellent service. He has been a great resource to the Board, especially in the
area of corporate
governance. In the past year we welcomed new directors John Manley, Linda Morgan and Hartley
Richardson to the Board and all have added to the depth and breadth of the Boards deliberations.
On behalf of the Board, I want to compliment CPRs new President and Chief Executive Officer Fred
Green, his predecessor Rob Ritchie, and the management team and employees of CPR for the improved
results in a very challenging environment in 2006. My fellow Board members and I believe that the
depth of talent at all levels in the Company is creating opportunities and delivering a high level
of performance that will serve our customers, communities and shareholders well in 2007 and into
the future.
JOHN E. CLEGHORN, O.C., FCA
Chairman of Board
2006 Annual Report
5
|
|
|
CHIEF EXECUTIVE OFFICERS |
|
|
2006 LETTER TO SHAREHOLDERS
|
|
|
Canadian Pacific delivered on our commitment of creating shareholder value with record results in
2006. We achieved this by building on the three pillars that support our strategy:
o |
|
generating quality revenue growth our guiding principle for all of our product development, capacity utilization, and expansion efforts; |
|
o |
|
improving the productivity of every asset, resource and process in the Company; and |
|
o |
|
investing in our people. Our skilled, aligned and motivated employees share the common vision of
creating the safest and most fluid railway in North America which will create long-term value for
our shareholders, our customers, and our employees. |
Our achievements also came as a direct result of Execution Excellence our relentless focus on
improving the Companys productivity, performance and its ability to weather economic change.
Through execution excellence we continue to transform our railway into a highly efficient business.
We achieved record operating and financial results in 2006, as detailed elsewhere in this report.
Our scheduled railway is more productive than ever as we continue to leverage our Integrated
Operating Plan (IOP). We are responding quickly to changes in traffic patterns
and volumes and adjusting our operations accordingly. We are providing the speed and consistency of
service that our customers value so highly.
As a result of productivity improvements made through our IOP, we delivered savings of $35 million
in 2006. In 2007 further IOP initiatives will improve fluidity and deliver additional cost savings.
We also initiated a growing pipeline of other expense reduction initiatives that will further
reduce our costs in 2007 and the coming years.
Most importantly, we achieved these productivity results while operating safely. Canadian Pacific
achieved record safety results in 2006, reducing train accidents by 39 % compared with 2005, making
CP the safest railway in North America. We also reduced personal injuries by 17 %. These results
were overshadowed by the loss of one of our team members, Dan Hesse, in a tragic accident in
Minneapolis. This reinforces that we must constantly be aware of the need for safe work practices
for ourselves, our fellow employees and the communities in which we work. As the Chairman pointed
out in his letter, we have formalized the addition of security as a new element of focus as our
efforts have become significant in this area and will increase over time.
6
2006 Annual Report
We significantly improved our financial results in 2006 achieving record operating income and a
record operating ratio. We held down expenses, improved operating income, and grew diluted earnings
per share.
Strong yields and our diverse commodity mix drove continued top-line growth, with increases in
grain, intermodal and merchandise offsetting weakness in coal and potash. When anticipated coal and
potash volumes did not materialize during the year, our team responded by cutting expenses and
growing new business.
We were tested by harsh winter operating conditions in western Canada in the fourth quarter and
again the CP team responded quickly and efficiently, demonstrating an embedded resilience that is
now part of our makeup. These actions characterize the robustness of the railways processes and
infrastructure and the growing performance-and-communications culture of our people.
We also addressed head-on new transportation legislation and regulatory challenges. Regulators in
Canada and the United States are increasingly aware that railways must consistently earn their cost
of capital to invest in needed infrastructure to meet existing and future demand. However, proposed
adverse regulatory changes still arise and require our constant vigilance. Our efforts in
addressing these are designed to ensure a fair and balanced environment in which Canadian Pacific
will prosper. For example, in response
to proposed federal legislation that would have imposed further onerous regulation on Canadas
railways, CP along with other industry partners, developed and introduced in 2006 a non-legislative
mediation and arbitration solution for most rate and service matters. We believe this process,
known as Commercial Dispute Resolution (CDR) will deliver a better, more timely and efficient
outcome for all parties shippers, the federal government, and ourselves.
We are on track to deliver on our commitments to customers and shareholders in 2007 and on our
vision to be the safest, most fluid railway in North America. I am confident, with the continued
strength in rail fundamentals, and our operational responsiveness we will overcome the challenges
of the upcoming year. For 2007, we expect growth in earnings per share of 9 % to 13 %, revenue
growth of 4 % to 6 %, and to generate free cash, after dividends, exceeding $250 million. Our
planned capital investments in 2007 of $885 to $895 million are targeted at further improving the
fluidity and safety of our network through investments in track infrastructure, locomotive power
and information technology, as well as land acquisition and construction of new track to service a
new Toyota plant in Ontario.
The investment we made in 2005 to expand our track corridor in western Canada is serving us well,
enabling both greater fluidity and preparing us to handle any future growth
in Asia-Pacific trade. The emerging economies of Asia will continue to play to CPs strengths.
Approximately 40 % of our business is with global markets, moving to or from the ports we serve. We
believe retail product imports from Asia to North America will continue to grow and that growth in
emerging economies like China and India will fuel demand for natural resources. This bodes well for
resource rich nations like Canada and railways with a strong bulk franchise like CP.
In my first year as Chief Executive Officer, I am indebted to our Chairman John Cleghorn and our
Board of Directors for their guidance and wise counsel. Our people were the key to our successes
and I want to thank all of our employees who stepped up their game and addressed the challenges put
before them. We reconstituted our Management Committee and Operating Committee and made other
organizational changes in 2006 that will strengthen the company generating new ideas and
allowing faster decision making and effective execution of our operating plan. Our people are
engaged in building our franchise through Execution Excellence and we are well positioned to take
the next step towards becoming the safest, most fluid railway in North America.
FRED GREEN
Chief Executive Officer
2006 Annual Report
7
|
|
|
MANAGEMENTS DISCUSSION |
|
|
AND ANALYSIS
|
|
|
March 2,
2007 |
|
|
This Managements Discussion and Analysis (MD&A) supplements the Consolidated Financial
Statements and related notes for the year ended December 31, 2006. Except where otherwise
indicated, all financial information reflected herein is expressed in Canadian dollars. All
information has been prepared in accordance with Canadian generally accepted accounting principles
(GAAP), except as described in the Non-GAAP Earnings section of this MD&A. In this MD&A, our,
us, we, CP and the Company refer to Canadian Pacific Railway Limited (CPRL), CPRL and its
subsidiaries, CPRL and one or more of its subsidiaries, or one or more of CPRLs subsidiaries, as
the context may require. Other terms not defined in the body of this MD&A are defined in the
Glossary of Terms.
Business
Profile
Canadian Pacific Railway Limited, through its subsidiaries, operates a transcontinental railway in
Canada and the United States and provides logistics and supply chain expertise. Through our
subsidiaries, we provide rail and intermodal transportation services over a network of
approximately 13,300 miles, serving the principal business centres of Canada from Montreal, Quebec,
to Vancouver, British Columbia, and the U.S. Northeast and Midwest regions. Our railway feeds
directly into the U.S. heartland from the East and West coasts. Agreements with other carriers
extend our market reach east of Montreal in Canada, throughout the U.S. and into Mexico. Through
our subsidiaries, we transport bulk commodities, merchandise freight and intermodal traffic. Bulk
commodities include grain, coal, sulphur and fertilizers. Merchandise freight consists of finished
vehicles and automotive parts, as well as forest and industrial and consumer products. Intermodal
traffic consists largely of high-value, time-sensitive retail goods transported in overseas
containers that can be handled by train, ship and truck, and in domestic containers and trailers
that can be moved by train and truck.
Strategy
Our vision is to become the safest and most fluid railway in North America. Through the ingenuity
of our people, it is our objective to create long-term value for customers, shareholders and
employees by profitably growing within the reach of our rail franchise.
We seek to accomplish this objective through the following three-part strategy:
o |
|
generating quality revenue growth by realizing the benefits of demand growth in our bulk,
intermodal and merchandise business lines with targeted infrastructure capacity investments linked
to global trade opportunities; |
|
o |
|
improving productivity by leveraging strategic marketing and operating partnerships, executing a
scheduled railway through our Integrated Operating Plan (IOP) and driving more value from
existing assets and resources by improving fluidity; and |
|
o |
|
continuing to develop a dedicated, professional and knowledgeable workforce that is committed to
safety and sustainable financial performance through steady improvement in profitability, increased
free cash flow and a competitive return on investment. |
Additional Information
Additional information, including our Consolidated Financial Statements, MD&A, Annual Information
Form, press releases and other required filing documents, is available on SEDAR at www.sedar.com in
Canada, on EDGAR at www.sec.gov in the U.S. and on our website at www.cpr.ca. The aforementioned
documents are issued and made available in accordance with legal requirements and are not
incorporated by reference into this MD&A.
8
2006 Annual Report
Highlights Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 (in millions, except percentages and per-share data) |
|
2006 |
|
|
2005(1) |
|
|
2004(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
4,583.2 |
|
|
$ |
4,391.6 |
|
|
$ |
3,902.9 |
|
|
Operating income, before other specified items (2) |
|
|
1,128.6 |
|
|
|
1,001.5 |
|
|
|
786.6 |
|
|
Operating income |
|
|
1,128.6 |
|
|
|
991.2 |
|
|
|
714.7 |
|
|
Income, before FX on LTD and other specified items (2) |
|
|
627.5 |
|
|
|
528.4 |
|
|
|
359.5 |
|
|
Net income |
|
$ |
796.3 |
|
|
$ |
543.0 |
|
|
$ |
411.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating ratio, before other specified items (2) |
|
|
75.4 |
% |
|
|
77.2 |
% |
|
|
79.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
5.06 |
|
|
$ |
3.43 |
|
|
$ |
2.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share, before FX on LTD and other specified items (2) |
|
$ |
3.95 |
|
|
$ |
3.30 |
|
|
$ |
2.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
5.02 |
|
|
$ |
3.39 |
|
|
$ |
2.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share |
|
$ |
0.7500 |
|
|
$ |
0.5825 |
|
|
$ |
0.5200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash (2) |
|
$ |
244.9 |
|
|
$ |
92.0 |
|
|
$ |
38.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on capital employed (2) |
|
|
10.2 |
% |
|
|
9.4 |
% |
|
|
7.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,415.9 |
|
|
$ |
10,891.1 |
|
|
$ |
10,499.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term financial liabilities |
|
$ |
5,320.4 |
|
|
$ |
5,390.3 |
|
|
$ |
5,230.7 |
|
|
|
(1) Certain comparative period figures have been restated to reflect the retroactive
application of a new accounting pronouncement on stock-based compensation for employees eligible to
retire before the vesting date of stock-based awards or have been updated to reflect new
information (discussed further in the section Changes in Accounting Policy).
(2) These earnings measures have no standardized meanings prescribed by Canadian GAAP
and, therefore, are unlikely to be comparable to similar measures of other companies. These
earnings measures and other specified items are described in the section Non-GAAP Earnings. A
reconciliation of income and diluted EPS, before FX on LTD and other specified items, to net income
and diluted EPS, as presented in the financial statements is provided in the section Non-GAAP
Earnings. This information is in Canadian dollars.
2006 Annual Report
9
Operating Results
Income
Operating income in 2006 was $1,128.6 million, an increase of $137.4 million, or 13.9 %, from
$991.2 million in 2005.
Operating income, before other specified items, was $1,128.6 million in 2006, up $127.1 million, or
12.7 %, from $1,001.5 million in 2005. The growth in 2006 operating income, before other specified
items reflected:
o |
|
higher revenues due to increased freight rates across the majority of our business lines; |
|
o |
|
strong grain volumes; |
|
o |
|
expense reductions from co-production initiatives and operational benefits produced by
our IOP (discussed under the sub-heading Integrated Operating Plan in the section Future
Trends, Commitments and Risks); |
|
o |
|
reductions in management and administrative positions; and |
|
o |
|
$18 million gain from the sale of our Latta subdivision (discussed further in the section Future Trends, Commitments and Risks). |
The growth in 2006 operating income, before other specified items, was partially offset by:
o |
|
a significant reduction in coal volumes (discussed further in the section Freight Revenues); |
|
o |
|
higher fuel costs; |
|
o |
|
higher material costs for freight car and locomotive repairs and train servicing; and |
|
o |
|
the net impact of the change in the value of the Canadian dollar relative to the U.S.
dollar (Foreign Exchange) on U.S. dollar-denominated revenues and expenses. |
Fuel prices were significantly higher in 2006 than in 2005. During 2006, we continued to take steps
to mitigate the impact of high prices with fuel surcharges and hedging (discussed further under the
sub-heading Crude Oil Swaps in the section Financial Instruments).
There were no other specified items in operating income in 2006.
Net income for the year ended December 31, 2006, was $796.3 million, up $253.3 million, or 46.6 %,
from $543.0 million in 2005. Net income in 2006 included a positive adjustment of $176 million to
income tax expense as a result of reduced income tax rates.
Operating income of $991.2 million in
2005 was up $276.5 million, or 38.7 %, from $714.7 million in 2004.
Operating income, before other specified items, was $1,001.5 million in 2005, up $214.9 million, or
27.3 %, from $786.6 million in 2004. The increase was due to revenue growth of 12.5 % resulting
from higher freight rates and volumes partially due to an agreement reached with Elk Valley Coal
Partnership (EVC) (discussed further under the sub-heading Coal in the section Revenues).
The increase in 2005, compared with 2004, was partially offset by:
o |
|
higher costs for compensation and benefits, and depreciation and amortization
(discussed further in the section Operating Expenses, Before Other Specified Items); |
|
o |
|
the impact of inflation on expenses; and |
|
o |
|
the net negative impact of the change in Foreign Exchange. |
Other specified items in operating income in 2005 netted to a $10.3 million charge to income, down
$61.6 million from 2004. In 2005, other specified items included a charge of $44.2 million for a
labour restructuring initiative and a credit of $33.9 million arising from the settlement with a
third party related to the environmental liability. Other specified items in operating income in
2004 netted to a charge of $71.9 million including a charge of $90.9 million for environmental
remediation and a credit of $19.0 million for the reduction on a labour liability recorded in the
previous year. Other specified items are described in the section Non-GAAP Earnings under the
sub-heading Other Specified Items.
10
2006 Annual Report
Net income was $543.0 million in 2005, an increase of $131.9 million, or 32.1 %, from $411.1
million in 2004. Net income in 2005, compared with 2004, increased due to higher operating income
partially offset by higher income tax expenses (discussed further in the section Other Income
Statement Items) and a decrease in foreign exchange gains on long-term debt of $72.1 million
(after tax).
Diluted Earnings Per Share
Diluted earnings per share (EPS) in 2006 was $5.02, an increase of $1.63 from 2005. Diluted
EPS in 2005 was $3.39, an increase of $0.81 from $2.58 in 2004. Diluted EPS is calculated by
dividing net income by the weighted average number of shares outstanding, adjusted for the dilutive
effect of outstanding stock options, as calculated using the Treasury Stock Method. This method
assumes options that have an exercise price below the market price of the shares are exercised and
the proceeds are used to purchase common shares at the average market price during the period.
There was a positive impact on diluted EPS in 2006 resulting from a reduction of 5.0 million shares
outstanding due to our share repurchase plan (discussed further under the sub-heading Share
Capital in the section Balance Sheet).
Operating Ratio
Our operating ratio, before other specified items, improved to 75.4 % in 2006, compared with
77.2 % in 2005 and 79.8 % in 2004. The operating ratio, before other specified items, provides the
percentage
of revenues used to operate the railway. A lower percentage normally indicates higher efficiency.
Other specified items are discussed further under the sub-heading Other Specified Items in the
section Non-GAAP Earnings.
Pension Plan Deficit
The defined benefit pension plans deficit of $243.5 million as at December 31, 2006 was
approximately $600 million lower than the deficit of $842.2 million as at December 31, 2005. The
decrease in 2006 was due primarily to favourable pension fund returns, a small rise in long-term
interest rates and CPs substantial pension contributions.
Effect of Foreign Exchange on Earnings
Fluctuations in Foreign Exchange affect our results because U.S. dollar-denominated revenues
and expenses are translated into Canadian dollars. U.S. dollar-denominated revenues and expenses
are reduced when the Canadian dollar strengthens in relation to the U.S. dollar. Operating income
is also reduced because more revenues than expenses are generated in U.S. dollars.
Year-over-year fluctuations were significant as the Canadian dollar strengthened against the U.S. dollar by
approximately 7 % in 2006, compared with 2005, and by approximately 7 % in 2005, compared with
2004. The average foreign exchange rate for converting U.S. dollars to Canadian dollars decreased
to $1.13 in 2006 from $1.21 in 2005 and $1.30 in 2004. The table on page 12 shows the approximate
effect of the change in Foreign Exchange on our revenues and expenses, and income before foreign
exchange
gains and losses on long-term debt (FX on LTD) in 2006 and 2005. This analysis does not include
the effects of the change in Foreign Exchange on balance sheet accounts or of foreign exchange
hedging activity.
On average, a $0.01 strengthening (or weakening) of the Canadian dollar reduces
(or increases) annual operating income by approximately $3 million to $4 million. Foreign Exchange
fluctuations reduced operating income by $28 million in 2006, compared with 2005, and $35 million
in 2005, compared with 2004, as illustrated in the table on page 12. From time to time, we use
foreign exchange forward contracts to partially hedge the effects on our business of Foreign
Exchange transaction gains and losses and other economic factors. In addition, we have designated a
portion of our U.S. dollar-denominated long-term debt as a hedge of our net investment in
self-sustaining foreign subsidiaries. Our hedging instruments are discussed further in the section
Financial Instruments.
2006 Annual Report
11
Favourable (Unfavourable) Effect on Earnings Due to the Change in Foreign Exchange
|
|
|
|
|
|
|
|
|
For the year ended December 31 (in millions, except foreign exchange rate) (unaudited) |
|
2006 vs. 2005 |
|
|
2005 vs. 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Average annual foreign exchange rates |
|
|
$1.13 vs. $1.21 |
|
|
|
$1.21 vs. $1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
Freight revenues |
|
|
|
|
|
|
|
|
Grain |
|
|
$ (24 |
) |
|
|
$ (23 |
) |
Coal |
|
|
(7 |
) |
|
|
(8 |
) |
Sulphur and fertilizers |
|
|
(10 |
) |
|
|
(11 |
) |
Forest products |
|
|
(16 |
) |
|
|
(16 |
) |
Industrial and consumer products |
|
|
(25 |
) |
|
|
(25 |
) |
Automotive |
|
|
(12 |
) |
|
|
(14 |
) |
Intermodal |
|
|
(19 |
) |
|
|
(21 |
) |
Other revenues |
|
|
(1 |
) |
|
|
(2 |
) |
|
Total effect |
|
|
(114 |
) |
|
|
(120 |
) |
|
Operating expenses |
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
22 |
|
|
|
23 |
|
Fuel |
|
|
30 |
|
|
|
23 |
|
Materials |
|
|
3 |
|
|
|
3 |
|
Equipment rents |
|
|
12 |
|
|
|
13 |
|
Depreciation and amortization |
|
|
4 |
|
|
|
5 |
|
Purchased services and other |
|
|
15 |
|
|
|
18 |
|
|
Total effect |
|
|
86 |
|
|
|
85 |
|
|
Effect on operating income |
|
|
(28 |
) |
|
|
(35 |
) |
|
Other expenses |
|
|
|
|
|
|
|
|
Other charges |
|
|
0 |
|
|
|
1 |
|
Interest expense |
|
|
11 |
|
|
|
12 |
|
Income tax expense, before FX on LTD (1) |
|
|
7 |
|
|
|
6 |
|
|
Effect on income, before FX on LTD (1) |
|
|
$ (10 |
) |
|
|
$ (16 |
) |
|
|
(1) These earnings measures have no standardized meanings prescribed by Canadian GAAP and, therefore,
are unlikely to be comparable to similar measures of other companies. These earnings measures and
other specified items are described in the section Non-GAAP Earnings.
Non-GAAP Earnings
We present non-GAAP earnings and cash flow information in this MD&A to provide a basis for
evaluating underlying earnings and liquidity trends in our business that can be compared with
results of our operations in prior periods. These non-GAAP earnings exclude foreign currency
translation effects on long-term debt, which can be volatile and short term, and other specified
items
that are not among our normal ongoing revenues and operating expenses. The table on page 13 details
a reconciliation of income, before FX on LTD and other specified items, to net income, as presented
in the financial statements. Free cash is calculated as cash provided by operating activities, less
cash used in investing activities and dividends. Free cash is discussed further and reconciled to
the increase in cash as presented in the
financial statements in the Liquidity and Capital Resources section. Earnings that exclude FX on
LTD and other specified items, return on capital employed and free cash as described in this MD&A,
have no standardized meanings and are not defined by Canadian GAAP and, therefore, are unlikely to
be comparable to similar measures presented by other companies. Return on capital employed is
defined in the Glossary of Terms at the end of this MD&A.
12
2006 Annual Report
Summarized Statement of Consolidated Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended |
|
|
For the three months ended |
|
(reconciliation of non-GAAP earnings to GAAP earnings) |
|
December 31 |
|
|
December 31 |
|
(in millions, except diluted EPS and operating ratio) (unaudited) |
|
2006 |
|
|
2005 |
(1) |
|
2004 |
(1) |
|
2006 |
|
|
2005 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
4,583.2 |
|
|
$ |
4,391.6 |
|
|
$ |
3,902.9 |
|
|
$ |
1,190.4 |
|
|
$ |
1,166.9 |
|
Operating expenses, before other specified items |
|
|
3,454.6 |
|
|
|
3,390.1 |
|
|
|
3,116.3 |
|
|
|
870.3 |
|
|
|
862.7 |
|
Operating income, before other specified items |
|
|
1,128.6 |
|
|
|
1,001.5 |
|
|
|
786.6 |
|
|
|
320.1 |
|
|
|
304.2 |
|
Other charges |
|
|
27.8 |
|
|
|
18.1 |
|
|
|
36.1 |
|
|
|
6.4 |
|
|
|
6.8 |
|
Interest expense |
|
|
194.5 |
|
|
|
204.2 |
|
|
|
218.6 |
|
|
|
49.8 |
|
|
|
49.1 |
|
Income tax expense, before income tax on FX on LTD
and other specified items (2) |
|
|
278.8 |
|
|
|
250.8 |
|
|
|
172.4 |
|
|
|
82.9 |
|
|
|
77.8 |
|
|
Income, before FX on LTD and other specified items (2) |
|
|
627.5 |
|
|
|
528.4 |
|
|
|
359.5 |
|
|
|
181.0 |
|
|
|
170.5 |
|
|
Foreign exchange (gains) losses on long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FX on LTD (gains) losses |
|
|
0.1 |
|
|
|
(44.7 |
) |
|
|
(94.4 |
) |
|
|
44.9 |
|
|
|
0.6 |
|
Income tax expense on FX on LTD |
|
|
7.1 |
|
|
|
22.4 |
|
|
|
|
|
|
|
(9.5 |
) |
|
|
4.5 |
|
|
FX on LTD, net of tax (gain) loss |
|
|
7.2 |
|
|
|
(22.3 |
) |
|
|
(94.4 |
) |
|
|
35.4 |
|
|
|
5.1 |
|
Other specified items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits due to tax rate reductions |
|
|
(176.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charge for labour restructuring and asset impairment |
|
|
|
|
|
|
44.2 |
|
|
|
(19.0 |
) |
|
|
|
|
|
|
44.2 |
|
Special credit related to environmental remediation |
|
|
|
|
|
|
(33.9 |
) |
|
|
90.9 |
|
|
|
|
|
|
|
|
|
Income tax on other specified items |
|
|
|
|
|
|
(2.6 |
) |
|
|
(29.1 |
) |
|
|
|
|
|
|
(15.9 |
) |
|
Other specified items, net of tax |
|
|
(176.0 |
) |
|
|
7.7 |
|
|
|
42.8 |
|
|
|
|
|
|
|
28.3 |
|
|
Net income |
|
$ |
796.3 |
|
|
$ |
543.0 |
|
|
$ |
411.1 |
|
|
$ |
145.6 |
|
|
$ |
137.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS, before FX on LTD and other specified items (2) |
|
$ |
3.95 |
|
|
$ |
3.30 |
|
|
$ |
2.26 |
|
|
$ |
1.15 |
|
|
$ |
1.07 |
|
Diluted EPS, related to FX on LTD, net of tax (2) |
|
|
(0.04 |
) |
|
|
0.14 |
|
|
|
0.59 |
|
|
|
(0.23 |
) |
|
|
(0.03 |
) |
Diluted EPS, related to other specified items, net of tax (2) |
|
|
1.11 |
|
|
|
(0.05 |
) |
|
|
(0.27 |
) |
|
|
|
|
|
|
(0.18 |
) |
|
Diluted EPS, as determined by GAAP |
|
$ |
5.02 |
|
|
$ |
3.39 |
|
|
$ |
2.58 |
|
|
$ |
0.92 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating ratio, before other specified items (2) |
|
|
75.4 |
% |
|
|
77.2 |
% |
|
|
79.8 |
% |
|
|
73.1 |
% |
|
|
73.9 |
% |
Operating ratio, related to other specified items (2) |
|
|
|
|
|
|
0.2 |
% |
|
|
1.9 |
% |
|
|
|
|
|
|
3.8 |
% |
|
Operating ratio |
|
|
75.4 |
% |
|
|
77.4 |
% |
|
|
81.7 |
% |
|
|
73.1 |
% |
|
|
77.7 |
% |
|
|
(1) Certain comparative period figures have been restated to reflect the retroactive application of a new accounting pronouncement on stock-based compensation
for employees eligible to retire before the vesting date of stock-based awards or have been updated to reflect new information (discussed further in the section
Changes in Accounting Policy).
(2) These earnings measures have no standardized meanings prescribed by Canadian GAAP and, therefore, are unlikely to be comparable to similar measures
of other companies. These earnings measures and other specified items are described in this section of the MD&A.
2006 Annual Report
13
Foreign Exchange Gains
and Losses on Long-term Debt
Foreign exchange gains and losses on long-term debt arise mainly as a result of translating
U.S. dollar-denominated debt into Canadian dollars. We calculate FX on LTD using the difference in
foreign exchange rates at the beginning and at the end of each reporting period. They are mainly
unrealized and can only be realized when net U.S. dollar-denominated long-term debt matures or is
settled. Income, before FX on LTD and other specified items, is disclosed in the table above and
excludes FX on LTD from our earnings in order to eliminate the impact of volatile short-term
exchange rate fluctuations. For every $0.01 the Canadian dollar strengthens (or weakens) relative
to the U.S. dollar, the conversion of U.S. dollar-denominated long-term debt to Canadian dollars
creates a pre-tax foreign exchange gain (or loss) of approximately $9 million, net of hedging.
The Company recorded foreign exchange losses on long-term debt in 2006 as the Canadian dollar
exchange rate weakened to $1.1654 relative to the U.S. dollar on December 31, 2006, compared with
$1.1630 on December 31, 2005. There were foreign exchange gains on long-term debt in 2005 and 2004
as the exchange rate of the Canadian dollar relative to the U.S. dollar strengthened on December
31, 2005 and 2004, respectively, compared with the rate on December 31 of the prior years.
Foreign exchange losses on long-term debt were $0.1 million before tax in 2006, while foreign
exchange gains on long-term debt were $44.7 million before tax in 2005, and $94.4 million before
tax in 2004.
In 2005, income tax expense related to FX on LTD capital gains increased because
certain capital losses were no longer available to offset capital gains arising from FX on LTD
(discussed further under the sub-heading Income Taxes in the section Other Income Statement
Items).
Other Specified Items
Other specified items are material transactions that may include, but are not limited to,
restructuring and asset impairment charges, gains and losses on non-routine sales of assets,
unusual income tax adjustments, and other items that do not typify normal business activities.
In 2006, there was one other specified item in net income, as follows:
o |
|
In the second quarter of 2006, the governments of Canada and the provinces of Alberta,
Saskatchewan and Manitoba introduced legislation to reduce corporate income tax rates over
a period of several years. We recorded a future income tax benefit of $176.0 million to
reflect the positive impact of these tax rate reductions on transactions in prior years for
which future taxes will be paid. |
In 2005, other specified items included the following:
o |
|
A new restructuring initiative to reduce management and administrative costs, which
resulted in a special charge of $44.2 million ($28.3 million after tax) in the fourth
quarter of 2005. The restructuring was intended to eliminate more than 400 positions
(discussed further under the sub-heading Restructuring in the section Future Trends,
Commitments and Risks). |
|
o |
|
As a result of a settlement reached in the third quarter of 2005, we recognized a
reduction of $33.9 million ($20.6 million after tax) to a special charge initially taken in
the fourth quarter of 2004 (discussed further under the sub-heading Environmental in the
section Future Trends, Commitments and Risks). As part of the settlement we received $3.6
million in cash and were able to reduce an environmental remediation liability related to
one of our properties by $30.3 million. |
In 2004, other specified items included the following:
o |
|
A special charge of $90.9 million ($55.2 million after tax) taken in 2004 to reflect
the estimated costs required to remediate environmental contamination at a property in the
U.S. (discussed further under the sub-heading Environmental in the section Future
Trends, Commitments and Risks). |
|
o |
|
A favourable adjustment of $19.0 million ($12.4 million after tax) in 2004, reflecting
a reduction of a portion of the labour liability in the special charge we took in 2003. The
labour liability in the special charge in 2003 included original estimates of labour
liabilities to be incurred to restructure our northeastern U.S. operations. In 2004, we
achieved a successful new arrangement with Norfolk Southern Railway that is generating
efficiency improvements to operations in the region. As a result, we did not incur the
expected labour restructuring costs and the liability associated with restructuring our
northeastern U.S. operations was reversed. |
Lines of Business
Volumes
Changes in freight volumes generally contribute to a corresponding change in revenues and
certain variable expenses, such as fuel, equipment rents and crew costs.
Volumes in 2006 as measured by total carloads, decreased by 58,100, or 2 %, and total revenue
ton-miles (RTM) decreased by 2,429 million, or 2 %, compared with 2005. In 2005, total carloads
decreased by 22,600, or 1 %, while total RTMs increased by 1,676 million, or 1 %, compared with
2004.
The decline in carloads in 2006 compared with 2005 was due to both the sale of our Latta
subdivision (discussed further in the section Future Trends, Commitments
14
2006 Annual Report
and Risks) and the Nickel Spur, which reduced our carloads by 45,000 loads in 2006 (67,000 on an
annual basis), as well as a decline in coal carloads due to decreased shipments by our primary coal
customer.
With regard to RTMs in 2006 compared to 2005, a 16 % increase in grain RTMs due to the
strong export market for these products, was more than offset by RTM decreases of 18 %, 13 % and 11
% in coal, sulphur and fertilizers, and forest products, respectively
(discussed further in the Freight Revenue section). The sale of our Latta subdivision and the
Nickel Spur had a lesser impact on RTMs than on carloads, as traffic on both lines was short-haul
in nature.
Volumes increased in the grain and industrial and consumer products lines of business in 2005,
compared with 2004. Grain volumes were up due to increased crop size and strong export demand.
Volumes of industrial and consumer products increased due to
strong demand for steel, chemical and energy products, and aggregates. We also obtained more
longer-haul business, which resulted in an increase in RTMs. Overall, carloads were reduced as a
result of initiatives to increase high-margin, long-haul traffic and reduce low-margin, short-haul
traffic. The introduction in 2005 of additional high-capacity freight cars also resulted in fewer
carloads being required to move an equal amount of freight tonnage.
Volumes
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 (unaudited) |
|
2006 |
|
|
2005 |
(1) |
|
2004 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carloads (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
382.8 |
|
|
|
338.7 |
|
|
|
321.2 |
|
Coal |
|
|
281.7 |
|
|
|
352.3 |
|
|
|
395.2 |
|
Sulphur and fertilizers |
|
|
178.3 |
|
|
|
201.8 |
|
|
|
211.8 |
|
Forest products |
|
|
135.0 |
|
|
|
153.7 |
|
|
|
160.3 |
|
Industrial and consumer products |
|
|
316.0 |
|
|
|
322.2 |
|
|
|
319.0 |
|
Automotive |
|
|
165.3 |
|
|
|
168.1 |
|
|
|
171.7 |
|
Intermodal |
|
|
1,159.0 |
|
|
|
1,139.4 |
|
|
|
1,119.6 |
|
|
Total carloads |
|
|
2,618.1 |
|
|
|
2,676.2 |
|
|
|
2,698.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue ton-miles (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
30,127 |
|
|
|
26,081 |
|
|
|
23,805 |
|
Coal |
|
|
19,650 |
|
|
|
23,833 |
|
|
|
25,241 |
|
Sulphur and fertilizers |
|
|
17,401 |
|
|
|
20,080 |
|
|
|
20,418 |
|
Forest products |
|
|
8,841 |
|
|
|
9,953 |
|
|
|
10,557 |
|
Industrial and consumer products |
|
|
16,844 |
|
|
|
15,936 |
|
|
|
15,566 |
|
Automotive |
|
|
2,450 |
|
|
|
2,361 |
|
|
|
2,291 |
|
Intermodal |
|
|
27,561 |
|
|
|
27,059 |
|
|
|
25,749 |
|
|
Total revenue ton-miles |
|
|
122,874 |
|
|
|
125,303 |
|
|
|
123,627 |
|
|
|
(1) Certain prior period figures have been reclassified to conform with presentation adopted in 2006.
2006 Annual Report
15
Revenues
Our revenues are derived primarily from transporting freight. Other revenues are generated
mainly from leasing of certain assets, switching fees, land sales and income from business
partnerships.
At December 31, 2006, one customer comprised 11.5 % of total revenues and 5.6 % of total accounts
receivable. At December 31, 2005 and 2004, the same customer comprised 14.5 % and 11.7 % of total
revenues and 8.0 % and 12.4 % of total accounts receivable, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 (in millions) (unaudited) |
|
2006 |
|
|
2005 |
(1) |
|
2004 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
$ |
904.6 |
|
|
$ |
754.5 |
|
|
$ |
668.2 |
|
Coal |
|
|
592.0 |
|
|
|
728.8 |
|
|
|
530.3 |
|
Sulphur and fertilizers |
|
|
439.3 |
|
|
|
447.1 |
|
|
|
460.0 |
|
Forest products |
|
|
316.4 |
|
|
|
333.9 |
|
|
|
322.0 |
|
Industrial and consumer products |
|
|
603.8 |
|
|
|
542.9 |
|
|
|
481.4 |
|
Automotive |
|
|
314.4 |
|
|
|
298.0 |
|
|
|
288.5 |
|
Intermodal |
|
|
1,256.8 |
|
|
|
1,161.1 |
|
|
|
1,034.7 |
|
|
Total freight revenues |
|
$ |
4,427.3 |
|
|
$ |
4,266.3 |
|
|
$ |
3,785.1 |
|
|
Other revenues |
|
|
155.9 |
|
|
|
125.3 |
|
|
|
117.8 |
|
|
Total revenues |
|
$ |
4,583.2 |
|
|
$ |
4,391.6 |
|
|
$ |
3,902.9 |
|
|
|
(1) Certain prior period figures have been reclassified to conform with presentation adopted in 2006.
Freight Revenues
Freight revenues are earned from transporting bulk, merchandise and intermodal goods, and
include fuel surcharges billed to our customers. Freight revenues were $4,427.3 million in 2006, an
increase of $161.0 million, or 4 %, from 2005. Freight revenues were $4,266.3 million in 2005, an
increase of $481.2 million, or 13 %, from $3,785.1 million in 2004.
Revenue increase in grain, industrial and consumer products, automotive and intermodal more than
offset reductions in coal, sulphur and fertilizers and forest products in 2006, compared with 2005.
Freight revenues in 2006, compared with 2005, increased mainly due to:
o |
|
higher freight rates, including fuel surcharges; |
|
o |
|
strong growth in grain shipments; and |
|
o |
|
strong growth in the Alberta economy. |
This increase was partially offset by the negative impact on freight revenues of approximately $113
million due to the change in Foreign Exchange and reduced coal volume.
Freight revenues in 2005, compared with 2004, increased mainly due to:
o |
|
higher freight rates, including fuel surcharges; |
|
o |
|
our initiatives to increase high-margin, long-haul traffic and reduce low-margin, short-haul traffic; and |
|
o |
|
revenue recorded as a result of an agreement reached with EVC, which related to the
prior year (discussed further in this section under the sub-heading Coal). |
These 2005 increases were partially offset by the negative impact on freight revenues of
approximately $118 million due to the change in Foreign Exchange.
Fuel surcharge is adjusted to respond to fluctuations in fuel price for West Texas
Intermediate (WTI), heating oil, and the retail and wholesale price of diesel for vehicles. Fuel
surcharges contributed to revenue growth in 2006
and 2005 in a majority of our business lines. In 2006 and 2005, we recovered a significant portion
of our fuel cost increase through fuel surcharge revenues, which are included in freight revenues.
Grain
Canadian grain products, consisting mainly of durum, spring wheat, barley, canola, flax, rye
and oats, are primarily transported to Canadian and U.S. markets for domestic consumption and to
ports for export. U.S. grain products mainly include durum, spring wheat, corn, soybeans and barley
and are shipped from the midwestern U.S. to other points in the Midwest, the Pacific Northwest and
the northeastern U.S. Grain revenues in 2006 were $904.6 million, an increase of $150.1 million
from 2005. Grain revenues of $754.5 million in 2005 were up $86.3 million from $668.2 million in
2004.
16
2006 Annual Report
Grain revenues increased in 2006, compared with 2005, due to:
o |
|
a strong Canadian grain crop reflecting improved quality; |
|
o |
|
a large carryover from the 2005/06 crop year; |
|
o |
|
increased shipments of western Canadian grain to the United States as a result of a trade tariff being lifted; and |
|
o |
|
higher freight rates. |
Increases in grain revenues were partially offset by the negative impact of the change in Foreign
Exchange.
Grain revenues increased in 2005, compared with 2004, due to:
o |
|
higher freight rates, including fuel surcharges; |
|
o |
|
higher volumes as a result of a larger harvest in 2005 than in 2004; and |
|
o |
|
increased export volumes from both Canada and the U.S. due to strong worldwide demand
for grain and operational improvements that increased car availability to the U.S. Pacific Northwest. |
Increases in grain revenues were partially offset by the negative impact of the change in Foreign
Exchange.
Coal
Our Canadian coal business consists primarily of metallurgical coal transported from
southeastern British Columbia (B.C.) to the ports of Vancouver and Thunder Bay, Ontario, and to
the U.S. Midwest. Our U.S. coal business consists primarily of the transportation of thermal coal
and petroleum coke within the U.S. Midwest. In 2006, coal revenues were $592.0 million, a decrease
of $136.8 million from 2005. Coal revenues were $728.8 million in 2005, up $198.5 million from
$530.3 million in 2004.
The decline in coal revenues in 2006 was due to reduced export coal sales volumes by our primary
coal customer and to the
sale of our Latta subdivision. The decline also reflected a one-time positive adjustment of $23
million in 2005 for services provided to our main coal customer in 2004. Additionally, the sale of
the Latta subdivision resulted in a decline of 23,000 carloads of U.S. coal in 2006 (representing
approximately 40,000 carloads on an annual basis).
In 2005, compared with 2004, coal revenues increased due to:
o |
|
higher freight rates; |
|
o |
|
revenues recorded as a result of the agreement reached with EVC, which related to the prior year; and |
|
o |
|
business from new U.S. customers, which replaced certain low-margin, short-haul traffic. |
These increases were partially offset by:
o |
|
initiatives to increase high-margin, long-haul traffic and reduce low-margin,
short-haul traffic, which resulted in lower U.S. volumes and a minor decrease in U.S.
revenues; |
|
o |
|
a decrease in coal transported to the Port of Vancouver as a result of a customers decline in sales; and |
|
o |
|
a decrease in Canadian coal transported to the U.S. Midwest due to a steel mill shutdown. |
In the first quarter of 2005, we reached a new agreement with our main coal customer, EVC. Coal
revenues reported for 2005 included retroactive amounts owed to us under the agreement, which
included increased rates and minimum volumes to be transported. Revenues of approximately $23
million in 2005 are attributable to services provided to EVC in 2004, primarily as a result of the
agreement.
Sulphur and Fertilizers
Sulphur and fertilizers include potash, chemical fertilizers and sulphur shipped mainly from
western Canada to the ports of Vancouver, B.C., and Portland, Oregon, and to other Canadian and
U.S. destinations.
Revenues were $439.3 million in 2006, a decrease of $7.8 million from 2005. Revenues were $447.1
million in 2005, down $12.9 million from $460.0 million in 2004.
