SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of April, 2007
CANADIAN PACIFIC RAILWAY LIMITED
(Commission File No. 1-01342)
CANADIAN PACIFIC RAILWAY COMPANY
(Commission File No. 1-15272)
(translation of each Registrant’s name into English)
Suite 500, Gulf Canada Square, 401 – 9th Avenue, S.W., Calgary, Alberta, Canada, T2P 4Z4
(address of principal executive offices)
Indicate by check mark whether the registrants file or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F o Form 40-F x
Indicate by check mark whether the registrants by furnishing 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.
Yes o No x
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-
The interim financial statements and Management’s Discussion & Analysis included in this Report furnished on Form 6-K shall be incorporated by reference into, or as an exhibit to, as applicable, each of the following Registration Statements under the Securities Act of 1933 of the registrant: Form S-8 No. 333-140955 (Canadian Pacific Railway Limited), Form S-8 No. 333-127943 (Canadian Pacific Railway Limited), and Form S-8 No. 333-13962 (Canadian Pacific Railway Limited).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CANADIAN PACIFIC RAILWAY LIMITED CANADIAN PACIFIC RAILWAY COMPANY (Registrants) |
||||||||
Date: April 24, 2007
|
Signed: | Donald F. Barnhardt | ||||||
| By: | Name: | Donald F. Barnhardt | ||||||
| Title: | Corporate Secretary | |||||||
Release: Immediate, April 24, 2007
CANADIAN PACIFIC’S FIRST-QUARTER RESULTS SOLID DESPITE TOUGH WINTER CONDITIONS
CALGARY – Canadian Pacific Railway Limited (TSX/NYSE: CP) reported net income growth of 18 per
cent to $129 million in the first-quarter of 2007 when compared with the same quarter 2006.
Diluted earnings per share improved 21 per cent to $0.82.
SUMMARY OF FIRST-QUARTER 2007 COMPARED WITH FIRST-QUARTER 2006
| • | Excluding foreign exchange gains and losses on long-term debt, diluted earnings per share increased 8 per cent to $0.78 from $0.72. | ||
| • | Operating ratio improved to 79.5 per cent from 79.6 per cent. | ||
| • | Freight revenue of $1.09 billion increased 2.2 per cent from $1.07 billion. | ||
| • | Operating expenses at $887 million, up just 0.3 per cent from $884 million. |
“CP’s team delivered adjusted diluted EPS growth of 8 per cent in the face of extremely difficult,
weather-related operating conditions that challenged the entire transportation chain,” said Fred
Green, CP’s President and CEO. “Our disciplined execution of the integrated operating plan, in
addition to the investments in network capacity we’ve made in our Western corridor, paid major
dividends for us this quarter. We were able to recover from each event as it occurred and keep our
customers’ shipments moving.”
Mr. Green added, “Our operational focus on network fluidity has increased our resilience and
allowed our operations to rebound effectively. With the recent return to more normal operating
conditions, we expect to move freight volumes with increasing efficiency and improved service
levels through the balance of the year.”
Revenues in sulphur and fertilizers increased 31 per cent over first-quarter 2006 and intermodal
and automotive were also up, with growth of 6 per cent and 5 per cent respectively. Softness in
forest products offset some of the revenue growth, decreasing $11 million from the same period in
2006. Winter disruptions and the CN strike increased network congestion which resulted in reduced
shipments in coal and other commodities. Other revenue declined $18 million in 2007 reflecting a
significant land sale that took place in first-quarter 2006.
Operating expenses were essentially flat at $887 million, up 0.3 per cent from 2006, despite the
challenging winter operating conditions. Fuel, inflation and winter related expense increases were
partially offset by a drop in compensation and benefits expense.
2007 OUTLOOK
“CP is on track to deliver solid performance in 2007,” said Mike Lambert, Chief Financial Officer.
“A reduction in our cash pension funding requirement to approximately $100 million, down from our
original $150 million estimate given in the Fall of 2006, has improved our free cash outlook to
more than $300 million in 2007, up from $250 million estimated previously. Our diverse commodity
portfolio, a strong yield program and continued vigilance around cost containment will drive our
projected EPS growth of 9 to 13 per cent.”
1
CP’s outlook for diluted earnings per share excluding foreign exchange gains and losses on
long-term debt and other specified items remains in the range of $4.30 to $4.45 for 2007, compared
with 2006 diluted EPS which was $3.95.
CP expects to grow revenue in the range of 4 per cent to 6 per cent in 2007. Capital investment is
anticipated to be between $885 million and $895 million and free cash, after dividends, is now
expected to exceed $300 million in 2007. This outlook assumes oil prices averaging US$58 per
barrel and an average currency exchange rate of $1.15 per U.S. dollar (US$0.87).
NORMAL COURSE ISSUER BID ANNOUNCEMENT
CP also announces that its Board of Directors has authorized the acquisition of up to 15.5 million
Common Shares of CP for cancellation in 2007, and if not completed in 2007, in 2008. This
represents approximately 10 per cent of the public float of its Common Shares outstanding at March
15, 2007. CP currently has in place a normal course issuer bid under which it is permitted to
purchase up to 4.975 million Common Shares during the 12 month period ending March 27, 2008. CP
has purchased 674,990 shares in 2007. Subject to regulatory approval, CP intends to amend the
existing bid to enable it to purchase up to 15.5 million shares during 2007.
“We can increase the share repurchase plan because of our increasing generation of free cash flow
and our strong balance sheet. This reflects our confidence not only in the short term outlook for
CP, but also in the longer term prospects of our Franchise,” said Mr. Lambert.
FOREIGN EXCHANGE GAINS AND LOSSES ON LONG-TERM DEBT
CP had a foreign exchange gain on long-term debt of $9 million ($6 million after tax) in the first
quarter of 2007, compared with a foreign exchange loss on long-term debt of $6 million ($7 million
after tax) in the first quarter of 2006.
RESTATEMENT OF FIRST-QUARTER 2006 FINANCIAL STATEMENTS
As a result of the adoption of EIC162 “Stock-based Compensation for Employees Eligible to Retire
Before the Vesting Date” in December 2006, the comparative financial statements for the three
months ended March 31, 2006 have been restated with an increase in “Compensation and benefit”
expense of $2.3 million, a reduction in “Net income” of $2.2 million and a reduction in basic and
diluted earnings per share of $0.01. Basic and diluted earnings per share excluding foreign
exchange gains and losses on long-term debt was reduced by $0.02.
Presentation of non-GAAP earnings
CP presents non-GAAP earnings in this news release to provide a basis for evaluating underlying
earnings and liquidity trends in its business that can be compared with prior periods’ results of
operations. These non-GAAP earnings exclude foreign currency translation impacts on long-term
debt, which can be volatile and short term, and other specified items, which are not among CP’s
normal ongoing revenues and operating expenses. The impact of volatile short-term rate
fluctuations on foreign-denominated debt is only realized when long-term debt matures or is
settled. A reconciliation of income, excluding foreign exchange gains and losses on long-term debt
and other specified items, to net income as presented in the financial statements is detailed in
the attached Summary of Rail Data. Diluted EPS, excluding foreign exchange gains and losses on
long-term debt and other specified items is also referred to in this news release as (“adjusted
diluted EPS”).
Free cash after dividends is calculated as cash provided by operating activities, less cash used in
investing activities and dividends.
2
Earnings that exclude foreign exchange currency translation impact on long-term debt and other
specified items, and free cash after dividends, as described in this news release, have no
standardized meanings and are not defined by Canadian generally accepted accounting principles and,
therefore, are unlikely to be comparable to similar measures presented by other companies.
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.
There were no other specified items in the first quarters of 2007 and 2006.
Note on forward looking-information
This news release contains certain forward-looking statements relating but not limited to our
operations, anticipated financial performance and business prospects. Undue reliance should not be
placed on forward-looking information as actual results may differ
materially.
By its nature, CP’s forward-looking information involves numerous assumptions, inherent risks and
uncertainties, including but not limited to the following factors: changes in business strategies;
general global economic and business conditions; risks in agricultural production such as weather
conditions and insect populations; fluctuations in the value of the Canadian dollar relative to the
U.S. dollar; the availability and price of energy commodities; the effects of competition and
pricing pressures; industry capacity; shifts in market demand; changes in laws and regulations;
changes in taxes and tax rates; potential increases in maintenance and operating costs;
uncertainties of litigation; labour disputes; timing of completion of capital and maintenance
projects; interest rate fluctuations; effects of changes in market conditions on the financial
position of pension plans; and various events that could disrupt operations, including severe
weather conditions, security threats and governmental response to them, and technological changes.
There are factors that could cause actual results to differ from those described in the
forward-looking statements contained in this news release. These more specific factors are
identified and discussed in the Outlook section and elsewhere in this news release with the
particular forward-looking statement in question.
CP undertakes no obligation to update publicly or otherwise revise any forward-looking information,
whether as a result of new information, future events or otherwise.
Canadian Pacific, through the ingenuity of its employees located across Canada and in the United
States, intends to be the safest, and most fluid railway in North America. 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. Our combined
ingenuity makes Canadian Pacific a better place to work, rail a better way to ship, and North
America a better place to live. Come and visit us at www.cpr.ca to see how we can put our
ingenuity to work for you. Canadian Pacific is proud to be the official rail freight services
provider for the Vancouver 2010 Olympic and Paralympic Winter Games.
end
Contacts: |
||
Media
|
Investment Community | |
Leslie Pidcock
|
Janet Weiss, Assistant Vice-President Investor Relations | |
Tel.: (403) 319-6878
|
Tel.: (403) 319-3591 | |
e-mail: leslie_pidcock@cpr.ca
|
e-mail: investor@cpr.ca |
3
STATEMENT OF CONSOLIDATED INCOME
(in millions, except per share data)
(in millions, except per share data)
| For the three months | ||||||||
| ended March 31 | ||||||||
| 2007 | 2006 | |||||||
| Restated | ||||||||
| (see Note 2) | ||||||||
| (unaudited) | ||||||||
Revenues |
||||||||
Freight |
$ | 1,090.9 | $ | 1,067.2 | ||||
Other |
25.0 | 43.3 | ||||||
| 1,115.9 | 1,110.5 | |||||||
Operating expenses |
||||||||
Compensation and benefits |
332.5 | 352.2 | ||||||
Fuel |
171.2 | 157.9 | ||||||
Materials |
62.4 | 57.6 | ||||||
Equipment rents |
55.5 | 44.6 | ||||||
Depreciation and amortization |
118.6 | 114.8 | ||||||
Purchased services and other |
146.4 | 156.6 | ||||||
| 886.6 | 883.7 | |||||||
Operating income |
229.3 | 226.8 | ||||||
Other charges (Note 4) |
4.8 | 6.8 | ||||||
Foreign exchange (gains) losses on long-term debt |
(8.6 | ) | 6.4 | |||||
Interest expense (Note 5) |
46.8 | 47.3 | ||||||
Income tax expense |
57.7 | 57.5 | ||||||
Net income |
$ | 128.6 | $ | 108.8 | ||||
Basic earnings per share (Note 8) |
$ | 0.83 | $ | 0.69 | ||||
Diluted earnings per share (Note 8) |
$ | 0.82 | $ | 0.68 | ||||
See notes to interim consolidated financial statements.
4
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(in millions)
| For the three months | ||||||||
| ended March 31 | ||||||||
| 2007 | 2006 | |||||||
| Restated | ||||||||
| (see Note 2) | ||||||||
| (unaudited) | ||||||||
Comprehensive income |
||||||||
Net income |
$ | 128.6 | $ | 108.8 | ||||
Other comprehensive income |
||||||||
Net change in foreign currency
translation adjustments, net of
hedging activities |
(0.3 | ) | 1.5 | |||||
Net change in gains on derivatives
designated as cash flow hedges |
(3.2 | ) | — | |||||
Other comprehensive (loss) income
before income taxes |
(3.5 | ) | 1.5 | |||||
Income tax recovery |
0.7 | 0.2 | ||||||
Other comprehensive (loss) income (Note 10) |
(2.8 | ) | 1.7 | |||||
Comprehensive income |
$ | 125.8 | $ | 110.5 | ||||
See notes to interim consolidated financial statements.
5
CONSOLIDATED BALANCE SHEET
(in millions)
(in millions)
| March 31 | December 31 | |||||||
| 2007 | 2006 | |||||||
| Restated | ||||||||
| (see Note 2) | ||||||||
| (unaudited) | ||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 25.6 | $ | 124.3 | ||||
Accounts receivable and other current assets |
608.0 | 615.7 | ||||||
Materials and supplies |
162.2 | 158.6 | ||||||
Future income taxes |
109.7 | 106.3 | ||||||
| 905.5 | 1,004.9 | |||||||
Investments |
65.8 | 64.9 | ||||||
Net properties |
9,195.9 | 9,122.9 | ||||||
Other assets and deferred charges |
1,208.0 | 1,223.2 | ||||||
Total assets |
$ | 11,375.2 | $ | 11,415.9 | ||||
Liabilities and shareholders’ equity |
||||||||
Current liabilities |
||||||||
Short-term borrowing |
$ | 77.7 | $ | — | ||||
Accounts payable and accrued liabilities |
999.8 | 1,002.6 | ||||||
Income and other taxes payable |
15.2 | 16.0 | ||||||
Dividends payable |
35.0 | 29.1 | ||||||
Long-term debt maturing within one year |
31.5 | 191.3 | ||||||
| 1,159.2 | 1,239.0 | |||||||
Deferred liabilities |
697.6 | 725.7 | ||||||
Long-term debt |
2,747.8 | 2,813.5 | ||||||
Future income taxes |
1,831.3 | 1,781.2 | ||||||
Shareholders’ equity |
||||||||
Share capital (Note 9) |
1,182.9 | 1,175.7 | ||||||
Contributed surplus |
37.1 | 32.3 | ||||||
Accumulated other comprehensive income |
77.6 | 66.4 | ||||||
Retained income |
3,641.7 | 3,582.1 | ||||||
| 4,939.3 | 4,856.5 | |||||||
Total liabilities and shareholders’ equity |
$ | 11,375.2 | $ | 11,415.9 | ||||
Commitments and contingencies (Note 15).
See notes to interim consolidated financial statements.
See notes to interim consolidated financial statements.
6
STATEMENT OF CONSOLIDATED CASH FLOWS
(in millions)
(in millions)
| For the three months | ||||||||
| ended March 31 | ||||||||
| 2007 | 2006 | |||||||
| Restated | ||||||||
| (see Note 2) | ||||||||
| (unaudited) | ||||||||
Operating activities |
||||||||
Net income |
$ | 128.6 | $ | 108.8 | ||||
Add items not affecting cash: |
||||||||
Depreciation and amortization |
118.6 | 114.8 | ||||||
Future income taxes |
38.5 | 44.2 | ||||||
Foreign exchange (gains) losses on long-term debt |
(8.6 | ) | 6.4 | |||||
Amortization of deferred charges |
3.1 | 4.3 | ||||||
Restructuring payments |
(13.2 | ) | (27.8 | ) | ||||
Other operating activities, net |
(2.7 | ) | 4.1 | |||||
Change in non-cash working capital balances related
to operations |
(36.6 | ) | (80.5 | ) | ||||
Cash provided by operating activities |
227.7 | 174.3 | ||||||
Investing activities |
||||||||
Additions to properties |
(204.2 | ) | (191.7 | ) | ||||
Decrease in investments and other assets |
(0.3 | ) | (19.7 | ) | ||||
Net proceeds from disposal of
transportation properties |
8.9 | 4.3 | ||||||
Cash used in investing activities |
(195.6 | ) | (207.1 | ) | ||||
Financing activities |
||||||||
Dividends paid |
(29.1 | ) | (23.7 | ) | ||||
Issuance of CP Common Shares |
10.1 | 38.5 | ||||||
Purchase of CP Common Shares |
(16.1 | ) | (45.6 | ) | ||||
Increase in short-term borrowing |
77.7 | — | ||||||
Repayment of long-term debt |
(173.4 | ) | (10.7 | ) | ||||
Cash used in financing activities |
(130.8 | ) | (41.5 | ) | ||||
Cash position |
||||||||
Decrease in net cash and cash equivalents |
(98.7 | ) | (74.3 | ) | ||||
Net cash and cash equivalents at beginning of period |
124.3 | 121.8 | ||||||
Net cash and cash equivalents at end of period |
$ | 25.6 | $ | 47.5 | ||||
See notes to interim consolidated financial statements.
7
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(in millions)
(in millions)
| For the three months | ||||||||
| ended March 31 | ||||||||
| 2007 | 2006 | |||||||
| Restated | ||||||||
| (see Note 2) | ||||||||
| (unaudited) | ||||||||
Share capital |
||||||||
Balance, beginning of period |
$ | 1,175.7 | $ | 1,141.5 | ||||
Shares issued under stock option plans |
12.3 | 40.2 | ||||||
Shares repurchased |
(5.1 | ) | (6.6 | ) | ||||
Balance, end of period |
1,182.9 | 1,175.1 | ||||||
Contributed surplus |
||||||||
Balance, beginning of period |
32.3 | 245.1 | ||||||
Stock-based compensation expense related to stock option
plans |
4.8 | 4.1 | ||||||
Shares repurchased |
— | (45.0 | ) | |||||
Balance, end of period |
37.1 | 204.2 | ||||||
Accumulated other comprehensive income |
||||||||
Balance, beginning of period |
66.4 | 67.5 | ||||||
Adjustment for change in accounting policy |
14.0 | — | ||||||
Adjusted balance, beginning of period |
80.4 | 67.5 | ||||||
Other comprehensive (loss) income (Note 10) |
(2.8 | ) | 1.7 | |||||
Balance, end of period |
77.6 | 69.2 | ||||||
Retained earnings |
||||||||
Balance, beginning of period |
3,582.1 | 2,930.0 | ||||||
Adjustment for change in accounting policy |
4.0 | — | ||||||
Adjusted balance, beginning of period |
3,586.1 | 2,930.0 | ||||||
Net income for the period |
128.6 | 108.8 | ||||||
Shares repurchased |
(38.0 | ) | — | |||||
Dividends |
(35.0 | ) | (29.9 | ) | ||||
Balance, end of period |
3,641.7 | 3,008.9 | ||||||
Total accumulated other comprehensive income and
retained earnings |
3,719.3 | 3,078.1 | ||||||
Shareholders’ equity, end of period |
$ | 4,939.3 | $ | 4,457.4 | ||||
See notes to interim consolidated financial statements.
8
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
MARCH 31, 2007
(unaudited)
| 1 | Basis of presentation | |
| These unaudited interim consolidated financial statements and notes have been prepared using accounting policies that are consistent with the policies used in preparing Canadian Pacific Railway Limited’s (“CP”, “the Company” or “Canadian Pacific Railway”) 2006 annual consolidated financial statements, except as discussed below and in Note 2 for the adoption of new accounting standards for financial instruments, hedges and comprehensive income. They do not include all disclosures required under Generally Accepted Accounting Principles for annual financial statements and should be read in conjunction with the annual consolidated financial statements. | ||
| CP’s operations can be affected by seasonal fluctuations such as changes in customer demand and weather-related issues. This seasonality could impact quarter-over-quarter comparisons. | ||
| Financial Instruments | ||
| From January 1, 2007, certain financial instruments, including those classified as loans and receivables, available for sale, held for trading and financial liabilities, are initially measured at fair value and subsequently measured at fair value or amortized cost. Amortization is calculated using the effective interest rate for the instrument. Financial instruments that will be realized within the normal operating cycle are measured at their carrying amount as this approximates fair value. | ||
| Transaction costs related to the issuance of long-term debt are added to the fair value of the related instrument on issue and are amortized to income in conjunction with the amortization of the instrument using the effective interest rate method. | ||
| 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. Since 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. | ||
| Commencing from January 1, 2007 all derivative instruments are recorded at their fair value. They are classified on the Consolidated Balance Sheet in “Other assets and deferred charges”, “Deferred liabilities”, “Accounts receivable and other current assets” or “Accounts payable and accrued liabilities” as applicable. Prior to 2007, only derivative instruments that did not qualify as hedges or were not designated as hedges were carried at fair value on the Consolidated Balance Sheet in “Other assets and deferred charges” or “Deferred liabilities”. In the Statement of Consolidated Cash Flows, cash flows relating to derivative instruments designated as hedges are included in the same line as the related item. Gains and losses arising from derivative instruments will affect the following income statements lines: “Revenues”, “Compensation and benefits”, “Fuel”, “Other charges”, “Foreign exchange (gains) losses on long-term debt” and “Interest expense”. | ||
| For fair value hedges, the periodic change in value is recognized in income, where the changes in values of the hedged items are also recorded. For a cash flow hedge, the change in value of the effective portion is recognized in “Other comprehensive income”. Any ineffectiveness within an effective cash flow hedge is recognized in income as it arises in the same income account as the hedged item when realized. Should the hedging of a cash flow hedge relationship become ineffective, previously unrealized gains and losses remain within “Accumulated other comprehensive income” until the hedged item is settled and, prospectively, future changes in value of the derivative are recognized in income. The change in value of the effective portion of a cash flow hedge remains in “Accumulated other comprehensive income” until the related hedged item settles, at which time amounts recognized in “Accumulated other comprehensive income” are reclassified to the same income or balance sheet account that records the hedged item. Prior to January 1, 2007, the periodic change in the fair value of an effective hedging instrument was not recognized in the financial statements. | ||
| The transitional date for the assessment of embedded derivatives was January 1, 2001. |
9
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
MARCH 31, 2007
(unaudited)
| 2 | New accounting policies | |
| Financial instruments, hedging and comprehensive income | ||
| On January 1, 2007 the Company adopted the following accounting standards: Section 3855 “Financial Instruments — Recognition and Measurement”, Section 3861 “Financial Instruments - Disclosure and Presentation”, Section 3865 “Hedges” and 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 was on a prospective basis without retroactive restatement of prior periods, except for the restatement of equity balances to reflect the reclassification of “Foreign currency translation adjustments” to “Accumulated other comprehensive income”. | ||
| The impact of the adoption of these standards on January 1, 2007 was an increase in net assets of $18.0 million, a reduction in “Foreign currency translation adjustments” of $66.4 million, an increase in “Retained earnings” of $4.0 million, and the recognition of “Accumulated other comprehensive income” of $80.4 million. | ||
| The fair value of hedging instruments at January 1, 2007 was $31.7 million reflected in “Other assets and deferred charges” and “Accounts receivable and other current assets” and $4.8 million reflected in “Deferred liabilities” and “Accounts payable and accrued liabilities”. The inclusion of transaction costs within “Long-term debt” at amortized cost reduced “Long-term debt” by $33.4 million with an associated reduction in “Other assets and deferred charges” of $26.9 million. Deferred gains and losses on previously settled hedges were reclassified to “Accumulated other comprehensive income” and “Retained earnings” with a resultant decrease in “Other assets and deferred charges” of $4.8 million. The recognition of certain other financial instruments at fair value or amortized cost resulted in reductions in “Long-term debt” of $2.8 million, “Investments” of $1.5 million and “Other assets and deferred charges” of $0.4 million. The adoption of these standards increased the liability for “Future income taxes” by $11.6 million. Accumulated other comprehensive income is 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, transaction costs associated with the Company’s long term debt and previously deferred gains and losses on derivative instruments that were settled in prior years and which, had they currently existed, did not meet the criteria for hedge accounting under Accounting Standard Section 3865. The amounts recorded on the adoption of these standards differed from the estimated amounts disclosed in Note 3 to the 2006 annual financial statement as a result of the refinement of certain estimates used at the year end. | ||
| Stock-based compensation for employees eligible to retire before the vesting date | ||
| As a result of the adoption of EIC 162 “Stock-based Compensation for Employees Eligible to Retire Before the Vesting Date” in December 2006, the comparative financial statements for the three months ended March 31, 2006 have been restated with an increase in “Compensation and benefits” expense of $2.3 million, a reduction of “Net income” of $2.2 million and a reduction in basic and diluted earnings per share of $0.01. |
10
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
MARCH 31, 2007
(unaudited)
| 3 | Future accounting changes | |
| The CICA has issued the following accounting standards which will be effective for the Company from January 1, 2008: Section 3862 “Financial Instruments – Disclosures”, Section 3863 “Financial Instruments – Presentation” and Section 1535 “Capital Disclosures”. | ||
| These new accounting standards will require the Company to provide additional disclosures relating to its financial instruments, including hedging instruments, and about the Company’s capital. In addition, Section 3863 does not change the presentation guidance provided in Section 3861 “Financial Instruments – Disclosure and Presentation” which it replaces. It is not anticipated that the adoption of these new accounting standards will impact the amounts reported in the Company’s financial statements as they primarily relate to disclosure. | ||
| 4 | Other charges |
| For the three months | ||||||||
| ended March 31 | ||||||||
| (in millions) | 2007 | 2006 | ||||||
Amortization of discount on
accruals recorded at present
value |
$ | 2.0 | $ | 2.5 | ||||
Other exchange (gains) losses |
(0.5 | ) | 0.1 | |||||
Loss on sale of accounts
receivable |
1.3 | 1.1 | ||||||
(Gain) loss on non-hedging
derivative instruments |
(0.3 | ) | 0.8 | |||||
Other |
2.3 | 2.3 | ||||||
Total other charges |
$ | 4.8 | $ | 6.8 | ||||
| 5 | Interest expense |
| For the three months | ||||||||
| ended March 31 | ||||||||
| (in millions) | 2007 | 2006 | ||||||
Interest expense |
$ | 48.8 | $ | 49.0 | ||||
Interest income |
(2.0 | ) | (1.7 | ) | ||||
Net interest expense |
$ | 46.8 | $ | 47.3 | ||||
| 6 | Income taxes | |
| Cash taxes paid for the three months ended March 31, 2007 were $9.2 million (2006 — $5.8 million). |
11
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
MARCH 31, 2007
(unaudited)
| 7 | Restructuring and environmental remediation | |
| At March 31, 2007, the provision for restructuring and environmental remediation was $296.6 million (December 31, 2006 – $309.0 million). This provision primarily includes labour liabilities for restructuring plans. Payments are expected to continue in diminishing amounts until 2025. The environmental remediation liability includes the cost of a multi-year soil remediation program. | ||
| Set out below is a reconciliation of CP’s liabilities associated with restructuring and environmental remediation programs: | ||
| Three months ended March 31, 2007 |
| Opening | Closing | |||||||||||||||||||||||
| Balance | Foreign | Balance | ||||||||||||||||||||||
| Jan. 1 | Amortization | Exchange | Mar. 31 | |||||||||||||||||||||
| (in millions) | 2007 | Accrued | Payments | of Discount | Impact | 2007 | ||||||||||||||||||
Labour liability
for terminations
and severances |
$ | 187.4 | — | (12.5 | ) | 1.5 | (0.3 | ) | $ | 176.1 | ||||||||||||||
Other non-labour
liabilities for
exit plans |
1.4 | — | (0.1 | ) | — | — | 1.3 | |||||||||||||||||
Total restructuring
liability |
188.8 | — | (12.6 | ) | 1.5 | (0.3 | ) | 177.4 | ||||||||||||||||
Environmental
remediation program |
120.2 | 0.2 | (0.6 | ) | — | (0.6 | ) | 119.2 | ||||||||||||||||
Total restructuring
and environmental
remediation
liability |
$ | 309.0 | 0.2 | (13.2 | ) | 1.5 | (0.9 | ) | $ | 296.6 | ||||||||||||||
Three months ended March 31, 2006
| Opening | Closing | |||||||||||||||||||||||
| Balance | Foreign | Balance | ||||||||||||||||||||||
| Jan. 1 | Accrued | Amortization | Exchange | Mar. 31 | ||||||||||||||||||||
| (in millions) | 2006 | (Reduced) | Payments | of Discount | Impact | 2006 | ||||||||||||||||||
Labour liability
for terminations
and severances |
$ | 263.6 | (1.1 | ) | (24.8 | ) | 2.6 | 0.2 | $ | 240.5 | ||||||||||||||
Other non-labour
liabilities for
exit plans |
5.8 | — | (1.1 | ) | — | — | 4.7 | |||||||||||||||||
Total restructuring
liability |
269.4 | (1.1 | ) | (25.9 | ) | 2.6 | 0.2 | 245.2 | ||||||||||||||||
Environmental
remediation program |
129.4 | 1.1 | (1.9 | ) | — | 0.3 | 128.9 | |||||||||||||||||
Total restructuring
and environmental
remediation
liability |
$ | 398.8 | — | (27.8 | ) | 2.6 | 0.5 | $ | 374.1 | |||||||||||||||
Amortization of Discount is charged to income as “Other Charges”, “Compensation and
Benefits” and “Purchased Services and Other”, as applicable.