The decline in revenues in 2006, compared with 2005, was due predominantly to the protracted global
potash price negotiations which delayed the start of the shipping year until early in the third
quarter of 2006 and the negative impact of the change in Foreign Exchange. Volumes rebounded
following the completion of the negotiations; however, sulphur and fertilizers ended the year down
23,500 carloads from 2005 volumes.
Revenues decreased in 2005, compared with 2004, due to:
o |
|
reduced domestic shipments of potash as a result of lower producer inventories in 2005; |
|
o |
|
lower domestic shipments of potash in 2005 as a result of high potash prices and reduced farm demand for fertilizers; and |
|
o |
|
the negative impact of the change in Foreign Exchange. |
These decreases in 2005 were partially offset by higher freight rates and increased export potash
shipments, driven by greater demand in China and other Asian markets in 2005.
Forest Products
Forest products include lumber, wood pulp, paper products and panel transported from key
producing areas in western Canada, Ontario and Quebec to various destinations in North America.
Forest products revenues were $316.4 million in 2006, a decrease of $17.5 million from 2005.
Revenues were $333.9 million in 2005, up $11.9 million from $322.0 million in 2004.
Revenues declined in 2006, compared with 2005, due to:
o |
|
reduced volumes from a softening demand for lumber and panel caused by a decrease in
U.S. housing starts; |
2006 Annual Report
17
o |
|
difficult market conditions for our forest product customers caused by a strong
Canadian dollar and softwood lumber trade negotiations which have led to reduced volumes
and extended plant shut downs; and |
|
o |
|
the negative impact of the change in Foreign Exchange. |
Offsetting these factors was our strong yield and pricing, which softened the impact from the
volume decline.
Revenues increased in 2005, compared with 2004, as higher freight rates, including fuel surcharges,
more than offset the negative impact of the change in Foreign Exchange and lower volumes resulting
from our initiatives to increase high-margin, long-haul traffic and reduce low-margin, short-haul
traffic.
Industrial and Consumer Products
Industrial and consumer products include chemicals, plastics, aggregates, steel, and mine and
energy-related products (other than coal) shipped throughout North America. In 2006, industrial and
consumer products revenues were $603.8 million, an increase of $60.9 million from 2005. Revenues
were $542.9 million in 2005, up $61.5 million from $481.4 million in 2004.
The increase in 2006 revenues, compared with 2005, was due to:
o |
|
strong demand for steel, energy products and aggregates, largely driven by Alberta oil and gas activity and a strong Alberta economy; |
|
o |
|
strong worldwide demand for base metals; and |
|
o |
|
increased freight rates. |
The higher revenues were partially offset by the negative impact of the change in Foreign Exchange.
Industrial and consumer products revenues increased in 2005, compared with 2004, as a result of
higher freight rates, including fuel surcharges, and greater demand for steel, chemicals and energy
and construction
products, driven by economic expansion. The higher revenues were partially offset by the negative
impact of the change in Foreign Exchange and lower volumes resulting from reduced demand for
plastics in 2005. Also, revenues for food and consumer products were reclassified to industrial and
consumer products from intermodal (discussed further in this section under the sub-heading
Intermodal).
Automotive
Automotive consists primarily of the transportation of domestic and import vehicles as well as
automotive parts from North American assembly plants and the Port of Vancouver to destinations in
Canada and the U.S. In 2006, automotive revenues were $314.4 million, an increase of $16.4 million
from 2005. Automotive revenues were $298.0 million in 2005, up $9.5 million from $288.5 million in
2004.
The increase in automotive revenues in 2006, compared with 2005, was primarily due to higher
freight rates and increased volumes of imported vehicles, which created growth in long-haul
traffic. These increases were partially offset by extended plant shutdowns by domestic auto
producers, and the negative impact of the change in Foreign Exchange.
The increase in automotive revenues in 2005, compared with 2004, was primarily due to higher
freight rates, including fuel surcharges, and increased RTMs as a result of strong markets for
import vehicles. These increases were partially offset by the negative impact of the change in
Foreign Exchange.
Intermodal
Intermodal consists of domestic and international (import-export) container traffic. Our
domestic business consists primarily of retail goods moving in containers between eastern and
western Canada, and to and from the U.S. The international business handles containers of mainly
retail goods between the ports of Vancouver, Montreal, New York/New Jersey and Philadelphia and
inland Canadian and U.S. destinations. Intermodal revenues were $1,256.8 million
in 2006, an increase of $95.7 million from 2005. Intermodal revenues were $1,161.1 million in 2005,
up $126.4 million from $1,034.7 million in 2004.
International intermodal revenues increased in 2006, compared with 2005, as a result of higher
freight rates and container volume growth at the ports of Vancouver and Montreal driven by strong
global trade. Revenue growth in domestic intermodal was due to increased freight rates, volume and
long-haul traffic. These increases were partially offset by an extended strike at a facility at the
Port of Philadelphia as well as the negative impact of the change in Foreign Exchange.
Growth in our international intermodal revenues in 2005, compared with 2004, resulted from:
o |
|
increased freight rates, including fuel surcharges; |
|
o |
|
higher volumes at the Port of Vancouver driven by strong global trade; and |
|
o |
|
an increase in rates charged for the return of empty containers to port. |
Domestic intermodal revenue growth in 2005 was due to increased freight rates, including fuel surcharges, partially offset by:
o |
|
lower volumes compared with 2004 when a strike at a competing railway caused an increase in volumes for CP; and |
|
o |
|
reduced volumes and revenues due to the elimination of our Expressway trailer-on-flatcar service between Toronto and Detroit. |
Increases in all intermodal revenues were partially offset by the negative impact of the change in
Foreign Exchange.
The food and consumer portfolio consists of miscellaneous products, including sugar, meat
by-products, railway equipment and building materials moving primarily from western Canada to
various destinations in the U.S. Our food and consumer group has historically been reported as part
of the intermodal business line. However, changes in our market made it more appropriate to
18
2006 Annual Report
include this group with our industrial and consumer products business line, beginning in 2005. As a
result, revenues of $52.4 million and $51.2 million were reclassified from intermodal revenues to
industrial and consumer products in 2005 and 2004, respectively. Also, in 2005, revenues from other
intermodal fees and services were reclassified to intermodal from other revenues (discussed further
in this section under the sub-heading Other Revenues).
Other Revenues
Other revenues are generated from leasing certain assets, switching fees, land sales, and
business partnerships. Other revenues in 2006 were $155.9 million, an increase of $30.6 million
from 2005. Other revenues of $125.3 million in 2005 were up $7.5 million from $117.8 million in
2004.
In 2006, compared with 2005, other revenues increased due to a gain of approximately $18 million
realized from the sale of our Latta subdivision (discussed further in the section Future Trends,
Commitments and Risks) and increased land sales, in particular, the sale of a property to a
university in Montreal.
In 2005, compared with 2004, other revenues increased due to:
o |
|
the reclassification in 2005 of certain proceeds from passenger transportation to
Other Revenues from Operating Expenses, Before Other Specified Items; and |
|
o |
|
increased land sale revenues. |
The increase was partially offset by a portion of Other Revenues reclassified to Freight
Revenues as a result of the proportionate consolidation of a business partnership and an
adjustment to leasing revenues.
Other revenues have historically included other intermodal revenues, which are derived mainly from
container storage and terminal service fees. However, it is more appropriate to include these
revenues with the intermodal business line since they are earned through intermodal activity.
Beginning in 2005, other intermodal revenues were reclassified to intermodal revenues. In 2005 and
2004, $62.0 million and $56.3 million, respectively, were reclassified to intermodal revenue from
Other Revenues.
Freight Revenue per Carload
Freight revenue per carload is the amount of freight revenue earned for every carload moved,
calculated by dividing the freight revenue for a commodity by the number of carloads of the
commodity transported in the period. In 2006, total freight revenue per carload increased 6 % from
2005. Total freight revenue per carload in 2005 increased 14 % from 2004.
The increase in 2006 was due to higher freight rates, the impact of the sale of our Latta
subdivision and Nickel Spur, and an increase in the average length of haul. The increases more than
offset the negative impact of the change in Foreign Exchange.
The increase in 2005, compared with 2004, was due to:
o |
|
higher freight rates, including fuel surcharges; |
|
o |
|
the adjustment for the EVC agreement; and |
|
o |
|
a longer average distance of haul. |
These increases more than offset the negative impact of the change in Foreign Exchange.
Freight Revenue per Carload
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 ($) (unaudited) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight revenue per carload |
|
|
1,691 |
|
|
|
1,594 |
|
|
|
1,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
|
2,363 |
|
|
|
2,228 |
|
|
|
2,080 |
|
Coal |
|
|
2,102 |
|
|
|
2,069 |
|
|
|
1,342 |
|
Sulphur and fertilizers |
|
|
2,464 |
|
|
|
2,216 |
|
|
|
2,172 |
|
Forest products |
|
|
2,344 |
|
|
|
2,172 |
|
|
|
2,009 |
|
Industrial and consumer products |
|
|
1,911 |
|
|
|
1,685 |
|
|
|
1,509 |
|
Automotive |
|
|
1,902 |
|
|
|
1,773 |
|
|
|
1,680 |
|
Intermodal |
|
|
1,084 |
|
|
|
1,019 |
|
|
|
924 |
|
|
|
2006 Annual Report
19
Performance Indicators
The indicators listed in this table are key measures of our operating performance. Definitions
of these performance indicators are provided in the Glossary of Terms at the end of this MD&A.
Performance Indicators (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 (unaudited) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Safety indicators (2) |
|
|
|
|
|
|
|
|
|
|
|
|
FRA personal injuries per 200,000 employee-hours |
|
|
2.0 |
|
|
|
2.4 |
|
|
|
2.7 |
|
FRA train accidents per million train-miles |
|
|
1.4 |
|
|
|
2.3 |
|
|
|
2.1 |
|
Efficiency and other indicators |
|
|
|
|
|
|
|
|
|
|
|
|
Gross ton-miles (GTM) of freight (millions) |
|
|
236,405 |
|
|
|
242,100 |
|
|
|
236,451 |
|
Car miles per car day |
|
|
137.3 |
|
|
|
124.0 |
|
|
|
119.0 |
|
U.S. gallons of locomotive fuel consumed per 1,000 GTMs freight and yard |
|
|
1.20 |
|
|
|
1.18 |
|
|
|
1.20 |
|
Terminal dwell (hours) |
|
|
20.8 |
|
|
|
25.8 |
|
|
|
24.9 |
|
Average train speed (miles per hour) |
|
|
24.8 |
|
|
|
22.0 |
|
|
|
22.7 |
|
Number of active employees end of period |
|
|
15,327 |
|
|
|
16,295 |
|
|
|
15,637 |
|
Freight revenue per RTM (cents) |
|
|
3.60 |
|
|
|
3.40 |
|
|
|
3.06 |
|
|
|
(1) Train-miles, average train weights, and miles of road operated at the end of the period are no
longer reported as we no longer consider these to be the main drivers for managing our operating costs.
(2) Certain prior period figures have been restated to conform with current presentation or have been updated
to reflect new information.
Safety Indicators
Safety is a key priority for our management and Board of Directors. Our two main safety
indicators personal injuries and train accidents follow strict U.S. Federal Railroad
Administration (FRA) reporting guidelines.
o |
|
The FRA personal injury rate per 200,000 employee-hours in 2006 was 2.0, a 17 %
improvement compared with 2005 and a 26 % improvement compared with 2004. Our safety
management processes are designed to provide a continuous and consistent focus on improving
safety. |
|
o |
|
The FRA train accident rate in 2006 was 1.4 accidents per million train-miles, a 39 %
improvement compared with 2005 and a 33 % improvement compared with 2004. |
Efficiency and Other Indicators
o |
|
Terminal dwell, the average time a freight car resides in a terminal, decreased 19 %
in 2006, compared with 2005. The improvement in 2006 |
|
|
was largely due to better processes within our yards and providing seven-day-a-week outlets
for all our traffic which minimized the number of times freight cars are handled. Reducing
the time freight cars spend waiting in terminals also enabled us to decrease our fleet of
cars used with total cars on line falling 6 % in 2006. Terminal dwell in 2005 increased 4 %
compared with 2004, due in part to a major track capacity expansion program in our western
corridor. |
|
o |
|
GTMs declined 2 % in 2006, compared with 2005. The decrease in 2006 was mainly due to
lower coal and potash volumes partially offset by higher grain volume. GTMs increased 2 %
in 2005 compared with 2004. The increase was mainly due to higher grain and industrial and
consumer products volumes partially offset by lower coal volume. Fluctuations in GTMs
normally drive fluctuations in certain variable costs, such as fuel and crew costs. |
o |
|
Car miles per car day increased 11 % in 2006, compared with 2005, and increased 5 % in
2005, compared with 2004. The improvement in both years was due to the success of changes
to our IOP, which resulted in the more efficient movement of traffic over our network, and a
reduction in the size of our freight car fleet. |
|
o |
|
U.S. gallons of locomotive fuel consumed per 1,000 GTMs in both freight and yard
activity increased 2 % in 2006, compared with 2005. This was due to transporting more
non-bulk traffic which is less fuel efficient to move. The increases were partially offset
by increased utilization of fuel-efficient locomotives, improved execution of our IOP and
successful fuel-conservation efforts (discussed under the sub-heading Crude Oil Prices in
the section Future Trends, Commitments and Risks). Mild winter weather at the start of
2006 also helped to reduce fuel consumption. A 2 % improvement in 2005, compared with 2004,
was the result of utilizing additional fuel-efficient |
20
2006 Annual Report
|
|
locomotives, improved IOP design and execution and fuel conservation efforts. |
|
o |
|
Average train speed increased 13 % in 2006, compared with 2005. Trains moved at faster
speeds for longer distances as a result of our expanded track capacity in western Canada,
adhering to our IOP, and co-production agreements with other railroads that allow us to
move trains more efficiently. Train speed also increased as a result of transporting less
bulk volumes, which move in heavy trains that travel more slowly. Average train speed in
2005 decreased 3 % compared with 2004, which was largely due to the large construction
program in our western corridor to expand our capacity. |
o |
|
The number of active employees at December 31, 2006 decreased 6 % compared with the
number at December 31, 2005. The decrease was due mainly to job reductions made under
restructuring initiatives (discussed under the sub-heading Restructuring in the section
Future Trends, Commitments and Risks) and fewer capital project employees. Approximately
6 % of employees were assigned to capital projects at December 31, 2006, compared with 9 %
at December 31, 2005. |
|
|
|
Our year-end number of active employees increased 4 % in 2005, compared with 2004. Additional
employees were hired to handle business growth and increased |
|
|
capital program work undertaken in 2005, including a major track expansion of our western
corridor. This hiring more than offset job reductions under restructuring initiatives. |
|
o |
|
Freight revenue per RTM increased 6 % in 2006, compared with 2005. The increase was due
to higher freight rates, partially offset by the negative impact of the change in Foreign
Exchange. Freight revenue per RTM increased 11 % in 2005, compared with 2004, primarily due
to increases in freight rates and fuel surcharge revenues. These increases were partially
offset by the negative impact of the change in Foreign Exchange. |
Operating Expenses, Before Other Specified Items
Operating Expenses, Before Other Specified Items (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 |
|
2006 |
|
|
2005 (2) |
|
|
2004 (2) |
|
(in millions) (unaudited) |
|
Expense |
|
|
% of revenue |
|
|
Expense |
|
|
% of revenue |
|
|
Expense |
|
|
% of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
$ |
1,327.6 |
|
|
|
29.0 |
|
|
$ |
1,322.1 |
|
|
|
30.1 |
|
|
$ |
1,261.5 |
|
|
|
32.3 |
|
Fuel |
|
|
650.5 |
|
|
|
14.2 |
|
|
|
588.0 |
|
|
|
13.4 |
|
|
|
440.0 |
|
|
|
11.3 |
|
Materials |
|
|
212.9 |
|
|
|
4.6 |
|
|
|
203.3 |
|
|
|
4.6 |
|
|
|
178.5 |
|
|
|
4.6 |
|
Equipment rents |
|
|
181.2 |
|
|
|
4.0 |
|
|
|
210.0 |
|
|
|
4.8 |
|
|
|
218.5 |
|
|
|
5.6 |
|
Depreciation and amortization |
|
|
464.1 |
|
|
|
10.1 |
|
|
|
445.1 |
|
|
|
10.1 |
|
|
|
407.1 |
|
|
|
10.4 |
|
Purchased services and other |
|
|
618.3 |
|
|
|
13.5 |
|
|
|
621.6 |
|
|
|
14.2 |
|
|
|
610.7 |
|
|
|
15.6 |
|
|
Total |
|
$ |
3,454.6 |
|
|
|
75.4 |
|
|
$ |
3,390.1 |
|
|
|
77.2 |
|
|
$ |
3,116.3 |
|
|
|
79.8 |
|
|
|
(1) These earnings measures have no standardized meanings prescribed by Canadian GAAP and, therefore, are
unlikely to be comparable to similar measures of other companies. These earnings measures and other
specified items are described in the section Non-GAAP Earnings.
(2) Certain comparative period figures have been restated for retroactive application of a new accounting
pronouncement on stock-based compensation for employees eligible to retire before the vesting date of
stock-based awards or have been updated to reflect new information (discussed further in the section
Changes in Accounting Policy).
Operating expenses, before other specified items were $3,454.6 million in 2006, up $64.5
million, or 2 % from 2005. These expenses were $3,390.1 million in 2005, an increase of $273.8
million, or 9 %, from $3,116.3 in 2004.
Operating expenses in 2006, compared with 2005, were higher due primarily to:
o |
|
increased price of materials used for freight car repairs, primarily related to the replacement of wheel sets, and train servicing; and |
|
o |
|
increased depreciation and amortization expense. |
These increases were partially offset by improved operating efficiencies, cost-containment
initiatives, lower GTMs, and the positive impact of the change in
Foreign Exchange. The change in Foreign Exchange reduced operating expenses by approximately $86
million. In addition, the higher fuel costs were largely recovered in revenue through fuel
surcharges and through the benefits of hedging.
In 2005, compared with 2004, operating expenses increased due largely to:
o |
|
higher fuel, depreciation and amortization, and compensation and benefits costs; |
2006 Annual Report
21
o |
|
increased GTMs; and |
|
o |
|
the effect of inflation. |
These factors were partially offset by a favourable Foreign Exchange impact of approximately $85
million in 2005.
Compensation and Benefits
Compensation and benefits expense includes employee wages, salaries and fringe benefits. In
2006, compensation and benefits expense was $1,327.6 million, an increase of $5.5 million from
2005. Compensation and benefits expense was $1,322.1 million in 2005, an increase of $60.6 million
from $1,261.5 million in 2004.
In 2006, compared with 2005, compensation and benefits expense increased as a result of inflation,
higher pension expenses, and higher stock-based compensation costs prior to the implementation in
the second quarter of 2006 of our Total Return Swap Program (discussed further in the sub-heading
Total Return Swap in the Section Financial Instruments). These increases were mostly offset by:
o |
|
reduced costs as a result of restructuring initiatives (discussed further under the
sub-heading Restructuring in the section Future Trends, Commitments and Risks); |
|
o |
|
savings realized from efficiencies gained through our IOP (discussed further under the
sub-heading Integrated Operating Plan in the section Future Trends, Commitments and
Risks) as well as other productivity improvements; |
|
o |
|
reduced costs as a result of lower freight volumes; and |
|
o |
|
the positive impact of the change in Foreign Exchange. |
Compensation and benefits expense increased in 2005, compared with 2004, due to:
o |
|
higher costs associated with employee incentive compensation, due largely to increased share prices affecting stock-based compensation; |
o |
|
the impact of inflation; |
|
o |
|
selective hiring to handle increased freight volumes; and |
|
o |
|
increased pension costs. |
The increase in 2005 was partially offset by lower expenses resulting from restructuring
initiatives and the positive impact of the change in Foreign Exchange.
Fuel
Fuel expense consists of the cost of fuel used by locomotives and includes provincial, state
and federal fuel taxes and the impact of our hedging program. In 2006, fuel expense was $650.5
million, an increase of $62.5 million from 2005. Fuel expense was $588.0 million in 2005, up $148.0
million from $440.0 million in 2004.
Fuel expense in 2006, compared with 2005, increased due to higher crude oil prices and refining
charges, and an unfavourable change in our fuel consumption rate due to a higher proportion of
non-bulk freight traffic. These increases were partially offset by:
o |
|
favourable settlement of prior period recoveries including a fuel excise tax refund; |
|
o |
|
reduced workload; and |
|
o |
|
the positive impact of the change in Foreign Exchange. |
Fuel expense increased in 2005, compared with 2004, as a result of higher crude oil prices and
refining charges, business growth, and fuel tax refunds received in 2004. These increases in fuel
expense were partially offset by the positive impact of the change in Foreign Exchange, our fuel
hedging program and fuel conservation measures.
Fuel price increases are also mitigated by our fuel surcharge program (discussed further under the
sub-heading Freight Revenues in the section Lines of Business).
Materials
Materials expense includes the cost of materials used for track, locomotive, freight car, and
building maintenance. This expense was $212.9 million in 2006, an increase of $9.6 million from
2005. Materials expense was $203.3 million in 2005, up $24.8 million from $178.5 million in 2004.
The increase in 2006, compared with 2005, was due mainly to the higher cost of materials for
freight car repairs, primarily driven by price increases for replacement of wheel sets and other
freight car materials, and train servicing. The increase was partially offset by the positive
impact of the change in Foreign Exchange.
Materials expense increased in 2005, compared with 2004, due to:
o |
|
increased wheel replacements on freight cars, as well as higher consumption of other materials used to repair and service freight cars; |
|
o |
|
higher gasoline and heating costs; and |
|
o |
|
recoveries received from a supplier in 2004. |
These increases were partially offset by the positive impact of the change in Foreign Exchange.
Equipment Rents
Equipment rents expense includes the cost to lease freight cars, intermodal equipment and
locomotives from other companies, including railways. In 2006, equipment rents expense was $181.2
million, a decrease of $28.8 million from 2005. Equipment rents expense was $210.0 million in 2005,
down $8.5 million from $218.5 million in 2004.
The decrease in 2006, compared with 2005, was due mainly to more efficient movement of traffic over
our network which reduced the number of cars on line, resulting in lower equipment rental payments
to other railways and reduced locomotive lease costs. Higher
22
2006 Annual Report
charges to customers for loading and unloading delays and the positive impact of the change in
Foreign Exchange also contributed to the decrease in 2006.
The decrease in 2006 was partially offset by favourable adjustments in 2005 for freight car rentals
pertaining to prior periods.
Equipment rents expense decreased in 2005, compared with 2004, due mainly to:
o |
|
increased charges to customers for loading and unloading delays; |
|
o |
|
lower payments to other railways for the use of their freight cars, due to more efficient movement of traffic on our network; |
|
o |
|
favourable adjustments in 2005 for freight car rentals pertaining to prior periods; and |
|
o |
|
the positive impact of the change in Foreign Exchange. |
These decreases were partially offset by increased lease costs paid to equipment leasing companies
as a result of higher lease rates and our need for additional locomotives and freight cars to
handle business growth.
Depreciation and Amortization
Depreciation and amortization expense represents the charge associated with the use of track
and roadway, buildings, locomotives, freight cars and other depreciable assets. This expense was
$464.1 million in 2006, an increase of $19.0 million from 2005. Depreciation and amortization
expense of $445.1 million in 2005 was up $38.0 million from $407.1 million in 2004.
The increase in 2006, compared with 2005, was due largely to additions to capital assets for track
and locomotives, which was partially offset by asset retirements.
Expenses were higher in 2005, compared with 2004, was due largely to additions to our capital
assets and higher depreciation rates on certain maintenance equipment.
These increases were partially mitigated by the positive impact of the change in Foreign Exchange
and the retirement of assets.
Purchased Services and Other
Purchased services and other expense encompasses a wide range of costs, including expenses for
joint facilities, personal injury and damage, environmental remediation, property and other taxes,
contractor and consulting fees, and insurance. Purchased services and other expense was $618.3
million in 2006, a decrease of $3.3 million from 2005 and was $621.6 million in 2005, up $10.9
million from $610.7 million in 2004.
The decrease in 2006 was due largely to lower joint-facility and inter-railway expenditures
resulting mainly from our co-production initiatives, adherence to our IOP which reduced crew
transportation costs, and the positive impact of the change in Foreign Exchange. The decreases were
partially offset by higher building maintenance expenses and contract locomotive servicing costs.
Purchased services and other expense increased in 2005, compared with 2004, due to:
o |
|
higher outsourced maintenance costs as a result of an increase in the volume of work; |
|
o |
|
higher contractor and consulting fees, mainly for strategic and regulatory initiatives; |
|
o |
|
certain proceeds from passenger train operators, which are now reflected in Other Revenues; and |
|
o |
|
reduced overhead costs allocated to capital projects. |
These increases in purchased services and other expense in 2005 were partially offset by:
o |
|
lower costs associated with derailments, mishaps and personal injuries; |
|
o |
|
lower joint-facility and inter-railway expenditures; and |
o |
|
the positive impact of the change in Foreign Exchange. |
Other Income Statement Items
Other Charges
Other charges consist of amortization of the discounted portion of certain long-term accruals,
gains and losses due to the impact of the change in Foreign Exchange on working capital, various
costs related to financing, gains and losses associated with changes in the fair value of
non-hedging derivative instruments, and other non-operating expenditures. Other charges were $27.8
million in 2006, an increase of $9.7 million from 2005. Other charges were $18.1 million in 2005, a
decrease of $18.0 million from $36.1 million in 2004.
The increase in 2006 compared with 2005 was due mainly to the negative impact of the change in
Foreign Exchange on working capital balances in 2006, and lower realized gains on non-hedge
derivative instruments.
The decrease in 2005, compared with 2004, was mainly due to the positive impact of the change in
Foreign Exchange on working capital balances and a gain realized when non-hedge interest rate locks
were settled in 2005. These reductions were partially offset by a gain recorded in 2004 on the
settlement of our $105-million cross-currency fixed-to-floating interest rate swap agreements and a
2004 adjustment of an accrued liability.
Interest Expense
Interest expense includes interest on long-term debt and capital leases, net of interest
income. Interest expense was $194.5 million in 2006, a decrease of $9.7 million from 2005. Interest
expense was $204.2 million in 2005, a decrease of $14.4 million from $218.6 million in 2004.
Interest expense in 2006, compared with 2005, decreased due to the positive impact of the change in
Foreign Exchange and the
2006 Annual Report
23
retirement of $250-million Medium Term Notes in June 2005 (discussed further under the sub-heading
Financing Activities in the section Liquidity and Capital Resources). The improvements were
partially offset by higher interest charges on variable-interest rate debt tied to the London
Interbank Offered Rate (LIBOR), which increased relative to the comparable period.
Interest expense decreased in 2005, compared with 2004, due to the positive impact of the change in
Foreign Exchange and the retirement of the $250-million Medium Term Notes in June 2005. These
decreases were partially offset by an increase in interest from variable-interest debt, primarily
as a result of an increase in the LIBOR.
Income Taxes
Income tax expense in 2006 was $109.9 million, a decrease of $160.7 million from 2005. Income
tax expense was $270.6 million in 2005, an increase of $127.3 million from $143.3 million in 2004.
The reduction in tax expense in 2006, compared with 2005, was mainly due to a positive adjustment
of $176.0 million taken in the second quarter of 2006, partially offset by an increase in taxes as
a result of higher income. Income tax expense increased in 2005, compared with 2004, mainly due to
higher income.
The effective income tax rate for 2006 was 12.1 %, compared with 33.3 % for 2005, and 25.9 % for
2004. The normalized rates (income tax rate based on income adjusted for FX on LTD and other
specified items) for 2006, 2005 and 2004 were 30.8 %, 32.2 % and 32.4 %, respectively. The
reduction in our effective income tax rate in 2006 is due to changes in Canadian federal and
provincial corporate income tax rates and tax planning initiatives.
The governments of Canada and the provinces of Alberta, Saskatchewan and Manitoba have
substantively enacted legislation to reduce corporate income tax rates over a period of several
years. In the second quarter of 2006, we recorded a future income tax benefit of $176.0 million to
reflect the favourable impact of these tax rate reductions on transactions in prior years for which
future taxes will be paid.
In recent years, we have utilized non-capital tax loss carryforwards to offset current taxable
income. We anticipate that these non-capital tax loss carryforwards will be exhausted during 2007
and we will have an increase in our cash tax payments in future years.
Beginning in the fourth quarter of 2005, certain capital losses were no longer available to offset
capital gains arising from FX on LTD and other capital transactions. Following a review of
impending transactions during third-quarter 2005, we concluded that our remaining unrecognized
capital loss carryforwards for tax would more than likely be utilized. Consequently, we recorded a
future tax asset for all previously unrecognized capital loss carryforwards. As a result, any
future capital gains recorded, including FX on LTD, will be taxable, where historically they had
resulted in no net tax expense.
Also, as a result of this review, the income tax associated with FX on LTD increased by $7.2
million in 2006 (2005 $5.1 million). The income tax expense, before income tax on FX on LTD,
which is a non-GAAP measure (discussed further in the section Non-GAAP Earnings), was reduced in
2006 by the same amount. This reclassification moves previously recognized capital losses that
historically were allocated to unrealized FX on LTD gains and includes them in the calculation of
income tax for other realized capital transactions, which are included in income tax expense before
income tax on FX on LTD. With this reclassification, the tax benefit of these losses is matched to
the transactions that utilize them.
Fourth-quarter Summary
Operating Results
In the fourth quarter of 2006, GTMs were 62,190 million and RTMs were 32,055 million, which is
comparable to the volumes in the same period of 2005. We reported net income of $145.6 million in
the fourth quarter of 2006, an increase of $8.5 million from $137.1 million in the same period of
2005. Operating income for the three-month period ended December 31, 2006, was $320.1 million, an
increase of $60.1 million from $260.0 million in the same period in 2005. The increases in net and
operating income were mainly due to:
o |
|
higher revenues from increased freight rates (discussed in this section under the
sub-heading Revenues); |
|
o |
|
cost-reduction programs, stemming in particular from operational benefits produced by
our IOP and reductions in management and administrative staff (discussed under the
sub-headings Integrated Operating Plan and Restructuring in the section Future Trends,
Commitments and Risks); and |
|
o |
|
benefits of co-production initiatives. |
These increases were partially offset by:
o |
|
higher costs for fuel and depreciation and amortization (discussed in this section under the sub-heading Operating Expenses, Before Other Specified Items); |
|
o |
|
reduced volumes for coal; and |
|
o |
|
the negative impact of the change in Foreign Exchange. |
Diluted EPS was $0.92 in the fourth quarter of 2006, an increase of $0.06 from $0.86 in the same
period of 2005.
Non-GAAP Earnings
A discussion of non-GAAP earnings and a reconciliation of income, before FX on LTD and other
specified items, to net income
24
2006 Annual Report
as presented in the financial statements for the fourth quarters of 2006 and 2005, is included in
the section Non-GAAP Earnings.
Income, before FX on LTD and other specified items, was $181.0 million in the fourth quarter of
2006, an increase of $10.5 million from $170.5 million in fourth-quarter 2005. The increase was due
to higher revenues as a result of increased freight rates and lower equipment rent expenses,
partially offset by an increase in fuel, depreciation and amortization, and purchased services and
other expenses (discussed in this section under the sub-headings Revenues and Operating
Expenses, Before Other Specified Items).
Revenues
Total revenues were $1,190.4 million in fourth-quarter 2006, an increase of $23.5 million from
$1,166.9 million in fourth-quarter 2005.
Grain
Grain revenues in the fourth quarter of 2006 were $261.6 million, an increase of $37.0 million
from $224.6 million in the same period of 2005. Driving this increase was a strong Canadian grain
crop reflecting improved quality, increased shipment of western Canadian grain to the U.S. as a
result of a trade tariff being lifted and higher freight rates. These increases were partially
offset by the negative impact of the change in Foreign Exchange.
Coal
Coal revenues were $149.3 million in fourth-quarter 2006, a decrease of $29.3 million from
$178.6 million in the same period of 2005. The decrease in revenues was due largely to reduced
export coal sales by our primary coal customer as well as the sale of our Latta subdivision.
Sulphur and Fertilizers
Sulphur and fertilizers revenues were $122.0 million in the fourth quarter of 2006, an increase
of $19.4 million from $102.6 million in fourth-quarter 2005. The increase reflected the settlement
of protracted global price negotiations between buyers and sellers of export potash which
significantly delayed shipments until the third and fourth quarters of 2006.
Forest Products
Forest products revenues were $71.2 million in the fourth quarter of 2006, a decrease of $9.6
million from $80.8 million in the same period of 2005.
This decrease was mainly due to:
o |
|
a softening demand for lumber and panel caused by a decrease in U.S. housing starts; |
|
o |
|
difficult market conditions for our forest product customers caused by a strong
Canadian dollar and softwood lumber trade negotiations which have lead to reduced volumes
and extended plant shut downs; and |
|
o |
|
the negative impact of Foreign Exchange. |
Partially offsetting these factors was our strong yield and pricing, which reduced the impact from
the volume decline.
Industrial and Consumer Products
Industrial and consumer products revenues were $148.5 million in the fourth quarter of 2006, an
increase of $2.1 million from $146.4 million in fourth-quarter 2005. The increase was due mainly
to:
o |
|
higher freight rates; |
|
o |
|
strong worldwide demand for base metals; and |
|
o |
|
strong demand for chemical, plastics and energy products largely driven by Alberta oil and gas activity and a strong Alberta economy. |
The higher revenues were partially offset by the negative impact of the change in Foreign Exchange.
Automotive
Automotive revenues were $74.9 million in fourth-quarter 2006, a decrease of $3.9 million from
$78.8 million in fourth-quarter 2005. The decrease was due primarily to lower volumes as a result of extended plant shutdowns by domestic
manufacturers.
Intermodal
Intermodal revenues grew in the fourth quarter of 2006 to $324.0 million, an increase of $11.4
million from $312.6 million in the same period of 2005. In the international business, growth was
due to higher freight rates and container volume growth at the ports of Vancouver and Montreal
driven by strong global trade. Growth in domestic intermodal was due to increased freight rates and
volumes as well as an increase in long-haul traffic. These increases were partially offset by the
negative impact of the change in Foreign Exchange.
Operating Expenses,
Before Other Specified Items
Operating expenses, before other specified items, in the fourth quarter of 2006 were $870.3
million, an increase of $7.6 million from $862.7 million in the same period of 2005.
Compensation and Benefits
Compensation and benefits expense in fourth-quarter 2006 was $322.2 million, an increase of
$0.2 million from $322.0 million in the fourth quarter of 2005. Expenses were effectively flat
year-over-year, as the negative impact of inflation and increased pension expenses offset decreases
in expenditures primarily driven by:
o |
|
reduced costs from restructuring initiatives (discussed further under the sub-heading
Restructuring in the section Future Trends, Commitments and Risks); |
2006 Annual Report
25
o |
|
savings realized from efficiencies gained through our IOP (discussed further under the
sub-heading Integrated Operating Plan in the section Future Trends, Commitments and
Risks); and |
|
o |
|
the positive impact of the change in Foreign Exchange. |
Note certain comparative period figures have been restated to reflect the retroactive application
of a new accounting pronouncement on stock-based compensation for employees eligible to retire
before the vesting date of stock-based awards or have been updated to reflect new information
(discussed further in the section Changes in Accounting Policy).
Fuel
Fuel expense was $171.2 million in fourth-quarter 2006, an increase of $4.8 million from $166.4
million in the fourth quarter of 2005. The increase was due to a lower hedge position in 2006 and a
higher rate of fuel consumption as the proportion of non-bulk freight traffic grew. The increases
were partially offset by favourable WTI crude prices and refining margins, and a positive impact of
the change in Foreign Exchange. Fuel price increases are also mitigated by our fuel surcharge
program (discussed further under the sub-heading Freight Revenues in the section Lines of
Business).
Materials
Materials expense was $53.7 million in the fourth quarter of 2006, an increase of $0.6 million
from $53.1 million in 2005. The increase was due mainly to the increased cost of materials used for
freight car repairs and train servicing, primarily driven by price increases for the replacement of
wheel sets.
Equipment Rents
Equipment rents expense was $47.8 million in the fourth quarter of 2006, a decrease of $5.2
million from $53.0 million in the same period of 2005. The decrease was due largely to:
o |
|
higher charges to customers for loading and unloading delays; |
|
o |
|
lower equipment rental payments to other railways as a result of more efficient
movement of traffic over our network which has reduced the number of cars on line; and |
|
o |
|
the positive impact of the change in Foreign Exchange. |
The decrease in the fourth quarter of 2006 was partially offset by higher freight car lease costs.
Depreciation and Amortization
Depreciation and amortization expense was $115.9 million in fourth-quarter 2006, an increase of
$2.3 million from $113.6 million in the fourth quarter of 2005, due largely to additions to capital
assets for track, which was partially offset by asset retirements.
Purchased Services and Other
Purchased services and other expense was $159.5 million in fourth-quarter 2006, an increase of
$4.9 million from $154.6 million in the same period of 2005. The increase was due mainly to higher
costs for information technology, building maintenance and contract locomotive servicing. The
increase was offset by net favourable billing recoveries.
Other Income Statement Items
In the fourth-quarter 2006, there was a loss to FX on LTD of $44.9 million ($35.4 million after
tax), compared with
a loss of $0.6 million ($5.1 million after tax) in the same period of 2005. The higher loss was due
to the impact of the change in Foreign Exchange on U.S. dollar-denominated debt.
Other charges were $6.4 million in the fourth quarter of 2006, a decrease of $0.4 million from $6.8
million in fourth-quarter 2005.
Interest expense was $49.8 million in fourth-quarter 2006, an increase of $0.7 million from $49.1
million in the same period of 2005. The increase was due to higher interest charges on
variable-interest debt tied to LIBOR, which increased relative to the comparable period, and
financing costs related to the issuance of debt in the fourth-quarter 2006 offset by the positive
impact of the change in Foreign Exchange on U.S. dollar-denominated interest expense.
Liquidity and Capital Resources
At December 31, 2006, we held $124.3 million in cash and short-term investments, which was an
increase of $77.9 million during the fourth quarter of 2006. At December 31, 2005, we held $121.8
million in cash and short-term investments, which was an increase of $35.2 million during the
fourth quarter of 2005. The increase in cash and short-term investments in the fourth-quarter 2006,
compared with the fourth-quarter 2005, was primarily due to less cash used in investing activities
which reflected a decline in capital additions. The increase in cash in the fourth-quarter 2006 was
partially offset by increased activity in our common share buy-back program (discussed further in
Balance Sheet section under the sub-heading Share Capital).
26
2006 Annual Report
Quarterly Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended |
|
|
|
|
|
|
(in millions, except per share data) |
|
2006 |
|
|
2005 |
|
|
(unaudited) |
|
Dec. 31 |
|
|
Sept. 30 | (2) |
|
June 30 | (2) |
|
Mar. 31 | (2) |
|
Dec. 31 |
(2) |
|
Sept. 30 |
(2) |
|
June 30 |
(2) |
|
Mar. 31 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
1,190.4 |
|
|
$ | 1,151.3 | |
|
$ | 1,131.0 | |
|
$ | 1,110.5 | |
|
$ |
1,166.9 |
|
|
$ |
1,104.7 |
|
|
$ |
1,105.9 |
|
|
$ |
1,014.1 |
|
Operating income |
|
|
320.1 |
|
|
| 299.1 | |
|
| 282.6 | |
|
| 226.8 | |
|
|
260.0 |
|
|
|
283.2 |
|
|
|
272.3 |
|
|
|
175.7 |
|
Net income |
|
|
145.6 |
|
|
| 163.8 | |
|
| 378.1 | |
|
| 108.8 | |
|
|
137.1 |
|
|
|
203.8 |
|
|
|
124.1 |
|
|
|
78.0 |
|
Operating income, before
other specified items (1) |
|
|
320.1 |
|
|
| 299.1 | |
|
| 282.6 | |
|
| 226.8 | |
|
|
304.2 |
|
|
|
249.3 |
|
|
|
272.3 |
|
|
|
175.7 |
|
Income, before FX
on LTD and other
specified items (1) |
|
|
181.0 |
|
|
| 169.7 | |
|
| 160.7 | |
|
| 116.1 | |
|
|
170.5 |
|
|
|
135.1 |
|
|
|
140.9 |
|
|
|
81.9 |
|
|
Basic earnings per share |
|
$ |
0.93 |
|
|
$ | 1.05 | |
|
$ | 2.39 | |
|
$ | 0.69 | |
|
$ |
0.87 |
|
|
$ |
1.29 |
|
|
$ |
0.79 |
|
|
|
0.49 |
|
Diluted earnings per share |
|
|
0.92 |
|
|
| 1.04 | |
|
| 2.37 | |
|
| 0.68 | |
|
|
0.86 |
|
|
|
1.27 |
|
|
|
0.78 |
|
|
|
0.48 |
|
Diluted earnings per share,
before FX on LTD and
other specified items (1) |
|
|
1.15 |
|
|
| 1.07 | |
|
| 1.00 | |
|
| 0.72 | |
|
|
1.07 |
|
|
|
0.84 |
|
|
|
0.88 |
|
|
|
0.51 |
|
|
|
(1) These earnings measures have no standardized meanings prescribed by Canadian
GAAP and, therefore, are unlikely to be comparable to similar measures of other companies. These
earnings measures and other specified items are described in the section Non-GAAP Earnings. A
reconciliation of income and diluted EPS, before FX on LTD and other specified items, to net income
and diluted EPS, as presented in the financial statements is provided in the section Non-GAAP
Earnings. This information is in Canadian dollars.
(2) Certain comparative period figures have been restated to reflect the retroactive
application of a new accounting pronouncement on stock-based compensation for employees eligible to
retire before the vesting date of stock-based awards or have been updated to reflect new
information (discussed further in the section Changes in Accounting Policy).
Quarterly Trends
Volumes of and, therefore,
revenues from certain goods are
stronger during different periods
of the year. First-quarter
revenues can be lower mainly due
to winter weather conditions,
closure of the Great Lakes ports
and reduced transportation of
retail goods. Second- and
third-quarter revenues generally
improve over the first quarter as
fertilizer volumes are typically
highest during the second quarter
and demand for
construction-related goods is
generally highest in the third
quarter. Revenues are typically
strongest in the fourth quarter,
primarily as a result of the
transportation of grain after the
harvest, fall fertilizer programs
and increased demand for retail
goods moved by rail. Operating
income
is also affected by seasonal
fluctuations. Operating income
is typically lowest in the
first quarter due to higher
operating costs associated with
winter conditions.
Mild weather in the first quarter
of 2006 helped to reduce the
negative impact of winter
conditions on both revenues and
expenses. Protracted global trade
negotiations delayed the shipment
of potash volumes until early in
the third quarter of 2006.
During the first and second
quarters of 2005, a total of
$23 million in additional
revenues was recorded as a
result of an agreement reached
with our largest coal shipper.
Operating and net income also
increased in these two periods
as a result of the additional
revenues.
Net income is also influenced by
seasonal fluctuations in customer
demand, weather-related costs, FX
on LTD, and other specified
items. Reduced income tax expense
contributed significantly to an
increase in net income in the
second quarter of 2006 as the
Government of Canada and several
provinces reduced future
corporate income tax rates
(discussed further under the
sub-heading Income Taxes in the
section Other Income Statement
Items). The Company recorded a
future income tax benefit of
$176.0 million to reflect the
positive impact of these tax rate
reductions on transactions in
prior years for which future
taxes will be paid.
2006 Annual Report
27
Changes in Accounting Policy
2006 Accounting Changes
Stock-Based Compensation for Employees
Eligible to Retire before the Vesting Date
The CICA issued Emerging
Issues Committee Abstract
Stock-Based Compensation for
Employees Eligible to Retire
Before the Vesting Date (EIC
162) which became effective for
the year ended December 31, 2006
and has been applied
retroactively with restatement of
prior periods. Under EIC 162,
compensation cost attributable to
stock-based awards is recognized
over the period from the grant
date to the date the employees
become eligible to retire when
this is shorter than the vesting
period. The adoption of EIC 162
resulted in a $3.3 million
adjustment to reduce opening
retained earnings at January 1,
2004, and decreased reported
Compensation and benefits
expenses in 2006 by $1.2 million
(2005 decreased by $0.1
million; 2004 increased by
$1.9 million) and decreased
Income tax expense in 2006 by
$0.1 million (2005 nil; 2004
nil).
Non-Monetary Transactions
In June 2005, the CICA issued
Accounting Standard Section 3831
Non-Monetary Transactions which
became effective January 1, 2006.
It has been applied prospectively
to non-monetary transactions
occurring on or after this date.
The standard requires that assets
or liabilities exchanged or
transferred in a non-monetary
transaction that has commercial
substance be valued at fair value
with any gain or loss recorded in
income. Commercial substance
exists when, as a result of the
transaction, there is a
significant change to future cash
flows of the item transferred or
the company as a whole.
Transactions that lack commercial
substance or for which the fair
value of the exchanged assets
cannot be reliably measured will
continue to be accounted for at
carrying value. Previously,
non-monetary transactions
that did not constitute the
culmination of the earnings
process were recorded at carrying
value. The impact to CP on
adoption of this new standard was
not significant.
Hedging Transactions
Effective January 1, 2004,
the Company adopted the CICA
Accounting Guideline 13 Hedging
Relationships (AcG 13). AcG 13
addresses the identification,
designation, documentation and
effectiveness of hedging
transactions for the purpose of
applying hedge accounting. It
also establishes
conditions for applying, and the
discontinuance of, hedge
accounting and hedge
effectiveness testing
requirements. Under the
guideline, the Company is
required to document its hedging
transactions and explicitly
demonstrate that hedges are
effective in order to continue
hedge accounting for positions
hedged with derivatives. Any
derivative financial instrument
that fails to meet the hedging
criteria will be accounted for in
accordance with the CICA Emerging
Issues Committee Abstract
Accounting for Trading,
Speculative or Non-hedging
Derivative Financial Instruments
(EIC 128).
Derivative instruments that do
not qualify as hedges and those
not designated as hedges are
carried on the Consolidated
Balance Sheet at fair value and
changes in fair value are
recognized in the period in which
the change occurs in the
Statement of Consolidated Income
in the line items to which the
derivative instruments are
related. The earnings impact of
non-hedging derivative
instruments that did not relate
to operating income were reported
as Gain on non-hedging
derivative instruments in Other
charges. In 2006, these resulted
in a gain of $1.2 million (2005
a gain of $6.6 million, 2004
a gain of $1.5 million). Total
Return Swaps (TRS) are
non-hedging derivative
instruments acquired by the
Company in 2006 that related to
stock-based compensation and
increased Compensation and
benefits by $1.2 million (2005
nil, 2004 nil).
Future Accounting Changes
The following changes to
accounting policies are effective
January 1, 2007:
Financial Instruments, Hedging
and Other Comprehensive Income
The CICA issued the following
accounting standards effective
for fiscal years beginning on or
after October 1, 2006: Accounting
Standard Section 3855 Financial
Instruments, Recognition and
Measurement, Accounting Standard
Section 3861 Financial
Instruments, Presentation and
Disclosure,
Accounting Standard Section 3865
Hedging and Accounting Standard
Section 1530 Comprehensive
Income. These sections require
certain financial instruments and
hedge positions to be recorded at
their fair value. They also
introduce the concept of
comprehensive income and
accumulated other comprehensive
income.
Adoption of these standards will
be effective January 1, 2007 on a
prospective basis without
retroactive restatement of prior
periods, except for the
reclassification of equity
balances to reflect Accumulated
other comprehensive income which
will include foreign currency
translation adjustments.
Under the new standards, financial
instruments designated as
held-for-trading and
available-for-sale will be
carried at their fair values
while financial instruments such
as loans and receivables,
financial liabilities, and
those classified as
held-to-maturity will be
carried at their amortized cost.
All derivatives will be carried
on the Consolidated Balance Sheet
at their fair value, including
derivatives designated as hedges.
The effective portion of
unrealized gains and losses on
cash flow hedges will be carried
in Accumulated other
comprehensive income, a
component of Shareholders
equity on the Consolidated
Balance Sheet, with any
ineffective portions of gains and
losses on hedges taken into
income immediately. Changes in
the value of fair value hedges
and the related changes in the
carrying value of the hedged item
will be taken into income
immediately.
28
2006 Annual Report
The Company has classified its
financial instruments as loans
and receivables, other
financial liabilities and
derivative instruments
designated as hedges. The first
two categories of financial
instruments will be accounted for
at cost or amortized cost while
hedges will be accounted for as
outlined in Accounting Standard
Section 3865. Long-term debt and
related transaction costs will be
measured at fair value at
inception and subsequently
measured at amortized cost.
Transaction costs will be
included as a component of the
amortized cost of the Companys
long-term debt balances.
The impact of the adoption of
these standards on January 1,
2007 is expected to be an
increase in net assets of
approximately $21 million; a
reduction in Foreign currency
translation adjustments of
approximately $66 million; an
increase in Retained earnings
of approximately $2 million and
the creation of Accumulated
other comprehensive income of
approximately $85 million.
The fair value of hedging
instruments is expected to be
approximately $32 million to be
reflected in Other assets and
deferred charges and
approximately $5 million
reflected in Deferred
liabilities. The inclusion of
transaction costs within
Long-term debt at amortized
cost is expected to reduce
Long-term debt by
approximately $25 million with
an associated reduction in
Other assets and deferred
charges of approximately $20
million. The adoption of these
standards is expected to
increase Future income tax
liabilities by approximately
$11 million. Accumulated other
comprehensive income will be
comprised of foreign currency
gains and losses on the net
investment in self-sustaining
foreign subsidiaries, foreign
currency gains and losses
related to long-term debt
designated as a hedge of the net
investment in self-sustaining
foreign subsidiaries, effective
portions of gains and losses
resulting from changes in the
fair value of cash flow hedging
instruments and the
reclassification of cumulative
foreign
currency translation
adjustments. The adjustment to
opening retained earnings
reflects the change in
measurement basis from original
cost to fair value or amortized
cost, of certain financial
assets, financial liabilities
and transaction costs associated
with the Companys long-term
debt.
Accounting Changes
Effective January 1, 2007,
the CICA has amended Accounting
Standard Section 1506
Accounting Changes
to prescribe the criteria for
changing accounting policies and
related accounting treatment and
for disclosure of accounting
changes. Changes in accounting
policies are permitted when
required by a primary source of
GAAP, for example when a new
accounting section is first
adopted, or when the change in
accounting policy results in
more reliable and relevant
financial information being
reflected in the financial
statements.
The adoption of this amended
accounting standard will not
impact the financial
statements of the Company.
Liquidity and Capital Resources
We believe adequate amounts
of cash and cash equivalents are
available in the normal course of
business to provide for ongoing
operations, including the
obligations identified in the
tables in the section
Contractual Commitments and in
the section Future Trends,
Commitments and Risks under the
sub-heading Financial
Commitments. We are not aware of
any trends or expected
fluctuations in our liquidity
that would create any
deficiencies. The following
discussion of operating,
investing and financing
activities describes our
indicators of liquidity and
capital resources.
Operating Activities
Cash provided by operating
activities was $1,051.0
million in 2006, an increase
of $0.3 million from 2005.
Cash provided by operating
activities was $1,050.7
million in 2005, an increase
of $268.2 million from $782.5
million in 2004.
The increase in 2006, compared
with 2005, was offset by:
o |
|
higher restructuring payments; |
|
o |
|
a higher year-end working capital
balance, primarily due to an
increase in accounts receivable
from higher freight revenues and
a reduction in accounts payable
from lower restructuring
payments; and |
|
o |
|
increased pension contributions. |
The increase in 2005, compared
with 2004, was mainly due to:
o |
|
a greater amount of cash being
generated through operations in
2005; |
|
o |
|
reduced restructuring payments; and |
|
o |
|
lower pension funding contributions. |
In 2005, the above increases in cash
from operating activities were
partially offset by an increase
in accounts receivable as higher
freight rates and higher volumes
increased the amounts billed to
customers.
There are no specific
or unusual requirements relating
to our working capital. In
addition, there are no unusual
restrictions on any subsidiarys
ability to transfer funds to
CPRL.
Investing Activities
Cash used in investing
activities was $693.7 million
in 2006, a decrease of $175.5
million from 2005. Cash used
in investing activities was
$869.2 million in 2005, an
increase of $206.6 million
from $662.6 million in 2004.
The decrease in cash used in
investing activities in 2006,
compared with 2005, was mainly
due to decreased cash capital
spending in 2006 and proceeds
from the sale of our Latta
subdivision.
The increase in 2005, compared
with 2004, was mainly due to
increased capital spending,
primarily to expand track
capacity in our western
corridor.
Capital spending in 2007 is
projected to be between $885
million and $895 million. Our
2007 capital spending outlook
assumes an increase in basic
right-of-way and asset
2006 Annual Report
29
renewal to help maintain the
reliability and safety of our
infrastructure, land acquisitions
for future development in
strategic locations across the
network, locomotive acquisitions
and upgrades to increase our
fuel-efficient hauling capacity,
improvements in information
technology to improve the systems
that manage railway operations
and customer shipments, and
investments planned to increase
capacity in automotive and
intermodal terminals to support
continued market growth. Our
capital spending outlook is based
on certain assumptions about
events and developments that may
not
materialize or that may be offset
entirely or partially by other
events and developments (see the
Forward-looking Information
section for a discussion of these
assumptions and other factors
affecting our expectations for
2007).
We intend to finance
capital expenditures with cash
from operations but may partially
finance these expenditures with
new debt, if required. Our
decision whether to acquire
equipment through the use of
capital and debt or through
operating leases will be
influenced by such factors as the
need to keep our capital
structure within debt covenants
and to maintain a net-debt to
net-debt-plus-equity ratio
(discussed below under the
subheading Financing
Activities) that would preserve
our investment grade standing, as
well as the amount of cash flow
we believe can be generated from
operations and the prevailing
interest rate environment.
Financing Activities
Cash used in financing
activities was $354.8 million in
2006, a decrease of $57.9
million, compared to $412.7
million in 2005. In 2004, cash
provided by financing activities
was $98.4 million.
The decrease in cash used in
2006, compared with 2005, was due
to lower long-term debt
repayments, mainly from the 2005
repayment of our 7.2 %
$250-million Medium Term Notes
and higher proceeds from the
issue of shares for stock options
exercised in 2006. These items
were partially offset by
increased
purchases of shares through the
Companys share repurchase
program (discussed under the
sub-section Share Capital in
the section Balance Sheet) and
higher dividend payments to our
shareholders.
The decrease in cash in 2005,
compared with 2004, was due to:
o |
|
the repayment of $250-million
Medium Term Notes; |
|
o |
|
the issuance
in 2004 of US$145-million
Senior Secured Notes, compared
with 2005 when no debt was
issued; and |
|
o |
|
payments made to
buy back shares under our share
repurchase program. |
The items noted above
were partially offset by
increased proceeds from the
issue of shares as a result of
stock options being exercised
in 2005.
We have available, as sources of
financing, unused credit
facilities of up to $511 million,
as well as an uncommitted amount
of US$15 million. Our unsecured
long-term debt securities are
rated Baa2, BBB and
BBB(high) by Moodys Investors
Service, Inc., Standard and
Poors Corporation and Dominion
Bond Rating Service,
respectively.
At December 31,
2006, our net-debt to
net-debt-plus-equity ratio
improved to 37.2 %, compared with
39.6 % and 43.0 % at December 31,
2005 and 2004, respectively. The
improvement in both years was due
primarily to an increase in
equity driven by current year
earnings partially offset by
reduced capital stock and
contributed surplus as a result
of the Companys share repurchase
program. Net debt is the sum of
long-term debt, long-term debt
maturing within one year and
short-term borrowing, less cash
and short-term investments. This
sum is divided by total net debt
plus total shareholders equity
as presented on our Consolidated
Balance Sheet.
Management is committed to
maintaining its net-debt to
net-debt-plus-equity ratio at an
acceptable level and intends to
continue to manage capital
employed so that we retain our
solid investment grade credit
ratings.
Free Cash
Free cash is a non-GAAP
measure that management considers
to be an indicator of liquidity.
Free cash is calculated as cash
provided by operating activities,
less cash used in investing
activities and dividends.
We generated positive free cash of
$244.9 million in 2006 compared
with $92.0 million in 2005 and
$38.2 million in 2004. The
increase in 2006, compared with
2005, was due to a decrease in
capital spending in 2006 and
proceeds from the sale of our
Latta subdivision, partially
offset by higher dividend
payments to our shareholders. The
increase in free cash in 2005,
compared with 2004, was due
largely to the increase in cash
generated by operating
activities (as discussed in this
section under the subheading
Operating Activities),
partially offset by increased
capital spending, mainly for the
expansion of our western track
corridor.
We expect to generate a higher
amount of free cash in 2007,
compared with 2006, achieved
mainly through the generation of
higher cash from operating
activities, partially offset by
increased capital spending,
dividend payments and reduced
land sales compared with 2006
when there was a significant
impact from the sale of the Latta
subdivision. Our free cash
outlook is based on certain
assumptions about events and
developments that may not
materialize or that may be offset
entirely or partially by other
events and developments (see the
section Forward-looking
Information for a discussion of
these assumptions and other
factors affecting our
expectations for 2007). Our free
cash outlook relies on the
assumptions established for
earnings and capital
expenditures, which are discussed
under the sub-heading Revenues
in the section Lines of
Business, and in the sections
Operating Expenses, Before Other
Specified Items, Liquidity and
Capital Resources and Other
Income Statement Items.
30
2006 Annual Report
Calculation of Free Cash
(reconciliation of free cash to GAAP cash position)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 (in millions) (unaudited) |
|
2006 |
|
|
2005 |
(2) |
|
2004 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
1,051.0 |
|
|
$ |
1,050.7 |
|
|
$ |
782.5 |
|
Cash used in investing activities |
|
|
(693.7 |
) |
|
|
(869.2 |
) |
|
|
(662.6 |
) |
Dividends paid |
|
|
(112.4 |
) |
|
|
(89.5 |
) |
|
|
(81.7 |
) |
|
Free cash (1) |
|
|
244.9 |
|
|
|
92.0 |
|
|
|
38.2 |
|
Cash (used in) provided by financing activities,
excluding dividend payment |
|
|
(242.4 |
) |
|
|
(323.2 |
) |
|
|
180.1 |
|
|
Increase / (decrease) in cash, as shown on the
Statement of Consolidated Cash Flows |
|
|
2.5 |
|
|
|
(231.2 |
) |
|
|
218.3 |
|
Net cash at beginning of period |
|
|
121.8 |
|
|
|
353.0 |
|
|
|
134.7 |
|
|
Net cash at end of period |
|
$ |
124.3 |
|
|
$ |
121.8 |
|
|
$ |
353.0 |
|
|
|
(1) This measure has no standardized meaning prescribed by Canadian GAAP and,
therefore, is unlikely to be comparable to similar measures of other companies.
(2) Certain comparative period figures have been restated to conform to presentation adopted in
2006.
Balance Sheet
Assets
Assets totalled $11,415.9
million at December 31, 2006,
compared with $10,891.1 million
at December 31,
2005, and $10,499.8 million at
December 31, 2004.
The increase in assets in 2006, compared with
2005, was mainly due to:
o |
|
capital additions, most of which were
locomotives and track
replacement; |
|
o |
|
an increase in accounts receivable due to higher
freight rates which have
increased amounts billed to
customers; |
|
o |
|
higher materials and supplies, mainly fuel stock and
engineering inventory; and |
|
o |
|
pension contributions made in excess of pension expense
recognized in income. |
These increases were partially offset
by a reduction in assets held for
sale in 2006.
The increase in
assets in 2005, compared with
2004, was mainly due to capital
additions, most of which were
locomotives, track replacement
and expansion of our western
corridor and other sections of
track, and an increase in
accounts receivable as higher
freight rates and volumes
resulted in increased amounts
billed to customers. These
increases were partially offset
by a reduction
in cash, largely for the
repayment of the $250-million
principal amount 7.20 %
Medium Term Notes in 2005.
Total Liabilities
Our combined short-term and
long-term liabilities were
$6,559.4 million at December 31,
2006, compared with $6,507.0
million at December 31, 2005, and
$6,518.9 million at December 31,
2004.
The increase in total
liabilities in 2006, compared
with 2005, was due mainly to an
increase in the future income tax
liability, driven by tax on
income generated in 2006,
partially offset by a reduction
in accounts payable.
The decrease in total
liabilities in 2005, compared
with 2004, was attributable to
the reduction in long-term debt
as a result of the repayment of
the $250-million principal
amount 7.20 % Medium Term Notes
in 2005 and the positive impact
of the change in Foreign
Exchange on long-term debt. This
decrease was mostly offset by
larger future income tax
balances as a result of tax on
income generated in 2005.
Equity
At December 31, 2006, our
Consolidated Balance Sheet
reflected $4,856.5 million in
equity, compared with equity
balances
of $4,384.1 million and $3,980.9
million at December 31, 2005 and
2004, respectively. The increase
was due primarily to growth in
retained income and the issuance
of Common Shares for stock
options exercised, partially
offset by shares repurchased
under normal course issuer bids.
Share Capital
Our Articles of
Incorporation authorize for
issuance an unlimited number of
Common Shares and an unlimited
number of First Preferred
Shares and Second Preferred
Shares. At February 28, 2007,
155,574,677 Common Shares and
no Preferred Shares were issued
and outstanding.
We also have a Management Stock
Option Incentive Plan (MSOIP)
under which key officers and
employees are granted options to
purchase CP shares. Each option
granted can be exercised for one
Common Share. As of February 20,
2007, an additional 4,078,642
Common Shares have been reserved
for issuance under the MSOIP. At
February 28, 2007, 6,381,103
options were outstanding under
our MSOIP, and there were
4,439,881 Common Shares
available for the granting of
future options.
We believe the Companys purchase of its own
Common Shares for cancellation
is an attractive and appropriate
use of corporate
2006 Annual Report
31
funds. Purchases are made through
the facilities of the Toronto
Stock Exchange and the New York
Stock Exchange. The prices that
we pay for any shares will be the
market price at the time of
purchase.
In 2006 and 2005, we purchased
for cancellation 6,760,992 Common
Shares under two normal course
issuer bids (NCIB) authorized
by our Board of Directors.
In May 2005, CP filed its first
normal course issuer bid (2005
NCIB) that
allowed us to repurchase shares
for cancellation from June 6,
2005 to June 5, 2006. CP was
given approval to repurchase
2,500,000 shares, representing
1.6 % of the Common Shares
outstanding on May 25, 2005. On
March 1, 2006, we completed the
necessary filings to increase
the number of Common Shares
eligible for purchase under our
2005 NCIB, to 3,325,000 shares
or 2.1 % of the Common Shares
outstanding as of December 31,
2005.
From June 6, 2005 to June 5,
2006, all shares authorized under
the 2005 NCIB were purchased at
an average price of $51.82 per
share. Of the 3,325,000 shares,
1,761,000 shares were purchased
in 2005 at an average price of
$45.77 and the remaining
1,564,000 shares were purchased
in 2006 at an average price of
$58.62.
On June 1, 2006 we completed the
filings for a new normal course
issuer bid (2006 NCIB) to cover
the period of June 6, 2006 to
June 5, 2007 and to enable us to
purchase for cancellation up to
3,936,000, or 2.5 % of our
158,321,252 Common Shares
outstanding as of May 31, 2006.
The filing was necessary to
effect the repurchase of up to
5.5 million Common Shares in the
calendar year 2006, as authorized
by our Board of Directors on
February 21, 2006 (representing
3.5 % of our Common Shares
outstanding as of December 31,
2005). Of the 3,936,000 shares
authorized under the 2006 NCIB,
3,435,992 shares were purchased
in 2006 at an average price per
share of $56.66 and 249,990
shares had been purchased in 2007
as of February 28th at an average
price per share of $64.11.
In the calendar year 2006, CP
purchased 4,999,992 shares in
accordance with the 2005 NCIB
and 2006 NCIB at an average
price per share of $57.27.
On March 1, 2007, we announced
our intention, subject to
regulatory approval, to make a
further normal course issuer
bid to enable us to purchase up
to a total of 5,500,000 shares
during 2007.
On July 21, 2003, our Board of
Directors suspended the
Directors Stock Option Plan
(DSOP) under which members of
the Board of Directors were
granted options to purchase CP
shares. The DSOP allowed each
option granted to be exercised
for one Common Share. At January
31, 2006, 144,000 options were
outstanding under the DSOP, and
there were 340,000 Common Shares
available for the granting of
future options out of the
500,000 Common Shares currently
authorized. Outstanding options
granted prior to suspension of
the DSOP remain in effect with
no amendments. The DSOP was
suspended as a result of a
review by external compensation
consultants of the Companys
compensation philosophy for the
Board of Directors.
Shareholders may obtain, without
charge, a copy of our Notice of
Intention to Make a Normal Course
Issuer Bid by writing to The
Office of the Corporate
Secretary, Canadian Pacific
Railway Limited, Suite 920, Gulf
Canada Square, 401 9th Avenue
S.W., Calgary, Alberta, T2P 4Z4,
by telephone at (403) 319-7165 or
1-866-861-4289, by fax at (403)
319-6770, or by e-mail at
Shareholder@cpr.ca.
Dividends
Dividends declared by the Board of Directors in the last three years are as follows:
|
|
|
|
|
|
|
|
|
Dividend amount |
|
|
Record date |
|
|
Payment date |
|
|
$0.1275 |
|
March 26, 2004 |
|
April 26, 2004 |
$0.1275 |
|
June 25, 2004 |
|
July 26, 2004 |
$0.1325 |
|
September 24, 2004 |
|
October 25, 2004 |
$0.1325 |
|
December 31, 2004 |
|
January 31, 2005 |
$0.1325 |
|
March 25, 2005 |
|
April 25, 2005 |
$0.1500 |
|
June 24, 2005 |
|
July 25, 2005 |
$0.1500 |
|
September 30, 2005 |
|
October 31, 2005 |
$0.1500 |
|
December 30, 2005 |
|
January 30, 2006 |
$0.1875 |
|
March 31, 2006 |
|
April 24, 2006 |
$0.1875 |
|
June 30, 2006 |
|
July 31, 2006 |
$0.1875 |
|
September 29, 2006 |
|
October 30, 2006 |
$0.1875 |
|
December 29, 2006 |
|
January 29, 2007 |
$0.2250 |
|
March 30, 2007 |
|
April 30, 2007 |
|
|
32
2006 Annual Report
Financial Instruments
Our policy with respect to
using financial instruments is to
selectively reduce volatility
associated with fluctuations in interest and
foreign exchange rates and in the
price of fuel. We document the
relationship between the hedging
instruments and their associated
hedged items, as well as the risk
management objective and strategy
for the use of the hedging
instruments. This documentation
includes linking the derivatives
that are designated as fair value
or cash flow hedges to specific
assets or liabilities on our
Balance Sheet, commitments or
forecasted transactions. At the
time a derivative contract is
entered into, and at least
quarterly, we assess whether the
derivative item is effective in
offsetting the changes in fair
value or cash flows of the hedged
items. The derivative qualifies
for hedge accounting treatment if
it is effective in substantially
mitigating the risk it was
designed to address. If the
derivative is not effective, its
book value is adjusted to its
market value each quarter and the
associated gains or losses are
included in Other Charges on
our Statement of Consolidated
Income.
It is not our intent to
use financial derivatives or
commodity instruments for trading
or speculative purposes.
In 2007, new Canadian accounting
standards will apply to financial
instruments as described under
the sub-heading Financial
Instruments, Hedging and Other
Comprehensive Income in the
section Changes in Accounting
Policy.
We are exposed to
counterparty credit risk in the
event of non-performance by
counterparties. In order to
mitigate this risk, limits are
set by our Board of Directors for
counterparty transactions and we
conduct regular monitoring of the
credit standing of the
counterparties or their
guarantors. We do not anticipate
any losses with respect to
counterparty credit risk.
Interest Rate Management
We may enter into interest
rate risk management
transactions to manage
exposure to fluctuations in
interest rates,
to protect against increases in
interest rates in anticipation
of future debt issuances, and to
convert a portion of our
fixed-rate
long-term debt to floating-rate
debt. From time to time, we use
interest rate swaps, bond
forwards and interest rate locks
as part of our interest rate
risk management strategy.
Interest Rate Swaps
In 2003 and 2004, we entered
into fixed-to-floating interest
rate swap agreements totalling
US$200 million to convert a
portion of our US$400 million
6.25 % Notes to floating-rate
debt. We pay an average floating
rate that fluctuates quarterly
based on LIBOR. These swaps
expire in 2011 and are accounted
for as a fair value hedge.
Accounting for these swaps
increased Interest Expense on
the Statement of Consolidated
Income by $0.7 million in 2006
compared with a $2.8 million
reduction in interest expense in
2005. At December 31, 2006, an
unrealized loss of $2.8 million
from these interest rate swaps
was calculated based on their
fair value utilizing swap,
currency and basis-spread curves
from Reuters. We have not
recorded the fair value of these
swaps on our Consolidated Balance
Sheet. Values may vary marginally
due to either the terms of the
contract or minor variations in
the time of day when the data was
collected.
Interest and Treasury Rate Locks
At December 31, 2006, Other
assets and deferred charges on
the Consolidated Balance Sheet
included unamortized losses of
$13.4 million (December 31, 2005
$16.9 million) for previously
cancelled interest and treasury
rate locks, and Deferred
liabilities on the Consolidated
Balance Sheet included an
unamortized gain of $8.3 million
(December 31, 2005 $8.6
million) from interest rate
locks. These gains and losses are
being amortized over the lives of
their underlying debt.
Amortization of the gains and
losses, which is included in
Interest expense on the
Statement of Consolidated Income,
resulted in a net expense of $3.1
million in 2006, compared with a
net expense of $3.1 million in
2005.
Foreign Exchange Management
We enter into foreign
exchange risk management
transactions primarily to manage
fluctuations in the exchange
rate between Canadian and U.S.
currencies. From time to time,
we use foreign exchange forward
contracts as part of our foreign
exchange risk management
strategy. We have designated a
portion of our U.S.
dollar-denominated long-term
debt as a hedge of our net
investment in self-sustaining
foreign subsidiaries.
Foreign Exchange Forward Contracts
We have hedged a portion of
our U.S. dollar-denominated
freight revenues earned in Canada
by selling forward U.S. dollars
from time to time. At December
31, 2006, we had no forward sales
of U.S. dollars outstanding
(December 31, 2005 US$58.9
million) and no unrealized gains
or losses. The unrealized gain on
forward contracts as of December
31, 2005, calculated using the
trading value of the U.S. dollar
from the Bank of Canada, was $2.5
million. This unrealized gain was
not included in our financial
statements at December 31, 2005.
Freight revenues on our
Statement of Consolidated Income
included realized gains of $3.9
million on these foreign exchange
forward contracts in 2006,
compared with realized losses of
$2.2 million in 2005.
Fuel Price Management
Swaps and fuel surcharges
(discussed under the sub-heading
Freight Revenues in the
section Lines of Business),
together with fuel conservation
practices, are the key elements
of our program to manage the
risk arising from fuel price
volatility.
Crude Oil Swaps
We may enter into crude oil
or heating oil swap contracts to
help mitigate future price
increases related to the
purchase of fuel. We generally
enter into commodity swap
purchase contracts, and
unrealized gains or losses
related to these swaps are
deferred until the related fuel
purchases are realized.
2006 Annual Report
33
At December 31, 2006, an
unrealized gain of $31.7 million
(December 31, 2005 unrealized
gain of $59.2 million) was
calculated based on the fair
value of our swaps, which was
derived from the WTI price, as
quoted by recognized dealers or
as developed based upon the
present value of expected future
cash flows discounted at the
applicable U.S. Treasury Rate,
LIBOR or swap spread. We have not
included any unrealized gains in
our financial statements in 2006.
Fuel purchases and commodity swap
contracts have an element of
foreign exchange variability.
From time to time, we use foreign
exchange forward contracts to
manage this element of fuel-price
risk. We enter into purchase
contracts of U.S. dollars because
the Canadian dollar cost of fuel
increases if the U.S. dollar
appreciates relative to the
Canadian dollar. Gains and losses
on the crude oil swaps, coupled
with foreign exchange forward
contracts, offset increases and
decreases in the cash cost of
fuel.
An unrealized loss of $3.1
million (December 31, 2005
unrealized loss of $7.2 million)
related to the forward purchases
of U.S. dollars (which were
coupled with the crude oil
swaps) was calculated based on
the fair value of these forward
contracts at December 31, 2006.
Forward curves from Reuters were
utilized to establish the fair
value. The unrealized loss was
not recorded in our financial
statements in 2006. These
forwards will settle in 2007
through 2009.
Fuel expense was reduced by $29.1
million in 2006 (2005 $48.1
million) as a result of $33.7
million in realized gains (2005
$51.5 million) arising from
settled swaps, partially offset
by $4.6 million (2005 $3.4
million) in realized losses
arising from the settled foreign
exchange forward contracts.
For every US$1.00 increase in the
price of WTI, fuel expense before
hedging will increase by
approximately $8 million,
assuming current foreign exchange
rates and fuel consumption
levels. As at December 31, 2006
we had
fuel hedges for approximately 10%
of our estimated fuel purchases
in 2007, 3 % in 2008 and 3 % in
2009, with no hedges in place for
purchases beyond this time. We
have a fuel risk mitigation
program to moderate the impact of
increases in fuel prices, which
includes these swaps and fuel
surcharges (discussed in the
section Lines of Business under
the sub-heading Freight
Revenues).
Stock-based Compensation
Expense Management
Total Return Swap
We entered into a TRS,
effective in May 2006, in order
to reduce the volatility and
total cost to the Company over
time of two stock-based
compensation programs: share
appreciation rights (SAR) and
deferred share units (DSU)
(discussed further under the
sub-heading Stock Price in the
section Future Trends, Risks
and Commitments). The value of
the TRS derivative is linked to
the market value of our stock.
Unrealized gains and losses on
the TRS substantially offset the
costs and benefits recognized in
the SAR and DSU stock-based
compensation programs due to
fluctuations in share price
during the period the TRS was in
place. Compensation and
benefits expense on our
Statement of Consolidated Income
included an unrealized loss on
these swaps of $1.2 million.
Off-balance Sheet Arrangements
Sale of Accounts Receivable
We have sold through our
accounts receivable
securitization program a portion
of our freight receivables to
raise funds for operations. Under
the program, which has a term of
five years expiring in September
2009, we have sold an undivided
co-ownership interest in $120.0
million of eligible freight
receivables to an unrelated
trust. The trust is a
multi-seller trust and we are not
the primary beneficiary. We may
increase this sale amount up to a
program limit of $200.0 million.
At December 31, 2006, the
outstanding undivided
co-ownership interest held by the
trust under the accounts
receivable securitization program
was $120.0 million (2005
$120.0 million). A loss of $5.0
million on the securitization
program in 2006 (2005 $3.5
million) was included in Other
charges on our Statement of
Consolidated Income.
We provide a credit enhancement
amount to absorb all credit
losses. The trust has no recourse
to the co-ownership interest in
receivables that we retain, other
than in respect of the credit
enhancement amount. This amount
was recognized as a retained
interest. At December 31, 2006,
the fair value of the retained
interest was approximately 19.1 %
of the receivables sold, or $22.9
million (2005 fair value of
approximately 16 %, or $19.5
million) and was included in
Accounts receivable and other
current assets on our
Consolidated Balance Sheet. The
fair value of the retained
interest approximated the
carrying value as a result of the
short collection cycle of the
receivables and expected credit
losses amounting to less than
0.05 % of total receivables.
Proceeds from collections
reinvested in the accounts
receivable securitization program
were $1,475.7 million for 2006,
compared with $1,480.6 million
for 2005. Receivables funded
under the securitization program
may not include delinquent,
defaulted or written-off
receivables, or receivables that
do not meet certain
obligor-specific criteria,
including concentrations in
excess of prescribed limits. We
maintain an adequate allowance
for doubtful accounts based on
expected collectibility of
accounts receivable. Credit
losses are based on specific
identification of uncollectible
accounts and the application of
historical percentages by aging
category. At December 31, 2006,
allowances of $10.6 million (2005
$8.0 million) were recorded in
Accounts receivable. In 2006,
$2.0 million (2005 $0.5
million) of accounts receivable
were written off to Freight
revenues.
34
2006 Annual Report
We have retained the
responsibility for servicing,
administering and collecting
freight receivables sold. Even
though we act as collector of all
of the securitized receivables,
we have no claim against the
trusts co-ownership interest in
the securitized
receivables. We do not receive a
fee for our servicing
responsibilities. The benefits we
receive for servicing the
receivables approximate the
related costs. The average
servicing period is approximately
one month. At December 31, 2006,
a servicing asset
of $0.1 million (2005 $0.1
million) and a servicing
liability of $0.1 million (2005
$0.1 million) were recorded.
The securitization program is
subject to our standard
reporting and credit-rating
requirements. This includes
provision of a monthly
portfolio report that the pool
of eligible receivables
satisfies pre-established
criteria that are reviewed and
approved by Dominion Bond
Rating Service and are standard
for agreements of this nature.
Failure to comply with these
provisions would trigger
termination of the program.
In the event the program is
terminated prior to maturity, we
expect to have sufficient
liquidity remaining in our
revolving credit facility to
meet our payment obligations. We
have complied with all
termination tests during the
program.
Contractual Commitments
The accompanying table
indicates our known obligations
and commitments to make future
payments for contracts, such as
debt and capital lease and
commercial arrangements.
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual commitments at December 31, 2006 |
|
|
|
|
|
|
|
|
13 |
|
35 |
|
|
After |
|
|
|
(in millions) |
|
Total |
|
|
< 1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
2,665.9 |
|
|
|
164.3 |
|
|
|
38.5 |
|
|
|
870.1 |
|
|
|
1,593.0 |
|
Capital lease obligations |
|
|
338.9 |
|
|
|
27.0 |
|
|
|
18.2 |
|
|
|
32.2 |
|
|
|
261.5 |
|
Operating lease obligations (1) |
|
|
634.2 |
|
|
|
133.2 |
|
|
|
170.6 |
|
|
|
106.2 |
|
|
|
224.2 |
|
Supplier purchase obligations |
|
|
739.4 |
|
|
|
135.0 |
|
|
|
202.8 |
|
|
|
142.3 |
|
|
|
259.3 |
|
Other long-term liabilities reflected
on our Consolidated Balance Sheet (2) |
|
|
919.2 |
|
|
|
125.2 |
|
|
|
218.9 |
|
|
|
170.4 |
|
|
|
404.7 |
|
|
Total contractual obligations |
|
|
5,297.6 |
|
|
|
584.7 |
|
|
|
649.0 |
|
|
|
1,321.2 |
|
|
|
2,742.7 |
|
|
|
(1) We have guaranteed residual values on certain leased equipment with a maximum
exposure of $442.5 million. Management estimates that we will not be required to make payments
under these residual guarantees and, as such, have not included any amount with respect to these
guaranteed residual values in the minimum payments shown above.
(2) Includes expected cash payments for restructuring, environmental remediation, asset
retirement obligations, post-retirement benefits, workers compensation benefits, long-term
disability benefits and pension benefit payments for our non-registered supplemental pension plans.
Projected payments for post-retirement, workers compensation benefits and long-term disability
benefits include the anticipated payments for years 2007 to 2016. Pension contributions for our
registered pension plans are not included due to the volatility in calculating them. Pension
payments are discussed further under the sub-heading Pension Plan Deficit in the section Future
Trends, Commitments and Risks.
Future Trends,
Commitments and Risks
Change in Executive Officers
and Chairman of the Board
On May 5, 2006, CPs Chief Executive
Officer (CEO), Robert J.
Ritchie, retired and Fred J.
Green assumed the position of
CEO. Mr. Green also retained his
position as President.
On May 5, 2006, the Chairman of our Board,
J.E. (Ted) Newall, retired and
was replaced by John E. Cleghorn.
Effective April 14, 2006, CPs
Executive Vice-President and
Chief Financial Officer,
Michael T. Waites, resigned.
Effective October 16, 2006,
Michael R. Lambert was
appointed Executive
Vice-President and Chief
Financial Officer.
Sale of Latta Subdivision
On May 26, 2006, the U.S. Surface
Transportation Board approved
the sale of our Latta
subdivision to Indiana Rail Road
Co. (INRD). The Latta
subdivision, located
in the State of Indiana, is a
rail line between Fayette, near
Terre Haute, and Bedford. The
sale also included rights of
INRD to use certain track of CSX
Transportation between Chicago,
Illinois, and Louisville,
Kentucky. INRD assumed all rail
operations on the line beginning
May 27, 2006. We do not expect
the sale of this portion of our
operations to materially impact
our financial results. This sale
was not segregated as a
discontinued operation on our
financial statements because it
did not generate its own
identifiable cash
2006 Annual Report
35
flow. Total annual carloads
associated with this subdivision
were approximately 54,000, of
which approximately 40,000 were
for coal traffic. The carloads
affected were for relatively
short distances on CP.
Rail Network Capacity
Significant increases in rail
traffic volumes have created
capacity challenges for the North
American rail sector. In
particular, a rapid surge in
exports and imports has created
pressure on railway systems to
and from the Pacific Coast. In
2005, we completed a major
expansion of our track network in
western Canada between the
prairies and the Port of
Vancouver on the Pacific Coast.
Any further expansion will be
tied to ongoing market conditions
and the continuation of a stable
regulatory environment in Canada.