12
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
MARCH 31, 2007
(unaudited)
| 8 | Earnings per share | |
| At March 31, 2007, the number of shares outstanding was 155.2 million (March 31, 2006 158.6 million). | ||
| Basic earnings per share have been calculated using net income for the period divided by the weighted average number of CP shares outstanding during the period. | ||
| Diluted earnings per share have been calculated using the treasury stock method, which gives effect to the dilutive value of outstanding options. | ||
| The number of shares used in earnings per share calculations is reconciled as follows: |
| For the three months | ||||||||
| ended March 31 | ||||||||
| (in millions) | 2007 | 2006 | ||||||
Weighted average shares
outstanding |
155.5 | 158.5 | ||||||
Dilutive effect of stock options |
1.9 | 1.7 | ||||||
Weighted average diluted
shares outstanding |
157.4 | 160.2 | ||||||
(in dollars) |
||||||||
Basic earnings per share |
$ | 0.83 | $ | 0.69 | (1) | |||
Diluted earnings per share |
$ | 0.82 | $ | 0.68 | (1) | |||
(1) Restated
| 9 | Shareholders’ equity | |
| An analysis of shares outstanding is as follows: |
| For the three months | ||||||||
| ended March 31 | ||||||||
| (in millions) | 2007 | 2006 | ||||||
Shares outstanding, January 1 |
155.5 | 158.2 | ||||||
Shares issued under stock option plans |
0.4 | 1.3 | ||||||
Shares repurchased |
(0.7 | ) | (0.9 | ) | ||||
Shares outstanding, March 31 |
155.2 | 158.6 | ||||||
13
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
MARCH 31, 2007
(unaudited)
| 9 | Shareholders’ equity (continued) | |
| In June 2006, the Company completed the acquisition of Common Shares under the previous normal course issuer bid and filed a new normal course issuer bid to purchase, for cancellation, up to 3.9 million of its outstanding Common Shares. Under this filing, share purchases may be made during the 12-month period beginning June 6, 2006, and ending June 5, 2007. Of the 3.9 million shares authorized for repurchase under this filing, 3.4 million were repurchased in 2006 at an average price per share of $56.66 and 0.2 million shares were purchased in the first quarter of 2007 at an average price per share of $64.11. | ||
| In March 2007, the Company completed the filing for a new normal course issuer bid (“2007 NCIB”) to cover the period of March 28, 2007 to March 27, 2008 to purchase, for cancellation, up to 5.0 million of its outstanding Common Shares. Of the 5.0 million shares authorized under the 2007 NCIB, 0.2 million shares were purchased in the first quarter of 2007 at an average price per share of $64.76. | ||
| In addition to the 0.2 million shares purchased through the 2007 NCIB, pursuant to a notice of intention to make an exempt issuer bid filed on March 23, 2007, the Company purchased, for cancellation, 0.3 million shares through a private agreement with an arm’s length third party on March 29, 2007 at an average price of $63.12. | ||
| In April 2007, the Company received approval from its Board of Directors to amend its 2007 NCIB to purchase, for cancellation, up to 15.5 million of its outstanding Common Shares during 2007, and if not completed in 2007, in 2008. This amendment is subject to regulatory approval. | ||
| 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. When shares are repurchased, it takes three days before the transaction is settled and the shares are cancelled. The cost of shares purchased in a given month and settled in the following month is accrued in the month of purchase. During the three months ended March 31, 2007, 0.7 million shares were repurchased at an average price of $63.85 (three months ended March 31, 2006, 0.9 million shares were repurchased at an average price of $57.81). |
| 10 | Other comprehensive income | |
| Components of other comprehensive income and the related tax effects are as follows: |
| For the three months ended March 31 | ||||||||||||
| 2007 | ||||||||||||
| Income tax | ||||||||||||
| Before tax | (expense) | Net of tax | ||||||||||
| (in millions) | amount | recovery | amount | |||||||||
Unrealized foreign exchange gain on
translation of U.S. dollar-denominated
long-term debt designated as a hedge of
the net investment in U.S. subsidiaries |
$ | 3.9 | $ | (0.6 | ) | $ | 3.3 | |||||
Unrealized foreign exchange loss on
translation of the net investment in
U.S. subsidiaries |
(4.2 | ) | — | (4.2 | ) | |||||||
Realized gain on settled cash flow hedges |
(3.3 | ) | 1.3 | (2.0 | ) | |||||||
Increase in unrealized holding gains on
cash flow hedges |
0.1 | — | 0.1 | |||||||||
Other comprehensive loss |
$ | (3.5 | ) | $ | 0.7 | $ | (2.8 | ) | ||||
14
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
MARCH 31, 2007
(unaudited)
| 10 | Other comprehensive income (continued) |
| For the three months ended March 31 | ||||||||||||
| 2006 | ||||||||||||
| Income tax | ||||||||||||
| Before tax | (expense) | Net of tax | ||||||||||
| (in millions) | amount | recovery | amount | |||||||||
Unrealized foreign
exchange loss on
translation of U.S.
dollar-denominated
long-term debt designated
as a hedge of the net
investment in U.S.
subsidiaries |
$ | (0.9 | ) | $ | 0.2 | $ | (0.7 | ) | ||||
Unrealized foreign
exchange gain on
translation of the net
investment in U.S.
subsidiaries |
2.4 | — | 2.4 | |||||||||
Other comprehensive income |
$ | 1.5 | $ | 0.2 | $ | 1.7 | ||||||
Changes in the balances of each classification within Accumulated other comprehensive income
are as follows:
Three months ended March 31, 2007
| Adjustment | ||||||||||||||||||||
| Opening | for change | Adjusted | Closing | |||||||||||||||||
| Balance, | in | Opening | Balance, | |||||||||||||||||
| Jan. 1, | accounting | Balance, | Period | Mar. 31, | ||||||||||||||||
| (in millions) | 2007 | policy | Jan. 1, 2007 | change | 2007 | |||||||||||||||
Foreign exchange
on U.S. dollar
debt designated as
a hedge of the net
investment in U.S.
subsidiaries |
$ | 234.9 | $ | 0.4 | $ | 235.3 | $ | 3.3 | $ | 238.6 | ||||||||||
Foreign exchange
on net investment
in U.S.
subsidiaries |
(168.5 | ) | — | (168.5 | ) | (4.2 | ) | (172.7 | ) | |||||||||||
Increase
(decrease) in
unrealized
effective gains of
cash flow hedges |
— | 18.9 | 18.9 | (1.9 | ) | 17.0 | ||||||||||||||
Unrealized loss on
settled hedge
instruments |
— | (5.3 | ) | (5.3 | ) | — | (5.3 | ) | ||||||||||||
Accumulated other
comprehensive
income |
$ | 66.4 | $ | 14.0 | $ | 80.4 | $ | (2.8 | ) | $ | 77.6 | |||||||||
15
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
MARCH 31, 2007
(unaudited)
| 10 | Other comprehensive income (continued) | |
| Three months ended March 31, 2006 |
| Closing | ||||||||||||
| Opening | Balance, | |||||||||||
| Balance, | Period | Mar. 31, | ||||||||||
| (in millions) | Jan. 1, 2006 | change | 2006 | |||||||||
Foreign exchange on U.S.
dollar debt designated as a
hedge of the net investment
in U.S. subsidiaries |
$ | 238.1 | $ | (0.7 | ) | $ | 237.4 | |||||
Foreign exchange on net
investment in U.S.
subsidiaries |
(170.6 | ) | 2.4 | (168.2 | ) | |||||||
Accumulated other
comprehensive income |
$ | 67.5 | $ | 1.7 | $ | 69.2 | ||||||
| During the next twelve months, the Company expects $12.3 million of unrealized holding gains on derivative instruments to be realized and recognized in the Statement of Consolidated Income. Derivative instruments designated as cash flow hedges will mature during the period ending December 2009. | ||
| 11 | Fair value of financial instruments | |
| The fair value of a financial instrument is the amount of consideration that would be agreed upon in an arm’s length transaction between willing parties. The Company uses the following methods and assumptions to estimate fair value of each class of financial instruments for which carrying amounts are included in the Consolidated Balance Sheet as follows: | ||
| Loans and receivables Accounts receivable and other current assets — The carrying amounts included in the Consolidated Balance Sheet approximate fair value because of the short maturity of these instruments. |
||
| Investments — Long-term receivable balances are carried at amortized cost based on an initial fair value determined using discounted cash flow analysis using observable market based inputs. | ||
| Financial liabilities Accounts payable and accrued liabilities and short-term borrowings — The carrying amounts included in the Consolidated Balance Sheet approximate fair value because of the short maturity of these instruments. |
||
| Long-term debt — The carrying amount of long-term debt is at amortized cost based on an initial fair value determined using the quoted market prices for the same or similar debt instruments. | ||
| Available for sale Investments — The Company’s equity investments recorded on a cost basis have a carrying value that equals cost as fair value cannot be reliably established. These investments are not traded on a liquid market. |
||
| Held for trading Other assets and deferred charges and Deferred liabilities — Derivative instruments that are designated as hedging instruments are measured at fair value determined using the quoted market prices for the same or similar instruments. Derivative instruments that are not designated in hedging relationships are classified as held for trading and measured at fair value determined by using quoted market prices for the same or similar instruments and changes in the fair values of such derivative instruments are recognized in net income as they arise. |
||
| Cash and cash equivalents — The carrying amounts included in the Consolidated Balance Sheet approximate fair value because of the short maturity of these instruments. |
16
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
MARCH 31, 2007
(unaudited)
| 11 | Fair value of financial instruments (continued) | |
| Carrying value and fair value of financial instruments | ||
| The carrying values of financial instruments equal or approximate their fair values with the exception of long-term debt which has a carrying value of approximately $2,779 million and a fair value of approximately $3,068 million at March 31, 2007. | ||
| 12 | Stock-based compensation | |
| In the first quarter of 2007, under CP’s stock option plans, the Company issued 1,299,800 options to purchase Common Shares at the price of $62.57 per share, based on the closing price on the day prior to the grant date. In tandem with these options, 432,050 stock appreciation rights were issued at the exercise price of $62.57. Also, all 30,000 unvested Restricted Share Units, issued in 2005, were cancelled in the first quarter of 2006. | ||
| Pursuant to the employee plan, options may be exercised upon vesting, which is between 24 months and 36 months after the grant date, and will expire after 10 years. Some options vest after 48 months, unless certain performance targets are achieved, in which case vesting is accelerated. These options expire five years after the grant date. Other options only vest if certain performance targets are achieved and expire approximately five years after the grant date. | ||
| The following is a summary of the Company’s fixed stock option plans as of March 31 (including options granted under the Directors’ Stock Option Plan, which was suspended in 2003): |
| 2007 | 2006 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Number of | average | Number of | average | |||||||||||||
| options | exercise price | options | exercise price | |||||||||||||
Outstanding, January 1 |
6,815,494 | 38.50 | 7,971,917 | $ | 32.07 | |||||||||||
New options granted |
1,299,800 | 62.57 | 1,376,500 | 57.70 | ||||||||||||
Exercised |
(356,491 | ) | 29.82 | (1,349,300 | ) | 28.48 | ||||||||||
Forfeited/cancelled |
(51,175 | ) | 35.48 | (195,530 | ) | 39.69 | ||||||||||
Outstanding, March 31 |
7,707,628 | 42.98 | 7,803,587 | $ | 37.02 | |||||||||||
Options exercisable
at March 31 |
4,713,928 | 33.89 | 3,919,337 | $ | 29.38 | |||||||||||
Compensation expense is recognized over the vesting period for stock options issued since
January 1, 2003, based on their estimated fair values on the date of grants, as determined by
the Black-Scholes option pricing model. Had CP used the fair value method for options
granted between January 1, 2002, and December 31, 2002, CP’s pro forma basis net income and
earnings per share would have been as follows:
| For the three months | ||||||||||||
| ended March 31 | ||||||||||||
| 2007 | 2006 | |||||||||||
| Restated | ||||||||||||
Net income (in millions) |
As reported | $ | 128.6 | $ | 108.8 | |||||||
| Pro forma | $ | 128.6 | $ | 108.6 | ||||||||
Pro forma basic and diluted earnings per share are unchanged from the amounts disclosed in
the Statement of Consolidated Income.
17
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
MARCH 31, 2007
(unaudited)
| 12 | Stock-based compensation (continued) | |
| Under the fair value method, the fair value of options at the grant date is $11.2 million for options issued in the first quarter of 2007 (first quarter of 2006 – $11.7 million). The weighted average fair value assumptions were approximately: |
| For the three months | ||||||||
| ended March 31 | ||||||||
| 2007 | 2006 | |||||||
Expected option life (years) |
4.00 | 4.50 | ||||||
Risk-free interest rate |
3.89 | % | 4.06 | % | ||||
Expected stock price volatility |
23 | % | 22 | % | ||||
Expected annual dividends per share |
$ | 0.90 | $ | 0.75 | ||||
Weighted average fair value of options
granted during the year |
$ | 12.96 | $ | 12.97 | ||||
| 13 | Pensions and other benefits | |
| The total benefit cost for the Company’s defined benefit pension plans, defined contribution pension plans and post-retirement benefits for the quarter ended March 31, 2007, was $27.4 million (quarter ended March 31, 2006 — $30.9 million). | ||
| 14 | Significant customers | |
| During the first quarter of 2007, one customer comprised 11.1% of total revenue (first quarter of 2006 – 13.0%). At March 31, 2007, one customer represented 4.2% of total accounts receivable (March 31, 2006 – 6.1%). |
18
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
MARCH 31, 2007
(unaudited)
| 15 | Commitments and contingencies | |
| In the normal course of its operations, the Company becomes involved in various legal actions, including claims relating to injuries and damages 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 March 31, 2007, cannot be predicted with certainty, it is the opinion of management that their resolution will not have a material adverse effect on the Company’s financial position or results of operations. | ||
| Capital commitments | ||
| At March 31, 2007, CP had multi-year capital commitments of $609.4 million, mainly for locomotive overhaul agreements, in the form of signed contracts or letters of intent. Payments for these commitments are due in 2007 through 2016. | ||
| Operating lease commitments | ||
| At March 31, 2007, minimum payments under operating leases were estimated at $605.4 million in aggregate, with annual payments in each of the next 5 years of: remainder of 2007 – $100.7 million; 2008 – $100.2 million; 2009 – $72.1 million; 2010 – $56.5 million; 2011– $51.2 million. | ||
| Guarantees | ||
| The Company has residual value guarantees on operating lease commitments of $363.9 million at March 31, 2007. The maximum amount that could be payable under these and all of the Company’s other guarantees cannot be reasonably estimated due to the nature of certain of the guarantees. All or a portion of amounts paid under certain guarantees could be recoverable from other parties or through insurance. The Company has accrued for all guarantees that it expects to pay. At March 31, 2007, these accruals, which do not include any amounts for residual value guarantees, amounted to $7.5 million. |
19
Summary of Rail Data
| First Quarter | ||||||||||||||||
| 2007 | 2006 (1) | Variance | % | |||||||||||||
Financial (millions, except per share data) |
||||||||||||||||
Revenues |
||||||||||||||||
Freight revenue |
$ | 1,090.9 | $ | 1,067.2 | $ | 23.7 | 2.2 | |||||||||
Other revenue |
25.0 | 43.3 | (18.3 | ) | (42.3 | ) | ||||||||||
| 1,115.9 | 1,110.5 | 5.4 | 0.5 | |||||||||||||
Operating
expenses |
||||||||||||||||
Compensation and benefits |
332.5 | 352.2 | (19.7 | ) | (5.6 | ) | ||||||||||
Fuel |
171.2 | 157.9 | 13.3 | 8.4 | ||||||||||||
Materials |
62.4 | 57.6 | 4.8 | 8.3 | ||||||||||||
Equipment rents |
55.5 | 44.6 | 10.9 | 24.4 | ||||||||||||
Depreciation and amortization |
118.6 | 114.8 | 3.8 | 3.3 | ||||||||||||
Purchased services and other |
146.4 | 156.6 | (10.2 | ) | (6.5 | ) | ||||||||||
| 886.6 | 883.7 | 2.9 | 0.3 | |||||||||||||
Operating income |
229.3 | 226.8 | 2.5 | 1.1 | ||||||||||||
Other charges |
4.8 | 6.8 | (2.0 | ) | (29.4 | ) | ||||||||||
Interest expense |
46.8 | 47.3 | (0.5 | ) | (1.1 | ) | ||||||||||
Income tax expense before foreign exchange (gains)/losses on
long-term debt (2) |
55.1 | 56.6 | (1.5 | ) | (2.7 | ) | ||||||||||
Income before foreign exchange (gains)/losses on long-term debt (2) |
122.6 | 116.1 | 6.5 | 5.6 | ||||||||||||
Foreign
exchange (gains)/losses on long-term debt (FX on LTD) |
||||||||||||||||
FX on LTD |
(8.6 | ) | 6.4 | (15.0 | ) | — | ||||||||||
Income tax on FX on LTD (3) |
2.6 | 0.9 | 1.7 | — | ||||||||||||
FX on LTD (net of tax) |
(6.0 | ) | 7.3 | (13.3 | ) | — | ||||||||||
Net income |
$ | 128.6 | $ | 108.8 | $ | 19.8 | 18.2 | |||||||||
Earnings
per share (EPS) |
||||||||||||||||
Basic earnings per share |
$ | 0.83 | $ | 0.69 | $ | 0.14 | 20.3 | |||||||||
Diluted earnings per share |
$ | 0.82 | $ | 0.68 | $ | 0.14 | 20.6 | |||||||||
EPS
before FX on LTD (2) |
||||||||||||||||
Basic earnings per share |
$ | 0.79 | $ | 0.73 | $ | 0.06 | 8.2 | |||||||||
Diluted earnings per share |
$ | 0.78 | $ | 0.72 | $ | 0.06 | 8.3 | |||||||||
Weighted average number of shares outstanding (millions) |
155.5 | 158.5 | (3.0 | ) | (1.9 | ) | ||||||||||
Operating ratio (2) (4) (%) |
79.5 | 79.6 | (0.1 | ) | — | |||||||||||
ROCE before FX on LTD (after tax) (2) (4) (%) |
10.1 | 9.6 | 0.5 | — | ||||||||||||
Net debt to net debt plus equity (%) |
36.4 | 39.9 | (3.5 | ) | — | |||||||||||
EBIT before FX on LTD (2) (4) (millions) |
$ | 224.5 | $ | 220.0 | $ | 4.5 | 2.0 | |||||||||
EBITDA before FX on LTD (2) (4) (millions) |
$ | 343.1 | $ | 334.8 | $ | 8.3 | 2.5 | |||||||||
| (1) | Certain comparative period figures have been restated for retroactive application of a new accounting standard adopted in 2006 related to stock-based compensation for employees eligible to retire before the vesting date. | |
| (2) | These are earnings measures that are not in accordance with GAAP and may not be comparable to similar measures of other companies. See note on non-GAAP earnings measures attached to commentary. | |
| (3) | Income tax on FX on LTD is discussed in the current MD&A in the “Other Income Statement Items” section – “Income Taxes”. |
(4)
|
EBIT: | Earnings before interest and taxes. | ||
| EBITDA: | Earnings before interest, taxes, and depreciation and amortization. | |||
| ROCE (after tax): | Return on capital employed (after tax) = earnings before after-tax interest
expense (last 12 months) divided by average net debt plus
equity. |
|||
| Operating ratio: | Operating expenses divided by revenues. |
20
Summary of Rail Data (Page 2)
| First Quarter | ||||||||||||||||
| 2007 | 2006 | Variance | % | |||||||||||||
Commodity Data |
||||||||||||||||
Freight Revenues (millions) |
||||||||||||||||
- Grain |
$ | 219.6 | $ | 211.3 | $ | 8.3 | 3.9 | |||||||||
- Coal |
131.3 | 160.2 | (28.9 | ) | (18.0 | ) | ||||||||||
- Sulphur and fertilizers |
122.4 | 93.1 | 29.3 | 31.5 | ||||||||||||
- Forest products |
72.0 | 83.4 | (11.4 | ) | (13.7 | ) | ||||||||||
- Industrial and consumer products |
151.9 | 148.3 | 3.6 | 2.4 | ||||||||||||
- Automotive |
82.1 | 78.3 | 3.8 | 4.9 | ||||||||||||
- Intermodal |
311.6 | 292.6 | 19.0 | 6.5 | ||||||||||||
Total Freight Revenues |
$ | 1,090.9 | $ | 1,067.2 | $ | 23.7 | 2.2 | |||||||||
Millions of Revenue Ton-Miles (RTM) |
||||||||||||||||
- Grain |
7,484 | 7,474 | 10 | 0.1 | ||||||||||||
- Coal |
4,583 | 5,054 | (471 | ) | (9.3 | ) | ||||||||||
- Sulphur and fertilizers |
4,984 | 3,455 | 1,529 | 44.3 | ||||||||||||
- Forest products |
2,000 | 2,434 | (434 | ) | (17.8 | ) | ||||||||||
- Industrial and consumer products |
4,133 | 4,341 | (208 | ) | (4.8 | ) | ||||||||||
- Automotive |
625 | 603 | 22 | 3.6 | ||||||||||||
- Intermodal |
6,926 | 6,727 | 199 | 3.0 | ||||||||||||
Total RTMs |
30,735 | 30,088 | 647 | 2.2 | ||||||||||||
Freight Revenue per RTM (cents) |
||||||||||||||||
- Grain |
2.93 | 2.83 | 0.10 | 3.5 | ||||||||||||
- Coal |
2.86 | 3.17 | (0.31 | ) | (9.8 | ) | ||||||||||
- Sulphur and fertilizers |
2.46 | 2.69 | (0.23 | ) | (8.6 | ) | ||||||||||
- Forest products |
3.60 | 3.43 | 0.17 | 5.0 | ||||||||||||
- Industrial and consumer products |
3.68 | 3.42 | 0.26 | 7.6 | ||||||||||||
- Automotive |
13.14 | 12.99 | 0.15 | 1.2 | ||||||||||||
- Intermodal |
4.50 | 4.35 | 0.15 | 3.4 | ||||||||||||
Freight Revenue per RTM |
3.55 | 3.55 | — | — | ||||||||||||
Carloads (thousands) |
||||||||||||||||
- Grain |
89.3 | 92.4 | (3.1 | ) | (3.4 | ) | ||||||||||
- Coal |
58.5 | 78.7 | (20.2 | ) | (25.7 | ) | ||||||||||
- Sulphur and fertilizers |
50.2 | 39.0 | 11.2 | 28.7 | ||||||||||||
- Forest products |
30.1 | 37.6 | (7.5 | ) | (19.9 | ) | ||||||||||
- Industrial and consumer products |
75.7 | 79.7 | (4.0 | ) | (5.0 | ) | ||||||||||
- Automotive |
42.4 | 42.3 | 0.1 | 0.2 | ||||||||||||
- Intermodal |
287.6 | 281.8 | 5.8 | 2.1 | ||||||||||||
Total Carloads |
633.8 | 651.5 | (17.7 | ) | (2.7 | ) | ||||||||||
Freight Revenue per Carload |
||||||||||||||||
- Grain |
$ | 2,459 | $ | 2,287 | $ | 172 | 7.5 | |||||||||
- Coal |
2,244 | 2,036 | 208 | 10.2 | ||||||||||||
- Sulphur and fertilizers |
2,438 | 2,387 | 51 | 2.1 | ||||||||||||
- Forest products |
2,392 | 2,218 | 174 | 7.8 | ||||||||||||
- Industrial and consumer products |
2,007 | 1,861 | 146 | 7.8 | ||||||||||||
- Automotive |
1,936 | 1,851 | 85 | 4.6 | ||||||||||||
- Intermodal |
1,083 | 1,038 | 45 | 4.3 | ||||||||||||
Freight Revenue per Carload |
$ | 1,721 | $ | 1,638 | $ | 83 | 5.1 | |||||||||
21
Summary of Rail Data (Page 3)
| First Quarter | ||||||||||||||||
| 2007 | 2006 (1) | Variance | % | |||||||||||||
Operations and Productivity |
||||||||||||||||
Freight gross ton-miles (GTM) (millions) |
57,560 | 57,014 | 546 | 1.0 | ||||||||||||
Revenue ton-miles (RTM) (millions) |
30,735 | 30,088 | 647 | 2.2 | ||||||||||||
Average number of active employees |
14,884 | 15,267 | (383 | ) | (2.5 | ) | ||||||||||
Number of active employees at end of period |
15,048 | 15,394 | (346 | ) | (2.2 | ) | ||||||||||
FRA personal injuries per 200,000 employee-hours |
1.9 | 2.1 | (0.2 | ) | (9.5 | ) | ||||||||||
FRA train accidents per million train-miles |
1.8 | 1.2 | 0.6 | 50.0 | ||||||||||||
Total operating expenses per RTM (cents) |
2.88 | 2.94 | (0.06 | ) | (2.0 | ) | ||||||||||
Total operating expenses per GTM (cents) |
1.54 | 1.55 | (0.01 | ) | (0.6 | ) | ||||||||||
Compensation and benefits expense per GTM (cents) |
0.58 | 0.62 | (0.04 | ) | (6.5 | ) | ||||||||||
GTMs per average active employee (000) |
3,867 | 3,734 | 133 | 3.6 | ||||||||||||
Miles of road operated at end of period (2) |
13,260 | 13,693 | (433 | ) | (3.2 | ) | ||||||||||
Average train speed – AAR definition (mph) |
23.2 | 25.3 | (2.1 | ) | (8.3 | ) | ||||||||||
Terminal dwell time – AAR definition (hours) |
24.0 | 21.3 | 2.7 | 12.7 | ||||||||||||
Car miles per car day |
134.6 | 132.1 | 2.5 | 1.9 | ||||||||||||
Average daily total cars on-line – AAR definition (000) |
81.3 | 80.9 | 0.4 | 0.5 | ||||||||||||
U.S. gallons of locomotive fuel per 1,000 GTMs – freight & yard |
1.26 | 1.24 | 0.02 | 1.6 | ||||||||||||
U.S. gallons of locomotive fuel consumed – total (millions) (3) |
72.4 | 71.1 | 1.3 | 1.8 | ||||||||||||
Average foreign exchange rate (US$/Canadian$) |
0.854 | 0.873 | (0.019 | ) | (2.2 | ) | ||||||||||
Average foreign exchange rate (Canadian$/US$) |
1.171 | 1.146 | 0.025 | 2.2 | ||||||||||||
| (1) | Certain comparative period figures have been restated for retroactive application of a new accounting standard adopted in 2006 related to stock-based compensation for employees eligible to retire before the vesting date. | |
| (2) | Excludes track on which CP has haulage rights. | |
| (3) | Includes gallons of fuel consumed from freight, yard and commuter service but excludes fuel used in capital projects and other non-freight activities. |
22
Canadian Pacific
Management’s Discussion and Analysis
for the three months ended March 31, 2007
Table of Contents
BUSINESS PROFILE |
2 | |||
STRATEGY |
2 | |||
ADDITIONAL INFORMATION |
2 | |||
OPERATING RESULTS |
3 | |||
NON-GAAP EARNINGS |
6 | |||
LINES OF BUSINESS |
7 | |||
Volumes |
7 | |||
Revenues |
7 | |||
Freight Revenue per Carload |
8 | |||
PERFORMANCE INDICATORS |
9 | |||
OPERATING EXPENSES |
10 | |||
OTHER INCOME STATEMENT ITEMS |
11 | |||
QUARTERLY FINANCIAL DATA |
12 | |||
CHANGES IN ACCOUNTING POLICY |
12 | |||
LIQUIDITY AND CAPITAL RESOURCES |
13 | |||
BALANCE SHEET |
14 | |||
FINANCIAL INSTRUMENTS |
16 | |||
OFF-BALANCE SHEET ARRANGEMENTS |
18 | |||
CONTRACTUAL COMMITMENTS |
19 | |||
FUTURE TRENDS, COMMITMENTS AND RISKS |
19 | |||
CRITICAL ACCOUNTING ESTIMATES |
22 | |||
SYSTEMS, PROCEDURES AND CONTROLS |
23 | |||
FORWARD-LOOKING INFORMATION |
23 | |||
GLOSSARY OF TERMS |
25 |
This Management’s Discussion and Analysis (“MD&A”) supplements the Consolidated Financial
Statements and related notes for the three months ended March 31, 2007. 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.
April 22, 2007
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
CPRL’s 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 in overseas containers that can
be transported 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:
| • | 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. |
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.