We are also maximizing our
freight handling capacity by
acquiring new and more powerful
locomotives and replacing older
freight cars with more efficient
and higher-capacity freight cars.
Integrated Operating Plan
We manage scheduled
operations through our IOP. The
key principles upon which our IOP
is built include moving freight
cars across the network with as
few handlings as possible,
creating balance in the
directional flow of trains in our
corridors by day of week, and
minimizing the time that
locomotives and freight cars are
idle. During 2006, execution of
our IOP generated productivity
and efficiency improvements that
reduced expenses in key areas,
while improving service
reliability to support rate
increases and grow market share.
Areas of expense reduction
included labour, purchased
services and equipment costs.
Canadian Government
Covered Hopper Car Fleet
CP transports grain
throughout North America in
covered hopper cars. The
overall covered hopper fleet
consists of owned, leased and
managed freight cars. The
managed segment consists of
cars provided by Canadian
federal and provincial
governments for the purpose of
transporting regulated grain. In
2006, the Canadian Federal
Conservative government has
announced its intention to
retain ownership of its cars and
negotiate
new operating agreements with CP
and Canadian National Railway
Company (CN). The agreement
with CP is expected to become
effective in the first half of
2007. Currently, 6,300 of these
cars operate on CP rail lines
and our expectation is that this
will continue to be the case. We
view the federal governments
decision as a positive
development that allows for the
negotiation of a progressive
operating agreement geared
towards ensuring an efficient,
low-cost grain handling and
transportation system.
Agreements
In January 2006, CP and CN
entered into an agreement, which
assists in the optimization of
railway infrastructure in the
lower mainland of B.C. Under the
arrangement, CP will operate the
trains of both railways using CP
crews from Boston Bar, B.C., to
the terminals on the south shore
of Burrard Inlet in Vancouver,
and return to North Bend, B.C. CN
will operate the trains of both
railways using CN crews from
Boston Bar to the terminals on
the north shore of Burrard Inlet
and return to North Bend. CP will
provide all switching on the
south shore of Burrard Inlet,
with the exception of the
Burlington Northern Santa Fe
Railway barge slip, and CN will
provide all switching on the
north shore of Burrard Inlet. In
addition, CP will operate some CN
trains to or from the Roberts
Bank port area at Delta, B.C.
General Risks
We have a substantial
investment in fixed plant and
equipment and, therefore, have a
limited ability to adjust
production levels in response to
significant and short-term
declines in traffic volumes,
potentially resulting in a
cyclical adverse impact on
predicted future earnings
levels. However, we actively
manage our processes and
resources to control variable
costs, increase efficiency and
mitigate the negative effects of
declines in freight traffic.
In 2007, we will continue our
focus on quality revenue growth
and cost
reduction, as well as improved
utilization of our asset base.
Targeted initiatives and price
improvements are expected to
drive revenue growth, including
growth from value-added services
provided by Canadian Pacific
Logistics Solutions, our
logistics and supply chain
division. We anticipate continued
revenue gains, assuming global
and North American demands for
our services continue to grow.
Our traffic volumes and revenues
are largely dependent upon the
health and growth of the North
American and global economies,
exchange rates, and other factors
affecting the volume and patterns
of international trade. Our
future grain transportation
revenues may be negatively
affected by drought or other
severe weather conditions, insect
infestation, and rate regulation.
If these occur, we will attempt
to mitigate the effects of any
downward pressure on
transportation revenues primarily
through cost-containment
measures.
Stock Price
In 2006, the market value of
our Common Shares increased $12.69
per share (from $48.71 to $61.40)
on the Toronto Stock Exchange. In
2005, the market value of our
Common Shares increased $7.61 per
share (from $41.10 to $48.71) on
the Toronto Stock Exchange. These
changes in share price caused
corresponding increases in the
value of our outstanding SARs and
DSUs in both years. Effective the
second quarter of 2006, we put in
place a TRS (discussed under the
sub-heading Total Return Swap in
the section Financial
Instruments) to mitigate gains
and losses associated with the
effect of our share price on the
SARs and DSUs. Excluding the
impact of our TRS, the cost of our
SARs and DSUs resulted in an
increase in compensation and
benefits expense of $11.0 million
in 2006, compared with 2005. Prior
to the implementation of the TRS,
the increase in share value in
2005 led to an increase in
compensation and benefits expense
of $8.8 million in 2005, compared
with 2004.
36
2006 Annual Report
Crude Oil Prices
Crude oil prices remain
volatile due to strong world
demand and geopolitical events
that disrupt and threaten to
disrupt supply. We will continue
to moderate the impact of
increases in fuel prices through
a fuel risk mitigation program,
which includes fuel surcharges
(discussed under the sub-heading
Freight Revenues in the section
Lines of Business). We
currently have hedges in place
(discussed in the section
Financial Instruments) that
partially offset the effects of
rising fuel prices. Revenue from
fuel surcharges and the benefits
of hedging resulted in the
recovery of a significant portion
of our fuel price increase in
2006. We are also reducing fuel
costs by acquiring more
fuel-efficient locomotives and
employing fuel-efficiency
initiatives through our IOP.
Border Security
We strive to ensure our
customers have unlimited access
to North American markets by
working closely with Canadian and
U.S. customs officials and other
railways to facilitate the safe
and secure movement of goods
between Canada and the U.S. We
also take all necessary
precautions to prevent smuggling
or other illegal activities. We
have taken the following steps to
reduce the risks associated with
the cross-border transportation
of goods:
o |
|
We are a certified
carrier with the U.S.
Customs and Border Protections
(CBP) Customs-Trade
Partnership Against Terrorism
(C-TPAT) program and with the
Canada Border Services Agencys
(CBSA) Partners in Protection
(PIP) program. C-TPAT and PIP
are partnership programs that
seek to strengthen overall
supply chain and border
security. We are also an
approved carrier under CBSAs
Customs Self-assessment
program. |
|
o |
|
We have implemented several
regulatory security frameworks
that focus on the provision of
advanced electronic cargo
information. We are fully
automated with both CBSA and
CBP and provide |
|
|
the requisite shipment
information electronically
well in advance of freight
arrival at the border. |
|
o |
|
Based on a joint Declaration of
Principles, a Vehicle and Cargo
Inspection System (VACIS) has
been installed at five of our
border crossings under a
co-operative program with CBSA
and U.S. Customs and Border
Protection. Rail VACIS systems
use non-intrusive gamma ray
technology to scan U.S.-bound
rail shipments. |
Labour Relations
Agreements are in place with
five of seven bargaining units
in Canada and 10 of 28
bargaining units in the U.S. All
negotiations under way are
progressing. The following is a
status summary:
Canada
Negotiations are currently
underway with the Teamsters
Canada Rail Conference
(TCRC-MWED), which represents
employees who maintain track
infrastructure, and Teamsters
Canada Rail Conference
(TCRC-RTE), which represents
employees who operate trains.
Both negotiations commenced in
September 2006 and both of these
contracts expired December 31,
2006.
U.S.
We are party to collective
agreements with 15 bargaining
units on our Soo Line Railroad
(Soo Line) subsidiary and 13
on our Delaware and Hudson
Railway (D&H) subsidiary.
On the Soo Line, negotiations
have commenced with 14
bargaining units representing
track maintainers, conductors,
clerks, car repair employees,
mechanical labourers,
machinists, electricians, train
dispatchers, signal repair
employees, police, blacksmiths
and boilermakers, sheet metal
workers, locomotive engineers
and mechanical supervisors. An
agreement with the bargaining
unit representing yard
supervisors extends through
2009.
D&H has agreements in place with
nine unions representing freight
car repair employees, clerks,
signal repair employees,
mechanical supervisors,
mechanical labourers, machinists,
engineering supervisors, police
and yard supervisors.
Negotiations are underway with
the remaining four bargaining
units, which represent locomotive
engineers, electricians, track
maintainers and conductors.
Environmental
We have implemented a
comprehensive Environmental
Management System, which includes
a general Environmental
Protection Policy as well as
policies and procedures that
address specific issues and
facilitate the reduction of
environmental risk. We also
prepare an annual Corporate
Environmental Plan that states
our environmental goals and
objectives as well as strategies
and tactics.
We have developed
specific environmental programs
to address areas such as air
emissions, wastewater, management
of vegetation, chemicals and
waste, storage tanks and fuelling
facilities, and environmental
impact assessment. In addition,
we continue to focus on
preventing spills and other
incidents that have a negative
impact on the environment. As a
precaution, we have established a
Strategic Emergency Response
Contractor network and located
spill equipment kits across
Canada and the U.S. to ensure a
rapid and efficient response in
the event of an environmental
incident. We also regularly
update and test emergency
preparedness and response plans.
We have developed an
environmental audit program that
comprehensively, systematically
and regularly assesses our
facilities for compliance with
legal requirements and our
policies for conformance to
accepted industry standards.
Audits are followed by a formal
Corrective Action Planning
process to ensure findings are
addressed in a timely manner. In
addition, our Board of Directors
has established an Environmental
and Safety Committee, which
conducts semi-annually a
comprehensive review of
environmental issues.
2006 Annual Report
37
We focus on key strategies,
identifying tactics and actions
to support commitments to the
community. Our strategies
include:
o |
|
protecting the environment; |
|
o |
|
ensuring compliance
with applicable environmental
laws and regulations; |
|
o |
|
promoting awareness and training; |
|
o |
|
managing emergencies through preparedness; and |
|
o |
|
encouraging involvement, consultation and dialogue with
communities along our lines. |
In 2004, we recorded a $90.9
million charge for costs
associated with investigation,
characterization, remediation and
other applicable actions related
to environmental
contamination at a CP-owned
property in the U.S., which
includes areas previously
leased to third parties.
In 2005, we reached a binding
settlement in relation to a
lawsuit with a potentially
responsible party involving
portions of past environmental
contamination at the
above-mentioned property in the
U.S. The lawsuit against this
other party has been dismissed
and the party has accepted
responsibility for designated
portions of the property and
paid us a settlement sum in
partial payment of the response
costs we have incurred.
As a
result of the settlement, we
were able to reverse accrued
liabilities related to the
property and recognize a total
reduction of $33.9 million to
the special charges
accrued in prior years. Under
applicable accounting rules,
this reduction could not be
recognized until the outcome of
the lawsuit or any binding
settlement with the other
responsible party became known.
We continue to be responsible for
remediation work on portions of
the property in the State of
Minnesota and continue to retain
liability accruals for remaining
future expected costs. The costs
are expected to be incurred over
approximately 10 years. The
states voluntary investigation
and remediation program will
oversee the work to ensure it is completed in
accordance with applicable
standards.
Certain Other Financial Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of commitment per period |
|
|
|
|
|
|
|
|
|
|
|
2008 & |
|
|
2010 & |
|
|
2012 & |
|
At December 31, 2006 (in millions)(unaudited) |
|
Total |
|
|
2007 |
|
|
2009 |
|
|
2011 |
|
|
beyond |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit |
|
|
354.2 |
|
|
|
354.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital commitments (1) |
|
|
480.1 |
|
|
|
206.1 |
|
|
|
75.6 |
|
|
|
53.2 |
|
|
|
145.2 |
|
Offset financial liability |
|
|
179.5 |
|
|
|
179.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments |
|
|
1,013.8 |
|
|
|
739.8 |
|
|
|
75.6 |
|
|
|
53.2 |
|
|
|
145.2 |
|
|
|
|
|
|
|
|
(1) We have several contracts outstanding with termination payments ranging from
$nil to $18.9 million per contract, and resulting in a minimum exposure of $3.3 million and a
maximum exposure of $43.6 million, depending on the date of termination. These contracts are not
reflected in the commitments above and expire mainly between 2007 and 2013. |
Financial Commitments
In addition to the financial
commitments mentioned previously
in the sections Off-balance
Sheet Arrangements and
Contractual Commitments, we are
party to certain other financial
commitments set forth in the
table above and discussed below.
Letters of Credit
Letters of credit are
obtained mainly to provide
security to third parties as
part of agreements. We are
liable for these contract
amounts in the case of
non-performance under
third-party agreements. As a
result, our available line of
credit is adjusted for the
letters of credit contract
amounts currently included
within our revolving credit
facility.
Capital Commitments
We remain committed to
maintaining our current high
level of plant quality and
renewing our franchise. As
part of this commitment, we
are obligated to make various
capital purchases related to
track
programs, locomotive
acquisitions and overhauls,
freight cars, and land. At
December 31, 2006, we had
multi-year capital commitments
of $480.1 million in the form
of signed contracts, largely
for locomotive overhaul
agreements. Payments for these
commitments are due in 2007
through 2016. These
expenditures are expected to be
financed by cash generated from
operations or by issuing new
debt.
38
2006 Annual Report
Offset Financial Liability
We entered into a bank loan
to finance the acquisition of
certain equipment. This loan is
offset by a financial asset with
the same institution. At
December 31, 2006, the loan had
a balance of $184.3 million,
offset by a financial asset of
$179.5 million. The remainder is
included in Long-term debt on
our Consolidated Balance Sheet.
Pension Plan Deficit
The defined benefit pension
plans deficit was $243.5 million
as at December 31, 2006. A plan
surplus or deficit is calculated
as the difference between an
actuarially estimated future
obligation for pension payments
and the fair market value of the
assets available to pay this
liability. The pension obligation
is discounted using a discount
rate that is a blended interest
rate of high-quality corporate
debt instruments. The discount
rate is one of the factors that
can influence a plans deficit.
Other factors include the actual
return earned on the assets and
rates used, based on managements
best estimates, for future salary
increases and inflation. We
estimate that every 1.0
percentage point increase (or
decrease) in the discount rate
can cause our defined benefit
pension plans deficit to
decrease (or increase) by
approximately $600 million,
reflecting the changes to both
the pension obligations and the
value of the pension funds debt
securities. Similarly, every 1.0
percentage point the actual
return on assets varies above (or
below) the estimated return for
the year, the deficit would
decrease (or increase) by
approximately $75 million.
Adverse experience with respect
to these factors could eventually
increase funding and pension
expense significantly, while
favourable experience with
respect to these factors could
eventually decrease funding and
pension expense significantly.
The defined benefit pension
plans deficit as
at December 31, 2006, was
approximately $600 million
lower than the deficit as at
December 31, 2005. The decrease
in 2006 was due primarily to
favourable pension fund
returns, a small rise in
long-term interest rates and
CPs substantial pension
contributions.
Between 51 % and 57 % of the
plans assets are invested in
equity securities. As a result,
stock market performance is the
key driver in determining the
pension funds asset performance.
Most of the plans remaining
assets are invested in debt
securities, which, as mentioned
above, provide a partial offset
to the increase (or decrease) in
our pension deficit caused by
decreases (or increases) in the
discount rate.
The deficit will fluctuate
according to future market
conditions and funding will be
revised as necessary to reflect
such fluctuations. We will
continue to make contributions
towards this deficit that, as a
minimum, meet requirements as
prescribed by Canadian pension
supervisory authorities.
We made contributions of $209.5
million to the defined benefit
pension plans in 2006, compared
with $141.7 million in 2005.
Our
main pension plan is currently
undergoing an updated actuarial
valuation as at January 1, 2007
which is expected to be completed
by April 30, 2007. An actuarial
valuation will be required as at
each January 1st until such time
as the plan no longer has a
solvency deficit (i.e. an excess
of the plans liabilities,
calculated on a plan termination
basis, over the fair market value
of the plans assets). Each
years minimum contribution
requirement will be set out in
the January 1st valuation for
that year. At this time, we
expect our pension contribution
in 2007 to be approximately $130
million. Future pension
contributions will be highly
dependent on our actual
experience, with such variables
as investment returns, interest
rate fluctuations,
and demographic changes. If long
Canada bond yields at December
31, 2007 remain at or above
their levels on December 31,
2006 and
our pension fund achieves an 8 %
investment return in 2007, we
project our pension
contributions to be
approximately $100 million in
2008.
Restructuring
Restructuring initiatives
were announced in 2003 and 2005
to improve efficiency in our
administrative areas by
eliminating 1,220 management and
administrative positions. The
total targeted reductions for
these initiatives were
successfully achieved by the end
of the third quarter of 2006. We
will continue to hire
selectively in specific areas of
the business, as required by
growth or changes in traffic
patterns.
Cash payments related to
severance under all restructuring
initiatives and to our
environmental remediation program
(described under the sub-heading
Critical Accounting Estimates)
totalled $96.3 million in 2006,
compared with $69.0 million in
2005 and $88.8 million in 2004.
In 2006, payments made for all
restructuring liabilities
amounted to $76.8 million,
compared with payments of $50.6
million in 2005 and $65.5 million
in 2004. Payments in 2006
relating to the labour
liabilities were $71.8 million,
compared with $50.5 million in
2005 and $62.2 million in 2004.
Cash payments for restructuring
and environmental initiatives
are estimated to be $75.6
million in 2007, $63.0 million
in 2008, $46.1 million in 2009,
and a total of $131.7 million
over the remaining years
through 2025, which will be
paid in decreasing amounts. All
payments will be funded from
general operations. Of these
amounts, cash payments related
only to the restructuring
initiatives are expected to be
$54.5 million in 2007, $43.6
million in 2008, $30.9 million
in 2009, and a total
2006 Annual Report
39
of $67.2 million over the
remaining years through 2025.
These amounts include residual
payments to protected employees
for previous restructuring
plans that are substantially
complete.
Critical Accounting Estimates
To prepare financial
statements that conform with
Canadian GAAP, we are required to
make estimates and assumptions
that affect the reported amounts
of assets and liabilities, the
disclosure of contingent assets
and liabilities at the date of
the financial statements, and the
reported amounts of revenues and
expenses during the reporting
period. Using the most current
information available, we review
our estimates on an ongoing
basis, including those related to
environmental liabilities,
pensions and other benefits,
property, plant and equipment,
future income taxes, and legal
and personal injury liabilities.
The development, selection and
disclosure of these estimates,
and this MD&A, have been
reviewed by the Board of
Directors Audit, Finance and
Risk Management Committee,
which is comprised entirely of
independent directors.
Environmental Liabilities
We estimate the probable
costs to be incurred in the
remediation of property
contaminated by past railway use.
We screen and classify sites
according to typical activities
and scale of operations
conducted, and we develop
remediation strategies for each
property based on the nature and
extent of the contamination, as
well as the location of the
property and surrounding areas
that may be adversely affected by
the presence of contaminants. We
also consider available
technologies, treatment and
disposal facilities and the
acceptability of site-specific
plans based on the local
regulatory environment.
Site-specific plans range from
containment and risk management
of the contaminants through to
the removal and treatment of the
contaminants and affected soils
and ground water. The details of
the estimates reflect the
environmental liability at each
property. We are committed to
fully meeting our regulatory and
legal obligations with respect to
environmental matters.
Liabilities for environmental
remediation may change from time
to time as new information about
previously untested sites becomes
known. The net liability may also
vary as the courts decide legal
proceedings against outside
parties responsible for
contamination. These potential
charges, which cannot be
quantified at this time, are not
expected to be material to our
financial position, but may
materially affect income in the
period in which a charge is
recognized. Material increases to
costs would be reflected as
increases to Deferred
liabilities on our Consolidated
Balance Sheet and to Special
charges within operating
expenses on our Statement of
Consolidated Income.
In 2006, environmental
liabilities were increased by
$10.5 million, largely due to the
accrual of anticipated
remediation costs through 2016 at
various sites. In 2005,
environmental liabilities
decreased by $22.4 million, due
mainly to a $33.9 million
reduction to an accrual recorded
for a property in the U.S. in a
previous year. The accrual in
2004 and the reduction in 2005
are discussed further in this
MD&A under the sub-heading
Environmental in the section
Future Trends, Commitments and
Risks.
At December 31, 2006, the
accrual for environmental
remediation on our Consolidated
Balance Sheet amounted to $120.2
million, of which the long-term
portion amounting to $98.8
million was included in Deferred
liabilities and the
short-term portion amounting to
$21.4 million was included in
Accounts payable and accrued
liabilities. Costs incurred
under our environmental
remediation program are charged
against the accrual. Total
payments were $19.5 million in
2006 and $18.4 million in 2005.
The U.S. dollar-denominated
portion of the liability was
affected by the change in Foreign
Exchange, resulting in a decrease
in environmental liabilities of
$0.2 million in 2006 and $2.7
million in 2005.
Pensions and Other Benefits
We have defined benefit and
defined contribution pension
plans. Other benefits include
post-retirement medical and life
insurance for
pensioners, and post-employment
workers compensation benefits.
Workers compensation benefits
are described in this section
under the sub-heading Legal and
Personal Injury Liabilities.
Pension and post-retirement
benefits liabilities are subject
to various external influences
and uncertainties, as described
under the sub-heading Pension
Plan Deficit in the section
Future Trends, Commitments and
Risks.
Pension costs are actuarially
determined using the
projected-benefit method prorated
over the credited service periods
of employees. This method
incorporates our best estimates
of expected plan investment
performance, salary escalation
and retirement ages of employees.
The expected return on fund
assets is calculated using
market-related asset values
developed from a five-year
average of market values for the
funds equity securities (with
each prior years market value
adjusted to the current date for
assumed investment income during
the intervening period) plus the
market value of the funds fixed
income and real estate
securities. The discount rate we
use to determine the benefit
obligation is based
40
2006 Annual Report
on market interest rates on
high-quality corporate debt
instruments with matching cash
flows. Unrecognized actuarial
gains and losses in excess of 10
% of the greater of the benefit
obligation and the market-related
value of plan assets are
amortized over the expected
average remaining service period
of active employees expected to
receive benefits under the plan
(approximately 11 years). Prior
service costs arising from plan
amendments are amortized over the
expected average remaining
service period of active
employees who were expected to
receive benefits under the plan
at the date of amendment. A
transitional asset and
obligation, which arose from
implementing the CICA Accounting
Standard Section 3461 Employee
Future Benefits effective
January 1, 2000, are being
amortized over the expected
average remaining service period
of active employees who were
expected to
receive benefits under the plan
at January 1, 2000 (approximately
13 years).
Other assets and
deferred charges on our December
31, 2006 Consolidated Balance
Sheet included prepaid pension
costs of $1,075.7 million. This
accrued benefit asset is
increased mainly by amounts
contributed to the plans by the
Company, partially offset by the
amount of pension expense for the
year. Our Consolidated Balance
Sheet also included $0.3 million
in Accounts payable and accrued
liabilities and $1.2 million in
Deferred liabilities for
pension obligations.
The obligations with respect to
post-retirement benefits,
including health care, workers
compensation in Canada and life
insurance, are actuarially
determined and accrued using the
projected-benefit method prorated
over the credited service periods
of employees. Fluctuations in the
post-retirement benefit
obligation are caused by changes
in the discount rate used. A 1.0
percentage
point increase (decrease) in the
discount rate would decrease
(increase) the liability by
approximately $50 million. We
included post-retirement benefits
accruals of $204.9 million in
Deferred liabilities and
post-retirement benefits accruals
of $3.5 million in Accounts
payable and accrued liabilities
on our December 31, 2006,
Consolidated Balance Sheet.
Pension and post-retirement
benefits expenses (excluding
workers compensation benefits)
were included in Compensation
and benefits on our December
31, 2006, Statement of
Consolidated Income.
Combined pension and
post-retirement benefits
expenses were $122.1 million in
2006, compared with $82.6
million in 2005.
Pension expense
consists of defined benefit
pension expense plus defined
contribution pension expense
(equal to contributions).
Pension expense was $78.5
million in 2006, compared with
$39.8 million in 2005.
Defined benefit pension expense
was $75.3 million in 2006,
compared with $36.7 million in
2005. Defined contribution
pension expense was $3.2 million
in 2006, compared with $3.1
million in 2005. Post-retirement
benefits expense in 2006 was
$43.6 million, compared with
$42.8 million in 2005.
Property, Plant and Equipment
We depreciate the cost of
properties, net of salvage, on a
straight-line basis over the
estimated useful life of the
property group. We follow the
group depreciation method under
which a single depreciation rate
is applied to the total cost in
a particular class of property,
despite differences in the
service life or salvage value of
individual properties within the
same class. Under the group
depreciation method, retirements
or disposals of properties in
the normal
course of business are accounted
for by charging the cost of the
property less any net salvage to
accumulated depreciation.
Due to the capital intensive nature of
the railway industry,
depreciation represents a
significant part of our operating
expenses. The estimated useful
lives of properties have a direct
impact on the amount of
depreciation expense charged and
the amount of accumulated
depreciation recorded as a
component of Net properties on
our Consolidated Balance Sheet.
At December 31, 2006, accumulated
depreciation was $5,010.9
million. Depreciation expense
relating to properties amounted
to $464.1 million in 2006,
compared with $445.1 million in
2005.
We undertake regular
depreciation studies to establish
the estimated useful life of each
property group. The studies use
statistical analysis and
historical retirement records
whenever feasible to estimate
service lives and salvage rates.
In cases where there are new
asset types or there is
insufficient retirement
experience, the depreciation
lives and salvage parameters are
based on engineering or other
expert opinions in the field.
Beginning in 2006 management
performed the depreciation
studies with the assistance of
external consultants. Revisions
to the estimated useful lives and
net salvage projections for
properties constitute a change in
accounting estimate and we deal
with these prospectively by
amending depreciation rates. It
is anticipated that there will be
changes in the estimates of
weighted average useful lives and
net salvage for each property
group as assets are acquired,
used and retired. Substantial
changes in either the useful
lives of properties or the
salvage assumptions could result
in significant changes to
depreciation expense. For
example, if the estimated average
life
2006 Annual Report
41
of road locomotives, our largest
asset group, increased (or
decreased) by 5 %, annual
depreciation expense would
decrease (or increase) by
approximately $3 million.
We review the carrying amounts of
our properties when
circumstances indicate that such
carrying amounts may not be
recoverable based on future
undiscounted cash flows. When
such properties are determined
to be impaired, recorded asset
values are revised to the fair
value and an impairment loss is
recognized.
In 2006, depreciation expense
increased $19 million from the
previous year due primarily to
capital additions to locomotives
and track investment.
Future Income Taxes
We account for future income
taxes in accordance with the
CICA Accounting Standard Section
3465 Income Taxes, which is
based on the liability method.
This method focuses on a
companys balance sheet and the
temporary differences otherwise
calculated from the comparison
of book versus tax values. It is
assumed that such temporary
differences will be settled in
the future at substantively
enacted tax rates. This
valuation process determines the
future income tax assets and
liabilities at the balance sheet
date.
In determining future income
taxes, we make estimates and
assumptions regarding future tax
matters, including estimating the
timing of the realization and
settlement of future income tax
assets (including the benefit of
tax losses) and liabilities.
Future income taxes are
calculated using the current
substantively enacted federal and
provincial future income tax
rates, which may differ in future
periods.
In 2006, we reduced our
future income tax liability by
$176 million due to a reduction
in income tax rates by the
Government of
Canada and certain provincial
governments (discussed under the
sub-heading Income Taxes in
the section Other Income
Statement Items).
Following a review of impending
transactions during third-quarter
2005, we concluded that our
remaining unrecognized capital
loss carryforwards for tax would
more than likely be utilized, and
we recorded a future tax asset
for all previously unrecognized
capital loss carryforwards. As a
result, any future capital gains
recorded, including FX on LTD,
will be taxable, where
historically they had resulted in
no net tax expense.
As a result of this review, we
made further reclassifications of
income tax allocated to
unrealized FX on LTD (for
non-GAAP reporting purposes).
These reclassifications moved
previously recognized capital
losses that have historically
been allocated to unrealized FX
on LTD gains and included them in
the calculation of income tax for
other capital transactions, which
are included in income tax
expense, before income tax on FX
on LTD and other specified items.
We expect a normalized income tax
rate for 2007 of between 30 % and
32 %.
Future income tax expense
totalling $75.3 million was
included in income tax for 2006
and $258.0 million was included
in income tax for 2005. At
December 31, 2006, future income
tax liabilities of $1,781.2
million were recorded as a
long-term liability, comprised
largely of temporary differences
related to accounting for
properties. Future income tax
benefits of $106.3 million
realizable within one year were
recorded as a current asset. We
believe that our future income
tax provisions are adequate.
Legal and Personal Injury Liabilities
We are involved in litigation
in Canada and the U.S. related to
our business. Management is
required to establish estimates
of potential liability arising
from incidents, claims and
pending litigation, including
personal injury claims and
certain occupation-related and
property damage claims.
These estimates are determined
on a case-by-case basis. They
are based on an assessment of
the actual damages incurred,
current legal advice with
respect to the expected outcome
of the legal action, and
actuarially determined
assessments with respect to
settlements in other similar
cases. We employ experienced
claims adjusters who investigate
and assess the validity of
individual claims made against
us and estimate the damages
incurred.
A provision for incidents, claims
or litigation is recorded based
on the facts and circumstances
known at the time. We accrue for
likely claims when the facts of
an incident become known and
investigation results provide a
reasonable basis for estimating
the liability. The lower end of
the range is accrued if the facts
and circumstances permit only a
range of reasonable estimates and
no single amount in that range is
a better estimate than any other.
Additionally, for administrative
expediency, we keep a general
provision for lesser-value injury
cases. Facts and circumstances
related to asserted claims can
change, and a process is in place
to monitor accruals for changes
in accounting estimates.
With respect to claims related to
occupational health and safety in
the provinces of Quebec, Ontario,
Manitoba and British Columbia,
estimates administered through
the Workers Compensation Board
(WCB) are actuarially
determined. In the provinces of
Saskatchewan and Alberta, we are
assessed for an annual WCB
contribution. As a result, this
amount is not subject to
estimation by management.
42
2006 Annual Report
Railway employees in the U.S. are
not covered by a state workers
compensation program, but are
covered by U.S. federal law for
railway employees. Although we
manage in the U.S. using a
case-by-case comprehensive
approach, for accrual purposes, a
combination of case-by-case
analysis and statistical analysis
is utilized.
In 2005, we
conducted a study to better
measure the level of accruals for
asbestos claims from retired U.S.
employees, and to better
calibrate the case-by-case
accruals for other U.S. employee
claims to recent safety and other
experience trends. The result of
the study was to increase our
liability accrual for such claims
by $4.1 million with a
corresponding charge to operating
expense. These studies are now
being conducted on an annual
basis. In 2006, adjustment to the
liability was not significant.
Provisions for incidents, claims
and litigation charged to
income, which are included in
Purchased services and other
on our Statement of Consolidated
Income, amounted to $41.1
million in 2006 and $43.0
million in 2005.
Accruals for incidents, claims
and litigation, including WCB
accruals, totalled $157.6
million, net of insurance
recoveries, at December 31,
2006. The total accrual
included $102.8 million in
Deferred liabilities and
$80.5 million in Accounts
payable and accrued
liabilities, offset by $9.0
million in Other assets and
deferred charges and $16.7
million in Accounts
receivable.
Systems, Procedures and Controls
The Companys Chief
Executive Officer and Chief
Financial Officer are
responsible for establishing
and maintaining disclosure
controls and procedures (as
defined in Rules 13a-15(e) and
15d-15(e) of the U.S.
Securities Exchange Act of 1934
(as amended)) to ensure that
material information relating to
the Company is made known to
them. The Chief Executive Officer
and Chief Financial Officer have
a process to evaluate these
disclosure controls and are
satisfied that they are adequate
for ensuring that such material
information is made known to
them.
Forward-looking Information
This MD&A contains certain
forward-looking statements within
the meaning of the Private
Securities Litigation Reform Act
of 1995 (United States) and other
relevant securities litigation
relating but not limited to our
operations, anticipated financial
performance, business prospects
and strategies. Forward-looking
information typically contains
statements with words such as
anticipate, believe,
expect, plan or similar words
suggesting future outcomes.
Readers are cautioned to not
place undue reliance on
forward-looking information
because it is possible that we
will not achieve predictions,
forecasts, projections and other
forms of forward-looking
information. In addition, we
undertake no obligation to update
publicly or otherwise revise any
forward-looking information,
whether as a result of new
information, future events or
otherwise except as required by
law.
By its nature, our
forward-looking information
involves numerous assumptions,
inherent risks and uncertainties,
including but not limited to the
following factors: changes in
business strategies; general
North American and global
economic and business conditions;
the availability and price of
energy commodities; the effects
of competition and pricing
pressures; industry capacity;
shifts in market demands; changes
in laws and regulations,
including regulation of rates;
potential increases in
maintenance and operating costs;
uncertainties of litigation;
labour disputes; risks and
liabilities arising from
derailments; timing of completion
of capital and maintenance
projects; currency and interest
rate fluctuations; effects of
changes in market conditions on
the financial position of pension
plans; various events that could
disrupt operations, including
severe weather conditions;
security threats; and
technological changes.
The performance of the North
American and global economies
remains uncertain. Grain
production and yield in Canada
were stable in the last crop year
and are expected to remain so in
the current crop year.
However, factors over which we
have no control, such as weather
conditions and insect
populations, affect crop
production and yield in the grain
collection areas we serve. Fuel
prices also remain uncertain, as
they are influenced by many
factors, including, without
limitation, worldwide oil demand,
international politics, severe
weather, labour and political
instability in major
oil-producing countries and the
ability of these countries to
comply with agreed-upon
production quotas. We intend to
continue our fuel cost mitigation
program to attempt to offset the
effects of high crude oil prices.
2006 Annual Report
43
In Canada, Bill C-11, legislation
amending the Canada
Transportation Act (CTA), was
introduced in Parliament in
spring 2006. Bill C-11 contains
some of the amendments that had
been included in Bill C-44, which
was introduced in 2005 but was
terminated when Parliament was
dissolved on November 29, 2005.
Bill C-11 includes, among other
things, amendments concerning the
grain revenue cap, commuter and
passenger access, and railway
noise. Amendments concerning Final
Offer Arbitration (FOA) and
other shipper remedies are not
included in Bill C-11 which
passed Second Reading in the
House of Commons (the House)
and was sent to the standing
Committee on Transport and
Infrastructure (Committee). It
was reported by the Committee
with some amendments on issues
including noise in December
2006. It is anticipated that,
unless Parliament is dismissed,
Bill C-11 will be passed in the
House in the first half of 2007
and will then be sent to the
Senate. There
may be additional changes to
the CTA in respect of FOA and
other matters that had been
dealt with in Bill C-44. No
assurance can be given as to
the effect on CP of the
provisions of Bill C-11 or as
to the content, timing or
effect on CP of any anticipated
additional legislation.
CPs railway operations in the
United States are subject to
regulation by the STB. The STB
has undertaken an independent
review of a number of commercial
matters including the methodology
used by railways to assess fuel
surcharges, the commercial
relationship between large
railways and shortlines, the
rates charged by railways to
grain shippers and a review of
the methodology for determining
the railway industrys cost of
capital. The STB has also
promulgated proposed new rules
for the handling of disputes by
small and medium shippers. It is
too early to assess the possible
impact on CP if any new
regulation is forthcoming as a
result of these hearings and
proposed rules.
The sustainability of recent
increases in the value of the
Canadian dollar relative to the
U.S. dollar is unpredictable, as
the value of the Canadian dollar
is affected by a number of
domestic and international
factors, including, without
limitation, economic
performance, Canadian and
international monetary policies
and U.S. debt levels.
There is
also continuing uncertainty with
respect to security issues
involving the transportation of
goods in populous areas of the
U.S. and Canada and the
protection of North Americas
rail infrastructure, including
the movement of goods across the
Canada-U.S. border.
There are more specific factors
that could cause actual results
to differ from those described
in the forward-looking
statements contained in this
MD&A. These more specific
factors are identified and
discussed in the section Future
Trends, Commitments and Risks
and elsewhere in this MD&A with
the particular forward-looking
statement in question.
44
2006 Annual Report
Glossary of Terms
Average train speed the
average speed attained as a train
travels between terminals,
calculated by dividing the total
train miles traveled by the total
hours operated. This calculation
does not include the travel time
or the distance traveled
by: i) trains used in or around
CPs yards; ii) passenger trains;
and iii) trains used for
repairing track. The calculation
also does not include the time
trains spend waiting in
terminals.
Car miles per car day the
total car-miles for a period
divided by the total number of
active cars.
Total car-miles includes the
distance travelled by every car
on a revenue-producing train and
a train used in or around our
yards.
A car-day is assumed to
equal one active car. An active
car is a revenue-producing car
that is generating costs to CP on
an hourly or mileage basis.
Excluded from this count are i)
cars that are not on the track or
are being stored; ii) cars that
are in need of repair; iii) cars
that are used to carry materials
for track repair; iv) cars owned
by customers that are on the
customers tracks; and v) cars
that are idle and waiting to be
reclaimed by CP.
Carloads revenue-generating shipments of
containers, trailers and freight
cars.
CICA Canadian Institute of
Chartered Accountants.
Class 1 railway a railway
earning a minimum of
US$319.3 million in
revenues annually.
CPRL Canadian Pacific Railway Limited.
CP, the Company CPRL, CPRL
and its subsidiaries, CPRL
and one or more of its
subsidiaries, or one of more
of CPRLs subsidiaries.
Co-production initiatives
commercial agreements with other
railways, made for the purpose
of operating convenience, which
are for: (i) the sharing of
track where two railways operate
trains over each others track;
(ii) the provision of trackage
rights where one railway permits
another railway to operate
trains over its track; or (iii)
the provision of haulage or
switching services under which
one railway moves the trains or
cars of another railway over its
track.
Diluted EPS, before FX on LTD a
variation of the calculation of
diluted EPS, which is calculated
by dividing income, before FX on
LTD, by the weighted average
number of shares
outstanding, adjusted for
outstanding stock options using
the Treasury Stock Method, as
described on page 11.
D&H Delaware and Hudson
Railway Company, Inc., a
wholly owned indirect U.S.
subsidiary of CPRL.
EPS earnings per share.
Fluidity obtaining more
value from our existing
assets and resources.
Foreign Exchange the net impact
of a change in the value of the
Canadian dollar relative to the
U.S. dollar (exclusive of any
impact on market demand).
FRA U.S. Federal Railroad
Administration, a regulatory
agency whose purpose is to
promulgate and enforce rail
safety regulations; administer
railroad assistance programs;
conduct research and development
in support of improved railroad
safety and national rail
transportation policy; provide
for the rehabilitation of
Northeast Corridor rail passenger
service; and consolidate
government support of rail
transportation activities.
FRA personal injuries per 200,000
employee-hours the number of
personal injuries, multiplied by
200,000 and divided by total
employee-hours. Personal injuries
are defined as injuries that
require employees to lose time
away from work, modify their
normal duties or obtain medical
treatment beyond minor first aid.
Employee-hours are the total
hours worked, excluding vacation
and sick time, by all employees,
excluding contractors.
FRA train accidents per million
train-miles the number of train
accidents, multiplied by
1,000,000 and divided by total
train-miles. Train accidents
included in this metric meet or
exceed the FRA reporting
threshold of US$7,700 in damage.
Freight revenue per carload the
amount of freight revenue
earned for every carload moved,
calculated by dividing the
freight revenue for a commodity
by the number of carloads of
the commodity transported in
the period.
Freight revenue per RTM the
amount of freight revenue earned
for every RTM moved, calculated
by dividing the total freight
revenue by the total RTMs in the
period.
FX on
LTD foreign
exchange gains and losses on
long-term debt.
GAAP Canadian generally
accepted accounting
principles.
GTMs or gross ton-miles the
movement of total train weight
over a distance of one mile.
Total train weight is comprised
of the weight of the freight
cars, their contents and any
inactive locomotives. An
increase in GTMs indicates
additional productivity.
IOP Integrated Operating Plan, the
foundation for our scheduled
railway operations.
2006 Annual Report
45
LIBOR London Interbank
Offered Rate.
MD&A Managements Discussion and
Analysis.
Number of active employees
end of period the number of
actively employed workers during
the last month of the period.
This includes employees who are
taking vacation and statutory
holidays and other forms of
short-term paid leave, and
excludes individuals who have a
continuing employment
relationship with us but are not
currently working.
Operating ratio the ratio of
total operating expenses to
total revenues. A lower
percentage normally
indicates higher efficiency.
Return on capital employed
income before FX on LTD and
other specified items plus
after-tax interest expense
divided by average net debt plus
equity.
RTMs or revenue ton-miles the
movement of one
revenue-producing ton of freight
over a distance of one mile.
Soo Line Soo Line Railroad
Company, a wholly owned
indirect U.S. subsidiary of
CPRL.
STB U.S. Surface Transportation
Board, a regulatory agency with
jurisdiction over railway rate
and service issues and rail
restructuring, including mergers
and sales.
Terminal dwell the
average time a freight car
resides at a specified terminal
location. The timing starts with
a train arriving in the terminal,
a customer releasing the car to
us, or a car arriving that is to
be transferred to another
railway. The timing ends when the
train leaves, a customer receives
the car from us or the freight
car is transferred to another
railway. Freight cars are
excluded if: i) a train is moving
through the terminal without
stopping; ii) they are being
stored at the terminal; iii) they
are in need of repair; or iv)
they are used in track repairs.