2
| For the three months ended | ||||||||
| Highlights summary | March 31 | |||||||
| (in millions, except percentages and per-share data) | 2007 | 2006(1) | ||||||
Revenues |
$ | 1,115.9 | $ | 1,110.5 | ||||
Operating income |
229.3 | 226.8 | ||||||
Income, before FX on LTD(2) |
122.6 | 116.1 | ||||||
Net income |
$ | 128.6 | $ | 108.8 | ||||
Operating ratio(2) |
79.5 | % | 79.6 | % | ||||
Basic earnings per share |
$ | 0.83 | $ | 0.69 | ||||
Diluted earnings per share, before FX on LTD(2) |
$ | 0.78 | $ | 0.72 | ||||
Diluted earnings per share |
$ | 0.82 | $ | 0.68 | ||||
Dividends declared per share |
$ | 0.2250 | $ | 0.1875 | ||||
Free cash(2) |
$ | 3.0 | $ | (56.5 | ) | |||
Return on capital employed(2) |
10.1 | % | 9.6 | % | ||||
Total assets as at March 31 |
$ | 11,375.2 | $ | 10,948.9 | ||||
Total long-term financial liabilities as at March 31 |
$ | 5,276.7 | $ | 5,291.7 | ||||
| (1) | Certain comparative period figures have been restated to reflect the retroactive application of a new accounting standard adopted in 2006 related to stock-based compensation for employees eligible to retire before the vesting date of stock-based awards. | |
| (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 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”. A reconciliation of free cash to GAAP cash position is provided in the section “Liquidity and Capital Resources” under the sub-heading “Free Cash”. This information is in Canadian dollars. |
OPERATING RESULTS
Income
Operating results in first-quarter 2007 were adversely impacted by harsh winter operating
conditions in our western network which were more disruptive than the milder 2006 winter
conditions. A heavy snow pack and elevated rainfall in our western corridor resulted in
avalanches, mud slides and wash-outs that interrupted the operational fluidity of the railway in
first-quarter 2007. As well, impacts at the Port of Vancouver related to the strike at Canadian
National Railway (“CN”) caused a slowing of transit times for CP traffic that originated from, or
terminated at, CN-served facilities. Despite these operating conditions, operating income for the
first quarter of 2007 was $229.3 million, an increase of $2.5 million, or 1.1%, from $226.8 million
for the same period in 2006.
The increase in operating income was due to:
| • | freight revenue growth in sulphur and fertilizer and intermodal market segments; | ||
| • | higher revenues resulting from increased freight rates; and | ||
| • | a reduction in stock-based compensation expense (discussed further in the section “Operating Expenses” under the sub-heading “Compensation and Benefits”). |
The increase in operating income was partially offset by:
| • | expenses incurred to manage the impacts of the harsh winter operating conditions in first-quarter 2007; | ||
| • | decrease in revenues as a result of increased network congestion due to winter weather disruptions and the CN strike; | ||
| • | higher fuel expense as higher refining charges and reduced hedge benefits more than offset the impact of lower crude oil prices; and | ||
| • | a decrease in other revenue reflecting a large land sale that took place in first-quarter 2006. |
Fuel prices remain volatile. During 2007 we continued to take steps to mitigate the impact of high
prices with fuel surcharges and hedging (discussed further in the section “Financial Instruments”
under the sub-heading “Crude Oil Swaps”).
Net income for the three months ended March 31, 2007, was $128.6 million, up $19.8 million, or
18.2%, from $108.8 million for the same period in 2006. Net income in first-quarter 2007, compared
with first-quarter 2006, increased due to higher operating income and foreign exchange gains on
long-term debt whereas there was a foreign exchange loss on long-term debt in the prior year.
3
Diluted Earnings per Share
Diluted earnings per share (“EPS”) was $0.82 in the first quarter of 2007, an increase of $0.14
from $0.68 in the same period of 2006. Diluted EPS excluding foreign exchange gains and losses on
long-term debt (“FX on LTD”) of $0.78 for the first quarter of 2007 was $0.06 higher compared to a
diluted EPS excluding FX on LTD of $0.72 in the first quarter of 2006. 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. A reduction in the number of shares outstanding due to our share repurchase plan
(discussed further in the section “Balance Sheet” under the sub-heading “Share Capital”) also had a
positive impact on diluted EPS in the first quarter of 2007.
Operating Ratio
Our operating ratio was 79.5% in the first quarter of 2007, compared with 79.6% in the same period
of 2006. The operating ratio, provides the percentage of revenues used to operate the railway. A
lower percentage normally indicates higher efficiency.
Return on Capital Employed
Return on capital employed (“ROCE”) reported in the first quarter of 2007 was 10.1%, up 0.5% from
9.6% in the same period of 2006. The improvement reflected higher profitability of investments in
the railway over the four quarters ended March 31, 2007, compared to the four quarters ended March
31, 2006, primarily driven by higher revenues and improved operating ratio.
4
Impact of Foreign Exchange on Earnings
| Favourable (unfavourable) impact on earnings due to the change in Foreign Exchange | For the three | |||
| months ended | ||||
| (in millions, except foreign exchange rate) | March 31 | |||
| (unaudited) | 2007 vs. 2006 | |||
Average quarterly foreign exchange rates |
$1.17 vs. $1.15 | |||
Freight revenues |
||||
Grain |
$ | 2 | ||
Coal |
1 | |||
Sulphur and fertilizers |
1 | |||
Forest products |
1 | |||
Industrial and consumer products |
2 | |||
Automotive |
1 | |||
Intermodal |
1 | |||
Other revenues |
— | |||
Total effect |
$ | 9 | ||
Operating expenses |
||||
Compensation and benefits |
(2 | ) | ||
Fuel |
(2 | ) | ||
Materials |
— | |||
Equipment rents |
(1 | ) | ||
Depreciation and amortization |
— | |||
Purchased services and other |
(1 | ) | ||
Total effect |
(6 | ) | ||
Effect on operating income |
$ | 3 | ||
Other expenses |
||||
Other charges |
— | |||
Interest expense |
(1 | ) | ||
Income tax expense, before FX on LTD (1) |
(1 | ) | ||
Effect on income, before FX on LTD (1) |
$ | 1 | ||
| (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 are described in the section “Non-GAAP Earnings”. |
The Canadian dollar weakened against the U.S. dollar by approximately 2% in the first
quarter of 2007, compared with the same period in 2006. The average foreign exchange rate for
converting U.S. dollars to Canadian dollars increased to $1.17 in first-quarter 2007 from $1.15
in the first quarter of 2006. The adjoining table shows the approximate impact of the change in
Foreign Exchange on our revenues and expenses, and income before FX on LTD in 2007 and 2006.
This analysis does not include the impact of the change in Foreign Exchange on balance sheet
accounts or of foreign exchange hedging activity.
On average, a $0.01 weakening (or strengthening) of the Canadian dollar increases (or reduces)
annual operating income by approximately $3 million to $5 million. Foreign Exchange fluctuations
increased operating income by $3 million in first-quarter 2007, compared with the same period of
2006, as illustrated in the adjoining table. From time to time, we use foreign exchange forward
contracts to partially hedge the impact 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”.
5
NON-GAAP EARNINGS
| Summarized statement of consolidated income | For the three months | |||||||
| (reconciliation of non-GAAP earnings to GAAP earnings) (in millions, except diluted EPS and operating ratio) | ended March 31 | |||||||
| (unaudited) | 2007 | 2006(1) | ||||||
Revenues |
$ | 1,115.9 | $ | 1,110.5 | ||||
Operating expenses |
886.6 | 883.7 | ||||||
Operating income |
229.3 | 226.8 | ||||||
Other charges |
4.8 | 6.8 | ||||||
Interest expense |
46.8 | 47.3 | ||||||
Income tax expense, before income tax on FX on LTD(2) |
55.1 | 56.6 | ||||||
Income, before FX on LTD(2) |
122.6 | 116.1 | ||||||
Foreign
exchange (gains) losses on long-term debt |
||||||||
FX on LTD – (gains) losses |
(8.6 | ) | 6.4 | |||||
Income tax on FX on LTD |
2.6 | 0.9 | ||||||
FX on LTD, net of tax — (gains) losses |
(6.0 | ) | 7.3 | |||||
Net income |
$ | 128.6 | $ | 108.8 | ||||
Diluted EPS, before FX on LTD(2) |
$ | 0.78 | $ | 0.72 | ||||
Diluted EPS, related to FX on LTD, net of tax(2) |
0.04 | (0.04 | ) | |||||
Diluted EPS, as determined by GAAP |
$ | 0.82 | $ | 0.68 | ||||
| (1) | Certain comparative period figures have been restated to reflect the retroactive application of a new accounting standard adopted in 2006 related to stock-based compensation for employees eligible to retire before the vesting date of stock-based awards. | |
| (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. |
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. The adjoining table
details a reconciliation of income, before FX on LTD, 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 is 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 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. ROCE reported quarterly represents
the return over the current quarter and the previous three quarters. The measure is used by
management to assess profitability of investments in the railway. ROCE is measured as income
before FX on LTD and other specified items plus after-tax interest expense divided by average net
debt plus equity. It does not have a comparable GAAP measure to which it can be reconciled.
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 gains on long-term debt in the first quarter of 2007 as the
Canadian dollar exchange rate strengthened to $1.16 relative to the U.S. dollar on March 31, 2007,
compared with $1.17 on December 31, 2006. Foreign exchange gains on long-term debt were $8.6
million before tax in first-quarter 2007 whereas the foreign exchange losses on long-term debt were
$6.4 million before tax in the same period of 2006.
Income tax expense (or benefit) related to FX on LTD capital gains is discussed further in the
section “Other Income Statement Items” under the sub-heading “Income Taxes”.
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.
There were no other specified items in the first quarter of 2007 or 2006.
6
LINES OF BUSINESS
Volumes
| For the three months | ||||||||
| Volumes | ended March 31 | |||||||
| (unaudited) | 2007 | 2006 | ||||||
Carloads (in thousands) |
||||||||
Grain |
89.3 | 92.4 | ||||||
Coal |
58.5 | 78.7 | ||||||
Sulphur and fertilizers |
50.2 | 39.0 | ||||||
Forest products |
30.1 | 37.6 | ||||||
Industrial and consumer products |
75.7 | 79.7 | ||||||
Automotive |
42.4 | 42.3 | ||||||
Intermodal |
287.6 | 281.8 | ||||||
Total carloads |
633.8 | 651.5 | ||||||
Revenue ton-miles (in millions) |
||||||||
Grain |
7,484 | 7,474 | ||||||
Coal |
4,583 | 5,054 | ||||||
Sulphur and fertilizers |
4,984 | 3,455 | ||||||
Forest products |
2,000 | 2,434 | ||||||
Industrial and consumer products |
4,133 | 4,341 | ||||||
Automotive |
625 | 603 | ||||||
Intermodal |
6,926 | 6,727 | ||||||
Total revenue ton-miles |
30,735 | 30,088 | ||||||
Changes in freight volumes generally contribute to a corresponding change in freight revenues
and certain variable expenses, such as fuel, equipment rents and crew costs.
Volumes in the first quarter of 2007 as measured by total carloads, decreased by 17,700, or 2.7%,
and total revenue ton-miles (“RTM”) increased by 647 million, or 2.2%, compared with the same
period in 2006. RTMs increased despite the decreased carloads due to a longer average length of
haul.
The decline in carloads was largely due to the sale of our Latta subdivision in the second
quarter of 2006, which reduced our carloads by 13,500 in first-quarter 2007.
Strong global economic demand for bulk products resulted in increased shipments during much of
first-quarter 2007. This growth in shipments, however, was curtailed due to harsh winter
operating conditions and the impact of the CN strike. We expect to transport the majority of
delayed bulk shipments in the remainder of 2007.
The increase in RTMs reflected a strong recovery of potash shipments and intermodal growth, which
was partially offset by lower RTMs in forest products and coal.
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.
One customer comprised 11.1% of total revenues for the three months ended March 31, 2007 and 4.2%
of total accounts receivable at March 31, 2007. The same customer comprised 13.0% of total
revenues for the three months ended March 31, 2006 and 6.1% of total accounts receivable at March
31, 2006.
| Revenues | For the three months | |||||||
| (in millions) | ended March 31 | |||||||
| (unaudited) | 2007 | 2006 | ||||||
Grain |
$ | 219.6 | $ | 211.3 | ||||
Coal |
131.3 | 160.2 | ||||||
Sulphur and fertilizers |
122.4 | 93.1 | ||||||
Forest products |
72.0 | 83.4 | ||||||
Industrial and consumer products |
151.9 | 148.3 | ||||||
Automotive |
82.1 | 78.3 | ||||||
Intermodal |
311.6 | 292.6 | ||||||
Total freight revenues |
$ | 1,090.9 | $ | 1,067.2 | ||||
Other revenues |
25.0 | 43.3 | ||||||
Total revenues |
$ | 1,115.9 | $ | 1,110.5 | ||||
Freight Revenues
Freight revenues are earned from transporting bulk, merchandise and intermodal goods, and include
fuel surcharges billed to our customers. Freight revenues were $1,090.9 million in the first
quarter of 2007, an increase of $23.7 million, or 2.2%, from first-quarter 2006.
Freight revenues in first-quarter 2007, compared with first-quarter 2006, increased mainly due to
higher freight rates and strong growth in potash shipments. The change in Foreign Exchange also
had a positive impact on freight revenues.
Grain
Grain revenues for the first quarter of 2007 were $219.6 million, an increase of $8.3 million, or
3.9%, from $211.3 million for the same period of 2006. The increase was due to:
| • | a strong Canadian grain crop reflecting improved quality; | ||
| • | a large carryover from the first half of the 2006/07 crop year; | ||
| • | strong exports; and | ||
| • | higher freight rates. |
Increases in grain revenues were partially offset by the impact of poor weather in our western
network, which delayed the movement of traffic.
7
Coal
Coal revenues in first-quarter 2007 were $131.3 million, a decrease of $28.9 million, or 18.0%,
from $160.2 million for the same period of 2006. The decline in coal revenues in the first
quarter of 2007 was due to a reduction in our coal volumes in the U.S., primarily due to the sale
of the Latta subdivision in second-quarter 2006 and delayed shipments to the Port of Vancouver
caused by poor weather conditions in western Canada.
Sulphur and Fertilizers
Sulphur and fertilizers revenues were $122.4 million in the first quarter of 2007, an increase of
$29.3 million, or 31.5%, from $93.1 million in the same period of 2006. The increase was the
result of the return to normal export potash shipments which were significantly depressed in
first-quarter 2006 due to protracted global potash price negotiations.