U.S. gallons of locomotive fuel
per 1,000 GTMs consumed
freight and yard the total fuel
consumed in freight and yard
operations for every 1,000 GTMs
traveled. This is calculated by
dividing the total amount of fuel
issued to our locomotives,
excluding commuter and
non-freight activities, by the
total freight-related GTMs. The
result indicates how efficiently
we are using fuel.
WCB Workers Compensation Board, a mutual
insurance corporation providing
workplace liability and
disability insurance in Canada.
WTI West Texas
Intermediate, a commonly
used index for the price of
a barrel of crude oil.
46
2006 Annual Report
|
|
|
|
|
|
|
MANAGEMENTS RESPONSIBILITY
|
|
|
|
|
FOR FINANCIAL REPORTING
|
|
|
The information in this
Annual Report is the
responsibility of management. The
consolidated financial statements
have been prepared by management
in accordance with Canadian
generally accepted accounting
principles and include some
amounts based on managements
best estimates and careful
judgment. The consolidated
financial statements include the
accounts of Canadian Pacific
Railway Limited, Canadian Pacific
Railway Company and all of its
subsidiaries (the Company). The
financial information of the
Company included in this Annual Report is
consistent with that in the
consolidated financial
statements. The consolidated
financial statements have been
approved by the Board of
Directors.
Our Board of Directors
is responsible for reviewing and
approving the consolidated
financial statements and for
overseeing managements
performance of its financial
reporting responsibilities. The
Board of Directors carries out
its responsibility for the
consolidated financial statements
principally through its Audit,
Finance and Risk Management
Committee (the Audit Committee),
consisting of five members, all
of whom are outside directors.
The Audit Committee reviews the
consolidated financial statements
and Managements Discussion and
Analysis with management and the
independent auditors prior to
submission to the Board for
approval. The Audit Committee
meets regularly with management,
internal auditors, and the
independent auditors to review
accounting policies, and
financial reporting. The Audit
Committee also reviews the
recommendations of both the
independent and internal auditors
for improvements
MICHAEL LAMBERT
Executive Vice-President
and Chief Financial Officer
March 2, 2007
to internal controls, as well
as the actions of management to
implement such recommendations.
The internal and independent
auditors have full access to
the Audit Committee, with or
without the presence of
management.
Managements Report on Internal
Control over Financial Reporting
Management is responsible for
establishing and maintaining
adequate internal control over
financial reporting for the
Company. Because of its inherent
limitations, internal control
over financial reporting may not
prevent or detect misstatements.
Also, projections of any
evaluation of effectiveness to
future periods are subject to the
risk that controls may become
inadequate because of changes in
conditions, or that the degree of
compliance with the policies or
procedures may deteriorate.
Management has assessed the
effectiveness of the Companys
internal controls over financial
reporting in accordance with the
criteria set forth by the
Committee of Sponsoring
Organizations of the Treadway
Commission in Internal
Control-Integrated Framework.
Based on this assessment,
management determined that the
Company maintained effective
internal control over financial
reporting as of December 31,
2006.
Managements assessment of
the effectiveness of the
Companys internal control over
financial reporting as of
December 31, 2006 has been
audited by PricewaterhouseCoopers
LLP, independent auditors, as
stated in their report, which is
included herein.
FRED J. GREEN
Chief Executive Officer
2006 Annual Report
47
To the Shareholders of
Canadian Pacific Railway Limited
We have completed an
integrated audit of the
consolidated financial
statements and internal control
over financial reporting of
Canadian Pacific Railway Limited
as of December 31, 2006 and
audits of its 2005 and 2004
consolidated financial
statements. Our opinions, based
on our audits, are presented
below.
Consolidated
Financial Statements
We have audited the
accompanying consolidated balance
sheets of Canadian Pacific
Railway Limited as at December
31, 2006 and 2005, and the
related consolidated statements
of income, retained income and
cash flows for each of the three
years in the period ended
December 31, 2006. These
financial statements are the
responsibility of the Companys
management. Our responsibility is
to express an opinion on these
financial statements based on our
audits.
We conducted our audit of the
Companys financial statements as
at December 31, 2006 and for the
year then ended in accordance
with Canadian generally accepted
auditing standards and the
standards of the Public Company
Accounting Oversight Board
(United States). We conducted our
audits of the Companys financial
statements as at December 31,
2005 and 2004 and for each of the
two years in the period ended
December 31, 2005 in accordance
with Canadian generally accepted
auditing standards. Those
standards require that we plan
and perform an audit to obtain
reasonable assurance about
whether the financial statements
are free of material
misstatement. An audit of
financial statements includes
examining, on a test basis,
evidence supporting the amounts
and disclosures in the financial
statements. A financial statement
audit also includes assessing the
accounting principles used and
significant estimates made by
management, and evaluating the
overall financial statement
presentation.
In our opinion, the consolidated
financial statements referred to
above present fairly, in all
material respects, the financial
position of the Company as at
December 31, 2006 and 2005 and
the results of its operations
and its cash flows for each of
the three years in the period
ended December 31, 2006 in
accordance with Canadian
generally accepted accounting
principles.
Internal
Control Over Financial Reporting
We have also audited
managements assessment,
included in the Managements
Report on Internal Control over
Financial Reporting that the
Company maintained effective
internal control over financial
reporting as of December 31,
2006, based on criteria
established in Internal Control
Integrated Framework issued
by the Committee of Sponsoring
Organizations of the Treadway
Commission (COSO). The
Companys management is
responsible for maintaining
effective internal control over
financial reporting and for its
assessment of the effectiveness
of internal control over
financial reporting. Our
responsibility is to
48
2006 Annual Report
express opinions on
managements assessment and on
the effectiveness of the
Companys internal control over
financial reporting based on
our audit.
We conducted our audit of
internal control over financial
reporting in accordance with the
standards of the Public Company
Accounting Oversight Board
(United States). Those standards
require that we plan and perform
the audit to obtain reasonable
assurance about whether
effective internal control over
financial reporting was
maintained in all material
respects. An audit of internal
control over financial reporting
includes obtaining an
understanding of internal
control over financial
reporting, evaluating
managements assessment, testing
and evaluating the design and
operating effectiveness of
internal control, and performing
such other procedures as we
consider necessary in the
circumstances. We believe that
our audit provides a reasonable
basis for our opinions.
A companys internal control over
financial reporting is a process
designed to provide reasonable
assurance regarding the
reliability of financial
reporting and the preparation of
financial statements for external
purposes in accordance with
generally accepted accounting
principles. A companys internal
control over financial reporting
includes those policies and
procedures that (i) pertain to
the maintenance of records that,
in reasonable detail, accurately
and fairly reflect the
transactions and dispositions of
the assets of the company; (ii)
provide reasonable
assurance that transactions are
recorded as necessary to permit
preparation of financial
statements in accordance with
generally accepted accounting
principles, and
that receipts and expenditures
of the company are being made
only in accordance with
authorizations of management and
directors of the company; and
(iii) provide reasonable
assurance regarding prevention
or timely detection of
unauthorized acquisition, use,
or disposition of the companys
assets that could have a
material effect on the financial
statements.
Because of its inherent
limitations, internal control
over financial reporting may not
prevent or detect misstatements.
Also, projections of any
evaluation of effectiveness to
future periods are subject to the
risk that controls may become
inadequate because of changes in
conditions, or that the degree of
compliance with the policies or
procedures may deteriorate.
In our opinion, managements
assessment that the Company
maintained effective internal
control over financial reporting
as at December 31, 2006 is fairly
stated, in all material respects,
based on criteria established in
Internal Control Integrated
Framework issued by the COSO.
Furthermore, in our opinion, the
Company maintained, in all
material respects, effective
internal control over financial
reporting as of December 31, 2006
based on criteria established in
Internal Control Integrated
Framework issued by the COSO.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Calgary, Alberta
March 2, 2007
Comments by Auditors on
Canada-U.S. Reporting Difference
In the United States,
reporting standards for auditors
require the addition of an
explanatory paragraph (following
the opinion paragraph) when there
is a change in accounting
principles that has a material
effect on the comparability of
the Companys financial
statements, such as the changes
in the manner in which it
accounts for its stock based
compensation described in Notes 2
and 26 and its pension and post
retirement benefits described in
Note 26. Our report to the
shareholders dated March 2, 2007,
is expressed in accordance with
Canadian reporting standards,
which do not require a reference
to such a change in accounting
principles in the Auditors
Report when the change is
properly accounted for and
adequately disclosed in the
financial statements.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Calgary, Alberta
March 2, 2007
2006 Annual Report
49
STATEMENT OF CONSOLIDATED INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 (in millions, except per share data) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
|
|
|
(see Note 2
|
) |
|
(see Note 2
|
) |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Freight (Note 6) |
|
$ |
4,427.3 |
|
|
$ |
4,266.3 |
|
|
$ |
3,785.1 |
|
Other |
|
|
155.9 |
|
|
|
125.3 |
|
|
|
117.8 |
|
|
|
|
|
4,583.2 |
|
|
|
4,391.6 |
|
|
|
3,902.9 |
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
1,327.6 |
|
|
|
1,322.1 |
|
|
|
1,261.5 |
|
Fuel |
|
|
650.5 |
|
|
|
588.0 |
|
|
|
440.0 |
|
Materials |
|
|
212.9 |
|
|
|
203.3 |
|
|
|
178.5 |
|
Equipment rents |
|
|
181.2 |
|
|
|
210.0 |
|
|
|
218.5 |
|
Depreciation and amortization |
|
|
464.1 |
|
|
|
445.1 |
|
|
|
407.1 |
|
Purchased services and other |
|
|
618.3 |
|
|
|
621.6 |
|
|
|
610.7 |
|
|
|
|
|
3,454.6 |
|
|
|
3,390.1 |
|
|
|
3,116.3 |
|
|
Operating income, before the following: |
|
|
1,128.6 |
|
|
|
1,001.5 |
|
|
|
786.6 |
|
Special (credit) charge for environmental remediation (Notes 4
and 20) |
|
|
|
|
|
|
(33.9 |
) |
|
|
90.9 |
|
Special charge for (reduction to) labour restructuring (Notes
5 and 20) |
|
|
|
|
|
|
44.2 |
|
|
|
(19.0 |
) |
|
Operating income |
|
|
1,128.6 |
|
|
|
991.2 |
|
|
|
714.7 |
|
Other charges (Note 7) |
|
|
27.8 |
|
|
|
18.1 |
|
|
|
36.1 |
|
Foreign exchange gain on long-term debt |
|
|
0.1 |
|
|
|
(44.7 |
) |
|
|
(94.4 |
) |
Interest expense (Note 8) |
|
|
194.5 |
|
|
|
204.2 |
|
|
|
218.6 |
|
Income tax expense (Note 9) |
|
|
109.9 |
|
|
|
270.6 |
|
|
|
143.3 |
|
|
Net income |
|
$ |
796.3 |
|
|
$ |
543.0 |
|
|
$ |
411.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share (Note 10) |
|
$ |
5.06 |
|
|
$ |
3.43 |
|
|
$ |
2.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share (Note 10) |
|
$ |
5.02 |
|
|
$ |
3.39 |
|
|
$ |
2.58 |
|
|
|
See Notes to Consolidated Financial Statements.
50
2006 Annual Report
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
As at December 31 (in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
(see Note 2
|
) |
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
124.3 |
|
|
$ |
121.8 |
|
Accounts receivable and other current assets (Note 11) |
|
|
615.7 |
|
|
|
524.0 |
|
Materials and supplies |
|
|
158.6 |
|
|
|
140.1 |
|
Future income taxes (Note 9) |
|
|
106.3 |
|
|
|
108.0 |
|
|
|
|
|
1,004.9 |
|
|
|
893.9 |
|
Investments (Note 13) |
|
|
64.9 |
|
|
|
67.3 |
|
Net properties (Note 14) |
|
|
9,122.9 |
|
|
|
8,790.9 |
|
Other assets and deferred charges (Note 15) |
|
|
1,223.2 |
|
|
|
1,139.0 |
|
|
Total assets |
|
$ |
11,415.9 |
|
|
$ |
10,891.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
1,002.6 |
|
|
$ |
1,032.8 |
|
Income and other taxes payable |
|
|
16.0 |
|
|
|
30.2 |
|
Dividends payable |
|
|
29.1 |
|
|
|
23.7 |
|
Long-term debt maturing within one year (Note 16) |
|
|
191.3 |
|
|
|
30.0 |
|
|
|
|
|
1,239.0 |
|
|
|
1,116.7 |
|
Deferred liabilities (Note 18) |
|
|
725.7 |
|
|
|
745.9 |
|
Long-term debt (Note 16) |
|
|
2,813.5 |
|
|
|
2,970.8 |
|
Future income taxes (Note 9) |
|
|
1,781.2 |
|
|
|
1,673.6 |
|
Shareholders equity |
|
|
|
|
|
|
|
|
Share capital (Note 21) |
|
|
1,175.7 |
|
|
|
1,141.5 |
|
Contributed surplus (Note 21) |
|
|
32.3 |
|
|
|
245.1 |
|
Foreign currency translation adjustments (Note 21) |
|
|
66.4 |
|
|
|
67.5 |
|
Retained income |
|
|
3,582.1 |
|
|
|
2,930.0 |
|
|
|
|
|
4,856.5 |
|
|
|
4,384.1 |
|
|
Total liabilities and shareholders equity |
|
$ |
11,415.9 |
|
|
$ |
10,891.1 |
|
|
|
Commitments and
contingencies (Note 24).
See
Notes to Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
|
Approved on behalf of the Board:
|
|
J.E. Cleghorn, Director
|
|
R. Phillips, Director |
2006 Annual Report
51
STATEMENT OF CONSOLIDATED CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 (in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
|
|
|
(see Note 2
|
) |
|
(see Note 2
|
) |
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
796.3 |
|
|
$ |
543.0 |
|
|
$ |
411.1 |
|
Add (deduct) items not affecting cash |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
464.1 |
|
|
|
445.1 |
|
|
|
407.1 |
|
Future income taxes (Note 9) |
|
|
75.3 |
|
|
|
258.0 |
|
|
|
131.5 |
|
Environmental remediation charge (Notes 4 and 20) |
|
|
|
|
|
|
(30.9 |
) |
|
|
90.9 |
|
Restructuring and impairment charge (Notes 5 and 20) |
|
|
|
|
|
|
44.2 |
|
|
|
(19.0 |
) |
Foreign exchange gain on long-term debt |
|
|
0.1 |
|
|
|
(44.7 |
) |
|
|
(94.4 |
) |
Amortization of deferred charges |
|
|
16.5 |
|
|
|
19.5 |
|
|
|
24.7 |
|
Restructuring and environmental payments (Note 20) |
|
|
(96.3 |
) |
|
|
(69.0 |
) |
|
|
(88.8 |
) |
Other operating activities, net |
|
|
(103.4 |
) |
|
|
(91.2 |
) |
|
|
(113.8 |
) |
Change in non-cash working capital balances related to
operations (Note 12) |
|
|
(101.6 |
) |
|
|
(23.3 |
) |
|
|
33.2 |
|
|
Cash provided by operating activities |
|
|
1,051.0 |
|
|
|
1,050.7 |
|
|
|
782.5 |
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Additions to properties (Note 14) |
|
|
(793.7 |
) |
|
|
(884.4 |
) |
|
|
(673.8 |
) |
Decrease in investments and other assets |
|
|
2.2 |
|
|
|
2.0 |
|
|
|
1.0 |
|
Net proceeds from disposal of transportation properties |
|
|
97.8 |
|
|
|
13.2 |
|
|
|
10.2 |
|
|
Cash used in investing activities |
|
|
(693.7 |
) |
|
|
(869.2 |
) |
|
|
(662.6 |
) |
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(112.4 |
) |
|
|
(89.5 |
) |
|
|
(81.7 |
) |
Issuance of CP Common Shares |
|
|
66.6 |
|
|
|
31.8 |
|
|
|
2.5 |
|
Purchase of CP Common Shares |
|
|
(286.4 |
) |
|
|
(80.6 |
) |
|
|
|
|
Issuance of long-term debt |
|
|
2.8 |
|
|
|
|
|
|
|
193.7 |
|
Repayment of long-term debt |
|
|
(25.4 |
) |
|
|
(274.4 |
) |
|
|
(16.1 |
) |
|
Cash (used in) provided by financing activities |
|
|
(354.8 |
) |
|
|
(412.7 |
) |
|
|
98.4 |
|
|
Cash position |
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
2.5 |
|
|
|
(231.2 |
) |
|
|
218.3 |
|
Cash and cash equivalents at beginning of year |
|
|
121.8 |
|
|
|
353.0 |
|
|
|
134.7 |
|
|
Cash and cash equivalents at end of year |
|
$ |
124.3 |
|
|
$ |
121.8 |
|
|
$ |
353.0 |
|
|
|
See Notes to Consolidated Financial Statements.
52
2006 Annual Report
STATEMENT OF CONSOLIDATED RETAINED INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 (in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
|
|
|
(see Note 2
|
) |
|
(see Note 2
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1 |
|
$ |
2,930.0 |
|
|
$ |
2,479.2 |
|
|
$ |
2,153.9 |
|
Adjustment for change in accounting policy (Note 2) |
|
|
|
|
|
|
|
|
|
|
(3.3 |
) |
|
|
|
|
2,930.0 |
|
|
|
2,479.2 |
|
|
|
2,150.6 |
|
Net income for the year |
|
|
796.3 |
|
|
|
543.0 |
|
|
|
411.1 |
|
Dividends |
|
|
(117.7 |
) |
|
|
(92.2 |
) |
|
|
(82.5 |
) |
Shares repurchased |
|
|
(26.5 |
) |
|
|
|
|
|
|
|
|
|
Balance, December 31 |
|
$ |
3,582.1 |
|
|
$ |
2,930.0 |
|
|
$ |
2,479.2 |
|
|
|
See Notes to Consolidated Financial Statements.
2006 Annual Report
53
|
|
|
NOTES TO CONSOLIDATED
|
|
|
FINANCIAL STATEMENTS
|
|
|
December 31, 2006
|
|
|
1. Summary of Significant Accounting Policies
Principles of Consolidation
These consolidated financial statements include the accounts of Canadian Pacific Railway
Limited (CPRL) and all of its subsidiaries, including variable-interest entities (VIE) for
which CPRL is the primary beneficiary and the proportionate share of the accounts of jointly
controlled enterprises (collectively referred to as CP or the Company), and have been prepared
in accordance with Canadian generally accepted accounting principles (GAAP).
These consolidated financial statements are expressed in Canadian dollars, except where otherwise
indicated. The preparation of these financial statements in conformity with Canadian GAAP requires
management to make estimates and assumptions that affect the reported amounts of revenues and
expenses during the period, the reported amounts of assets and liabilities, and the disclosure of
contingent assets and liabilities at the date of the financial statements. On an ongoing basis,
management reviews its estimates, including those related to restructuring and environmental
liabilities, pensions and other benefits, depreciable lives of properties, future income tax assets
and liabilities, as well as legal and personal injury liabilities based upon currently available
information. Actual results could differ from these estimates.
Principal Subsidiaries
The following list sets out CPRLs principal railway operating subsidiaries, including the
jurisdiction of incorporation and the percentage of voting securities owned directly or indirectly
by CPRL as of December 31, 2006.
|
|
|
|
|
|
|
|
|
Incorporated under |
|
Percentage of voting securities |
Principal subsidiary |
|
the laws of |
|
held directly or indirectly by CPRL |
|
|
|
|
|
|
|
|
|
Canadian Pacific Railway Company
|
|
Canada
|
|
|
100 |
% |
Soo Line Railroad Company (Soo Line)
|
|
Minnesota
|
|
|
100 |
% |
Delaware and Hudson Railway Company, Inc. (D&H)
|
|
Delaware
|
|
|
100 |
% |
Mount Stephen Properties Inc. (MSP)
|
|
Canada
|
|
|
100 |
% |
|
|
Revenue Recognition
Railway freight revenues are recognized based on the percentage of completed service method.
Other revenue is recognized as service is performed or contractual obligations are met. Volume
rebates are accrued as a reduction of freight revenues based on estimated volumes and contract
terms as freight service is provided.
Cash and Cash Equivalents
Cash and cash equivalents includes marketable short-term investments that are readily
convertible to cash. Short-term investments are stated at cost, which approximates market value.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies, other than those held through
self-sustaining foreign subsidiaries, are translated into Canadian dollars at the year-end exchange
rate for monetary items and at the historical exchange rates for non-monetary items. Foreign
currency revenues and expenses are translated at the exchange rate in effect on the dates of the
related transactions. Foreign currency gains and losses, other than those arising from the
translation of the Companys net investment in self-sustaining foreign subsidiaries, are included
in income.
54
2006 Annual Report
The accounts of the Companys self-sustaining foreign subsidiaries are translated into Canadian
dollars using the year-end exchange rate for assets and liabilities and the average exchange rates
during the year for revenues and expenses. Exchange gains and losses arising from translation of
these foreign subsidiaries accounts are included in Shareholders equity as foreign currency
translation adjustments (see Note 21). A portion of the U.S. dollar-denominated long-term debt has
been designated as a hedge of the net investment in self-sustaining foreign subsidiaries. As a
result, unrealized foreign exchange gains and losses on a portion of the U.S. dollar-denominated
long-term debt are offset against foreign exchange gains and losses arising from translation of
self-sustaining foreign subsidiaries accounts.
Pensions and Other Benefits
Pension costs are actuarially determined using the projected-benefit method prorated over the
credited service periods of employees. This method incorporates managements best estimate of
expected plan investment performance, salary escalation and retirement ages of employees. The
expected return on fund assets is calculated using market-related asset values, developed from a
five-year average of market values for the funds equity securities (with each prior years market
value adjusted to the current date for assumed investment income during the intervening period)
plus the market value of the funds fixed income and real estate securities. The discount rate used
to determine the benefit obligation is based on market interest rates on high-quality corporate
debt instruments with matching cash flows. Unrecognized actuarial gains and losses in excess of 10
% of the greater of the benefit obligation and the market-related value of plan assets are
amortized over the expected average remaining service period of active employees expected to
receive benefits under the plan (approximately 11 years). Prior service costs arising from plan
amendments are amortized over the expected average remaining service period of active employees who
were expected to receive benefits under the plan at the date of amendment. The transitional asset
and obligation arising from implementing the CICA Accounting Standard Section 3461 Employee Future
Benefits effective January 1, 2000, are being amortized over the expected average remaining
service period of active employees who were expected to receive benefits under the plan at January
1, 2000 (approximately 13 years).
Benefits other than pensions, including health care, some workers compensation and long-term
disability benefits in Canada and life insurance, are actuarially determined and accrued on a basis
similar to pension costs.
Materials and Supplies
Materials and supplies on hand are valued at the lower of average cost and replacement value.
Net Properties
Fixed asset additions and major renewals are recorded at cost. The Company capitalizes
development costs for major new computer systems, including the related variable indirect costs. In
addition, CP capitalizes the cost of major overhauls and large refurbishments. When depreciable
property is retired or otherwise disposed of in the normal course of business, the book value, less
net salvage proceeds, is charged to accumulated depreciation. However, when removal costs exceed
the salvage value on assets and the Company had no legal obligation to remove, the net removal cost
is charged to income in the period in which the asset is removed and is not charged to accumulated
depreciation. When there is a legal obligation associated with the retirement of property, plant
and equipment, a liability is initially recognized at its fair value and a corresponding asset
retirement cost is added to the gross book value of the related asset and amortized to expense over
the estimated term to retirement. The Company reviews the carrying amounts of its properties whenever changes in circumstances
indicate that such carrying amounts may not be recoverable based on future undiscounted cash flows.
When such properties are determined to be impaired, recorded asset values are revised to the fair
value and an impairment loss is recognized.
Depreciation is calculated on the straight-line basis at rates based on the estimated service life,
taking into consideration the projected annual usage of depreciable property, except for rail and
other track material in the U.S., which is based directly on usage. Usage is based on volumes of
traffic.
Assets to be disposed of are included in Other assets and deferred charges on the
Consolidated Balance Sheet. They are reported at the lower of the carrying amount and fair value,
less costs to sell, and are no longer depreciated.
Equipment under capital lease is included in properties and depreciated over the period of expected
use.
2006 Annual Report
55
2006 Annual Report 55
Estimated service life used for principal categories of properties is as follows:
|
|
|
|
|
Assets |
|
Years |
|
|
|
|
Diesel locomotives |
|
|
28 to 32 |
|
|
Freight cars |
|
|
23 to 47 |
|
|
Ties |
|
|
35 to 45 |
|
|
Rails in first position |
|
|
21 to 30 |
|
in other than first position |
|
|
54 |
|
Computer system development costs |
|
|
5 to 15 |
|
|
|
Derivative Financial and Commodity Instruments
Derivative financial and commodity instruments may be used from time to time by the Company to
manage its exposure to price risks relating to foreign currency exchange rates, stock-based
compensation, interest rates and fuel prices. Beginning January 1, 2004, when CP utilizes
derivative instruments in hedging relationships, CP identifies, designates and documents those
hedging transactions and regularly tests the transactions to demonstrate effectiveness in order to
continue hedge accounting. In the Statement of Consolidated Cash Flows, cash flows relating to
derivative instruments are included in the same line as the related item.
Should the hedging relationship become ineffective, previously unrecognized gains and losses remain
deferred until the hedged item is settled and, prospectively, future changes in value of the hedge
are recognized in income. Derivative instruments that do not qualify as hedges or are not
designated as hedges are carried at fair value on the Consolidated Balance Sheet in Other assets
and deferred charges or Deferred liabilities. Any change in fair value is recognized in the
period in which the change occurs in the Statement of Consolidated Income in the line item to which
the derivative instrument is related.
The Company from time to time enters into foreign exchange forward contracts to hedge anticipated
sales in U.S. dollars, the related accounts receivable and future capital acquisitions. Foreign
exchange translation gains and losses on foreign currency-denominated derivative financial
instruments used to hedge anticipated U.S. dollar-denominated sales are recognized as an adjustment
of the revenues when the sale is recorded. Those used to hedge future capital acquisitions are
recognized as an adjustment of the property amount when the acquisition is recorded.
The Company also occasionally enters into foreign exchange forward contracts as part of its
short-term cash management strategy. These contracts are not designated as hedges due to their
short-term nature and are carried on the Consolidated Balance Sheet at fair value. Changes in fair
value are recognized in income in the period in which the change occurs.
The Company enters into interest rate swaps to manage the risk related to interest rate
fluctuations. These swap agreements require the periodic exchange of payments without the exchange
of the principal amount on which the payments are based. Interest expense on the debt is adjusted
to include the payments owing or receivable under the interest rate swaps.
The Company has a fuel-hedging program under which CP acquires future crude oil contracts for a
portion of its diesel fuel purchases to reduce the risk of price volatility affecting future cash
flows. In addition, foreign exchange forward contracts are used as part of the fuel-hedging program
to manage the foreign exchange variability component of CPs fuel price risk. The gains or losses
on the hedge contracts are applied against the corresponding fuel purchases in the period during
which the hedging contracts mature.
The Company enters into derivatives called Total Return Swaps (TRS) to mitigate fluctuations in
stock appreciation
rights (SAR) and deferred share units (DSU). These are not designated as hedges and are
recorded at market value with the offsetting gain or loss reflected in Compensation and benefits.
Restructuring Accrual and Environmental Remediation
Restructuring liabilities are recorded at their present value. The discount related to
liabilities incurred in 2003 and subsequent years is amortized to Compensation and benefits and
Purchased services and other over the payment period. The discount related to liabilities
incurred prior to 2003 is amortized to Other charges over the payment period. Environmental
remediation accruals cover site-specific remediation programs. Provisions for labour restructuring
and environmental remediation costs are recorded in Deferred liabilities, except for the current
portion, which is recorded in Accounts payable and accrued liabilities.
56
2006 Annual Report
Income
Taxes
The Company follows the liability method of accounting for income taxes. Future income tax
assets and liabilities are determined based on differences between the financial reporting and tax
bases of assets and liabilities using substantively enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The effect of a change in income tax rates on
future income tax assets and liabilities is recognized in income in the period during which the
change occurs.
Earnings
per Share
Basic earnings per share are calculated using the weighted average number of Common Shares
outstanding during the year. Diluted earnings per share are calculated using the Treasury Stock
Method for determining the dilutive effect of options.
Stock-based
Compensation
CP follows the fair value based approach to accounting for stock-based compensation applying to
options issued for years beginning in 2003. Compensation expense and an increase in contributed
surplus are recognized for stock options over their vesting period based on their estimated fair
values on the date of grants, as determined using the Black-Scholes option-pricing model.
Forfeitures and cancellations of options are accounted for when they occur except for tandem
options where forfeitures are estimated on the grant date. The Company provides pro forma basis net
income and earnings per share information in Stock-based compensation (see Note 23) for the fair
value of options granted between January 1 and December 31, 2002.
Any consideration paid by employees on exercise of stock options is credited to share capital when
the option is exercised and the recorded fair value of the option is removed from contributed
surplus and credited to share capital. Compensation expense is also recognized for SARs, DSUs,
using the intrinsic method, and employee share purchase plans, using the issue price, by amortizing
the cost over the vesting period or over the period from the grant date to the date employees
become eligible to retire when this is shorter than the vesting period, with the liability for SARs
and DSUs marked-to-market until exercised. Forfeitures and cancellations of SARs and DSUs are
accounted for when they occur. The SAR liability is settled to Share capital when a SAR is
cancelled due to the exercise of a tandem option (see Note 23).
2. New Accounting Policies
Stock-based
Compensation for Employees Eligible to Retire Before the Vesting
Date
The CICA issued Emerging Issues Committee Abstract Stock-based Compensation for Employees
Eligible to Retire Before the Vesting Date (EIC 162) which became effective for the year ended
December 31, 2006 and has been applied retroactively with restatement of prior periods. Under EIC
162, compensation cost attributable to stock-based awards is recognized over the period from the
grant date to the date employees become eligible to retire when this is shorter than the vesting
period. The adoption of EIC 162 resulted in a $3.3 million adjustment to reduce opening retained
income at January 1, 2004, decreased Compensation and benefits expense in 2006 by $1.2 million
(2005 decreased by $0.1 million, 2004 increased by $1.9 million) and decreased Income tax
expense in 2006 by $0.1 million (2005 nil; 2004 nil).
Non-monetary
Transactions
In June 2005, the CICA issued Accounting Standard Section 3831 Non-monetary Transactions
which became effective on January 1, 2006. It has been applied prospectively to non-monetary
transactions occurring on or after that date. The standard requires that assets or liabilities
exchanged or transferred in a non-monetary transaction that has commercial substance be valued at
fair value with any gain or loss recorded in income. Commercial substance exists when, as a result
of the transaction, there is a significant change to future cash flows of the item transferred or
the company as a whole. Transactions that lack commercial substance or for which the fair value of
the exchanged assets cannot be reliably measured will continue to be accounted for at carrying
value. Previously, non-monetary transactions that did not constitute the culmination of the
earnings process were recorded at carrying value. The impact to CP on adoption of this new standard
was not significant.
Hedging
Transactions
Effective from January 1, 2004, the Company prospectively adopted the CICA Accounting Guideline
13 Hedging Relationships (AcG 13). AcG 13 addresses the identification, designation,
documentation and effectiveness of hedging transactions for the purpose of applying hedge
accounting. It also establishes conditions for applying, and the discontinuance of, hedge
accounting and hedge effectiveness testing requirements. Under the guideline, the Company is
required to document its hedging transactions and explicitly demonstrate that hedges are effective
in order to continue hedge accounting for positions hedged with derivatives. Any derivative
financial instrument that fails to meet the hedging criteria will be accounted for in accordance
with the CICA Emerging Issues Committee Abstract Accounting for Trading, Speculative or
Non-hedging Derivative Financial Instruments (EIC 128).
2006 Annual Report
57
Derivative instruments that do not qualify as hedges and those not designated as hedges are
carried on the Consolidated Balance Sheet at fair value and changes in fair value are recognized in
the period in which the change occurs in the Statement of Consolidated Income in the line items to
which the derivative instruments are related. The earnings impact of non-hedging derivative
instruments that did not relate to operating income were reported as Gain on non-hedging
derivative instruments in Other charges (see Note 7). In 2006, these resulted in a gain of $1.2
million (2005 a gain of $6.6 million, 2004 a gain of $1.5 million). Total Return Swaps are
non-hedging derivative instruments acquired by the Company in 2006 that related to stock-based
compensation and increased Compensation and Benefits by $1.2 million (2005 nil, 2004 nil)
(see Note 17).
3. Future Accounting Changes
Financial
Instruments, Hedging and Comprehensive Income
The CICA issued the following accounting standards effective for fiscal years beginning on or
after October 1, 2006: Accounting Standard Section 3855 Financial Instruments, Recognition and
Measurement, Accounting Standard Section 3861 Financial Instruments, Presentation and
Disclosure, Accounting Standard Section 3865 Hedging and Accounting Standard Section 1530
Comprehensive Income. These sections require certain financial instruments and hedge positions to
be recorded at their fair value. They also introduce the concept of comprehensive income and
accumulated other comprehensive income.
Adoption of these standards will be effective from January 1, 2007 on a prospective basis without
retroactive restatement of prior periods, except for the reclassification of equity balances to
reflect Accumulated Other Comprehensive Income which will include foreign currency translation
adjustments.
Under the new standard, financial instruments designated as held-for-trading and
available-for-sale will be carried at their fair value while financial instruments such as loans
and receivables, financial liabilities and those classified as held-to-maturity will be
carried at their amortized cost. All derivatives will be carried on the Consolidated Balance Sheet
at their fair value, including derivatives designated as hedges. The effective portion of
unrealized gains and losses on cash flow hedges will be carried in Accumulated other comprehensive
income, a component of Shareholders equity (on the Consolidated Balance Sheet), with any
ineffective portions of gains and losses on cash flow hedges taken into income immediately. Changes
in the value of fair value hedges and the related changes in the carrying value of the hedged item
will be taken into income immediately.
The Company has classified its financial instruments as loans and receivables, other financial
liabilities and derivative instruments designated as hedges. The first two categories of
financial instruments will be accounted for at cost or amortized cost while hedges will be
accounted for as outlined in Accounting Standard Section 3865. Long-term debt and related
transaction costs will be measured at fair value at inception and subsequently measured at
amortized cost. Transaction costs will be included as a component of the amortized cost of the
Companys long-term debt balances.
The impact of the adoption of these standards on January 1, 2007 is expected to be an increase in
net assets of approximately $21 million, a reduction in Foreign currency translation adjustments
of approximately $66 million, an increase in Retained earnings of approximately $2 million, and
the creation of Accumulated other comprehensive income of approximately $85 million.
The fair value of hedging instruments is expected to be approximately $32 million to be reflected
in Other assets and deferred charges and approximately $5 million to be reflected in Deferred
liabilities. The inclusion of transaction costs within Long-term debt at amortized cost is
expected to reduce Long-term debt by approximately $25 million with an associated reduction in
Other assets and deferred charges of approximately $20 million. The adoption of these standards
is expected to increase Future income tax liabilities by approximately $11 million. Accumulated
other comprehensive income will be comprised of foreign currency gains and losses on the net
investment in self-sustaining foreign subsidiaries, foreign currency gains and losses related to
long-term debt designated as a hedge of the net investment in self-sustaining foreign
subsidiaries, effective portions of gains and losses resulting from changes in the fair value of
cash flow hedging instruments, and the reclassification of cumulative foreign currency translation
adjustments. The adjustment to opening retained earnings reflects the change in measurement basis,
from original cost to fair value or amortized cost, of certain financial assets, financial
liabilities, and transaction costs associated with the Companys long term debt.
Accounting
Changes
Effective from January 1, 2007, the CICA has amended Accounting Standard Section 1506
Accounting Changes to prescribe the criteria for changing accounting policies and related
accounting treatment and disclosures of accounting changes. Changes in accounting policies are
permitted when required by a primary source of GAAP, for example when a new accounting section is
first adopted, or when the change in accounting policy results in more reliable and relevant
financial information being reflected in the financial statements.
The adoption of this amended accounting standard will not impact the financial statements of the
Company.
58
2006 Annual Report
4. Special (Credit) Charge for Environmental Remediation
In the fourth quarter of 2004, CP recorded a special charge of $90.9 million (see Note 20) for
investigation, characterization, remediation and other applicable actions related to environmental
contamination at a CP-owned property in the U.S., which includes areas previously leased to third
parties. CP is participating in the State of Minnesotas voluntary investigation and clean-up
program at the east side of the property. The property is the subject of ongoing fieldwork being
undertaken in conjunction with the appropriate state authorities to determine the extent and
magnitude of the contamination and the appropriate remediation plan. In 2005, CP filed with the
State of Minnesota a response action plan for the east side of the property.
In the third quarter of 2005, a binding settlement was reached relating to a lawsuit with a
potentially responsible party in relation to portions of past environmental contamination at the
above-mentioned CP-owned property. As a result, the lawsuit against this party was dismissed. CP
reduced accrued liabilities related to this property and recognized in 2005 a total reduction of
$33.9 million to the special charge for environmental remediation recorded in 2004 (see Note 20).
5. Special Charge for (Reduction to) Labour Restructuring and Asset Impairment
In the fourth quarter of 2005, CP recorded a special charge of $44.2 million for a labour
restructuring initiative. The job reductions, mostly in management and administrative positions,
were completed in 2006 (see Note 20).
In the fourth quarter of 2004, upon receiving partial regulatory approval for a new arrangement
with another rail carrier, CP recorded a reduction of $19.0 million (US$16.0 million) related to a
$21.8-million accrual originally recorded in 2003 for labour restructuring on the D&H.
6. Change in Accounting Estimate
During 2005, the Company prospectively recorded a $23.4-million adjustment to increase revenues
in 2005 related to services provided in 2004. The adjustment reflected a change in estimate
primarily as a result of a contract settlement with a customer.
7. Other Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
Amortization of discount on accruals recorded at present value |
|
$ |
10.0 |
|
|
$ |
15.4 |
|
|
$ |
19.1 |
|
Other exchange losses (gains) |
|
|
6.5 |
|
|
|
(2.2 |
) |
|
|
11.7 |
|
Loss on sale of accounts receivable (Note 11) |
|
|
5.0 |
|
|
|
3.5 |
|
|
|
2.9 |
|
Gain on non-hedging derivative instruments |
|
|
(1.2 |
) |
|
|
(6.6 |
) |
|
|
(1.5 |
) |
Other |
|
|
7.5 |
|
|
|
8.0 |
|
|
|
3.9 |
|
|
Total other charges |
|
$ |
27.8 |
|
|
$ |
18.1 |
|
|
$ |
36.1 |
|
|
|
8. Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
Interest expense |
|
$ |
200.5 |
|
|
$ |
211.8 |
|
|
$ |
223.9 |
|
Interest income |
|
|
(6.0 |
) |
|
|
(7.6 |
) |
|
|
(5.3 |
) |
|
Net interest expense |
|
$ |
194.5 |
|
|
$ |
204.2 |
|
|
$ |
218.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cash interest payments |
|
$ |
192.8 |
|
|
$ |
199.6 |
|
|
$ |
219.0 |
|
|
|
2006 Annual Report
59
9. Income Taxes
The following is a summary of the major components of the Companys income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
Restated
|
|
|
|
|
|
|
(see Note 2)
|
|
(see Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada (domestic) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense |
|
$ |
3.3 |
|
|
$ |
10.3 |
|
|
$ |
10.6 |
|
|
Future income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
Origination and reversal of temporary differences |
|
|
194.7 |
|
|
|
213.9 |
|
|
|
162.4 |
|
Effect of tax rate decreases |
|
|
(176.0 |
) |
|
|
|
|
|
|
|
|
Recognition of previously unrecorded tax losses |
|
|
|
|
|
|
(17.2 |
) |
|
|
(29.1 |
) |
Effect of hedge of net investment in self-sustaining foreign subsidiaries |
|
|
0.6 |
|
|
|
(2.1 |
) |
|
|
(8.7 |
) |
Other |
|
|
(2.3 |
) |
|
|
(1.0 |
) |
|
|
(14.5 |
) |
|
Total future income tax expense |
|
|
17.0 |
|
|
|
193.6 |
|
|
|
110.1 |
|
|
Total income taxes (domestic) |
|
$ |
20.3 |
|
|
$ |
203.9 |
|
|
$ |
120.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (foreign) |
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense |
|
$ |
31.3 |
|
|
$ |
2.3 |
|
|
$ |
1.2 |
|
|
Future income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
Origination and reversal of temporary differences |
|
|
62.5 |
|
|
|
64.4 |
|
|
|
23.2 |
|
Other |
|
|
(4.2 |
) |
|
|
|
|
|
|
(1.8 |
) |
|
Total future income tax expense |
|
|
58.3 |
|
|
|
64.4 |
|
|
|
21.4 |
|
|
Total income taxes (foreign) |
|
$ |
89.6 |
|
|
$ |
66.7 |
|
|
$ |
22.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense |
|
$ |
34.6 |
|
|
$ |
12.6 |
|
|
$ |
11.8 |
|
Future income tax expense |
|
|
75.3 |
|
|
|
258.0 |
|
|
|
131.5 |
|
|
Total income taxes (domestic and foreign) |
|
$ |
109.9 |
|
|
$ |
270.6 |
|
|
$ |
143.3 |
|
|
|
60
2006 Annual Report
The provision for future income taxes arises from temporary differences in the carrying values of
assets and liabilities for financial statement and income tax purposes. The temporary differences
comprising the future income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
(see Note 2)
|
|
|
|
|
|
|
|
|
|
Future income tax assets |
|
|
|
|
|
|
|
|
Restructuring liability |
|
$ |
64.5 |
|
|
$ |
97.3 |
|
Amount related to tax losses carried forward |
|
|
83.6 |
|
|
|
132.6 |
|
Liabilities carrying value in excess of tax basis |
|
|
84.1 |
|
|
|
45.2 |
|
Future environmental remediation costs |
|
|
42.7 |
|
|
|
47.7 |
|
Other |
|
|
21.4 |
|
|
|
35.8 |
|
|
Total future income tax assets |
|
|
296.3 |
|
|
|
358.6 |
|
|
Future income tax liabilities |
|
|
|
|
|
|
|
|
Capital assets carrying value in excess of tax basis |
|
|
1,567.3 |
|
|
|
1,570.6 |
|
Other long-term assets carrying value in excess of tax basis |
|
|
338.0 |
|
|
|
338.6 |
|
Other |
|
|
65.9 |
|
|
|
15.0 |
|
|
Total future income tax liabilities |
|
|
1,971.2 |
|
|
|
1,924.2 |
|
|
Total net future income tax liabilities |
|
|
1,674.9 |
|
|
|
1,565.6 |
|
Net current future income tax assets |
|
|
106.3 |
|
|
|
108.0 |
|
|
Net long-term future income tax liabilities |
|
$ |
1,781.2 |
|
|
$ |
1,673.6 |
|
|
|
The Companys consolidated effective income tax rate differs from the expected statutory tax rates.
Expected income tax expense at statutory rates is reconciled to income tax expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
Restated
|
|
|
|
|
|
|
(see Note 2)
|
|
(see Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense at Canadian statutory tax rates |
|
$ |
298.6 |
|
|
$ |
291.8 |
|
|
$ |
202.4 |
|
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Large corporations tax |
|
|
(5.6 |
) |
|
|
8.3 |
|
|
|
5.9 |
|
Gains not subject to tax |
|
|
(22.0 |
) |
|
|
(22.0 |
) |
|
|
(31.8 |
) |
Foreign tax rate differentials |
|
|
6.6 |
|
|
|
2.7 |
|
|
|
6.8 |
|
Effect of tax rate decreases |
|
|
(176.0 |
) |
|
|
|
|
|
|
|
|
Recognition of previously unrecorded tax losses |
|
|
|
|
|
|
(17.2 |
) |
|
|
(29.1 |
) |
Other |
|
|
8.3 |
|
|
|
7.0 |
|
|
|
(10.9 |
) |
|
Income tax expense |
|
$ |
109.9 |
|
|
$ |
270.6 |
|
|
$ |
143.3 |
|
|
|
The Company has no unbenefited capital losses at December 31, 2006 and 2005.
2006 Annual Report
61
In June 2006, federal and provincial legislation was substantively enacted to reduce corporate
income tax rates over a period of several years. As a result of these changes, the Company recorded
a $176.0 million benefit in future tax liability and income tax expense in 2006.
Cash taxes paid for the year ended December 31, 2006 was $50.9 million (2005 $7.6 million; 2004
$14.5 million).
10. Earnings per Share
At December 31, 2006, the number of shares outstanding was 155.5 million (2005 158.2
million).
Basic earnings per share have been calculated using net income for the year divided by the weighted
average number of CPRL shares outstanding during the year.
Diluted earnings per share have been calculated using the Treasury Stock Method, which gives effect
to the dilutive value of outstanding options. After the spin-off of CP from Canadian Pacific
Limited (CPL) in October 2001, CPL stock options held by CPL employees were exchanged for CP
replacement options. At December 31, 2006, there were 0.2 million replacement options outstanding
(2005 0.4 million; 2004 0.4 million). Since the spin-off, CPRL has issued new stock options
to CP employees. At December 31, 2006, there were 4.3 million new options outstanding (2005 5.5
million; 2004 5.6 million). These new option totals at December 31, 2006 exclude 2.3 million
options (2005 2.0 million; 2004 1.7 million) for which there are tandem SARs outstanding (see
Note 23), as these are not included in the dilution calculation.
The number of shares used in the earnings per share calculations is reconciled as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
157.3 |
|
|
|
158.4 |
|
|
|
158.7 |
|
Dilutive effect of stock options |
|
|
1.5 |
|
|
|
1.7 |
|
|
|
0.4 |
|
|
Weighted average diluted shares outstanding |
|
|
158.8 |
|
|
|
160.1 |
|
|
|
159.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in dollars) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
5.06 |
|
|
$ |
3.43 |
(1) |
|
$ |
2.59 |
(1) |
|
|
Diluted earnings per share |
|
$ |
5.02 |
|
|
$ |
3.39 |
(1) |
|
$ |
2.58 |
(1) |
|
|
|
|
|
|
|
(1) Restated (see Note 2) the restatement had no impact to basic or diluted
earnings per share for 2005. For 2004, basic and diluted earnings per share decreased by $0.01 and
$0.02, respectively. |
In 2006, 379,908 options (2005 1,000; 2004 634,639) were excluded from the computation of
diluted earnings per share because their effects were not dilutive.
11. Accounts Receivable
The Company maintains an adequate allowance for doubtful accounts based on expected
collectibility of accounts receivable. Credit losses are based on specific identification of
uncollectible accounts and the application of historical percentages by aging category. At December
31, 2006, allowances of $10.6 million (2005 $8.0 million) were recorded in Accounts
receivable. During 2006, provisions of $2.0 million of accounts receivable (2005 $0.5 million)
were recorded within Freight revenues.
In September 2004, the Company renewed its accounts receivable securitization program for a term of
five years to September 2009. Under the terms of the renewal, the Company sold an undivided
co-ownership interest in $120.0 million of eligible freight receivables to an unrelated trust. The
trust is a multi-seller trust and CP is not the primary beneficiary. The Company may increase the
sale amount up to a program limit of $200.0 million. At December 31, 2006, the outstanding
undivided co-ownership interest held by the trust under the accounts receivable securitization
program was $120.0 million (2005 $120.0 million).
62
2006 Annual Report
The undivided co-ownership interest is sold on a fully serviced basis and the Company receives no
fee for ongoing servicing responsibilities. The average servicing period is approximately one
month. A servicing asset of $0.1 million and a liability of $0.1 million have been recorded, as the
benefit the Company derives from servicing the receivables approximates the value of the activity.
Receivables funded under the securitization program may not include delinquent, defaulted or
written-off receivables, nor receivables that do not meet certain obligor-specific criteria,
including concentrations in excess of prescribed limits.
The Company provides a credit enhancement amount to absorb credit losses. The trust has no recourse
to the co-ownership interest in receivables retained by the Company, other than in respect of the
credit enhancement amount. This amount is recognized by the Company as a retained interest and
included in accounts receivable. At December 31, 2006, the fair value of the retained interest was
19.1 % of the receivables sold or $22.9 million (2005 16.2 % or $19.5 million). The fair value
approximated carrying value as a result of the short collection cycle and negligible credit losses.
The Company cannot enter into an agreement with a third party with respect to its retained
interest.
The securitization program is subject to standard reporting and credit-rating requirements for CP.
The reporting includes provision of a monthly portfolio report that the pool of eligible
receivables satisfies pre-established criteria that are reviewed and approved by Dominion Bond
Rating Service and are standard for agreements of this nature. Failure to comply with these
provisions would trigger termination of the program.
In 2006, the Company recognized a loss of $5.0
million (2005 $3.5 million; 2004
$2.9 million) on the securitization program. The loss is
included in Other charges on the Statement of Consolidated Income.
The table below summarizes certain cash flows related to the transfer of receivables:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from collections reinvested |
|
$ |
1,475.7 |
|
|
$ |
1,480.6 |
|
|
|
12. Change in Non-cash Working Capital Balances Related to Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Use) source of cash: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other current assets |
|
$ |
(101.0 |
) |
|
$ |
(61.8 |
) |
|
$ |
(39.0 |
) |
Materials and supplies |
|
|
(15.8 |
) |
|
|
(14.6 |
) |
|
|
(35.5 |
) |
Accounts payable and accrued liabilities |
|
|
(0.4 |
) |
|
|
39.1 |
|
|
|
112.3 |
|
Income and other taxes payable |
|
|
15.6 |
|
|
|
14.0 |
|
|
|
(4.6 |
) |
|
Change in non-cash working capital |
|
$ |
(101.6 |
) |
|
$ |
(23.3 |
) |
|
$ |
33.2 |
|
|
|
13. Investments
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Rail investments accounted for on an equity basis |
|
$ |
37.9 |
|
|
$ |
34.7 |
|
Other investments accounted for on a cost basis |
|
|
27.0 |
|
|
|
32.6 |
|
|
Total investments |
|
$ |
64.9 |
|
|
$ |
67.3 |
|
|
|
2006 Annual Report
63
Effective January 1, 2005, CPs 50 % investment in the Detroit River Tunnel Partnership has been
accounted for on a proportionate consolidation basis. Summarized financial information for the
Companys interest in the Detroit River Tunnel Partnership is as follows:
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
0.9 |
|
|
$ |
1.1 |
|
Long-term assets |
|
|
48.0 |
|
|
|
45.8 |
|
Current liabilities |
|
|
2.1 |
|
|
|
2.9 |
|
Long-term liabilities |
|
|
0.5 |
|
|
|
2.1 |
|
Revenues |
|
|
12.8 |
|
|
|
11.2 |
|
Expenses |
|
|
1.7 |
|
|
|
3.0 |
|
Net income |
|
|
11.1 |
|
|
|
8.2 |
|
Cash provided by operating activities |
|
|
8.9 |
|
|
|
9.3 |
|
Cash used in investing activities |
|
|
1.4 |
|
|
|
1.6 |
|
Cash used in financing activities |
|
|
7.3 |
|
|
|
7.6 |
|
|
|
Income before tax from CPs investment in the Detroit River Tunnel Partnership was $11.1 million in
2006 (2005 $8.2 million; 2004 $6.2 million). The equity loss from the Companys investment in
the CNCP Niagara-Windsor Partnership was $0.6 million in 2006 (2005 $0.6 million; 2004 0.9
million). CPs investment in the Indiana Harbor Belt Railroad Company generated equity income of
$3.6 million in 2006 (2005 $3.0 million; 2004 $2.5 million). Equity income (loss) is recorded
in Other revenues on the Statement of Consolidated Income.
14. Net Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Net book |
|
(in millions) |
|
Cost |
|
|
depreciation |
|
|
value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Track and roadway |
|
$ |
8,615.1 |
|
|
$ |
2,770.5 |
|
|
$ |
5,844.6 |
|
Buildings |
|
|
344.8 |
|
|
|
154.1 |
|
|
|
190.7 |
|
Rolling stock |
|
|
3,548.3 |
|
|
|
1,450.9 |
|
|
|
2,097.4 |
|
Other |
|
|
1,625.6 |
|
|
|
635.4 |
|
|
|
990.2 |
|
|
Total net properties |
|
$ |
14,133.8 |
|
|
$ |
5,010.9 |
|
|
$ |
9,122.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Track and roadway |
|
$ |
8,180.0 |
|
|
$ |
2,614.2 |
|
|
$ |
5,565.8 |
|
Buildings |
|
|
329.7 |
|
|
|
143.0 |
|
|
|
186.7 |
|
Rolling stock |
|
|
3,448.5 |
|
|
|
1,395.7 |
|
|
|
2,052.8 |
|
Other |
|
|
1,610.5 |
|
|
|
624.9 |
|
|
|
985.6 |
|
|
Total net properties |
|
$ |
13,568.7 |
|
|
$ |
4,777.8 |
|
|
$ |
8,790.9 |
|
|
|
At December 31, 2006, software development costs of $609.8 million (2005 $608.7 million) and
accumulated depreciation of $239.8 million (2005 $230.0 million) were included in the category
Other. Additions during 2006 were $37.6 million (2005 $39.6 million; 2004 $30.3 million)
and depreciation expense was $53.2 million (2005 $52.3 million; 2004 $53.6 million).
64
2006 Annual Report
At December 31, 2006, net properties included $522.5 million (2005 $401.0 million) of assets
held under capital lease at cost and related accumulated depreciation of $112.4 million (2005
$98.7 million).
During 2006, capital assets were acquired under the Companys capital program at an aggregate cost
of $818.6 million (2005 $906.0 million; 2004 $686.3 million), $21.6 million of which were
acquired by means of capital leases (2005 $0.6 million; 2004 nil). Cash payments related to
capital purchases were $793.7 million in 2006 (2005 $884.4 million; 2004 $673.8 million). At
December 31, 2006, $3.5 million (2005 $9.4 million; 2004 $0.2 million) remained in accounts
payable related to the above purchases.
15. Other Assets and Deferred Charges
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension costs |
|
$ |
1,081.2 |
|
|
$ |
944.8 |
|
Other (1) |
|
|
142.0 |
|
|
|
194.2 |
|
|
Total other assets and deferred charges |
|
$ |
1,223.2 |
|
|
$ |
1,139.0 |
|
|
|
|
|
|
(1) |
|
At December 31, 2006, the category Other included assets held for sale that
had a carrying value of $1.0 million (2005 $37.1 million) that were reclassified from Net
properties. |
16. Long-term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Currency in which payable |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.250 % Notes due 2011 |
|
US$ |
|
$ |
466.2 |
|
|
$ |
465.2 |
|
7.125 % Debentures due 2031 |
|
US$ |
|
|
407.9 |
|
|
|
407.1 |
|
9.450 % Debentures due 2021 |
|
US$ |
|
|
291.4 |
|
|
|
290.7 |
|
5.750 % Debentures due 2033 |
|
US$ |
|
|
291.4 |
|
|
|
290.7 |
|
4.90 % Medium Term Notes due 2010 |
|
CDN$ |
|
|
350.0 |
|
|
|
350.0 |
|
5.41 % Senior Secured Notes due 2024 |
|
US$ |
|
|
160.3 |
|
|
|
163.6 |
|
6.91 % Secured Equipment Notes due 2007 2024 |
|
CDN$ |
|
|
223.2 |
|
|
|
229.3 |
|
7.49 % Equipment Trust Certificates due 2007 2021 |
|
US$ |
|
|
134.9 |
|
|
|
137.6 |
|
Secured Equipment Loan due 2007 |
|
US$ |
|
|
141.6 |
|
|
|
143.1 |
|
Secured Equipment Loan due 2007 2015 |
|
CDN$ |
|
|
149.6 |
|
|
|
154.0 |
|
Obligations under capital leases due 2007 2022 (6.85 %
7.65 %) |
|
US$ |
|
|
317.0 |
|
|
|
320.8 |
|
Obligations under capital leases due 2007 (7.88 % 10.93 %) |
|
CDN$ |
|
|
21.9 |
|
|
|
0.3 |
|
Bank loan payable on demand due 2010 (5.883 %) |
|
CDN$ |
|
|
4.7 |
|
|
|
4.5 |
|
Other |
|
US$ |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
2,960.1 |
|
|
|
2,957.1 |
|
Perpetual 4 % Consolidated Debenture Stock |
|
US$ |
|
|
35.7 |
|
|
|
35.6 |
|
Perpetual 4 % Consolidated Debenture Stock |
|
GB£ |
|
|
9.0 |
|
|
|
8.1 |
|
|
|
|
|
|
|
|
|
3,004.8 |
|
|
|
3,000.8 |
|
Less: Long-term debt maturing within one year |
|
|
|
|
|
|
191.3 |
|
|
|
30.0 |
|
|
|
|
|
|
|
|
$ |
2,813.5 |
|
|
$ |
2,970.8 |
|
|
|
2006 Annual Report
65
At December 31, 2006, long-term debt denominated in U.S. dollars was US$1,927.5 million (2005
US$1,938.6 million).
Interest on each of the following instruments is paid semi-annually: 6.250 % Notes and 7.125 %
Debentures on April 15 and October 15; 9.450 % Debentures on February 1 and August 1; and 5.750 %
Debentures on March 15 and September 15 of each year. All of these Notes and Debentures are
unsecured but carry a negative pledge.
The 4.90 % Medium Term Notes due 2010 are unsecured but carry a negative pledge. Interest is paid
semi-annually in arrears on June 15 and December 15 of each year.
The 5.41 % Senior Secured Notes due 2024 are secured by specific locomotive units with a carrying
value at December 31, 2006, of $191.7 million. Equal blended semi-annual payments of principal and
interest are made on March 3 and September 3 of each year, up to and including September 3, 2023.
Final payment of the remaining interest and principal will be made on March 3, 2024.
The 6.91 % Secured Equipment Notes are full recourse obligations of the Company secured by a first
charge on specific locomotive units with a carrying value at December 31, 2006, of $195.6 million.
The Company made semi-annual payments of interest in the amount of $8.1 million on April 1 and
October 1 of each year, up to and including October 1, 2004. Commencing April 1, 2005, and
continuing on April 1 and October 1 of each year, the Company pays equal blended semi-annual
payments of principal and interest of $10.9 million. Final payment of the principal and interest is
due October 1, 2024.
The 7.49 % Equipment Trust Certificates are secured by specific locomotive units with a carrying
value at December 31, 2006, of $146.6 million. Semi-annual interest payments of US$4.4 million were
made on January 15 and July 15 of each year, up to and including January 15, 2005. Beginning on
July 15, 2005, and continuing on January 15 and July 15 of each year, the Company makes semi-annual
payments that vary in amount and are interest-only payments or blended principal and interest
payments. Final payment of the principal is due January 15, 2021.
The Secured Equipment Loan due
2007 is secured by specific units of rolling stock with a carrying value at December 31, 2006, of
$185.2 million. The interest rate is floating and is calculated based on a blend of one-month and
three-month average London Interbank Offered Rate (LIBOR) plus a spread (2006 5.57 %; 2005
5.90 %). The Company makes blended payments of principal and interest quarterly on February 20, May
20, August 20 and November 20 of each year.
The Secured Equipment Loan due 2007-2015 is secured by specific locomotive units with a carrying
value of $160.8 million at December 31, 2006. The interest rate is floating and is calculated based
on a six-month average Canadian Dollar Offered Rate (calculated based on an average of Bankers
Acceptance rates) plus 53 basis points (2006 3.89 %; 2005 3.02 %). The Company makes blended
payments of principal and interest semi-annually on February 1 and August 1 of each year.
The bank loan payable on demand matures in 2010 and carries an interest rate of 5.883 %. The amount
of the loan at December 31, 2006, was $184.2 million (2005 $173.7 million). The Company has
offset against this loan a financial asset of $179.5 million (2005 $169.2 million) with the same
financial institution.
The Consolidated Debenture Stock, created by an Act of Parliament of 1889, constitutes a first
charge upon and over the whole of the undertaking, railways, works, rolling stock, plant, property
and effects of the Company, with certain exceptions.
The 7.20 % Medium Term Notes due 2005 were unsecured but carried a negative pledge. Interest was
paid semi-annually in arrears on June 28 and December 28 of each year. The final interest payment
and principal repayment occurred on June 28, 2005.
Annual maturities and sinking fund requirements, excluding those pertaining to capital leases, for
each of the five years following 2006 are (in millions): 2007 $164.3; 2008 $ 18.7; 2009 $
19.8; 2010 $ 374.5; 2011 $ 495.6.
66
2006 Annual Report
At December 31, 2006, capital lease obligations included in long-term debt were as follows:
|
|
|
|
|
|
|
|
|
(in millions) |
|
Year |
|
|
Capital leases |
|
|
|
|
|
|
|
|
|
|
|
|
Minimum lease payments in: |
|
|
2007 |
|
|
$ |
49.7 |
|
|
|
|
2008 |
|
|
|
30.7 |
|
|
|
|
2009 |
|
|
|
32.1 |
|
|
|
|
2010 |
|
|
|
43.8 |
|
|
|
|
2011 |
|
|
|
21.3 |
|
|
|
Thereafter |
|
|
|
380.2 |
|
|
Total minimum lease payments |
|
|
|
|
|
|
557.8 |
|
Less: Imputed interest |
|
|
|
|
|
|
(218.9 |
) |
|
Present value of minimum lease payments |
|
|
|
|
|
|
338.9 |
|
Less: Current portion |
|
|
|
|
|
|
(27.0 |
) |
|
Long-term portion of capital lease obligations |
|
|
|
|
|
$ |
311.9 |
|
|
|
Capital lease obligations include $2.8 million owing to a VIE for which the Company is
not the primary beneficiary.
The carrying value of the assets securing the capital lease
obligations was $410.1 million at December 31, 2006.
17. Financial instruments
Foreign Exchange Forward Contracts
Exposure to changes arising from fluctuations in the exchange rate between Canadian and U.S.
dollars on future revenue streams has been partially managed by selling forward U.S. dollars at
fixed rates in future periods, which are accounted for as cash flow hedges. At December 31, 2006,
the Company had no outstanding foreign exchange forward contracts related to future revenue streams
(2005 US$58.9 million in 2006 at exchange rates ranging from 1.1994 to 1.2019). At December 31,
2006, there was no unrealized gain or loss on foreign exchange forward contracts related to future
revenue streams (2005 CDN$2.5 million gain).
Commodity Contracts
Exposure to fluctuations in fuel prices has been partially managed by selling or purchasing
crude oil swaps. At December 31, 2006, the Company had entered into futures contracts, which are
accounted for as cash flow hedges, to purchase approximately 1,116,000 barrels (2005 1,746,000
barrels) over the 2007-2009 period at average annual prices ranging from US$32.24 to US$41.59 per
barrel (2005 US$30.51 to US$38.19 over the 2006-2009 period). At December 31, 2006, the
unrealized gain on crude oil futures was CDN$31.7 million (2005 CDN$59.2 million). The Company
from time to time uses foreign exchange forward contracts to manage the risk caused by foreign
exchange variability on fuel purchases and commodity hedges. The Company enters into purchase
contracts of U.S. dollars because the Canadian dollar cost of fuel increases if the U.S. dollar
appreciates relative to the Canadian dollar. Gains and losses on the crude oil swaps, coupled with
foreign exchange forward contracts, offset increases and decreases in the cash cost of fuel. At
December 31, 2006, the Company had entered into foreign exchange forward contracts totalling
US$45.8 million over the 2007-2009 period at exchange rates ranging from 1.1759 to 1.3008 (2005
US$63.5 million over the 2006-2009 period at exchange rates ranging from 1.2226 to 1.3008), which
are accounted for as cash flow hedges. At December 31, 2006, the unrealized loss on these forward
contracts was CDN$3.1 million (2005 CDN$7.2 million).
2006 Annual Report
67
Interest Rate Contracts
At December 31, 2003, the Company had outstanding cross-currency interest rate swap agreements,
which were accounted for as a hedge, for a nominal amount of CDN$105.0 million. These swap
agreements converted a portion of the Companys fixed-interest-rate liability into a variable-rate
liability for the 4.90 % Medium Term Notes. At December 31, 2003, the unrealized gain on these
cross-currency interest rate swap agreements was CDN$2.2 million. Effective January 1, 2004, in
connection with the implementation of AcG 13 Hedging Relationships, the Company determined that
these swap agreements no longer qualified for hedge accounting (see Note 2). The unrealized gain of
CDN$2.2 million was recorded in Deferred liabilities on the Consolidated Balance Sheet and is
being amortized to Other charges over the remaining seven-year term of the originally designated
hedged item. In addition, income based on settlements of the swaps during 2004 was recorded in
Other charges. In July 2004, the Company terminated these agreements and realized a loss of
CDN$2.2 million, which was recorded in Other charges.
At December 31, 2006, the Company had outstanding interest rate swap agreements, classified as a
fair value hedge, for a nominal amount of US$200.0 million (2005 US$200.0 million). The swap
agreements converted a portion of the Companys fixed-interest-rate liability into a variable-rate
liability for the 6.250 % Notes. At December 31, 2006, the unrealized loss on these interest rate
swap agreements was CDN$2.8 million (2005 CDN$0.2 million).
The following table discloses the terms of the swap agreements at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
Expiration
|
|
October 15, 2011 |
|
Notional amount of principal (in CDN$ millions)
|
|
$ 233.1 |
Fixed receiving rate
|
|
6.250 |
% |
Variable paying rate (1)
|
|
6.4 |
% |
|
|
|
|
|
(1) |
|
Based on U.S. three-month LIBOR. |
In 2004, the Company entered into agreements that established the borrowing rate on US$200.0
million of long-term debt, which was expected to be issued in the first half of 2005. Unrealized
gains on this arrangement, which was accounted for as a cash flow hedge, were CDN$1.8 million at
December 31, 2004. In the first quarter of 2005, the hedge was terminated as the Company decided
not to issue the debt and the $5.8-million gain on settlement was recorded in Other charges.
During 2004, the Company recorded losses of CDN$2.0 million on six treasury rate locks totalling
US$124.0 million to fix the benchmark rate on the 5.41 % US$145.0-million Senior Secured Notes
offering issued in March 2004. These treasury rate locks are accounted for as a cash flow hedge and
the losses are being amortized over the 20-year life of the existing financing.
68
2006 Annual Report
Credit Risk Management
Counterparties to financial instruments expose the Company to credit losses in the event of
non-performance. However, the Company does not anticipate non-performance that would materially
impact the Companys financial statements because dealings have been with counterparties of high
credit quality and adequate provisions have been made. In addition, the Company believes there are
no significant concentrations of credit risk.
Interest Rate Exposure and Fair Values
The Companys exposure to interest rate risk along with the total carrying amounts and fair
values of its financial instruments are summarized in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate maturing in |
|
|
|
|
|
|
|
2006 |
|
At floating |
|
|
|
|
|
|
2008 |
|
|
2012 |
|
|
Total carrying |
|
|
|
|
(in millions) |
|
interest rates |
|
|
2007 |
|
|
to 2011 |
|
|
and after |
|
|
value |
|
|
Fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments |
|
$ |
124.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
124.3 |
|
|
$ |
124.3 |
|
Crude oil swaps, unrealized gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.7 |
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.250 % Notes |
|
|
|
|
|
|
|
|
|
|
466.2 |
|
|
|
|
|
|
|
466.2 |
|
|
|
487.0 |
|
7.125 % Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407.9 |
|
|
|
407.9 |
|
|
|
484.3 |
|
9.450 % Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
291.4 |
|
|
|
291.4 |
|
|
|
381.7 |
|
5.750 % Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
291.4 |
|
|
|
291.4 |
|
|
|
300.6 |
|
4.90 % Medium Term Notes |
|
|
|
|
|
|
|
|
|
|
350.0 |
|
|
|
|
|
|
|
350.0 |
|
|
|
355.3 |
|
5.41 % Senior Secured Notes |
|
|
|
|
|
|
3.8 |
|
|
|
17.5 |
|
|
|
139.0 |
|
|
|
160.3 |
|
|
|
157.8 |
|
6.91 % Secured Equipment Notes |
|
|
|
|
|
|
6.6 |
|
|
|
31.1 |
|
|
|
185.5 |
|
|
|
223.2 |
|
|
|
259.0 |
|
7.49 % Equipment Trust Certificates |
|
|
|
|
|
|
3.1 |
|
|
|
14.8 |
|
|
|
117.0 |
|
|
|
134.9 |
|
|
|
155.7 |
|
Secured Equipment Loan |
|
|
141.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141.6 |
|
|
|
141.6 |
|
Secured Equipment Loan |
|
|
149.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149.6 |
|
|
|
149.6 |
|
4 % Consolidated Debenture Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44.7 |
|
|
|
44.7 |
|
|
|
37.4 |
|
Obligations under capital leases |
|
|
|
|
|
|
27.0 |
|
|
|
50.4 |
|
|
|
261.5 |
|
|
|
338.9 |
|
|
|
358.2 |
|
Bank loan payable on demand |
|
|
|
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
4.7 |
|
|
|
4.7 |
|
|
Total long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,004.8 |
|
|
$ |
3,272.9 |
|
Foreign exchange forward
contracts on fuel, unrealized loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1 |
|
Interest rate swaps, unrealized loss |
|
|
233.1 |
|
|
|
|
|
|
|
(233.1 |
) |
|
|
|
|
|
|
|
|
|
|
2.8 |
|
Total return swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
2006 Annual Report
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate maturing in |
|
|
|
|
|
|
|
2005 |
|
At floating |
|
|
|
|
|
|
2007 |
|
|
2011 |
|
|
Total carrying |
|
|
|
|
(in millions) |
|
interest rates |
|
|
2006 |
|
|
to 2010 |
|
|
and after |
|
|
value |
|
|
Fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments |
|
$ |
121.8 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
121.8 |
|
|
$ |
121.8 |
|
Crude oil swaps, unrealized gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59.2 |
|
Foreign exchange forward
contracts on future revenue
streams, unrealized gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5 |
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.250 % Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
465.2 |
|
|
|
465.2 |
|
|
|
494.1 |
|
7.125 % Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407.1 |
|
|
|
407.1 |
|
|
|
488.7 |
|
9.450 % Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290.7 |
|
|
|
290.7 |
|
|
|
397.6 |
|
5.750 % Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290.7 |
|
|
|
290.7 |
|
|
|
303.0 |
|
4.90 % Medium Term Notes |
|
|
|
|
|
|
|
|
|
|
350.0 |
|
|
|
|
|
|
|
350.0 |
|
|
|
357.2 |
|
5.41 % Senior Secured Notes |
|
|
|
|
|
|
3.6 |
|
|
|
16.5 |
|
|
|
143.5 |
|
|
|
163.6 |
|
|
|
165.7 |
|
6.91 % Secured Equipment Notes |
|
|
|
|
|
|
6.1 |
|
|
|
29.1 |
|
|
|
194.1 |
|
|
|
229.3 |
|
|
|
268.8 |
|
7.49 % Equipment Trust Certificates |
|
|
|
|
|
|
2.9 |
|
|
|
13.8 |
|
|
|
120.9 |
|
|
|
137.6 |
|
|
|
163.5 |
|
Secured Equipment Loan |
|
|
143.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143.1 |
|
|
|
143.1 |
|
Secured Equipment Loan |
|
|
154.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154.0 |
|
|
|
154.0 |
|
4 % Consolidated Debenture Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43.7 |
|
|
|
43.7 |
|
|
|
38.8 |
|
Obligations under capital leases |
|
|
|
|
|
|
6.5 |
|
|
|
51.8 |
|
|
|
262.8 |
|
|
|
321.1 |
|
|
|
369.6 |
|
Bank loan payable on demand |
|
|
|
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
4.5 |
|
|
|
4.5 |
|
Other |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
0.2 |
|
|
Total long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,000.8 |
|
|
$ |
3,348.8 |
|
Foreign exchange forward
contracts on fuel, unrealized loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.2 |
|
Interest rate swaps, unrealized loss |
|
|
232.6 |
|
|
|
|
|
|
|
|
|
|
|
(232.6 |
) |
|
|
|
|
|
|
0.2 |
|
|
|
The Company has determined the estimated fair values of its financial instruments based on
appropriate valuation methodologies. However, considerable judgment is necessary to develop these
estimates. Accordingly, the estimates presented herein are not necessarily indicative of what the
Company could realize in a current market exchange. The use of different assumptions or
methodologies may have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument:
o |
|
Short-term financial assets and liabilities are valued at their carrying amounts as presented on
the Consolidated Balance Sheet, which are reasonable estimates of fair value due to the
relatively short period to maturity of these instruments. |
|
o |
|
The fair value of publicly traded long-term debt is determined based on market prices at December
31, 2006 and 2005. The fair value of other long-term debt is estimated based on rates currently
available to the Company for long-term borrowings, with terms and conditions similar to those
borrowings in place at the applicable Consolidated Balance Sheet date. |
|
o |
|
The fair value of derivative instruments is estimated as the carrying value plus the unrealized
gain or loss calculated based on market prices or rates at December 31, 2006 and 2005, which
generally reflects the estimated amount the Company would receive or pay to terminate the
contracts at the applicable Consolidated Balance Sheet date. |
70
2006 Annual Report
Stock-based Compensation Expense Management
The Company entered into a TRS, effective in May 2006, in order to reduce the volatility and
total cost to the Company over time of two types of stock-based compensation: SARs and DSUs. The
value of the TRS derivative is linked to the market value of our stock and is intended to mitigate
the impact on expenses of share value movements on SARs and DSUs. Compensation and benefits
expense increased by $1.2 million for the year ended December 31, 2006 due to unrealized losses for
these swaps. These losses substantially offset the benefits recognized in the SAR and DSU stock
based compensation programs due to fluctuations in share price during the period the TRS was in
place.
18. Deferred Liabilities
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
(see Note 2)
|
|
|
|
|
|
|
|
|
|
Provision for restructuring and environmental remediation (Note 20) |
|
$ |
309.0 |
|
|
$ |
398.8 |
|
Deferred workers compensation and personal injury accruals |
|
|
162.5 |
|
|
|
162.8 |
|
Accrued employee benefits |
|
|
208.4 |
|
|
|
177.8 |
|
Asset retirement obligations (Note 19) |
|
|
30.9 |
|
|
|
32.9 |
|
Deferred revenue on rights-of-way license agreements |
|
|
45.8 |
|
|
|
45.1 |
|
Stock-based compensation liabilities |
|
|
76.6 |
|
|
|
48.8 |
|
Other |
|
|
81.4 |
|
|
|
70.8 |
|
|
|
|
|
914.6 |
|
|
|
937.0 |
|
Less: Amount payable/realizable within one year |
|
|
188.9 |
|
|
|
191.1 |
|
|
Total deferred liabilities |
|
$ |
725.7 |
|
|
$ |
745.9 |
|
|
|
Deferred revenue on rights-of-way license agreements is being amortized to income on a
straight-line basis over the related lease terms.
19. Asset Retirement Obligations
The Company has two liabilities related to asset retirement obligations (ARO) recorded in
Deferred liabilities. These liabilities are discounted at 6.25 %. The accretion expense related
to these AROs in 2006 was $2.0 million (2005 $2.1 million; 2004 $2.0 million), offset by
payments made of $0.7 million and a reduction of $3.4 million due to a sale of a related asset
(2005 payments of $0.6 million and a reduction of $1.0 million due to a sale of a related asset;
2004 payments of $1.2 million), thereby decreasing the ARO liability to $30.9 million at
December 31, 2006 (2005 $32.9 million; 2004 $32.4 million). Accretion expense is included in
Depreciation and amortization on the Statement of Consolidated Income.
Upon the ultimate retirement of grain-dependent branch lines, the Company has to pay a fee, levied
under the Canada Transportation Act, of $30,000 per mile of abandoned track. The undiscounted
amount of the liability was $51.9 million at December 31, 2006 (2005 $55.4 million), which, when
present valued, was $29.6 million at December 31, 2006 (2005 $31.8 million). The payments are
expected to be made in the 2007-2044 period.
The Company also has a liability on a joint facility
that will have to be settled based on a proportion of use during the
life of the asset. The estimate of the obligation at December 31, 2006, was $15.3 million (2005 $14.6 million),
which, when present valued, was $1.3 million at December 31, 2006 (2005 $1.1 million). For
purposes of estimating this liability, the payment related to the retirement of the joint facility
is anticipated to be in 38 years.
20. Restructuring Accrual and Environmental Remediation
At December 31, 2006, the provision for restructuring and environmental remediation was $309.0
million (2005 $398.8 million). The restructuring provision was primarily for labour liabilities
for restructuring plans, including those discussed in Special charge for (reduction to) labour
restructuring and asset impairment (see Note 5). Payments are expected to continue in diminishing
amounts until 2025. The environmental remediation liability includes the cost of a multi-year soil
remediation program for various sites, as well as a special charge taken in 2004 related to a
specific property (see Note 4).
2006 Annual Report
71
Set out below is a reconciliation of CPs liabilities associated with its restructuring and
environmental remediation programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Closing |
|
|
|
balance |
|
|
Accrued |
|
|
|
|
|
|
Amortization |
|
|
exchange |
|
|
balance |
|
(in millions) |
|
Jan. 1 |
|
|
(reduced) |
|
|
Payments |
|
|
of discount |
(1) |
|
impact |
|
|
Dec. 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labour liability for terminations
and severances |
|
$ |
263.6 |
|
|
$ |
(14.1 |
) |
|
$ |
(71.8 |
) |
|
$ |
9.8 |
|
|
$ |
(0.1 |
) |
|
$ |
187.4 |
|
Other non-labour liabilities for exit plans |
|
|
5.8 |
|
|
|
0.7 |
|
|
|
(5.0 |
) |
|
|
0.1 |
|
|
|
(0.2 |
) |
|
|
1.4 |
|
|
Total restructuring liability |
|
|
269.4 |
|
|
|
(13.4 |
) |
|
|
(76.8 |
) |
|
|
9.9 |
|
|
|
(0.3 |
) |
|
|
188.8 |
|
|
Environmental remediation program |
|
|
129.4 |
|
|
|
10.5 |
|
|
|
(19.5 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
120.2 |
|
|
Total restructuring and environmental
remediation liability |
|
$ |
398.8 |
|
|
$ |
(2.9 |
) |
|
$ |
(96.3 |
) |
|
$ |
9.9 |
|
|
$ |
(0.5 |
) |
|
$ |
309.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labour liability for terminations
and severances |
|
$ |
269.7 |
|
|
$ |
33.6 |
|
|
$ |
(50.5 |
) |
|
$ |
12.0 |
|
|
$ |
(1.2 |
) |
|
$ |
263.6 |
|
Other non-labour liabilities for exit plans |
|
|
6.1 |
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
(0.2 |
) |
|
|
5.8 |
|
|
Total restructuring liability |
|
|
275.8 |
|
|
|
33.5 |
|
|
|
(50.6 |
) |
|
|
12.1 |
|
|
|
(1.4 |
) |
|
|
269.4 |
|
|
Environmental remediation program |
|
|
172.9 |
|
|
|
(22.4 |
) |
|
|
(18.4 |
) |
|
|
|
|
|
|
(2.7 |
) |
|
|
129.4 |
|
|
Total restructuring and environmental
remediation liability |
|
$ |
448.7 |
|
|
$ |
11.1 |
|
|
$ |
(69.0 |
) |
|
$ |
12.1 |
|
|
$ |
(4.1 |
) |
|
$ |
398.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labour liability for terminations
and severances |
|
$ |
358.2 |
|
|
$ |
(36.4 |
) |
|
$ |
(62.2 |
) |
|
$ |
16.2 |
|
|
$ |
(6.1 |
) |
|
$ |
269.7 |
|
Other non-labour liabilities for exit plans |
|
|
9.2 |
|
|
|
0.9 |
|
|
|
(3.3 |
) |
|
|
0.4 |
|
|
|
(1.1 |
) |
|
|
6.1 |
|
|
Total restructuring liability |
|
|
367.4 |
|
|
|
(35.5 |
) |
|
|
(65.5 |
) |
|
|
16.6 |
|
|
|
(7.2 |
) |
|
|
275.8 |
|
|
Environmental remediation program |
|
|
94.8 |
|
|
|
101.0 |
|
|
|
(23.3 |
) |
|
|
|
|
|
|
0.4 |
|
|
|
172.9 |
|
|
Total restructuring and environmental
remediation liability |
|
$ |
462.2 |
|
|
$ |
65.5 |
|
|
$ |
(88.8 |
) |
|
$ |
16.6 |
|
|
$ |
(6.8 |
) |
|
$ |
448.7 |
|
|
|
(1) Amortization of discount is charged to income as Compensation and benefits
(2006 $5.1 million; 2005 $0.7 million; 2004 nil), Purchased services and other (2006
nil; 2005 $2.3 million; 2004 $4.9 million) and Other charges (2006 $4.8 million; 2005
$9.2 million; 2004 $11.7 million), as applicable.
New accruals and adjustments to previous accruals were a net reduction of $2.9 million in 2006,
compared with net increases of $11.1 million in 2005 and $65.5 million in 2004.
In 2006, CP recorded a net reduction in the restructuring liability included in Deferred
liabilities, of $13.4 million, mainly due to experience gains on termination costs for previously
accrued labour initiatives. This reduction was partially offset by an increase in the environmental
remediation liability, also included in Deferred liabilities, of $10.5 million. This net
reduction was recorded in Compensation and benefits and Purchased services and other.