Forest Products
Forest products revenues for first-quarter 2007 were $72.0 million, a decrease of $11.4 million
from $83.4 million, or 13.7%, in first-quarter 2006. The decrease was a result of continued soft
demand for lumber and panel products caused by a decrease in U.S. and Canadian housing starts, as
well as difficult market conditions for our forest product customers caused by softwood lumber
trade negotiations which have led to reduced volumes and extended plant shut downs. The decrease
was partially offset by price increases which softened the impact from the volume decline.
Industrial and Consumer Products
Industrial and consumer products revenues for the first quarter of 2007 were $151.9 million, an
increase of $3.6 million, or 2.4%, from $148.3 million in the same period of 2006. The increase
was due to increased freight rates.
Automotive
Automotive revenues for first-quarter 2007 were $82.1 million, an increase of $3.8 million, or
4.9%, from $78.3 million in first-quarter 2006. The increase was due primarily to higher freight
rates and increased volumes of imported vehicles.
Intermodal
Intermodal revenues for the first quarter of 2007 were $311.6 million, an increase of $19.0
million, or 6.5%, from $292.6 million first-quarter 2006. The increase in international intermodal
revenues was largely due to higher freight rates and the strong growth of import and export
container shipments from the ports of Vancouver and Montreal.
Other Revenues
Other revenues for the first quarter of 2007 were $25.0 million, a decrease of $18.3 million from
$43.3 million for first-quarter 2006. The decrease was primarily due to the sale of a property to
a university in Montreal in first-quarter 2006.
Freight Revenue per Carload
| For the three months ended | ||||||||
| Freight revenue per carload | March 31 | |||||||
| ($) (unaudited) | 2007 | 2006 | ||||||
Total freight revenue per carload |
$ | 1,721 | $ | 1,638 | ||||
Grain |
2,459 | 2,287 | ||||||
Coal |
2,244 | 2,036 | ||||||
Sulphur and fertilizers |
2,438 | 2,387 | ||||||
Forest products |
2,392 | 2,218 | ||||||
Industrial and consumer products |
2,007 | 1,861 | ||||||
Automotive |
1,936 | 1,851 | ||||||
Intermodal |
1,083 | 1,038 | ||||||
Total freight revenue per carload increased $83, or 5.1%, to $1,721 in the first quarter of
2007 from $1,638 in the same period of 2006. The increase was due to higher freight rates, changes
in traffic mix, and the positive impact of the change in Foreign Exchange.
8
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.
| For the three months ended | ||||||||
| Performance indicators | March 31 | |||||||
| (unaudited) | 2007 | 2006(1) | ||||||
Safety
indicators |
||||||||
FRA personal injuries per 200,000 employee-hours |
1.9 | 2.1 | ||||||
FRA train accidents per million train-miles |
1.8 | 1.2 | ||||||
Efficiency and other indicators |
||||||||
Gross ton-miles (“GTM”) of freight (millions) |
57,560 | 57,014 | ||||||
Car miles per car day |
134.6 | 132.1 | ||||||
U.S. gallons of locomotive fuel consumed
per 1,000 GTMs – freight and yard |
1.26 | 1.24 | ||||||
Terminal dwell (hours) |
24.0 | 21.3 | ||||||
Average train speed (miles per hour) |
23.2 | 25.3 | ||||||
Number of active employees – end of period |
15,048 | 15,394 | ||||||
Freight revenue per RTM (cents) |
3.55 | 3.55 | ||||||
| (1) | Certain comparative period figures have been restated to reflect the retroactive application of a new accounting standard adopted in 2006 related to stock-based compensation for employees eligible to retire before the vesting date of stock-based awards. |
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.
| • | The FRA personal injury rate per 200,000 employee-hours was 1.9 in the first quarter of 2007, compared with 2.1 in the same period of 2006. | ||
| • | The FRA train accident rate was 1.8 accidents per million train-miles for the first quarter of 2007, compared with 1.2 in the same period of 2006. |
Efficiency and Other Indicators
Efficiency and other indicators were adversely impacted by harsh winter operating conditions as
well as the CN strike which caused a slowing of transit times for CP traffic that originated from,
or terminated at, CN-served facilities.
| • | GTMs increased 1.0% in first-quarter 2007, compared with the same period of 2006, mainly due to higher potash volumes partially offset by lower coal and sulphur volumes. Fluctuations in GTMs normally drive fluctuations in certain variable costs, such as fuel and crew costs. | ||
| • | Car miles per car day increased 1.9% in first-quarter 2007, compared with the same period in 2006, due to better processes within our yards, which mitigated the impact of harsh winter conditions. | ||
| • | U.S. gallons of locomotive fuel consumed per 1,000 GTMs in both freight and yard activity increased 1.6% in the first quarter of 2007, compared with the same period in 2006. The impact of harsh winter conditions was partially offset by utilization of fuel-efficient AC locomotives, execution of our IOP and fuel-conservation efforts. | ||
| • | Terminal dwell, the average time a freight car resides in a terminal, increased 12.7% in the first quarter of 2007, compared with the same period in 2006, due primarily to weather related issues. | ||
| • | Average train speed decreased 8.3% in the first quarter of 2007, compared with the same period in 2006. Network disruptions resulted in trains being held until such time as the lines could be cleared which negatively impacted our train speed metric. | ||
| • | The number of active employees at March 31, 2007 decreased by 346, or 2.2% compared with the number at March 31, 2006. 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”). Approximately 6% of employees were assigned to capital projects at March 31, 2007, unchanged from March 31, 2006. |
9
OPERATING EXPENSES
| For the three months ended March 31 | ||||||||||||||||
| Operating expenses | 2007 | 2006 | ||||||||||||||
| (in millions) | % of | % of | ||||||||||||||
| (unaudited) | Expense | revenue | Expense | revenue | ||||||||||||
Compensation and benefits(1) |
$ | 332.5 | 29.8 | $ | 352.2 | 31.7 | ||||||||||
Fuel |
171.2 | 15.4 | 157.9 | 14.2 | ||||||||||||
Materials |
62.4 | 5.6 | 57.6 | 5.2 | ||||||||||||
Equipment rents |
55.5 | 5.0 | 44.6 | 4.0 | ||||||||||||
Depreciation and amortization |
118.6 | 10.6 | 114.8 | 10.4 | ||||||||||||
Purchased services and other |
146.4 | 13.1 | 156.6 | 14.1 | ||||||||||||
Total |
$ | 886.6 | 79.5 | $ | 883.7 | 79.6 | ||||||||||
| (1) | Certain comparative period figures have been restated to reflect the retroactive application of a new accounting standard adopted in 2006 related to stock-based compensation for employees eligible to retire before the vesting date of stock-based awards. |
Operating expenses were $886.6 million in the first quarter of 2007, up $2.9 million from
$883.7 million in the same period of 2006.
Harsh winter operating conditions as well as higher fuel prices driven by higher refining charges
led to increased operating expenses. The weakening of the Canadian dollar also had a negative
impact on operating expenses. The increase in operating expenses were largely offset by lower
stock-based compensation expense and the cost of a land donation in first-quarter 2006.
Compensation and Benefits
Compensation and benefits expense was $332.5 million in first-quarter 2007, a decrease of $19.7
million from $352.2 million in the same period of 2006. The decrease was due to:
| • | lower costs associated with employee incentive compensation due largely to a greater share appreciation in first-quarter 2006, compared with the same period in 2007 and the beneficial effect from the implementation of our Total Return Swap (“TRS”) in second-quarter 2006 (discussed further in the section “Financial Instruments” under the sub-heading “Stock-based Compensation Expense Management”); | ||
| • | reduced administrative costs as a result of restructuring initiatives (discussed further in the section “Future Trends, Commitments and Risks” under the sub-heading “Restructuring”); and | ||
| • | lower pension expenses. |
These decreases were partially offset by the negative impact of inflation.
Fuel
Fuel expense was $171.2 million in the first quarter of 2007, an increase of $13.3 million from
$157.9 million in first-quarter 2006. The increase was due largely to higher refining charges and
reduced hedge benefits, which was partially offset by lower crude oil prices.
Materials
Materials expense was $62.4 million in the first quarter of 2007, an increase of $4.8 million from
$57.6 million in the same period of 2006. The increase was due mainly to the higher cost of
materials for freight car repairs, primarily driven by price increases of replacement wheel sets
and increase in the number of wheel sets replaced as a result of the harsh winter operating
conditions.
Equipment Rents
Equipment rents expense was $55.5 million in first-quarter 2007, an increase of $10.9 million from
$44.6 million in the first quarter of 2006. The increase was due mainly to:
| • | higher lease rates paid to equipment leasing companies; | ||
| • | payments to Canadian Wheat Board for the use of their cars in regulated grain movements effective August 1, 2006; | ||
| • | additional locomotives and freight cars required to operate under harsh winter conditions; and | ||
| • | the timing of interline settlements. |
Depreciation and Amortization
Depreciation and amortization expense was $118.6 million in the first quarter of 2007, an increase
of $3.8 million from $114.8 million in the same period of 2006. The increase was due largely to
additions to capital assets for track and locomotives, which was partially offset by asset
retirements.
Purchased Services and Other
Purchased services and other expense was $146.4 million in the first quarter of 2007, a decrease of
$10.2 million from $156.6 million in the same period of 2006. The decrease was due largely to
reduced casualty expenses and transaction costs associated with a donation of CP land made to a
non-profit organization in first-quarter 2006.
10
OTHER INCOME STATEMENT ITEMS
Other Charges
Other charges were $4.8 million in the first quarter of 2007, a decrease of $2.0 million from $6.8
million in the same period of 2006. The decrease was due mainly to the positive impact of the
change in Foreign Exchange on working capital balances in 2007 and realized gains on non-hedge
derivative instruments.
Interest Expense
Interest expense was $46.8 million in the first quarter of 2007, a decrease of $0.5 million from
$47.3 million in the same period of 2006. Interest expense decreased largely due to the repayment
of a $143.0 million secured equipment loan in February 2007. The decrease was partially offset by
the negative impact of the change in Foreign Exchange and higher interest charges on
variable-interest rate debt tied to the London Interbank Offered Rate (“LIBOR”), which increased
relative to the comparable period.
Income Taxes
Income tax expense was $57.7 million in the first quarter of 2007, an increase of $0.2 million from
$57.5 million in the same period of 2006. The increase was mainly due to a higher income in the
first quarter of 2007, compared with the same period in 2006.
The effective income tax rate for first-quarter 2007 was 31.0%, compared with 34.6% for
first-quarter 2006. The normalized rates (income tax rate based on income adjusted for FX on LTD
and other specified items) was 31.0% for first-quarter 2007, compared with 32.7% for the same
period of 2006. The reduction in our estimated effective income tax rate for 2007 is due to
changes in Canadian federal and provincial corporate income tax rates and tax planning initiatives.
We expect a normalized 2007 income tax rate of between 30% and 32%.
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. The 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 the reclassification, the tax benefit of these losses is
matched to the transactions that utilize them. As a result of this review, the income tax
associated with FX on LTD, which is a non-GAAP measure, increased by $0.4 million in first-quarter
2007 (first-quarter 2006 — $2.5 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
first-quarter 2007 by the same amount.
11
QUARTERLY FINANCIAL DATA
| Quarterly financial data | For the quarter ended | |||||||||||||||||||||||||||||||
| (in millions, except per share data) | 2007 | 2006 | 2005 | |||||||||||||||||||||||||||||
| (unaudited) | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | Mar. 31 | Dec. 31 | Sept. 30 | Jun. 30 | ||||||||||||||||||||||||
Total revenue |
$ | 1,115.9 | $ | 1,190.4 | $ | 1,151.3 | $ | 1,131.0 | $ | 1,110.5 | $ | 1,166.9 | $ | 1,104.7 | $ | 1,105.9 | ||||||||||||||||
Operating income |
229.3 | 320.1 | 299.1 | 282.6 | 226.8 | 260.0 | 283.2 | 272.3 | ||||||||||||||||||||||||
Net income |
128.6 | 145.6 | 163.8 | 378.1 | 108.8 | 137.1 | 203.8 | 124.1 | ||||||||||||||||||||||||
Operating income, before other specified items(1) |
229.3 | 320.1 | 299.1 | 282.6 | 226.8 | 304.2 | 249.3 | 272.3 | ||||||||||||||||||||||||
Income, before FX on LTD and other
specified items(1) |
122.6 | 181.0 | 169.7 | 160.7 | 116.1 | 170.5 | 135.1 | 140.9 | ||||||||||||||||||||||||
Basic earnings per share |
$ | 0.83 | $ | 0.93 | $ | 1.05 | $ | 2.39 | $ | 0.69 | $ | 0.87 | $ | 1.29 | $ | 0.79 | ||||||||||||||||
Diluted earnings per share |
0.82 | 0.92 | 1.04 | 2.37 | 0.68 | 0.86 | 1.27 | 0.78 | ||||||||||||||||||||||||
Diluted earnings per share, before FX on
LTD and other specified items(1) |
0.78 | 1.15 | 1.07 | 1.00 | 0.72 | 1.07 | 0.84 | 0.88 | ||||||||||||||||||||||||
| (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. |
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.
The extreme weather in first-quarter 2007 resulted in delays to bulk and intermodal traffic in our
western corridor. We expect most of this backlogged traffic to be transported in the remainder of
the year.
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.
Net income is also influenced by seasonal fluctuations in customer demand and weather-related
issues.
CHANGES IN ACCOUNTING POLICY
2007 Accounting Changes
Financial instruments, hedging and comprehensive income
On January 1, 2007, the Company adopted the following accounting standards: Accounting Standard
Section 3855 “Financial Instruments — Recognition and Measurement”, Accounting Standard Section
3861 “Financial Instruments — Disclosure and Presentation”, Accounting Standard Section 3865
“Hedges” 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 was on a prospective basis without retroactive restatement of prior periods,
except for the restatement of equity balances to reflect the reclassification of foreign currency
translation adjustments to Accumulated Other Comprehensive Income.
The impact of the adoption of these standards on January 1, 2007 was an increase in net assets of
$18.0 million, a reduction in “Foreign currency translation adjustments” of $66.4 million, an
increase in “Retained earnings” of $4.0 million, and the recognition of “Accumulated other
comprehensive income” of $80.4 million.