72
2006 Annual Report
In 2005, CP established new restructuring initiatives to reduce labour costs, primarily in
management and administrative areas, which were completed in 2006. These initiatives required
recording a special charge of $44.2 million for labour restructuring, which included $43.1 million
for labour restructuring liabilities and $1.1 million for accelerated recognition of stock-based
compensation (included elsewhere in Deferred liabilities and in Contributed surplus). This
charge was partially offset by a net reduction of $9.6 million (included in Compensation and
benefits and Purchased services and other), largely due to experience gains on previously
accrued amounts and minor new initiatives. The adjustment to the environmental remediation program
was largely due to a binding settlement reached during the third quarter of 2005 with a potentially
responsible party, resulting in a reduction of $33.9 million to the special charge recorded in 2004
(see Note 4), including a $30.3-million reduction in the environmental liability. The $30.3-million
reduction was partially offset by $7.9 million of other adjustments, due largely to monitoring and
technical support costs related to multi-year sites.
In 2004, CP reversed a $19.0-million labour liability accrued in 2003 (see Note 5) and recorded
additional net reductions of $16.5 million for previously accrued labour and non-labour
initiatives, due mainly to experience gains on cost of terminations. In addition, the Company
recorded a $90.9-million charge (see Note 4), which included an increase in the environmental
remediation program liability of $85.7 million, an increase in non-labour liabilities of $0.7
million (included in the $16.5 million noted above) and a reduction in Other assets and deferred
charges of $4.5 million. The environmental remediation program liability was further increased by
$15.3 million for various other environmental sites included in the multi-year soil remediation
program.
21. Shareholders Equity
Authorized and Issued Share Capital
The Companys Articles of Incorporation authorize for issuance an unlimited number of Common
Shares and an unlimited number of First Preferred Shares and Second Preferred Shares. At December
31, 2006, no Preferred Shares had been issued.
An analysis of Common Share balances is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
(in millions) |
|
Number |
|
|
Amount |
|
|
Number |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital, January 1 |
|
|
158.2 |
|
|
$ | 1,141.5 | |
|
|
158.8 |
|
|
$ |
1,120.6 |
|
Shares issued under stock option plans |
|
|
2.3 |
|
|
| 71.0 | |
|
|
1.2 |
|
|
|
33.4 |
|
Shares repurchased |
|
|
(5.0 |
) |
|
| (36.8 | ) |
|
|
(1.8 |
) |
|
|
(12.5 |
) |
|
Share capital, December 31 |
|
|
155.5 |
|
|
$ | 1,175.7 | |
|
|
158.2 |
|
|
$ |
1,141.5 |
|
|
|
Included above in Shares issued under stock option plans is $3.3 million (2005 $0.9 million)
related to the cancellation of the SARs liability on exercise of tandem stock options, and $1.1
million (2005 $0.7 million) of stock-based compensation transferred from Contributed surplus.
Contributed Surplus
An analysis of contributed surplus balances is as follows:
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
(see Note 2)
|
|
|
|
|
|
|
|
|
|
Contributed surplus, January 1 |
|
$ |
245.1 |
|
|
$ |
304.1 |
|
Stock-based compensation expense related to stock option plans |
|
|
10.3 |
|
|
|
9.1 |
|
Shares repurchased |
|
|
(223.1 |
) |
|
|
(68.1 |
) |
|
Contributed surplus, December 31 |
|
$ |
32.3 |
|
|
$ |
245.1 |
|
|
|
2006 Annual Report
73
Stock-based Compensation Expense Related to Stock Options Plans reflects a transfer of $1.1
million (2005 $0.7 million) of stock-based compensation to Share Capital.
The balance remaining in contributed surplus of $32.3 million relates to stock-based compensation
recognized to date on unexercised options and will be attributed to share capital as options are
exercised.
In May 2005, the Company completed the necessary filings for a normal course issuer bid to
purchase, for cancellation, up to 2,500,000 of its outstanding Common Shares, representing 1.6 % of
the approximately 159.0 million Common Shares outstanding just prior to the filing date. In March
2006, the normal course issuer bid was amended to increase the number of Common Shares eligible to
be purchased to 3,325,000. Share repurchases were made during the 12-month period beginning June 6,
2005, and ending June 5, 2006. In June 2006, the Company completed the acquisition of Common Shares
under this normal course issuer bid and filed a new normal course issuer bid to purchase, for
cancellation, up to 3,936,000 of its outstanding Common Shares. Under the new filing, share
purchases may be made during the 12-month period that began June 6, 2006, and ends June 5, 2007.
The purchases are made at the market price on the day of purchase, with consideration allocated to
share capital up to the average carrying amount of the shares, and any excess allocated to
contributed surplus and retained earnings. Three days are required for share repurchase
transactions to be settled and the shares cancelled. The cost of shares purchased in a given month
and settled in the following month is accrued in the month of purchase. In 2006, 4,999,992 shares
(2005 1,761,000 shares) were repurchased at an average price of $57.28 (2005 $45.77).
The table below summarizes the allocation of the cost of shares repurchased between share capital,
contributed surplus and retained earnings:
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Share capital |
|
$ |
36.8 |
|
|
$ |
12.5 |
|
Contributed surplus |
|
|
223.1 |
|
|
|
68.1 |
|
Retained earnings |
|
|
26.5 |
|
|
|
|
|
|
CP Common Shares repurchased |
|
$ |
286.4 |
|
|
$ |
80.6 |
|
|
|
Foreign Currency Translation Adjustments
Included in equity are the following cumulative foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative foreign currency translation adjustment, January 1 |
|
$ |
67.5 |
|
|
$ |
77.0 |
|
Change in foreign currency translation rates on foreign subsidiaries |
|
|
2.1 |
|
|
|
(19.1 |
) |
|
Cumulative foreign currency translation adjustment, December 31,
before designated hedge |
|
|
69.6 |
|
|
|
57.9 |
|
Designated hedge, net of tax |
|
|
(3.2 |
) |
|
|
9.6 |
|
|
Cumulative foreign currency translation adjustment, December 31,
including designated hedge |
|
$ |
66.4 |
|
|
$ |
67.5 |
|
|
|
For the year ended December 31, 2006, the Company recorded future income taxes of $0.6 million on
the designated hedge (2005 recovery of $2.1 million).
74
2006 Annual Report
22. Pensions and Other Benefits
The Company has both defined benefit (DB) and defined contribution (DC) pension plans.
The DB plans provide for pensions based principally on years of service and compensation rates near
retirement. Pensions for Canadian pensioners are partially indexed to inflation. Annual employer
contributions to the DB plans, which are actuarially determined, are made on the basis of being not
less than the minimum amounts required by federal pension supervisory authorities.
Other benefits include post-retirement health and life insurance for pensioners, and
post-employment long-term disability and workers compensation benefits, which are based on
Company-specific claims.
At December 31, the elements of defined benefit cost for DB pension plans and other benefits
recognized in the year included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions |
|
Other benefits |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current service cost (benefits earned
by employees in the year) |
|
$ |
101.9 |
|
|
$ |
75.7 |
|
|
$ |
71.7 |
|
|
$ |
15.1 |
|
|
$ |
13.8 |
|
|
$ |
13.0 |
|
Interest cost on benefit obligation |
|
|
400.0 |
|
|
|
405.0 |
|
|
|
400.0 |
|
|
|
26.6 |
|
|
|
27.3 |
|
|
|
27.5 |
|
Actual return on fund assets |
|
|
(927.4 |
) |
|
|
(849.8 |
) |
|
|
(610.9 |
) |
|
|
(0.6 |
) |
|
|
(0.7 |
) |
|
|
(1.1 |
) |
Actuarial loss |
|
|
35.2 |
|
|
|
693.7 |
(1) |
|
|
168.1 |
|
|
|
(2.9 |
) |
|
|
29.8 |
|
|
|
18.8 |
|
Plan amendments |
|
|
1.3 |
|
|
|
56.5 |
|
|
|
|
|
|
|
(1.2 |
) |
|
|
(6.7 |
) |
|
|
1.6 |
|
|
Elements of employee future benefit
cost, before adjustments to
recognize the long-term nature
of employee future benefit costs |
|
|
(389.0 |
) |
|
|
381.1 |
|
|
|
28.9 |
|
|
|
37.0 |
|
|
|
63.5 |
|
|
|
59.8 |
|
Adjustments to recognize the
long-term nature of employee
future benefit costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of transitional
(asset) obligation |
|
|
(16.2 |
) |
|
|
(16.2 |
) |
|
|
(16.2 |
) |
|
|
12.4 |
|
|
|
12.7 |
|
|
|
12.8 |
|
Difference between expected return
and actual return on fund assets |
|
|
401.2 |
|
|
|
351.2 |
|
|
|
129.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference between actuarial
loss (gain) recognized
and actual actuarial loss (gain)
on benefit obligation |
|
|
64.9 |
|
|
|
(638.1 |
) |
|
|
(128.6 |
) |
|
|
9.1 |
|
|
|
(25.6 |
) |
|
|
(15.4 |
) |
Difference between amortization
of prior service costs and actual
plan amendments |
|
|
14.5 |
|
|
|
(41.3 |
) |
|
|
11.1 |
|
|
|
1.0 |
|
|
|
6.7 |
|
|
|
(1.6 |
) |
|
Net benefit cost |
|
$ |
75.4 |
|
|
$ |
36.7 |
|
|
$ |
25.1 |
|
|
$ |
59.5 |
|
|
$ |
57.3 |
|
|
$ |
55.6 |
|
|
|
|
|
|
(1) |
|
Actuarial loss for 2005 was largely a result of a decrease in the discount
rate. |
2006 Annual Report
75
Information about the Companys DB pension plans and other benefits, in aggregate, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions |
|
Other benefits |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1 |
|
$ |
7,732.2 |
|
|
$ |
6,827.0 |
|
|
$ |
498.9 |
|
|
$ |
469.4 |
|
Current service cost |
|
|
101.9 |
|
|
|
75.7 |
|
|
|
15.1 |
|
|
|
13.8 |
|
Interest cost |
|
|
400.0 |
|
|
|
405.0 |
|
|
|
26.6 |
|
|
|
27.3 |
|
Employee contributions |
|
|
53.9 |
|
|
|
56.7 |
|
|
|
0.2 |
|
|
|
|
|
Benefits paid |
|
|
(432.1 |
) |
|
|
(377.3 |
) |
|
|
(33.2 |
) |
|
|
(32.5 |
) |
Foreign currency changes |
|
|
0.3 |
|
|
|
(5.1 |
) |
|
|
0.3 |
|
|
|
(2.2 |
) |
Plan amendments and other |
|
|
1.3 |
|
|
|
56.5 |
|
|
|
4.5 |
|
|
|
(6.7 |
) |
Actuarial loss (gain) |
|
|
35.2 |
|
|
|
693.7 |
|
|
|
(2.9 |
) |
|
|
29.8 |
|
|
Benefit obligation at December 31 |
|
$ |
7,892.7 |
|
|
$ |
7,732.2 |
|
|
$ |
509.5 |
|
|
$ |
498.9 |
|
|
Change in fund assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of fund assets at January 1 |
|
$ |
6,890.1 |
|
|
$ |
6,222.7 |
|
|
$ |
11.9 |
|
|
$ |
12.1 |
|
Actual return on fund assets |
|
|
927.4 |
|
|
|
849.8 |
|
|
|
0.6 |
|
|
|
0.7 |
|
Employer contributions |
|
|
209.5 |
|
|
|
141.7 |
|
|
|
32.4 |
|
|
|
31.6 |
|
Employee contributions |
|
|
53.9 |
|
|
|
56.7 |
|
|
|
0.2 |
|
|
|
|
|
Benefits paid |
|
|
(432.1 |
) |
|
|
(377.3 |
) |
|
|
(33.2 |
) |
|
|
(32.5 |
) |
Foreign currency changes |
|
|
0.4 |
|
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
Fair value of fund assets at December 31 |
|
$ |
7,649.2 |
|
|
$ |
6,890.1 |
|
|
$ |
11.9 |
|
|
$ |
11.9 |
|
|
Funded status plan deficit |
|
$ |
(243.5 |
) |
|
$ |
(842.1 |
) |
|
$ |
(497.6 |
) |
|
$ |
(487.0 |
) |
Unamortized prior service cost |
|
|
126.9 |
|
|
|
141.4 |
|
|
|
(1.0 |
) |
|
|
|
|
Unamortized net transitional (asset) obligation |
|
|
(96.5 |
) |
|
|
(112.7 |
) |
|
|
74.1 |
|
|
|
86.5 |
|
Unamortized experience losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred investment losses due to use of market-related
value to determine net benefit cost |
|
|
(568.9 |
) |
|
|
(200.1 |
) |
|
|
|
|
|
|
|
|
Unamortized net actuarial loss |
|
|
1,861.7 |
(1) |
|
|
1,959.1 |
(1) |
|
|
118.9 |
|
|
|
127.9 |
|
|
Accrued benefit asset (liability) on the Consolidated Balance Sheet |
|
$ |
1,079.7 |
|
|
$ |
945.6 |
|
|
$ |
(305.6 |
) |
|
$ |
(272.6 |
) |
|
|
(1) The amount by which these losses exceed the 10 % corridor (representing 10 % of
the benefit obligation) was equal to $1,072.4 million at December 31, 2006 (2005 $1,185.9
million). Any such excess is amortized, commencing in the following year, over the expected average
remaining service period of active employees expected to receive benefits under the plan (December
31, 2006 11 years; December 31, 2005 12 years). In 2006, $100.1 million was amortized and
included in the net benefit cost (2005 $55.6 million).
76
2006 Annual Report
The accrued benefit asset (liability) is included on the Companys Consolidated Balance Sheet
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions |
|
Other benefits |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other current assets |
|
$ |
|
|
|
$ |
2.5 |
|
|
$ |
|
|
|
$ |
|
|
Other assets and deferred charges |
|
|
1,081.2 |
|
|
|
944.8 |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
(0.3 |
) |
|
|
(0.7 |
) |
|
|
(21.5 |
) |
|
|
(18.6 |
) |
Other long-term liabilities |
|
|
(1.2 |
) |
|
|
(1.0 |
) |
|
|
(284.1 |
) |
|
|
(254.0 |
) |
|
Accrued benefit asset (liability) on the Consolidated Balance Sheet |
|
$ |
1,079.7 |
|
|
$ |
945.6 |
|
|
$ |
(305.6 |
) |
|
$ |
(272.6 |
) |
|
|
The measurement date used to determine the plan assets and the accrued benefit obligation is
December 31 (November 30 for U.S. plans). The most recent actuarial valuations for pension funding
purposes were performed as at January 1, 2006. The next actuarial valuations for pension funding
purposes will be performed as at January 1, 2007.
Included in the benefit obligation and fair value of fund assets at year end were the following
amounts in respect of plans where the benefit obligation exceeded the fund assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions |
|
Other benefits |
(in millions) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation |
|
$ |
(7,892.7 |
) |
|
$ |
(7,732.2 |
) |
|
$ |
(509.5 |
) |
|
$ |
(498.9 |
) |
Fair value of fund assets |
|
|
7,649.2 |
|
|
|
6,890.1 |
|
|
|
11.9 |
|
|
|
11.9 |
|
|
|
|
$ |
(243.5 |
) |
|
$ |
(842.1 |
) |
|
$ |
(497.6 |
) |
|
$ |
(487.0 |
) |
|
|
Actuarial assumptions used were approximately:
|
|
|
|
|
|
|
|
|
|
|
|
|
(percentages) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.40 |
|
|
|
5.25 |
|
|
|
6.00 |
|
Projected future salary increases |
|
|
3.00 |
|
|
|
3.00 |
|
|
|
3.00 |
|
Health care cost trend rate |
|
|
10.00 |
(1) |
|
|
10.00 |
(1) |
|
|
8.50 |
(2) |
Benefit cost for year ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.25 |
|
|
|
6.00 |
|
|
|
6.25 |
|
Expected rate of return on fund assets |
|
|
8.00 |
|
|
|
8.00 |
|
|
|
8.00 |
|
Projected future salary increases |
|
|
3.00 |
|
|
|
3.00 |
|
|
|
3.00 |
|
Health care cost trend rate |
|
|
10.00 |
(1) |
|
|
8.50 |
(2) |
|
|
9.00 |
(2) |
|
|
|
|
|
(1) |
|
Beginning in 2008, the health care cost trend rate is projected to decrease by
0.5 % per year to approximately 5.0 % per year in 2017. |
(2) For these prior periods or measurement dates, the health care cost trend rate was
projected to decrease by 0.5 % per year to approximately 4.5 % per year in 2012.
2006 Annual Report
77
Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. A one-percentage-point change in the assumed health care cost trend rate would
have the following effects:
|
|
|
|
|
|
|
|
|
|
|
One percentage |
|
|
One percentage |
|
(in millions) Favourable (unfavourable) |
|
increase |
|
|
decrease |
|
|
|
|
|
|
|
|
|
|
|
|
Effect on the total of service and interest costs |
|
$ |
(0.9 |
) |
|
$ |
0.8 |
|
Effect on post-retirement benefit obligation |
|
$ |
(11.2 |
) |
|
$ |
10.7 |
|
|
|
Plan Assets
The Companys pension plan asset allocation and the current weighted average permissible range
for each major asset class, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of plan |
|
|
|
Current permissible |
|
|
assets at December 31 |
|
Asset allocation (percentage) |
|
range |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
51 57 |
|
|
|
56.3 |
|
|
|
55.5 |
|
Debt securities |
|
|
37 43 |
|
|
|
38.1 |
|
|
|
40.3 |
|
Real estate and other |
|
|
4 8 |
|
|
|
5.6 |
|
|
|
4.2 |
|
|
Total |
|
|
|
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
The Companys investment strategy is to achieve a long-term (five- to ten-year period) real rate of
return of 5.5 %, net of all fees and expenses. The Companys best estimate of long-term inflation
of 2.5 % yields a long-term nominal target of 8.0 %, net of all fees and expenses. In identifying
the asset allocation ranges, consideration was given to the long-term nature of the underlying plan
liabilities, the solvency and going-concern financial position of the plan, long-term return
expectations and the risks associated with key asset classes, as well as the relationships of their
returns with each other, inflation and interest rates. When advantageous and with due
consideration, derivative instruments may be utilized, provided the total value of the underlying
asset represented by financial derivatives, excluding currency forwards, is limited to 20 % of the
market value of the fund.
At December 31, 2006, fund assets consisted primarily of listed stocks and bonds, including 132,600
of the Companys Common Shares (2005 169,600) at a market value of $8.1 million (2005 $8.3
million) and 6.91 % Secured Equipment Notes issued by the Company at a par value of $4.1 million
(2005 $4.3 million) and at a market value of $4.7 million (2005 $4.9 million).
Cash Flows
In 2006, the Company contributed $202.0 million to its registered pension plans (2005 $138.3
million), including $3.0 million to the defined contribution plan (2005 $3.1 million). In
addition, the Company made payments directly to employees, their beneficiaries or estates or to
third-party benefit administrators of $42.0 million (2005 $37.3 million) with respect to
supplemental pension plan benefits and other benefits.
Defined Contribution Plan
Canadian non-unionized employees have the option to participate in the DC plan. The DC plan
provides a pension based on total employee and employer contributions plus investment income earned
on those contributions. Employee contributions are based on a percentage of salary. The Company
matches employee contributions to a maximum percentage each year. In 2006, the net cost of this
plan, which generally equals the employers required contribution, was $3.0 million (2005 $3.1
million).
78
2006 Annual Report
Post-employment Restructuring Benefits
The Company accrues post-employment labour liabilities as part of its restructuring accruals
(see Note 20) that are discounted at rates of 4.50 % and 6.75 %. The labour portion of the
Companys accrued restructuring liability was as follows:
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Change in liability: |
|
|
|
|
|
|
|
|
Restructuring labour liability at January 1 |
|
$ |
224.8 |
|
|
$ |
219.7 |
|
Plan adjustment |
|
|
(14.1 |
) |
|
|
33.6 |
|
Interest cost |
|
|
12.0 |
|
|
|
13.2 |
|
Benefits paid |
|
|
(61.8 |
) |
|
|
(40.5 |
) |
Foreign currency changes |
|
|
(0.1 |
) |
|
|
(1.2 |
) |
|
Restructuring labour liability at December 31 |
|
|
160.8 |
|
|
|
224.8 |
|
|
Unfunded restructuring labour amount |
|
|
(160.8 |
) |
|
|
(224.8 |
) |
Unamortized net transitional amount |
|
|
(26.6 |
) |
|
|
(38.8 |
) |
|
Accrued restructuring labour liability on the Consolidated Balance Sheet |
|
$ |
(187.4 |
) |
|
$ |
(263.6 |
) |
|
|
23. Stock-based Compensation
At December 31, 2006, the Company had several stock-based compensation plans, including a stock
option plan, tandem SARs, a DSU plan and an employee stock savings plan. These plans resulted in a
compensation cost in 2006 of $52.1 million (2005 $38.7 million; 2004 $26.9 million).
Replacement Options and SARs
Due to the reorganization of CPL and the spin-off of its subsidiary companies in October 2001,
all CPL employees who held CPL options at the date of the spin-off received in exchange for their
CPL options fully-vested replacement options and SARs in the spun-off companies, according to the
reorganization ratio used for Common Shares. The exercise price of the CPL options and SARs was
allocated among the replacement options and SARs of each of the spun-off companies, based on a
formula using the weighted average trading price of the spun-off companies for their first 10 days
of trading.
By agreement between CPRL and its former affiliates, the difference between the strike price and
the exercise price of SARs of the former affiliates held by CPRL employees is recognized as an
expense by CPRL. The difference between the strike price and the exercise price of CPRL SARs held
by employees of the former affiliates is recovered from the former affiliates.
SARs are attached to 50 % of the options and there is a one-to-one cancellation ratio between those
options and SARs.
Stock Option Plans and SARs
Under the Companys stock option plans, options are granted to eligible employees to purchase
Common Shares of the Company at a price equal to the market value of the shares at the grant date.
CP follows the fair value-based approach to accounting for stock-based compensation for options
issued for years beginning in 2003. Compensation expense is recognized for stock options over the
shorter of the vesting period or employee service period based on their estimated fair values on
the dates of grant, as determined by the Black-Scholes option-pricing model. Options granted
between January 1 and December 31, 2002, are not recorded at fair value and, as such, no
compensation expense has been recorded for these options. Additional fair value disclosure on these
options is included in Additional fair value disclosure.
Pursuant to the employee plan, options may be exercised upon vesting, which is between 24 and 36
months after the grant date, and will expire after 10 years (regular options). Some options vest
after 48 months, unless certain performance targets are achieved, in which case vesting is
accelerated (performance options). These performance options expire five years after the grant
date.
At December 31, 2006, there were 669,864 (2005 1,836,254; 2004 3,213,843) Common Shares
available for the granting of future options under the stock option plans, out of the 11,500,000
Common Shares currently authorized.
2006 Annual Report
79
With the granting of regular options, employees are simultaneously granted SARs equivalent to
one-half the number of regular options granted. A SAR entitles the holder to receive payment of an
amount equal to the excess of the market value of a Common Share at the exercise date of the SAR
over the related option exercise price. On an ongoing basis, a liability for SARs is accrued on the
incremental change in the market value of the underlying stock and amortized to income over the
vesting period. SARs may be exercised no earlier than two years and no later than 10 years after
the grant date.
Where an option granted is a tandem award, the holder can choose to exercise an
option or a SAR of equal intrinsic value.
In 2006, the expense for stock options was $11.1 million (2005 $9.8 million; 2004 $7.9
million) and for SARs was $26.1 million (2005 $16.8 million; 2004 $9.0 million).
The following is a summary of the Companys fixed stock option plan as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
average | |
|
Number of |
|
|
average |
|
|
|
options |
|
|
exercise price | |
|
options |
|
|
exercise price |
|
|
|
|
|
|
|
|
|
| | |
|
|
|
|
|
|
|
|
Outstanding, January 1 |
|
|
7,971,917 |
|
|
$ | 32.07 | |
|
|
7,752,080 |
|
|
$ |
29.32 |
|
New options granted |
|
|
1,467,900 |
|
|
| 57.80 | |
|
|
1,556,400 |
|
|
|
42.09 |
|
Exercised |
|
|
(2,330,664 |
) |
|
| 28.59 | |
|
|
(1,157,752 |
) |
|
|
27.48 |
|
Forfeited/cancelled |
|
|
(301,509 |
) |
|
| 39.07 | |
|
|
(178,811 |
) |
|
|
29.80 |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31 |
|
|
6,807,644 |
|
|
$ | 38.50 | |
|
|
7,971,917 |
|
|
$ |
32.07 |
|
|
|
|
|
|
|
|
|
| | |
|
|
|
|
|
|
|
|
Options exercisable at December 31 |
|
|
2,918,294 |
|
|
$ | 29.64 | |
|
|
3,162,807 |
|
|
$ |
27.37 |
|
|
|
At December 31, 2006, the details of the stock options outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
Options exercisable |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
years to |
|
|
average |
|
|
Number of |
|
|
average |
|
Range of exercise prices |
|
options |
|
|
expiration |
|
|
exercise price |
|
|
options |
|
|
exercise price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$14.07 $18.96 |
|
|
260,316 |
|
|
|
2 |
|
|
$ |
15.02 |
|
|
|
260,316 |
|
|
$ |
15.02 |
|
$27.62 $36.64 |
|
|
3,683,228 |
|
|
|
5 |
|
|
|
31.33 |
|
|
|
2,657,978 |
|
|
|
31.07 |
|
$42.05 $63.82 |
|
|
2,864,100 |
|
|
|
7 |
|
|
|
49.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,807,644 |
|
|
|
6 |
|
|
$ |
38.47 |
|
|
|
2,918,294 |
|
|
$ |
29.64 |
|
|
|
Deferred Share Unit Plan and Other
The Company established the DSU plan as a means to compensate and assist in attaining share
ownership targets set for certain key employees and Directors. A DSU entitles the holder to
receive, upon redemption, a cash payment equivalent to the market value of a Common Share at the
redemption date. DSUs vest over various periods of up to 36 months and are only redeemable for a
specified period after employment is terminated.
Key employees may choose to receive DSUs in lieu of cash payments for certain incentive programs.
In addition, when acquiring Common Shares to meet share ownership targets, key employees may be
granted a matching number of DSUs up to 33 % of the shares and DSUs acquired during the first six
months after becoming eligible under the plan and, thereafter, up to 25 %. Key employees have five
years to meet their ownership targets.
80
2006 Annual Report
An expense to income for DSUs is recognized over the vesting period for both the initial
subscription price and the change in value between reporting periods. At December 31, 2006, there
were 355,081 (2005 295,224; 2004 291,693) DSUs outstanding. In 2006, 65,781 (2005 47,891;
2004 53,113) DSUs were granted. In 2006, 26,137 (2005 44,167; 2004 11,355) DSUs were
redeemed. In 2006, the expense for DSUs was $6.8 million (2005 $4.1 million; 2004 $3.6
million).
The Company issued 30,000 Restricted Share Units (RSU) in 2005. These RSUs were forfeited in 2006
prior to vesting. An expense to income for RSUs was being recognized over the vesting period and
was recovered upon cancellation. In 2006, $0.6 million of expense was recovered (2005 expense
incurred of $0.6 million).
Employee Share Purchase Plan
The Company has an employee share purchase plan whereby both employee and Company contributions
are used to purchase shares on the open market for employees. The Companys contributions are
expensed over the one-year vesting period. Under the plan, the Company matches $1 for every $3
contributed by employees up to a maximum employee contribution of 6 % of annual salary.
At December 31, 2006, there were 11,682 participants (2005 8,989; 2004 10,289) in the plan.
The total number of shares purchased in 2006 on behalf of participants, including the Company
contribution, was 657,530 (2005 795,728; 2004 895,907). In 2006, the Companys contributions
totalled $10.0 million (2005 $8.8 million; 2004 $6.8 million) and the related expense was
$8.6 million (2005 $7.4 million; 2004 $6.4 million).
Additional Fair Value Disclosure
The issuance or exercise of stock options authorized by CPs stock compensation plan between
January 1 and December 31, 2002, does not result in a charge to income when the exercise price
equals the market price of the stock on the grant date, while an expense for SARs is recognized
over the vesting period on the incremental change in the market value of the underlying stock
between reporting periods. Had CP used the fair value method, the fair value of options granted
would have been amortized to compensation expense over the vesting period of the options. Under the
fair value method, CPs pro forma basis net income and earnings per share would have been as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
(see Note 2
|
) |
|
(see Note 2
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (in millions) |
|
As reported |
|
$ |
796.3 |
|
|
$ |
543.0 |
|
|
$ |
411.1 |
|
|
|
Pro forma |
|
$ |
796.1 |
|
|
$ |
542.7 |
|
|
$ |
409.0 |
|
Basic earnings per share (in dollars) |
|
As reported |
|
$ |
5.06 |
|
|
$ |
3.43 |
|
|
$ |
2.59 |
|
|
|
Pro forma |
|
$ |
5.06 |
|
|
$ |
3.43 |
|
|
$ |
2.58 |
|
Diluted earnings per share (in dollars) |
|
As reported |
|
$ |
5.02 |
|
|
$ |
3.39 |
|
|
$ |
2.58 |
|
|
|
Pro forma |
|
$ |
5.01 |
|
|
$ |
3.39 |
|
|
$ |
2.57 |
|
|
|
Under the fair value method, the fair value of options at the grant date was $12.4 million for
options issued in 2006 (2005 $10.1 million; 2004 $9.5 million). The weighted average fair
value assumptions were approximately:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected option life (years) |
|
|
4.50 |
|
|
|
4.50 |
|
|
|
4.50 |
|
Risk-free interest rate |
|
|
4.07 |
% |
|
|
3.49 |
% |
|
|
3.36 |
% |
Expected stock price volatility |
|
|
22 |
% |
|
|
24 |
% |
|
|
28 |
% |
Expected annual dividends per share |
|
$ |
0.75 |
|
|
$ |
0.53 |
|
|
$ |
0.50 |
|
Weighted average fair value of options granted during the year |
|
$ |
12.99 |
|
|
$ |
9.66 |
|
|
$ |
8.04 |
|
|
|
2006 Annual Report
81
24. Commitments and Contingencies
In the normal course of its operations, the Company becomes involved in various legal actions,
including claims relating to injuries and damage to property. The Company maintains provisions it
considers to be adequate for such actions. While the final outcome with respect to actions
outstanding or pending at December 31, 2006, cannot be predicted with certainty, it is the opinion
of management that their resolution will not have a material adverse effect on the Companys
financial position or results of operations.
At December 31, 2006, the Company had committed to total future capital expenditures amounting to
$480.1 million for years 2007-2016.
At December 31, 2006, the Company had a committed unused line
of credit of $516.1 million available for short-term and long-term financing, effective until
November 2010. In addition, the Company had an uncommitted unused line of credit of US$15 million
available for short-term financing. The interest rate for both credit facilities varies based on
bank prime, Bankers Acceptances or LIBOR.
Minimum payments under operating leases were estimated at $634.2 million in aggregate, with annual
payments in each of the five years following 2006 of (in millions): 2007 $133.2; 2008 $99.2;
2009 $71.4; 2010 $55.8; 2011 $50.4.
Guarantees
In the normal course of operating the railway, the Company enters into contractual arrangements
that involve providing certain guarantees, which extend over the term of the contracts. These
guarantees include, but are not limited to:
o |
|
residual value guarantees on operating lease commitments of $442.5 million at December 31, 2006; |
|
o |
|
guarantees to pay other parties in the event of the occurrence of specified events, including
damage to equipment, in relation to assets used in the operation of the railway through operating
leases, rental agreements, easements, trackage and interline agreements; and |
|
o |
|
indemnifications of certain tax-related payments incurred by lessors and lenders. |
The maximum amount that could be payable under these guarantees, excluding residual value
guarantees, cannot be reasonably estimated due to the nature of certain of these guarantees. All or
a portion of amounts paid under guarantees to other parties in the event of the occurrence of
specified events could be recoverable from other parties or through insurance. The Company has
accrued for all guarantees that it expects to pay. At December 31, 2006, these accruals amounted to
$6.2 million (2005 $13.3 million).
Indemnifications
Pursuant to a trust and custodial services agreement between the Company and the trustee of the
Canadian Pacific Railway Company Pension Trust Fund, the Company has undertaken to indemnify and
save harmless the trustee, to the extent not paid by the fund, from any and all taxes, claims,
liabilities, damages, costs and expenses arising out of the performance of the trustees
obligations under the agreement, except as a result of misconduct by the trustee. The indemnity
includes liabilities, costs or expenses relating to any legal reporting or notification obligations
of the trustee with respect to the defined contribution option of the pension plans or otherwise
with respect to the assets of the pension plans that are not part of the fund. The indemnity
survives the termination or expiry of the agreement with respect to claims, liabilities, etc.,
arising prior to the termination or expiry. At December 31, 2006, the Company had not recorded a
liability associated with this indemnification, as the Company does not expect to make any payments
pertaining to it.
Pursuant to the bylaws of CPRL, all current and former Directors and Officers of the Company are
indemnified by the Company. CP carries a directors and officers liability insurance policy subject
to a maximum coverage limit and certain deductibles in cases where CP reimburses a Director or
Officer for any loss covered by the policy.
25. Segmented Information
Operating Segment
The Company operates in only one operating segment: rail transportation. Operating results by
geographic areas, railway corridors or other lower level components or units of operation are not
regularly reviewed by the Companys chief operating decision maker to make decisions about the
allocation of resources to, or the assessment of performance of, such geographic areas, corridors,
components or units of operation.
At December 31, 2006, one customer comprised 11.5 % (2005 14.5 %, 2004 11.7 %) of CPs total
revenues. At December 31, 2006, accounts receivable from this customer represented 5.6 % (2005
8.0 %) of CPs total accounts receivable.
82
2006 Annual Report
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Canada |
|
|
United States |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,575.1 |
|
|
$ |
1,008.1 |
|
|
$ |
4,583.2 |
|
Net properties |
|
$ |
7,539.3 |
|
|
$ |
1,583.6 |
|
|
$ |
9,122.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,404.1 |
|
|
$ |
987.5 |
|
|
$ |
4,391.6 |
|
Net properties |
|
$ |
7,252.2 |
|
|
$ |
1,538.7 |
|
|
$ |
8,790.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
2,926.7 |
|
|
$ |
976.2 |
|
|
$ |
3,902.9 |
|
Net properties |
|
$ |
6,832.8 |
|
|
$ |
1,560.7 |
|
|
$ |
8,393.5 |
|
|
|
The Companys accounts have been adjusted to reflect an accounting basis that is more comparable
with that employed by other Class 1 railways in North America. CPs principal subsidiaries present
unconsolidated financial statements in accordance with generally accepted accounting practices for
railways as prescribed in the regulations of the Canadian Transportation Agency and the Surface
Transportation Board in the United States.
The condensed income statement and balance sheet information, which follows, includes the
Canadian operations prepared in accordance with the Uniform Classification of Accounts issued by
the Canadian Transportation Agency. The changes required to consolidate the Companys operations
are identified as consolidating entries.
Consolidating Information 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
(in millions) |
|
Canada |
|
|
United States |
|
|
countries |
|
|
entries |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,571.2 |
|
|
$ |
1,008.1 |
|
|
$ |
|
|
|
$ |
3.9 |
|
|
$ |
4,583.2 |
|
Operating expenses |
|
|
2,833.9 |
|
|
|
736.5 |
|
|
|
|
|
|
|
(115.8 |
) |
|
|
3,454.6 |
|
|
Operating income |
|
|
737.3 |
|
|
|
271.6 |
|
|
|
|
|
|
|
119.7 |
|
|
|
1,128.6 |
|
Interest and other charges |
|
|
196.5 |
|
|
|
42.0 |
|
|
|
(25.2 |
) |
|
|
9.0 |
|
|
|
222.3 |
|
Foreign exchange loss (gain) on long-term debt |
|
|
1.2 |
|
|
|
|
|
|
|
(1.3 |
) |
|
|
0.2 |
|
|
|
0.1 |
|
Income taxes |
|
|
69.6 |
|
|
|
86.7 |
|
|
|
0.5 |
|
|
|
(46.9 |
) |
|
|
109.9 |
|
|
Net income |
|
$ |
470.0 |
|
|
$ |
142.9 |
|
|
$ |
26.0 |
|
|
$ |
157.4 |
|
|
$ |
796.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
813.5 |
|
|
$ |
293.2 |
|
|
$ |
18.1 |
|
|
$ |
(119.9 |
) |
|
$ |
1,004.9 |
|
Net properties |
|
|
5,673.0 |
|
|
|
1,569.3 |
|
|
|
|
|
|
|
1,880.6 |
|
|
|
9,122.9 |
|
Other long-term assets |
|
|
1,241.7 |
|
|
|
67.9 |
|
|
|
414.4 |
|
|
|
(435.9 |
) |
|
|
1,288.1 |
|
|
Total assets |
|
$ |
7,728.2 |
|
|
$ |
1,930.4 |
|
|
$ |
432.5 |
|
|
$ |
1,324.8 |
|
|
$ |
11,415.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
924.3 |
|
|
$ |
227.7 |
|
|
$ |
0.2 |
|
|
$ |
86.8 |
|
|
$ |
1,239.0 |
|
Long-term liabilities |
|
|
4,299.0 |
|
|
|
1,076.2 |
|
|
|
|
|
|
|
(54.8 |
) |
|
|
5,320.4 |
|
Shareholders equity |
|
|
2,504.9 |
|
|
|
626.5 |
|
|
|
432.3 |
|
|
|
1,292.8 |
|
|
|
4,856.5 |
|
|
Total liabilities and shareholders equity |
|
$ |
7,728.2 |
|
|
$ |
1,930.4 |
|
|
$ |
432.5 |
|
|
$ |
1,324.8 |
|
|
$ |
11,415.9 |
|
|
|
2006 Annual Report
83
Consolidating Information 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
(in millions) |
|
Canada |
|
|
United States |
|
|
countries |
|
|
entries |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,397.9 |
|
|
$ |
987.5 |
|
|
$ |
|
|
|
$ |
6.2 |
|
|
$ |
4,391.6 |
|
Operating expenses |
|
|
2,731.1 |
|
|
|
779.0 |
|
|
|
|
|
|
|
(109.7 |
) |
|
|
3,400.4 |
|
|
Operating income |
|
|
666.8 |
|
|
|
208.5 |
|
|
|
|
|
|
|
115.9 |
|
|
|
991.2 |
|
Interest and other charges |
|
|
194.9 |
|
|
|
42.6 |
|
|
|
(22.1 |
) |
|
|
6.9 |
|
|
|
222.3 |
|
Foreign exchange (gain) loss on long-term debt |
|
|
(53.8 |
) |
|
|
|
|
|
|
13.7 |
|
|
|
(4.6 |
) |
|
|
(44.7 |
) |
Income taxes |
|
|
165.8 |
|
|
|
65.0 |
|
|
|
0.7 |
|
|
|
39.1 |
|
|
|
270.6 |
|
|
Net income |
|
$ |
359.9 |
|
|
$ |
100.9 |
|
|
$ |
7.7 |
|
|
$ |
74.5 |
|
|
$ |
543.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
686.5 |
|
|
$ |
263.8 |
|
|
$ |
5.0 |
|
|
$ |
(61.4 |
) |
|
$ |
893.9 |
|
Net properties |
|
|
5,514.9 |
|
|
|
1,533.6 |
|
|
|
|
|
|
|
1,742.4 |
|
|
|
8,790.9 |
|
Other long-term assets |
|
|
1,141.8 |
|
|
|
85.8 |
|
|
|
401.9 |
|
|
|
(423.2 |
) |
|
|
1,206.3 |
|
|
Total assets |
|
$ |
7,343.2 |
|
|
$ |
1,883.2 |
|
|
$ |
406.9 |
|
|
$ |
1,257.8 |
|
|
$ |
10,891.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
881.2 |
|
|
$ |
300.0 |
|
|
$ |
0.4 |
|
|
$ |
(64.9 |
) |
|
$ |
1,116.7 |
|
Long-term liabilities |
|
|
4,270.1 |
|
|
|
1,004.4 |
|
|
|
|
|
|
|
115.8 |
|
|
|
5,390.3 |
|
Shareholders equity |
|
|
2,191.9 |
|
|
|
578.8 |
|
|
|
406.5 |
|
|
|
1,206.9 |
|
|
|
4,384.1 |
|
|
Total liabilities and shareholders equity |
|
$ |
7,343.2 |
|
|
$ |
1,883.2 |
|
|
$ |
406.9 |
|
|
$ |
1,257.8 |
|
|
$ |
10,891.1 |
|
|
|
Consolidating Information 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
(in millions) |
|
Canada |
|
|
United States |
|
|
countries |
|
|
entries |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
2,923.6 |
|
|
$ |
976.2 |
|
|
$ |
|
|
|
$ |
3.1 |
|
|
$ |
3,902.9 |
|
Operating expenses |
|
|
2,451.1 |
|
|
|
876.0 |
|
|
|
0.2 |
|
|
|
(139.1 |
) |
|
|
3,188.2 |
|
|
Operating income (loss) |
|
|
472.5 |
|
|
|
100.2 |
|
|
|
(0.2 |
) |
|
|
142.2 |
|
|
|
714.7 |
|
Interest and other charges |
|
|
225.7 |
|
|
|
38.8 |
|
|
|
(14.1 |
) |
|
|
4.3 |
|
|
|
254.7 |
|
Foreign exchange (gain) loss on long-term debt |
|
|
(114.1 |
) |
|
|
|
|
|
|
31.7 |
|
|
|
(12.0 |
) |
|
|
(94.4 |
) |
Income taxes |
|
|
97.0 |
|
|
|
19.8 |
|
|
|
0.7 |
|
|
|
25.8 |
|
|
|
143.3 |
|
|
Net income (loss) |
|
$ |
263.9 |
|
|
$ |
41.6 |
|
|
$ |
(18.5 |
) |
|
$ |
124.1 |
|
|
$ |
411.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
848.1 |
|
|
$ |
205.0 |
|
|
$ |
5.1 |
|
|
$ |
(66.2 |
) |
|
$ |
992.0 |
|
Net properties |
|
|
5,182.0 |
|
|
|
1,552.5 |
|
|
|
|
|
|
|
1,659.0 |
|
|
|
8,393.5 |
|
Other long-term assets |
|
|
1,060.1 |
|
|
|
81.1 |
|
|
|
403.4 |
|
|
|
(430.3 |
) |
|
|
1,114.3 |
|
|
Total assets |
|
$ |
7,090.2 |
|
|
$ |
1,838.6 |
|
|
$ |
408.5 |
|
|
$ |
1,162.5 |
|
|
$ |
10,499.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
1,065.7 |
|
|
$ |
278.7 |
|
|
$ |
9.5 |
|
|
$ |
(65.7 |
) |
|
$ |
1,288.2 |
|
Long-term liabilities |
|
|
4,123.8 |
|
|
|
1,026.2 |
|
|
|
|
|
|
|
80.7 |
|
|
|
5,230.7 |
|
Shareholders equity |
|
|
1,900.7 |
|
|
|
533.7 |
|
|
|
399.0 |
|
|
|
1,147.5 |
|
|
|
3,980.9 |
|
|
Total liabilities and shareholders equity |
|
$ |
7,090.2 |
|
|
$ |
1,838.6 |
|
|
$ |
408.5 |
|
|
$ |
1,162.5 |
|
|
$ |
10,499.8 |
|
|
|
84
2006 Annual Report
26. Supplementary Data
Reconciliation of Canadian and United States Generally Accepted Accounting Principles
The consolidated financial statements of the Company have been prepared in accordance with GAAP
in Canada. The material differences between Canadian and U.S. GAAP relating to measurement and
recognition are explained below, along with their effect on the Companys Statement of Consolidated
Income and Consolidated Balance Sheet. Certain additional disclosures required under U.S. GAAP have
not been provided, as permitted by the United States Securities and Exchange Commission.
Accounting for Derivative Instruments and Hedging
Effective January 1, 2004, the Company adopted the CICA Accounting Guideline No. 13 Hedging
Relationships (AcG 13), which harmonized the documentation standards for financial instruments
and hedging with U.S. GAAP, as required by Financial Accounting Standards Board (FASB) Statement
No. 133 Accounting for Derivative Instruments and Hedging Activities (FASB 133). Under both
Canadian and U.S. GAAP, gains or losses are included in the income statement when the hedged
transaction occurs. However, under U.S. GAAP, the ineffective portion of a hedging derivative is
immediately recognized in income and the effective portion of changes in the fair value of
derivatives that are designated and qualify as cash flow hedges are recorded as a component of
accumulated other comprehensive income. Changes in the fair value of derivatives that are
designated and qualify as fair value hedges are recorded in income along with adjustments to the
hedged item. Under Canadian GAAP, derivative instruments that qualify as hedges are not recorded on
the balance sheet. Under U.S. GAAP, all derivative instruments are recognized on the balance sheet
at fair value. Canadian GAAP requires that gains and losses on derivatives meeting hedge accounting
requirements are deferred and recognized when the hedged transaction occurs.
Fair Value of Financial Instruments
Currently under Canadian GAAP, certain financial instruments are initially recorded at cost.
Under U.S. GAAP, these financial instruments are initially recorded at fair value.
Pensions and post-retirement benefits
The CICA Section 3461 Employee Future Benefits requires amortization of net actuarial gains
and losses only if the unamortized portion of these gains and losses exceeds 10 % of the greater of
the benefit obligation and the market-related value of the plan assets (the corridor). This
harmonized the Canadian GAAP treatment with FASB Statement No. 87 Employers Accounting for
Pensions (FASB 87) and FASB Statement No. 106 Employers Accounting for Post-retirement
Benefits Other Than Pensions (FASB 106).
Prior to January 1, 2000, all actuarial gains and losses were amortized under Canadian GAAP. Upon
transition to the CICA Section 3461 effective January 1, 2000, all unamortized gains and losses,
including prior service costs, were accumulated into a net transitional asset, which is being
amortized to income over approximately 13 years. This created a difference with U.S. GAAP in 2005,
2004 and 2003, under which prior service costs continued to be amortized over the expected average
remaining service period and all other net gains accumulated prior to January 1, 2000, fell within
the corridor. In 2005 and 2004, the difference was reduced due to amortization of losses outside
the corridor for Canadian GAAP (see Note 22).
FASB Statement No. 158 Employers Accounting for Defined Benefit Pension and Other Post-retirement
Plans, an amendment of FASB Statements No. 87, 88, 106 and 123R (FASB 158) requires that the
over or under funded status of defined benefit pension and other post-retirement plans be
recognized on the balance sheet. FASB 158 became effective for years ending after December 15,
2006. The over or under funded status is measured as the difference between the fair value of the
plan assets and the benefit obligation, being the projected benefit obligation for pension plans
and the accumulated benefit obligation for other post-retirement plans. In addition, any previously
unrecognized actuarial gains and losses and prior service costs and credits that arise during the
period will be recognized as a component of other comprehensive income, net of tax. There are no
requirements under the provisions of FASB 158 that are applicable in 2006 that impact reported U.S.
GAAP net income. Under Canadian GAAP, the over or under funded status of defined benefit plans are
not recognized on the balance sheet, nor does Canadian GAAP currently require the recognition of
other comprehensive income.
Adoption of FASB 158 on a prospective basis at December 31, 2006 resulted in a reduction in Other
assets and deferred charges of $881.9 million, an increase in Deferred liabilities of $345.3
million, a reduction in Accumulated other comprehensive income of $838.8 million and an increase
in deferred income tax assets of $388.4 million. The adoption of FASB 158 was reflected as an
adjustment to closing Accumulated other comprehensive income at December 31, 2006. In addition,
the Minimum pension liability of $43.6 million and an intangible asset of $3.9 million at
December 31, 2006, with an associated $25.7 million (after tax) balance in Accumulated other
comprehensive income, was reclassified to Unfunded status of defined benefit pension and
post-retirement plans. Neither 2006 nor prior periods have been restated.
2006 Annual Report
85
Prior to the adoption of FASB 158 in 2006, and in accordance with FASB 87, an additional minimum
pension liability was required for unfunded plans. The additional minimum pension liability
represented the excess of the unfunded accumulated benefit obligation over previously recorded
pension cost liabilities and was also charged directly to shareholders equity, net of related
deferred income taxes. Under Canadian GAAP, there is no requirement to set up an unfunded pension
liability (previously in 2005 a minimum pension liability) based on an annual funding test.
Post-employment Benefits
Post-employment benefits are covered by the CICA recommendations for accounting for employee
future benefits. Consistent with accounting for post-retirement benefits, the policy requires
amortization of actuarial gains and losses only if they fall outside of the corridor. Under FASB
Statement No. 112 Employers Accounting for Post-employment Benefits (FASB 112), such gains and
losses are included immediately in income.
Termination and Severance Benefits
Termination and severance benefits are covered by the CICA Section 3461 and the CICA Emerging
Issues Committee Abstract 134 Accounting for Severance and Termination Benefits (EIC 134). Upon
transition to the CICA Section 3461 effective January 1, 2000, a net transitional asset was created
and is being amortized to income over approximately 13 years. Under U.S. GAAP, the expected
benefits were not accrued and are expensed when paid.
Stock-based Compensation
FASB issued a revision to Statement No. 123 Share-based Payment (FASB 123R) which was
effective for CP from January 1, 2006. FASB 123R requires the use of an option-pricing model to
fair value, at the grant date, share-based awards issued to employees, including stock options,
SARs and DSUs. Under Canadian GAAP, liability awards, such as SARs and DSUs, are accounted for
using the intrinsic method. FASB 123R also requires that CP account for forfeitures on an estimated
basis. Under Canadian GAAP, CP has elected to account for forfeitures on an actual basis as they
occur. CP adopted FASB 123R on January 1, 2006 without restatement of prior periods using the
modified prospective approach. In addition, on adoption of FASB 123R, CP has recognized
compensation cost attributable to stock-based awards over the period from the grant date to the
date the employee becomes eligible to retire when this is shorter than the vesting period (the
non-substantive vesting period approach).
Previously CP recognized the compensation cost over the vesting period (the nominal vesting period
approach). Canadian GAAP has similar provisions for the recognition of the compensation cost
attributable to stock-based awards over the shorter of the period from grant date to vesting or
eligibility for retirement. However, Canadian GAAP introduced these provisions with the effect for
the year ended December 31, 2006 and the Company adopted them with retroactive restatement of prior
periods.
As a result of the adoption of FASB 123R, CP recorded a charge against income in 2006 of $3.0
million ($2.0 million of net tax) as a cumulative effect of the change in accounting principle and
2006 Compensation and benefit expense was decreased by $1.5 million ($0.9 million net of tax).
The cumulative effect of the change in accounting principle and the increase in the 2006
Compensation and benefit expense include a charge of $5.9 million ($5.1 million net of tax) and a
credit of $1.2 million ($1.3 million net of tax), respectively, relating to the adoption of the
non-substantive vesting approach. The net charge to income in 2006 decreased basic and diluted
earnings per share by $0.01. There was no impact to cash flow amounts as a result of the adoption
of FASB 123R.
Under FASB Interpretation No. 44 Accounting for Certain Transactions Involving Stock Compensation
(FIN 44), a compensation expense must be recorded if the intrinsic value of stock options is not
exactly the same immediately before and after an equity restructuring. As a result of the CPL
corporate reorganization in 2001, CPL underwent an equity restructuring, which resulted in
replacement options in CPRL stock having a different intrinsic value after the restructuring than
prior to it. Canadian GAAP did not require the revaluation of these options. The Company adopted on
a prospective basis effective January 2003 the CICA Section 3870 Stock-based Compensation and
Other Stock-based Payments, which requires companies to account for stock options at their fair
value. Concurrently, the Company elected to adopt the fair value option under FASB Statement No.
123 Accounting for Stock-based Compensation (FASB 123).
Internal Use Software
Under the American Institute of Certified Public Accountants Statement of Position No. 98-1
Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP
98-1), certain costs, including preliminary project phase costs, are to be expensed as incurred.
These costs are capitalized under Canadian GAAP.
86
2006 Annual Report
Capitalization of Interest
The Company expenses interest related to capital projects undertaken during the year. FASB
Statement No. 34 Capitalization of Interest Cost (FASB 34) requires these interest costs to be
capitalized.
Comprehensive Income
FASB Statement No. 130 Reporting Comprehensive Income (FASB 130) requires disclosure of the
change in equity from transactions and other events related to non-owner sources during the period.
Canadian GAAP will not require similar presentation until 2007 (see Note 3). In 2006 and the
comparative periods presented, other comprehensive income arose from foreign currency translation
on the net investment in self-sustaining foreign subsidiaries, foreign currency translation related
to long-term debt designated as a hedge of the net investment in self-sustaining foreign
subsidiaries, unfunded pension liability (minimum pension liability in 2005 and 2004) and changes
in the fair value of derivative instruments. In 2006, the Company made an adjustment to reduce deferred income tax liability and reduce deferred
income tax expense included in Other comprehensive income by $54.6 million for amounts
accumulated in Other comprehensive income prior to 2003.
Joint Venture
The CICA Section 3055 Interest in Joint Ventures requires the proportionate consolidation
method to be applied to the recognition of interests in joint ventures in consolidated financial
statements. The Company has a joint-venture interest in the Detroit River Tunnel Partnership. FASB
Accounting Principles Board Opinion No. 18 The Equity Method of Accounting for Investments in
Common Stock (APB 18) requires the equity method of accounting to be applied to interests in
joint ventures. Equity income from DRTP in 2006 was $11.2 million (2005 $8.2 million, 2004
$6.2 million).
Offsetting Contracts
FASB Financial Interpretation No. 39 Offsetting of Amounts Relating to Certain Contracts
(FIN 39) does not allow netting of assets and liabilities among three parties. In 2003, the
Company and one of its subsidiaries entered into a contract with a financial institution. Under
Canadian GAAP, offsetting amounts with the same party and with a legal right to offset are netted
against each other.
Start-up Costs
Under EIC 27 Revenues and Expenditures during the Pre-operating Period, costs incurred for
projects under development may be deferred until the projects are substantially complete. Upon
completion, these costs are amortized based on the expected period and pattern of benefit of the
expenditures. Under U.S. GAAP, these costs are to be expensed as incurred.
Statement of Cash Flows
There are no material differences in the Statement of Consolidated Cash Flows under U.S. GAAP.
Future Accounting Changes
Uncertainty in Tax Positions
In July 2006, FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Tax
Positions (FIN 48) introducing recognition and measurement criteria for income tax positions. An
income tax position is a position taken in a filed tax return or a position that will be taken in a
future tax return which has been reflected in the recognition and measurement of income or deferred
tax assets or liabilities. Under the provisions of FIN 48 a tax position must be evaluated using a
more likely than not recognition threshold based on the technical merits of the position and can
only be recognized if it is more likely than not that this position will be sustainable on audit.
If the position does not meet this threshold, no amount may be accrued. Additionally, the
recognized tax position will be measured at the largest amount that is greater than 50 % likely to
be realized on settlement. Under Canadian GAAP, the Company recognizes tax positions when they are
more likely than not, however, the tax position is measured at the best estimate of the final
settlement. FIN 48 will be effective for the Company commencing on January 1, 2007 and its adoption
is not expected to have a material impact.
Measurement Date of Defined Benefit Pension and Other Post-retirement Plans
FASB 158 also requires, effective in 2008, that pension and other post-retirement benefit plans
be measured as of the balance sheet date. The impact of adopting a plan measurement date at the
balance sheet date for the Companys U.S. plans cannot be determined at this time. The Companys
Canadian plans are already measured as of the balance sheet date.
2006 Annual Report
87
Comparative Income Statement
Net income is reconciled from Canadian to U.S. GAAP in the following manner:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
|
|
|
(see Note 2
|
)
|
|
(see Note 2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income Canadian GAAP |
|
$ |
796.3 |
|
|
$ |
543.0 |
|
|
$ |
411.1 |
|
Increased (decreased) by: |
|
|
|
|
|
|
|
|
|
|
|
|
Pension costs |
|
|
5.1 |
|
|
|
7.7 |
|
|
|
(0.3 |
) |
Post-retirement benefits |
|
|
9.1 |
|
|
|
9.2 |
|
|
|
8.6 |
|
Post-employment benefits |
|
|
6.7 |
|
|
|
(4.0 |
) |
|
|
(0.3 |
) |
Termination and severance benefits |
|
|
(8.2 |
) |
|
|
(9.4 |
) |
|
|
(9.1 |
) |
Internal use software additions |
|
|
(9.2 |
) |
|
|
(9.8 |
) |
|
|
(6.4 |
) |
Internal use software depreciation |
|
|
7.1 |
|
|
|
6.1 |
|
|
|
5.4 |
|
Stock-based compensation |
|
|
(3.0 |
) |
|
|
(3.4 |
) |
|
|
0.1 |
|
(Loss) gain on ineffective portion of hedges |
|
|
(0.9 |
) |
|
|
(6.6 |
) |
|
|
(16.1 |
) |
Capitalized interest additions |
|
|
4.1 |
|
|
|
4.4 |
|
|
|
4.2 |
|
Capitalized interest depreciation |
|
|
(3.9 |
) |
|
|
(3.9 |
) |
|
|
(3.7 |
) |
Start-up costs |
|
|
(10.8 |
) |
|
|
|
|
|
|
|
|
Fair value of financial instruments |
|
|
(2.3 |
) |
|
|
|
|
|
|
|
|
Future (deferred) income tax recovery related to net income |
|
|
(19.0 |
) |
|
|
1.7 |
|
|
|
6.7 |
|
|
Income before cumulative catch-up adjustment |
|
|
771.1 |
|
|
|
535.0 |
|
|
|
400.2 |
|
|
Cumulative catch-up adjustment on adoption of FASB 123 R, net of tax |
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income U.S. GAAP |
|
$ |
769.1 |
|
|
$ |
535.0 |
|
|
$ |
400.2 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange gain (loss) on net investment in self-sustaining U.S. subsidiaries |
|
|
2.1 |
|
|
|
(19.1 |
) |
|
|
(50.6 |
) |
Unrealized foreign exchange (loss) gain on designated net investment hedge |
|
|
(2.7 |
) |
|
|
16.5 |
|
|
|
49.5 |
|
Minimum pension liability adjustment |
|
|
783.3 |
|
|
|
(254.3 |
) |
|
|
20.8 |
|
Change in fair value of derivative instruments |
|
|
16.6 |
|
|
|
86.5 |
|
|
|
39.5 |
|
Gain on derivative instruments realized in net income |
|
|
(42.5 |
) |
|
|
(55.9 |
) |
|
|
(26.0 |
) |
Future (deferred) income tax (expense) recovery related to other comprehensive income |
|
|
(210.6 |
) |
|
|
74.5 |
|
|
|
(31.8 |
) |
|
Comprehensive income |
|
$ |
1,315.3 |
|
|
$ |
383.2 |
|
|
$ |
401.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share U.S. GAAP |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
4.89 |
|
|
$ |
3.38 |
|
|
$ |
2.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
4.84 |
|
|
$ |
3.34 |
|
|
$ |
2.51 |
|
|
|
88
2006 Annual Report
A summary of operating income resulting from Canadian and U.S. GAAP differences is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
|
|
|
(see Note 2
|
)
|
|
(see Note 2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
Canadian GAAP |
|
$ |
1,128.6 |
|
|
$ |
991.2 |
|
|
$ |
714.7 |
|
U.S. GAAP |
|
$ |
1,122.3 |
|
|
$ |
981.5 |
|
|
$ |
697.1 |
|
|
|
The differences between U.S. and Canadian GAAP operating income are itemized in the comparative net
income reconciliation, excluding the effect of future income taxes.
Consolidated Balance Sheet
Had the Consolidated Balance Sheet been prepared under U.S. GAAP, the differences would have
been as follows (higher/(lower)):
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
(see Note 2
|
)
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
Investment in joint ventures |
|
$ |
(0.4 |
) |
|
$ |
(0.1 |
) |
Accounts receivable and other current assets |
|
|
|
|
|
|
|
|
Investment in joint ventures |
|
|
1.9 |
|
|
|
0.7 |
|
Investments |
|
|
|
|
|
|
|
|
Investment in joint ventures |
|
|
87.8 |
|
|
|
41.9 |
|
Capital commitments and mortgages |
|
|
(2.3 |
) |
|
|
|
|
Long-term assets |
|
|
|
|
|
|
|
|
Properties |
|
|
|
|
|
|
|
|
Capitalized interest |
|
|
150.4 |
|
|
|
150.2 |
|
Internal use software |
|
|
(51.2 |
) |
|
|
(49.1 |
) |
Investment in joint ventures |
|
|
(71.5 |
) |
|
|
(35.9 |
) |
Other assets and deferred charges |
|
|
|
|
|
|
|
|
Pension |
|
|
(1,079.7 |
) |
|
|
(205.8 |
) |
Minimum pension liability adjustment |
|
|
|
|
|
|
(525.7 |
) |
Long-term receivable (FIN 39) |
|
|
179.5 |
|
|
|
169.2 |
|
Derivative instruments |
|
|
31.7 |
|
|
|
61.7 |
|
Start-up costs |
|
|
(10.8 |
) |
|
|
|
|
Investment in joint ventures |
|
|
(22.2 |
) |
|
|
(9.9 |
) |
|
Total assets |
|
$ |
(786.8 |
) |
|
$ |
(402.8 |
) |
|
|
2006 Annual Report
89
Consolidated Balance Sheet (continued)
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
(see Note 2
|
) |
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
|
|
|
|
|
|
Investment in joint ventures |
|
$ |
(1.3 |
) |
|
$ |
(1.1 |
) |
Income and other taxes payable |
|
|
|
|
|
|
|
|
Investment in joint ventures |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
Long-term liabilities |
|
|
|
|
|
|
|
|
Deferred liabilities |
|
|
|
|
|
|
|
|
Termination and severance benefits |
|
|
(19.0 |
) |
|
|
(27.2 |
) |
Post-retirement benefit liability |
|
|
|
|
|
|
43.3 |
|
Post-employment benefit liability |
|
|
16.4 |
|
|
|
23.1 |
|
Minimum pension liability adjustment |
|
|
|
|
|
|
297.3 |
|
Under funded status of defined benefit pension and other post-retirement plans |
|
|
421.0 |
|
|
|
|
|
Derivative instruments |
|
|
4.8 |
|
|
|
6.0 |
|
Investment in joint ventures |
|
|
(2.7 |
) |
|
|
(2.2 |
) |
Stock-based compensation |
|
|
(0.6 |
) |
|
|
(2.4 |
) |
Long-term debt |
|
|
|
|
|
|
|
|
Marked-to-market hedged portion of debt |
|
|
(2.8 |
) |
|
|
(0.2 |
) |
Bank loan (FIN 39) |
|
|
179.5 |
|
|
|
169.2 |
|
Future (deferred) income tax liability |
|
|
(437.2 |
) |
|
|
(278.4 |
) |
|
Total liabilities |
|
|
157.9 |
|
|
|
227.3 |
|
Shareholders equity |
|
|
|
|
|
|
|
|
Share capital |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
16.9 |
|
|
|
11.5 |
|
Contributed surplus |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
8.3 |
|
|
|
9.5 |
|
Foreign currency translation adjustments |
|
|
(66.4 |
) |
|
|
(67.5 |
) |
Retained income |
|
|
(128.4 |
) |
|
|
(101.2 |
) |
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
64.3 |
|
|
|
10.3 |
|
Funding status of defined benefit pension and other post-retirement plans |
|
|
(858.8 |
) |
|
|
|
|
Minimum pension liability adjustment |
|
|
|
|
|
|
(527.5 |
) |
Derivative instruments (FASB 133) |
|
|
19.4 |
|
|
|
34.8 |
|
|
Total liabilities and shareholders equity |
|
$ |
(786.8 |
) |
|
$ |
(402.8 |
) |
|
|
90
2006 Annual Report
FIVE-YEAR SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
(1) |
|
2004 |
(1) |
|
2003 |
(1)(2) |
|
2002 |
(1)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grain |
|
$ |
904.6 |
|
|
$ |
754.5 |
|
|
$ |
668.2 |
|
|
$ |
644.4 |
|
|
$ |
631.4 |
|
Coal |
|
|
592.0 |
|
|
|
728.8 |
|
|
|
530.3 |
|
|
|
444.0 |
|
|
|
442.5 |
|
Sulphur and fertilizers |
|
|
439.3 |
|
|
|
447.1 |
|
|
|
460.0 |
|
|
|
417.4 |
|
|
|
401.3 |
|
Forest products |
|
|
316.4 |
|
|
|
333.9 |
|
|
|
322.0 |
|
|
|
328.8 |
|
|
|
360.3 |
|
Industrial and consumer products (3) |
|
|
603.8 |
|
|
|
542.9 |
|
|
|
481.4 |
|
|
|
459.9 |
|
|
|
485.2 |
|
Intermodal (3) |
|
|
1,256.8 |
|
|
|
1,161.1 |
|
|
|
1,034.7 |
|
|
|
926.4 |
|
|
|
855.4 |
|
Automotive |
|
|
314.4 |
|
|
|
298.0 |
|
|
|
288.5 |
|
|
|
304.2 |
|
|
|
332.4 |
|
|
|
|
|
4,427.3 |
|
|
|
4,266.3 |
|
|
|
3,785.1 |
|
|
|
3,525.1 |
|
|
|
3,508.5 |
|
Other (3) (4) (6) |
|
|
155.9 |
|
|
|
125.3 |
|
|
|
117.8 |
|
|
|
135.6 |
|
|
|
157.1 |
|
|
Total revenues (4) (6) |
|
|
4,583.2 |
|
|
|
4,391.6 |
|
|
|
3,902.9 |
|
|
|
3,660.7 |
|
|
|
3,665.6 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
1,327.6 |
|
|
|
1,322.1 |
|
|
|
1,261.5 |
|
|
|
1,166.4 |
|
|
|
1,143.8 |
|
Fuel |
|
|
650.5 |
|
|
|
588.0 |
|
|
|
440.0 |
|
|
|
393.6 |
|
|
|
358.3 |
|
Materials |
|
|
212.9 |
|
|
|
203.3 |
|
|
|
178.5 |
|
|
|
179.2 |
|
|
|
168.7 |
|
Equipment rents |
|
|
181.2 |
|
|
|
210.0 |
|
|
|
218.5 |
|
|
|
238.5 |
|
|
|
255.4 |
|
Depreciation |
|
|
464.1 |
|
|
|
445.1 |
|
|
|
407.1 |
|
|
|
372.3 |
|
|
|
340.2 |
|
Purchased services and other |
|
|
618.3 |
|
|
|
621.6 |
|
|
|
610.7 |
|
|
|
583.6 |
|
|
|
555.6 |
|
|
Total operating expenses, before other specified items (4) (6) |
|
|
3,454.6 |
|
|
|
3,390.1 |
|
|
|
3,116.3 |
|
|
|
2,933.6 |
|
|
|
2,822.0 |
|
|
Operating income, before other specified items (4) (6) |
|
|
1,128.6 |
|
|
|
1,001.5 |
|
|
|
786.6 |
|
|
|
727.1 |
|
|
|
843.6 |
|
Other charges, before foreign exchange gains and losses
on long-term debt and other specified items (4) (5) (6) |
|
|
27.8 |
|
|
|
18.1 |
|
|
|
36.1 |
|
|
|
33.5 |
|
|
|
21.8 |
|
Interest expense |
|
|
194.5 |
|
|
|
204.2 |
|
|
|
218.6 |
|
|
|
218.7 |
|
|
|
242.2 |
|
Income tax expense, before foreign exchange gains
and losses on long-term debt and income tax
on other specified items (4) (5) (6) |
|
|
278.8 |
|
|
|
250.8 |
|
|
|
172.4 |
|
|
|
147.0 |
|
|
|
181.1 |
|
|
Income,
before foreign exchange gains and losses
on long-term debt and other specified items (4) (5) (6) |
|
|
627.5 |
|
|
|
528.4 |
|
|
|
359.5 |
|
|
|
327.9 |
|
|
|
398.5 |
|
|
Foreign exchange gain (loss) on long-term debt
(net of income tax) (5) |
|
|
(7.2 |
) |
|
|
22.3 |
|
|
|
94.4 |
|
|
|
224.4 |
|
|
|
16.7 |
|
Other specified items (net of income tax) (4) |
|
|
176.0 |
|
|
|
(7.7 |
) |
|
|
(42.8 |
) |
|
|
(153.2 |
) |
|
|
72.0 |
|
|
Net income |
|
$ |
796.3 |
|
|
$ |
543.0 |
|
|
$ |
411.1 |
|
|
$ |
399.1 |
|
|
$ |
487.2 |
|
|
|
(1) Certain comparative period figures have been restated for retroactive
application of a new accounting pronouncement on stock-based compensation for employees eligible to
retire before vesting date.
(2) Restated. Effective January 1, 2004, CP adopted retroactively with restatement the
Canadian Institute of Chartered Accountants new accounting standard for asset retirement
obligations.
2006 Annual Report
91
(3) In 2005, CP reclassified from Other revenue certain intermodal-related revenue
items consisting of container storage revenue and terminal service fees as part of the intermodal
line of business. Also, items relating to food and consumer products have been reclassed from the
intermodal group to the renamed Industrial and Consumer Products group.
(4) Before other specified items as follows: For 2006, a $176.0-million income tax
benefit was recorded due to Federal and Provincial income tax rate reductions; for 2005, a
$33.9-million ($20.6 million after tax) reduction to environmental remediation and a $44.2-million
($28.3 million after tax) special charge for labour restructuring; for 2004, a $19.0-million ($12.4
million after tax) reduction of a labour restructuring liability and a $90.9-million ($55.2 million
after tax) special charge for environmental remediation; for 2003, a $215.1-million ($141.4 million
after tax) special charge for labour restructuring and asset impairment, a $28.9-million ($18.4
million after tax) for a loss on transfer of assets to an outsourcing firm, a $59.3-million
favourable adjustment related to the revaluation of future income taxes, and an unfavourable impact
of $52.7 million for an increase in future income taxes resulting from the repeal of previously
legislated income tax reductions; for 2002, $72.0 million in income tax recoveries associated with
a favourable court ruling related to prior years taxes.
(5) Before foreign exchange gain (loss) on long-term debt as follows: for 2006, a
$0.1-million ($7.2 million after tax) foreign exchange loss on long-term debt; for 2005, a
$44.7-million ($22.3 million after tax) foreign exchange gain on long-term debt; for 2004, a
$94.4-million ($94.4 million after tax) foreign exchange gain on long-term debt; for 2003, a
$209.5-million ($224.4 million after tax) foreign exchange gain on long-term debt; for 2002, a
$13.4-million ($16.7 million after tax) foreign exchange gain on long-term debt.
(6) These are earnings measures that are not in accordance with GAAP and may not be
comparable to similar measures of other companies. CPs results, before foreign exchange gains and
losses on long-term debt and other specified items as defined in this summary, are presented to
provide the reader with information that is readily comparable to prior years results. By
excluding foreign exchange gains and losses on long-term debt, the impact of volatile short-term
exchange rate fluctuations, which can only be realized when long-term debt matures or is settled,
is largely eliminated. By also excluding other specified items, the results better reflect ongoing
operations at CP.
SHAREHOLDER INFORMATION
Common Share Market Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
Toronto Stock Exchange (Canadian dollars) |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
|
|
|
|
|
|
|
| | |
|
|
|
|
|
|
|
|
First Quarter |
|
|
60.85 |
|
|
| 45.55 | |
|
|
46.52 |
|
|
|
38.70 |
|
Second Quarter |
|
|
65.17 |
|
|
| 52.55 | |
|
|
46.88 |
|
|
|
41.46 |
|
Third Quarter |
|
|
57.97 |
|
|
| 51.05 | |
|
|
50.49 |
|
|
|
41.79 |
|
Fourth Quarter |
|
|
65.29 |
|
|
| 54.95 | |
|
|
52.70 |
|
|
|
46.60 |
|
|
Year |
|
|
65.29 |
|
|
| 45.55 | |
|
|
52.70 |
|
|
|
38.70 |
|
|
|
|
|
|
|
|
|
| | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
|
|
|
|
|
|
|
|
New York Stock Exchange (U.S. dollars) |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
|
First Quarter |
|
|
53.00 |
|
|
| 39.10 | |
|
|
38.05 |
|
|
|
31.52 |
|
Second Quarter |
|
|
57.73 |
|
|
| 47.10 | |
|
|
37.85 |
|
|
|
33.60 |
|
Third Quarter |
|
|
52.17 |
|
|
| 44.85 | |
|
|
43.40 |
|
|
|
33.71 |
|
Fourth Quarter |
|
|
57.32 |
|
|
| 48.75 | |
|
|
45.34 |
|
|
|
39.56 |
|
|
Year |
|
|
57.73 |
|
|
| 39.10 | |
|
|
45.34 |
|
|
|
31.52 |
|
|
|
|
|
|
|
|
|
| | |
|
|
|
|
|
|
|
|
Number of registered shareholders at year end |
|
|
|
|
|
| | |
|
|
|
|
|
|
18,497 |
|
Market prices at year end |
|
|
|
|
|
| | |
|
|
|
|
|
|
|
|
Toronto Stock Exchange |
|
|
|
|
|
| | |
|
|
|
|
|
CDN$ |
61.40 |
|
New York Stock Exchange |
|
|
|
|
|
| | |
|
|
|
|
|
US$ |
52.76 |
|
|
|
92
2006 Annual Report
Shareholder Administration
Common Shares
Computershare Investor Services Inc., with transfer facilities in Montreal, Toronto, Calgary
and Vancouver, serves as transfer agent and registrar for the Common Shares in Canada.
Computershare Trust Company NA, Denver, Colorado, serves as co-transfer agent and co-registrar for
the Common Shares in the United States.
For information concerning dividends, lost share certificates, estate transfers or for change in
share registration or address, please contact the transfer agent and registrar by telephone at
1-877-427-7245 toll free North America or International (514) 982-7555, or by email at
service@computershare.com; or write to:
Computershare Investor Services Inc.
100 University Avenue, 9th Floor
Toronto, Ontario Canada M5J 2Y1
4 % Consolidated Debenture Stock
Inquiries with respect to Canadian Pacific Railway Companys 4 % Consolidated Debenture
Stock should be directed as follows:
For stock denominated in U.S. currency The Bank of New York at (212) 815-5213
or by e-mail at nkercado@bankofny.com;
and
For stock denominated in pounds sterling BNY Trust Company of Canada at (416) 933-8504
or by e-mail at mredway@bankofny.com.
Market for Securities
The Common Shares of Canadian Pacific Railway Limited are listed on the Toronto and New York
stock exchanges. The Debenture Stock of Canadian Pacific Railway Company is listed on the London,
England Stock Exchange (sterling) and on the New York Stock Exchange (U.S. currency).
Trading Symbol
Common Shares CP
Duplicate Annual Reports
While every effort is made to avoid duplication, some Canadian Pacific Railway Limited
registered shareholders may receive multiple copies of shareholder information mailings such as
this Annual Report. Registered shareholders who wish to consolidate any duplicate accounts which
are registered in the same name are requested to write to Computershare Investor Services Inc.
Direct Deposit of Dividends
Registered shareholders are offered the option of having their Canadian and U.S. dollar
dividends directly deposited into their personal bank accounts in Canada and the United States on
the dividend payment dates. Shareholders may obtain a direct deposit enrollment form from
Computershare Investor Services Inc.
2006 Annual Report
93
Corporate Governance
Canadian Pacifics Board of Directors and its management are committed to a high standard of
corporate governance. They believe effective corporate governance calls for the establishment of
processes and structures that contribute to the sound direction and management of the Corporations
business, with a view to enhancing shareholder value.
A detailed description of CPs approach to corporate governance is contained in its Management
Proxy Circular issued in connection with the 2007 Annual Meeting of Shareholders.
Governance Standards
Any significant differences between the Corporations corporate governance practices and those
set forth in the corporate governance listing standards (Listing Standards) of the New York Stock
Exchange (NYSE) are set forth on Canadian Pacific Railway Limiteds website www.cpr.ca under
Governance.
Chief Executive Officer and Chief Financial Officer Certification
The certifications (the 302 Certifications) of the Chief Executive Officer and the Executive
Vice-President and Chief Financial Officer of each of Canadian Pacific Railway Limited and Canadian
Pacific Railway Company required by Section 302 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated by the Securities and Exchange Commission (SEC) thereunder, have been filed with the
SEC as an exhibit to the Annual Report of Canadian Pacific Railway Limited and Canadian Pacific
Railway Company on Form 40-F. The 302 Certifications have also been filed in fulfillment of the
requirements of Multilateral Instrument 52-109.
94
2006 Annual Report
Stephen E. Bachand (2) (4)* (5)
Retired President and Chief Executive Officer
Canadian Tire Corporation, Limited
Ponte Vedra Beach, Florida
John E. Cleghorn, O.C., F.C.A. (2)*
Chairman
Canadian Pacific Railway Limited
and SNC-Lavalin Group Inc.
Toronto, Ontario
Tim W. Faithfull (2) (3) (4)
Retired President and Chief Executive Officer
Shell Canada Limited
Oxford, Oxfordshire, England
Fred J. Green
President and Chief Executive Officer
Canadian Pacific Railway Limited
Calgary, Alberta
The Honourable John P. Manley (1) (2) (5)
Senior Counsel
McCarthy Tétrault LLP
Ottawa, Ontario
Linda J. Morgan (2) (3) (4)
Partner
Covington & Burling LLP
Bethesda, Maryland
Dr. James R. Nininger (2) (3) (4)
Retired President and Chief Executive Officer
The Conference Board of Canada
Ottawa, Ontario
Madeleine Paquin (1) (2) (3)
President and Chief Executive Officer
Logistec Corporation
Montreal, Quebec
Michael E.J. Phelps, O.C. (2) (4) (5)*
Chairman
Dornoch Capital Inc.
West Vancouver, British Columbia
Roger Phillips, O.C. (1)* (2) (5)
Retired President and Chief Executive Officer
IPSCO Inc.
Regina, Saskatchewan
Hartley T. Richardson (1) (2) (5)
President and Chief Executive Officer
James Richardson & Sons Limited
Winnipeg, Manitoba
Michael W. Wright (1) (2) (3)*
Retired Chairman of the Board
and Chief Executive Officer
SUPERVALU INC.
Longboat Key, Florida
(1) Audit, Finance and Risk Management Committee
(2) Corporate Governance and Nominating Committee
(3) Environmental and Safety Committee
(4) Management Resources and Compensation Committee
(5) Pension Trust Fund Committee
* denotes chairman of the committee
2006 Annual Report
95
|
|
|
SENIOR OFFICERS |
|
|
OF THE COMPANY
|
|
|
|
|
John E. Cleghorn, O.C., F.C.A. |
|
|
Chairman of the Board Toronto, Ontario |
|
1 |
|
Fred J. Green (1) |
|
|
President and Chief Executive Officer Calgary, Alberta |
|
2 |
|
Michael R. Lambert (1) |
|
|
Executive Vice-President and Chief Financial
Officer Calgary, Alberta |
|
3 |
|
Neal R. Foot(1) |
|
|
Executive Vice-President, Operations Calgary, Alberta |
|
4 |
|
Marcella M. Szel (1) |
|
|
Senior Vice-President, Marketing and Sales
Calgary, Alberta |
|
5 |
|
Brock M. Winter (1) |
|
|
Senior Vice-President, Operations
Calgary, Alberta |
|
6 |
|
Allen H. Borak (1) |
|
|
Vice-President, Business Information
and Technology Services
Calgary, Alberta |
|
7 |
|
Donald B. Campbell (1) |
|
|
Vice-President, Corporate Planning
Calgary, Alberta |
8 |
|
Paul A. Guthrie, Q.C. (1) |
|
|
Vice-President, Law
Municipal District of Rocky View, Alberta |
|
9 |
|
Jane A. OHagan (1) |
|
|
Vice-President, Strategy and External Affairs
Calgary, Alberta |
|
10 |
|
Jonathan R. Legg (1) |
|
|
Vice-President, Strategic Sourcing Group
Calgary, Alberta |
|
11 |
|
R. Andrew Shields (1) |
|
|
Vice-President,
Human Resources and Industrial Relations
Calgary, Alberta |
|
|
|
Paul Clark |
|
|
Vice-President,
Communications and Public Affairs
Calgary, Alberta |
|
|
|
Brian W. Grassby |
|
|
Vice-President and Comptroller
Calgary, Alberta |
|
|
|
Tracy A. Robinson |
|
|
Vice-President and Treasurer
Calgary, Alberta |
|
|
|
Donald F. Barnhardt |
|
|
Corporate Secretary
Calgary, Alberta |
|
|
|
|
|
(1) Management Committee of Canadian Pacific Railway Company |
Front cover, left to right Serge Poirier, Frank Devine, Tracy D. Harris, Bhupinder Singh Mavi, Peter H. Brown
Back
cover, left to right Todd Driediger, Victor Chu, Sakina Ali,
Anela Nikić
Inside front cover, left to right Rodrigo Simoes, Brian Nelson, Steve Ryan, Nancy Read
Page 2 Alberta Thermite Welding Gang
Page 4, left to right Murray Hamilton, Yasintha Vivekanandarajah, Jill Klusa, Larry Appleyard
|
|
|
|
|
designed and produced by smith + associates www.smithandassoc.com Please recycle. |
96
2006 Annual Report