The fair value of hedging instruments at January 1, 2007 was $31.7 million reflected in “Other
assets and deferred charges” and “Accounts receivable and other current assets” and $4.8 million
reflected in “Deferred liabilities” and “Accounts payable and accrued liabilities”. The inclusion
of transaction costs within “Long-term debt” at amortized cost reduced “Long-term debt” by $33.4
million
12
with an associated reduction in “Other assets and deferred charges” of $26.9 million. Deferred
gains and losses on previously settled hedges were reclassified to “Accumulated other comprehensive
income” and “Retained earnings” with a resultant decrease in “Other assets and deferred charges” of
$4.8 million. The recognition of certain other financial instruments at fair value or amortized
cost resulted in reductions in “Long-term debt” of $2.8 million, “Investments” of $1.5 million and
“Other assets and deferred charges” of $0.4 million. The adoption of these standards increased the
liability for “Future income taxes” by $11.6 million. Accumulated other comprehensive income is
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, transaction costs associated with the Company’s
long term debt and previously deferred gains and losses on derivative instruments that were settled
in prior years and which, had they currently existed, did not meet the criteria for hedge
accounting under Accounting Standard Section 3865. The amounts recorded on the adoption of these
standards differed from the estimated amounts disclosed in Note 3 to the 2006 annual financial
statement as a result of the refinement of certain estimates used at the year end.
Future accounting changes
The CICA has issued the following accounting standards which will be effective for the Company from
January 1, 2008: Accounting Standard Section 3862 “Financial Instruments – Disclosures”, Accounting
Standard Section 3863 “Financial Instruments – Presentation” and Accounting Standard Section 1535
“Capital Disclosures”.
These new accounting standards will require the Company to provide additional disclosures relating
to its financial instruments, including hedging instruments, and about the Company’s capital. In
addition, Accounting Standard Section 3863 does not change the presentation guidance provided in
Accounting Standard Section 3861 “Financial Instruments – Disclosure and Presentation” which it
replaces. It is not anticipated that the adoption of these new accounting standards will impact
the amounts reported in the Company’s financial statements as they primarily relate to disclosure.
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 $227.7 million in the first quarter of 2007, an increase
of $53.4 million from $174.3 million in the same period of 2006. The increase in cash provided by
operating activities was mainly due to higher net cash generated through operations and lower
restructuring payments.
There are no specific or unusual requirements relating to our working capital. In addition, there
are no unusual restrictions on any subsidiary’s ability to transfer funds to CPRL.
Investing Activities
Cash used in investing activities was $195.6 million in the first quarter of 2007, a decrease of
$11.5 million from $207.1 million in the same period of 2006. The decrease reflected the purchase
of freight cars that were being held for sale in first-quarter 2006, which was partially offset by
an increase in capital spending in first-quarter 2007.
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 renewal to help
maintain the reliability and safety of our infrastructure, land acquisitions and rail capacity
improvements for future development in strategic locations across the network, locomotive
acquisitions and upgrades to increase our fuel-efficient hauling capacity, investments 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 deemed advisable. 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 sub-heading “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.
13
Financing Activities
Cash used in financing activities was $130.8 million in the first quarter of 2007, an increase of
$89.3 million, compared with $41.5 million in the same period of 2006. The increase in cash used
in financing activities was due to the repayment of two debt instruments, a $143.0 million secured
equipment loan and a $19 million obligation under capital lease, partially offset by cash received
through short-term borrowing.
We have available, as sources of financing, unused credit facilities of up to $517 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 Moody’s Investors Service, Inc., Standard and Poor’s Corporation
and Dominion Bond Rating Service, respectively.
At March 31, 2007, our net-debt to net-debt-plus-equity ratio improved to 36.4%, compared with
39.9% at March 31, 2006. The improvement was due primarily to an increase in equity driven by
earnings partially offset by the Company’s share repurchase program which reduced equity. 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.
| Calculation of free cash | For the three months ended | |||||||
| (reconciliation of free cash to GAAP cash position) | March 31 | |||||||
| (in millions) (unaudited) | 2007 | 2006 | ||||||
Cash provided by operating activities |
$ | 227.7 | $ | 174.3 | ||||
Cash used in investing activities |
(195.6 | ) | (207.1 | ) | ||||
Dividends paid |
(29.1 | ) | (23.7 | ) | ||||
Free cash(1) |
3.0 | (56.5 | ) | |||||
Cash used in financing activities, excluding dividend payment |
(101.7 | ) | (17.8 | ) | ||||
Decrease in cash, as shown on the Statement of Consolidated
Cash Flows |
(98.7 | ) | (74.3 | ) | ||||
Net cash at beginning of period |
124.3 | 121.8 | ||||||
Net cash at end of period |
$ | 25.6 | $ | 47.5 | ||||
| (1) | These measures have no standardized meanings prescribed by Canadian GAAP and, therefore, are unlikely to be comparable to similar measures of other companies. |
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 $3.0 million in the first quarter of 2007 compared with negative
free cash of $56.5 million in the same period of 2006. The improvement was due largely to the
increase in cash generated by operating activities (as discussed in this section under the
sub-heading “Operating Activities”), partially offset by increased capital spending and a higher
dividend payment.
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 and dividend payments and reduced land sales. 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”, “Liquidity and Capital
Resources” and “Other Income Statement Items”.
BALANCE SHEET
Assets
Assets totalled $11,375.2 million at March 31, 2007, compared with $11,415.9 million at December
31, 2006. The decrease in assets was mainly due to a reduction in cash balances as a result of
repayment of long-term debt and the reclassification of transaction costs associated with the issue
of long-term debt in first-quarter 2007 due to the implementation of a new accounting policy. The
decrease was partially offset by an increase in net properties due to capital additions during the
first quarter of 2007.
Total Liabilities
Our combined short-term and long-term liabilities were $6,435.9 million at March 31, 2007, compared
with $6,559.4 million at December 31, 2006. The decrease in total liabilities was due mainly to a
reduction in long-term debt resulting from:
| • | the repayment of a $143.0 million secured equipment loan in the first quarter of 2007; | ||
| • | foreign exchange gains on long-term debt; and |
14
| • | the reclassification to long-term debt of transaction costs associated with the issue of long-term debt in first-quarter 2007 to conform with changes in accounting policy. |
The decrease was partially offset by an increase in short-term borrowing and dividends payable.
Accumulated Other Comprehensive Income
Effective January 1, 2007, new GAAP accounting standards were introduced affecting how CP accounts
for certain unrealized gains and losses by creating a new category of equity called “Accumulated
other comprehensive income” (“AOCI”). Amounts previously reported as “Foreign currency translation
adjustment” were reclassified to AOCI retroactively. Unrealized gains and losses on hedges net of
related future income taxes were transferred to AOCI prospectively (discussed further in the
section “Changes in Accounting Policy”).
Equity
At March 31, 2007, our Consolidated Balance Sheet reflected $4,939.3 million in equity, compared
with equity balances of $4,856.5 million at December 31, 2006. The increase was due primarily to:
| • | growth in retained income driven by net income; | ||
| • | the issuance of Common Shares for stock options exercised; and | ||
| • | the increase in AOCI as a result of the adoption of new accounting standards (discussed further in the section “Changes in Accounting Policy”). |
The increase was partially offset by shares repurchased under normal course issuer bids and
dividends.
Share Capital
At March 31, 2007, 155,613,338 Common Shares and no Preferred Shares were issued and outstanding.
At March 31, 2007, 7.7 million options were
outstanding under our Management Stock Option Incentive
Plan and Directors’ Stock Option Plan, and 3.5 million Common Shares have been reserved
for issuance of future options. Each option granted can be exercised for one Common Share.
We believe the Company’s purchase of its own Common Shares for cancellation is an attractive and
appropriate use of corporate funds. Purchases are typically 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.
On June 1, 2006, we completed the filings for a new normal course issuer bid (the “2006 NCIB”) to
enable us, during June 6, 2006 to June 5, 2007, 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 5,500,000 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 were purchased in
the first quarter of 2007 at an average price per share of $64.11.
On March 1, 2007, we announced our intention, subject to regulatory approval, to purchase up to
5,500,000 shares during 2007, by way of normal course issuer bid purchases or private agreement
purchases.
On March 26, 2007, we completed the filings for a new normal course issuer bid (the “2007 NCIB”) to
enable us, during March 28, 2007 to March 27, 2008, to purchase for cancellation up to 4,975,000,
or 3.2% of our 155,534,263 Common Shares outstanding as of March 15, 2007. Of the 4,975,000 shares
authorized under the 2007 NCIB, 150,000 shares were purchased in the first quarter of 2007 at an
average price per share of $64.76.
In addition to the 150,000 shares purchased through the 2007 NCIB, CP purchased 275,000 shares
privately for cancellation on March 29, 2007 at an average price of $63.12 pursuant to a notice of
intention to make an exempt issuer bid filed on March 23, 2007. To date, a total of 674,990 shares
have been purchased in 2007 at an average price of $63.85.
In April 2007, we received approval from our Board of Directors, subject to regulatory approval, to
amend our existing 2007 NCIB to permit the purchase for cancellation of up to 15,500,000 of our
outstanding Common shares during 2007, and if not completed in 2007, in 2008. This represents
approximately 10% of the public float of our Common Shares outstanding at March 15, 2007.
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.
15
Dividends
On March 1, 2007, our Board of Directors declared a quarterly dividend of $0.225 per share (2006 -
$0.1875 per share) on the outstanding Common Shares. The dividend is payable on April 30, 2007 to
holders of record at the close of business on March 30, 2007.
FINANCIAL INSTRUMENTS
From January 1, 2007, certain financial instruments, including those classified as loans and
receivables, available for sale, held for trading and financial liabilities, are initially measured
at fair value and subsequently measured at fair value or amortized cost. Financial instruments
that will be realized within the normal operating cycle are measured at their carrying amount as
this approximates fair value.
Fair Value of Non-derivative Financial Instruments
The fair value of a financial instrument is the amount of consideration that would be agreed upon
in an arm’s length transaction between willing parties. We use the following methods and
assumptions to estimate fair value of each class of financial instruments for which carrying
amounts are included in the Consolidated Balance Sheet as follows:
Loans and receivables
“Accounts receivable and other current assets”- The carrying amounts included in the Consolidated
Balance Sheet approximate fair value because of the short maturity of these instruments.
“Investments”- Long-term receivable balances are carried at amortized cost based on an initial fair
value determined using discounted cash flow analysis using observable market-based inputs.
Financial liabilities
“Accounts payable and accrued liabilities and short-term borrowing”- The carrying amounts included
in the Consolidated Balance Sheet approximate fair value because of the short maturity of these
instruments.
“Long-term debt”- The carrying amount of long-term debt is at amortized cost based on an initial
fair value determined using the quoted market prices for the same or similar debt instruments.
Available for sale
“Investments”- Our equity investments have a carrying value that equals cost as fair value cannot
be reliably established.
Held for trading
“Other assets and deferred charges” and “Deferred liabilities”- Derivative instruments that are
designated as hedging instruments are measured at fair value determined using the quoted market
prices for the same or similar instruments.
Derivative instruments that are not designated in hedging relationships are classified as held for
trading and measured at fair value determined using quoted market prices for the same or similar
instruments and changes in the fair values of such derivative instruments are recognized in net
income as they arise.
“Cash and cash equivalents”- The carrying amounts included in the Consolidated Balance Sheet
approximate fair value because of the short maturity of these instruments.
Derivative Financial Instruments
Commencing January 1, 2007 all derivative instruments are recorded on the Consolidated Balance
Sheet in “Other assets and deferred charges”, “Accounts receivable and other current assets”,
“Deferred liabilities”, or “Accounts payable and accrued liabilities” at their fair value. Prior
to 2007, only derivative instruments that did not qualify as hedges or were not designated as
hedges were carried at fair value on the Consolidated Balance Sheet in “Other assets and deferred
charges” or “Deferred liabilities”. In the Statement of Consolidated Cash Flows, cash flows
relating to derivative instruments designated as hedges are included in the same line as the
related item.
For fair value hedges, the periodic changes in values are recognized in income, where the change in
value of the hedged items is also recorded. For a cash flow hedge, the change in value of the
effective portion is recognized in “Other comprehensive income”. Any ineffectiveness within an
effective cash flow hedge is recognized in income as it arises in the same income account as the
hedge item when realized. Should the hedging relationship of a cash flow hedge become ineffective,
previously unrealized gains and losses remain within “Accumulated other comprehensive income” until
the hedged item is settled and, prospectively, future changes in value of the hedge are recognized
in income. The change in value of the effective portion of a cash flow hedge remains in
“Accumulated other comprehensive income” until the related hedged item settles, at which time
amounts recognized in “Accumulated other comprehensive income” are reclassified to the same income
or balance sheet account that records the hedged item. Prior to January 1, 2007, the periodic
change in the fair value of an effective hedging instrument was not recognized in the financial
statements.
Prior to January 1, 2007, if a derivative was not an effective hedge, its book value was adjusted
to its market value each quarter and the associated gains or losses were included in “Other
charges” on our Statement of Consolidated Income.
Our policy with respect to using derivative 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
16
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.
It is not our intent to use financial derivatives or commodity instruments for trading or
speculative purposes.
Credit Risk
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
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 notes at the floating interest rate
increased “Interest expense” on the Statement of Consolidated Income by $0.4 million in the first
quarter of 2007 compared with a $0.1 million reduction in interest expense in first-quarter 2006.
At March 31, 2007, the fair value of this swap was $1.9 million and was reflected in “Accounts
payable and accrued liabilities” and “Deferred liabilities”. The fair value was calculated
utilizing swap, currency and basis-spread curves from Reuters. From January 1, 2007, the change in
fair value of the swap is reflected in “Interest expense” in the Statement of Consolidated Income,
however, as the swaps has no ineffectiveness the net impact was nil. Previously any change in the
fair value of the swap was not recognized in income.
Interest and Treasury Rate Locks
At March 31, 2007, “Accumulated other comprehensive income” on the Consolidated Balance Sheet
included $5.3 million in unamortized gains and losses for previously settled interest and treasury
rate locks. These gains and losses are being amortized to income as interest is paid for the
related debt. Amortization of the gains and losses resulted in a reduction in interest expense of
$0.1 million in first-quarter 2007 with no associated after-tax change in “Other comprehensive
income”, compared with an increase in interest expense of $0.8 million in first-quarter 2006.
Foreign Exchange Management
Foreign Exchange Forward Contracts
From time to time we hedge a portion of our U.S.
dollar-denominated freight revenues earned in
Canada by selling forward U.S. dollars. At March 31, 2007, we had no forward sales of U.S. dollars
outstanding (March 31, 2006 – US$33.4 million) and no unrealized gains or losses. The unrealized
gain on forward contracts as of March 31, 2006, calculated using the trading value of the U.S.
dollar from the Bank of Canada, was $1.2 million. This unrealized gain was not included in our
financial statements at March 31, 2006. “Freight revenues” on our Statement of Consolidated Income
did not include any gain or loss for the first quarter of 2007 as no forward hedges settled,
compared with realized gains of $1.5 million in first-quarter 2006.
Fuel Price Management
Swaps and fuel surcharges, 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 the effective portion of these swaps are deferred in
“Accumulated other comprehensive income” until the related fuel purchases are realized.
At March 31, 2007, an unrealized gain of $28.2 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. The fair value of these swaps of $28.2 million is recognized
in “Accounts receivable and other current assets” and “Other assets and deferred charges” while the
unrealized gain, net of tax, is recognized in “Accumulated other comprehensive income” on our
Consolidated Balance Sheet. The change in the unrealized gain of $3.5 million before tax was
recognized as a decrease to “Other comprehensive income”.
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.
17
The fair value of the forward purchases of U.S. dollars (which were coupled with the crude oil
swaps) at March 31, 2007 was $2.8 million and is recognized in “Accounts receivable and other
current assets” and “Deferred liabilities”. The unrealized loss, net of tax, is recognized in
“Accumulated other comprehensive income”. The change in the unrealized loss of $0.3 million before
tax was recognized as an increase to “Other Comprehensive Income”. These forwards will settle
between 2007 and 2009.
Fuel expense was reduced by $4.6 million in the first quarter of 2007 (first quarter of 2006 — $6.6
million) as a result of $4.9 million in realized gains (first quarter of 2006 — $7.6 million)
arising from settled swaps, including $1.4 million of realized gains relating to settled
derivatives that were not designated as hedges, partially offset by $0.3 million (first quarter of
2006 — $1.0 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 March 31, 2007 we had fuel hedges for approximately 6% of our estimated fuel purchases in 2007,
3% in 2008 and 2% 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.
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: SAR and deferred share units
(“DSU”) (discussed further in the section “Future Trends, Risks and Commitments” under the
sub-heading “Stock Price”). 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 gain on these swaps of $6.3 million in the first quarter
of 2007.
OFF-BALANCE SHEET ARRANGEMENTS
The information on off-balance sheet arrangements disclosed in our MD&A documents for the year
ended December 31, 2006 remains substantially unchanged, except as updated as follows:
Sale of Accounts Receivable
At March 31, 2007, the outstanding undivided co-ownership interest held by an unrelated trust under
our accounts receivable securitization program was $120.0 million (March 2006 — $120.0 million).
Losses of $1.3 million on the securitization program in first-quarter 2007 (first-quarter 2006 –
losses of $1.1 million) were 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 March 31, 2007, the
fair value of the retained interest was approximately 22% of the receivables sold, or $26 million
(March 31, 2006 – fair value of approximately 18%, or $22 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 $377.1 million for
the first quarter of 2007, compared with $367.1 million for the first quarter of 2006. We have
complied with all termination tests during the program.
18
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.
| Contractual commitments | ||||||||||||||||||||
| at March 31, 2007 | Payments due by period | |||||||||||||||||||
| (in millions) | Total | < 1 year | 1 — 3 years | 3 — 5 years | After 5 years | |||||||||||||||
Long-term debt |
$ | 2,503.7 | $ | 18.6 | $ | 38.3 | $ | 865.7 | $ | 1,581.1 | ||||||||||
Capital lease obligations |
310.8 | 0.9 | 18.6 | 32.0 | 259.3 | |||||||||||||||
Operating lease obligations(1) |
605.4 | 100.7 | 172.3 | 107.7 | 224.7 | |||||||||||||||
Supplier purchase obligations |
691.4 | 100.4 | 198.1 | 137.9 | 255.0 | |||||||||||||||
Other long-term liabilities reflected on
our Consolidated Balance Sheet
(2) |
894.2 | 100.9 | 218.9 | 170.4 | 404.0 | |||||||||||||||
Total contractual obligations (3) |
$ | 5,005.5 | $ | 321.5 | $ | 646.2 | $ | 1,313.7 | $ | 2,724.1 | ||||||||||
| (1) | We have guaranteed residual values on certain leased equipment with a maximum exposure of $363.9 million, primarily in 2007 and beyond. Management estimates that we will have no net payments under these residual guarantees and, as such, has not included any amounts 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”. | |
| (3) | Excluded from this table is our contractual obligation under Short-term borrowing, which is reported in our Consolidated Balance Sheet |
FUTURE TRENDS, COMMITMENTS AND RISKS
Change in Executive Officers and Chairman of the Board
On March 6, 2007, CP announced the retirement of Executive Vice-President, Operations, Neal Foot.
Effective April 3, 2007, Brock Winter assumed the responsibilities of Mr. Foot.
Rail Network Capacity
Significant increases in rail traffic volumes have created capacity challenges for North American
railways. 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 the first quarter of 2007, 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 announced its intention to retain
ownership of its cars and negotiate new operating agreements with CP and CN. We view the federal
government’s 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. Currently, 6,300 of these cars operate on CP rail
lines and our expectation is that this will continue to be the case.
Stock Price
The market value of our Common Shares increased $3.55 per share (from $61.40 to $64.95) on the
Toronto Stock Exchange in the first quarter of 2007. The market value of our Common Shares
increased $9.55 per share (from $48.71 to $58.26) on the Toronto Stock Exchange in the first
quarter of 2006. These changes in share price caused corresponding increases in the value of our
outstanding
19
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 a decrease in
compensation and benefits expense of $9.9 million in first-quarter 2007, compared with the same
period in 2006.
Crude Oil Prices
Crude oil prices remain volatile due to strong world demand and geopolitical events, weather, and
unscheduled refinery outages 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. We currently have hedges in place (discussed in the section “Financial
Instruments”) that partially offset the effects of rising fuel prices. 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:
| • | We are a certified carrier with the U.S. Customs and Border Protection’s (“CBP”) Customs-Trade Partnership Against Terrorism (“C-TPAT”) program and with the Canada Border Services Agency’s (“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 CBSA’s Customs Self-Assessment program. | |
| • | 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. | |
| • | 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. The following is a negotiations status summary:
Canada
A settlement has not been reached with the Teamsters Canada Rail Conference (TCRC-MWED), which
represents employees who maintain track infrastructure. Both CP and TCRC-MWED have followed the
process set out in the Canada Labour Code (“Code”). The conciliation process ended on April 1,
2007. The parties are now in the 21 day cooling off period set out in the Code. Prior to a
strike, the TCRC-MWED must provide a 72-hour written notice.
Negotiations continue with the Teamsters Canada Rail Conference (TCRC-RTE), which represents
employees who operate trains. These negotiations commenced in September 2006.
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 continue to be responsible for remediation work on portions of a 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 state’s voluntary investigation and
remediation program will oversee the work to ensure it is completed in accordance with applicable
standards.
20
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 adjacent table and discussed below.
| Certain other financial | Amount of commitment per period | |||||||||||||||||||
| commitments at March 31, 2007 | remainder of | 2008 & | 2010 & | 2012 & | ||||||||||||||||
| (in millions) (unaudited) | Total | 2007 | 2009 | 2011 | beyond | |||||||||||||||
Letters of credit |
$ | 353.2 | $ | 353.2 | $ | — | $ | — | $ | — | ||||||||||
Capital commitments(1) |
609.4 | $ | 240.3 | $ | 169.7 | $ | 55.2 | $ | 144.2 | |||||||||||
Offset financial liability |
182.1 | $ | 182.1 | $ | — | $ | — | $ | — | |||||||||||
Total commitments |
$ | 1,144.7 | $ | 775.6 | $ | 169.7 | $ | 55.2 | $ | 144.2 | ||||||||||
| (1) | The Company has several IT contracts outstanding with termination clauses with a variety of payment terms and termination dates. The termination payments per contract range from NIL to $17.6 million, and in total they provide a minimum exposure to CPR of $3.3 million and a maximum exposure of $41.4 million. The termination dates range from 2007 to 2013. |
Letters of Credit
Our available line of credit is adjusted for the letters of credit contract amounts currently
included within our revolving credit facility.
Capital Commitments
We are obligated to make various capital purchases related to track programs, locomotive
acquisitions and overhauls, freight cars, and land. At March 31, 2007, we had multi-year capital
commitments of $609.4 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.
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 March 31, 2007, the loan had a balance of
$187.0 million, offset by a financial asset of $182.1 million. The remainder is included in
“Long-Term Debt” on our Consolidated Balance Sheet.
Pension Plan Deficit
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 fund’s debt
securities. Similarly, for 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.
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 fund’s 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 $20.4 million to the defined benefit pension plans in the first quarter of
2007, compared with $17.5 million in the same period of 2006.
The minimum contribution requirement for our main pension plan is set out in an updated actuarial
valuation as at January 1, 2007 (finalized in April 2007). We expect our pension contribution in
2007 to be approximately $100 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
$13.2 million in the first quarter of 2007, compared with $27.8 million in the same period of 2006.
Payments in the first quarter of 2007 relating to the labour liabilities were $12.5 million,
compared with $24.8 million in first-quarter 2006.
21
Cash payments for restructuring and environmental initiatives are estimated to be $62 million for
the remainder of 2007, $63 million in 2008, $46 million in 2009, and a total of $132 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 $42 million for the remainder of 2007, $44 million in 2008, $31
million in 2009, and a total of $67 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
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
At March 31, 2007, the accrual for environmental remediation on our Consolidated Balance Sheet
amounted to $119.2 million, of which the long-term portion amounting to $97.9 million was included
in “Deferred liabilities” and the short-term portion amounting to $21.3 million was included in
“Accounts payable and accrued liabilities”. Total payments were $0.6 million in the first quarter
of 2007 and $1.9 million in the same period of 2006. 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 $0.6 million in first-quarter 2007 and $0.3 million in first-quarter 2006.
Pensions and Other Benefits
“Other assets and deferred charges” on our March 31, 2007 Consolidated Balance Sheet included
prepaid pension costs of $1,086.5 million. 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.
We included post-retirement benefits accruals of $197.7 million in “Deferred liabilities” and
post-retirement benefits accruals of $19.0 million in “Accounts payable and accrued liabilities” on
our March 31, 2007 Consolidated Balance Sheet.
Pension and post-retirement benefits expenses (excluding workers’ compensation benefits) were
included in “Compensation and benefits” on our March 31, 2007, Statement of Consolidated Income.
Combined pension and post-retirement benefits expenses were $27.4 million in the first quarter of
2007, compared with $30.9 million in the same period of 2006.
Pension expense consists of defined benefit pension expense plus defined contribution pension
expense (equal to contributions). Pension expense was $16.2 million in first-quarter 2007,
compared with $20.0 million in the same period of 2006. Defined benefit pension expense was $15.1
million in the first quarter of 2007, compared with $18.9 million in the same period of 2006.
Post-retirement benefits expense in the first quarter of 2007 was $11.2 million, compared with
$10.9 million in the same period of 2006.
Property, Plant and Equipment
At March 31, 2007, accumulated depreciation was $5,115.4 million. Depreciation expense relating to
properties amounted to $118.6 million in the first quarter of 2007, compared with $114.8 million in
the same period of 2006.
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 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 the first quarter of 2007, depreciation expense increased $3.8 million from the same period in
2006 due primarily to capital additions to locomotives and track investment.
Future Income Taxes
Future income tax expense totalling $38.5 million was included in income tax for the first quarter
of 2007, compared with $44.3 million for the first quarter of 2006. At March 31, 2007, future
income tax liabilities of $1,831.3 million were recorded as a long-term liability and comprised
largely of temporary differences related to accounting for properties. Future income tax benefits
of $109.7 million realizable within one year were recorded as a current asset. We believe that our
future income tax provisions are adequate.
22
Legal and Personal Injury Liabilities
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 $13.5 million in the first
quarter of 2007, compared with $16.3 million in the same period of 2006.
Accruals for incidents, claims and litigation, including WCB accruals, totalled $158.4 million, net
of insurance recoveries, at March 31, 2007. The total accrual included $97.9 million in “Deferred
liabilities” and $100.2 million in “Accounts payable and accrued liabilities”, offset by $5.7
million in “Other assets and deferred charges” and $34.0 million in “Accounts receivable”.
SYSTEMS, PROCEDURES AND CONTROLS
The Company’s 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.
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.
Bill C-11 passed third reading in the House on February 28, 2007 and is now currently in the
Senate process. It is anticipated that, unless Parliament is dismissed, Bill C-11 will come into
force in 2007. 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.
CP’s 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 industry’s cost of capital. The STB has also promulgated proposed new
rules for the handling of disputes by small and
23
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 America’s 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.
24
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 CP’s 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 customer’s 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 CPRL’s subsidiaries. | |
“Co-production initiatives”
|
Co-production initiatives refers to 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 other’s 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 4. | |
“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. |
25
“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$8,200 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. | |
“LIBOR”
|
London Interbank Offered Rate. | |
“MD&A”
|
Management’s 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. |
26
“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. |
27
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
I, F. J. Green, Chief Executive Officer of Canadian Pacific Railway Limited, certify that:
| 1. | I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings) of Canadian Pacific Railway Limited (the issuer) for the interim period ending March 31, 2007; |
| 2. | Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings; |
| 3. | Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly represent in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the interim filings; |
| 4. | The issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for the issuer, and we have: |
| (a) | designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared; and | ||
| (b) | designed such internal control over financial reporting, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP; and |
| 5. | I have caused the issuer to disclose in the interim MD&A any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent interim period that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting. |
| Date: April 24, 2007 | |||
| Signed: | F. J. Green | ||
| F. J. Green | |||
| Chief Executive Officer | |||
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
I, M. R. Lambert, Chief Financial Officer of Canadian Pacific Railway Limited, certify that:
| 1. | I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings) of Canadian Pacific Railway Limited (the issuer) for the interim period ending March 31, 2007; |
| 2. | Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings; |
| 3. | Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly represent in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the interim filings; |
| 4. | The issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for the issuer, and we have: |
| (a) | designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared; and | ||
| (b) | designed such internal control over financial reporting, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP; and |
| 5. | I have caused the issuer to disclose in the interim MD&A any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent interim period that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting. |
| Date: April 24, 2007 | ||
| Signed: | M. R. Lambert | |
| M. R. Lambert | ||
| Chief Financial Officer | ||